Central Bank Governor of the Year 2016: Wathra’s way wins plaudits for Pakistan

By Eric Ellis

When Ashraf Wathra was formally appointed as governor of the State Bank of Pakistan (SBP) in April 2014, it’s a fair bet he didn’t expect one of his tasks would be to escort a glamorous royal from Europe.

Hosting bothersome finance ministry officials from Islamabad, certainly. And opening the national accounts to fly-in IMF beancounters goes with the economic territory in wobbly Pakistan these days. But The Netherlands’ Queen Maxima?

But there in Islamabad last February was Wathra, at the side of the visiting queen who, by all accounts, can at least talk the talk about emerging markets such as Pakistan. 

Maxima was visiting Pakistan as patron of the G20’s Global Partnership for Financial Inclusion. She launched the SBP’s Universal Financial Access initiative that is designed to bring financial services to at least 50% of the many millions of unbanked Pakistanis by 2020.

Wathra’s royal encounter in Islamabad serves not as some lifestyle-of-the-rich-and-famous moment but illustrates one of the reasons why Euromoney has chosen him as this year’s central bank governor of the year. 

His enlightened approach in enabling Pakistanis to try to boost the economy in a frontline country whose domestic religious strife has international impact has been decisive. In a fractious land where only one in five people has a bank account, the SBP’s grassroots initiatives are aimed at bringing Pakistanis into the financial mainstream, but not at the expense of a steady hand managing and stabilising the more conventional stuff of central banks: reserves, rates and regulation.

“He has done a great job,” says Nadeem Hussain, founder of the prominent micro financier Tameer Bank. Pakistan does have a tradition of such village-level financial initiatives, says Hussain, but not all of them have enjoyed enthusiastic backing from Pakistan’s state institutions.

“The governor gets it,” Hussain says. “Rather than only taking care of the easier-hanging fruit, governor Wathra has taken on board the thorny issue of addressing the unbanked in a supportive regulatory environment.

“Some 85% of us don’t have access to credit, and he’s the driver of the national inclusion plan. We have one for the first time in Pakistan.”

Shazad Dada, chief executive of Standard Chartered Pakistan, agrees. Wathra’s leadership is returning the confidence of the international investment community in Pakistan, he says.

“The last three years have been very good,” Dada says. “We’ve had a stable currency and we’ve gone through the IMF programme, and it’s safe to say that we now have a very stable economy. Now we are moving from stable economy mode to growth economy.”

Dada adds: “People should not feel anything coming from Pakistan is toxic; on that front the State Bank has done a lot of work in improving governance, the banking environment and the confidence of international investors.”

That confidence is shown in Pakistan’s evaluation by Euromoney Country Risk, a sovereign rating service that asks independent economists and analysts to measure key risk factors. 

Pakistan’s overall country risk score has been improving steadily in the ECR rankings, up by more than three points in the last year to score 31.2 out of 100 in the second quarter of 2016. Pakistan’s improved scores have pushed the country up 16 places in the global rankings since 2015 to 127th out of 186 countries. 

The improvements support ECR experts’ growing confidence in Pakistan’s economic and political institutions.

Dada says Wathra is consultative and accessible. “He’s someone who has come from the banking side himself so he appreciates and understands the challenges of bankers. He is willing to look at new ideas and initiatives.” 

Dada adds that Wathra’s SBP has been supportive in efforts to further digitise Pakistani banking.

Tameer’s Hussain says Wathra recognises that though Pakistanis might be underbanked, they are not underphoned, so he has advanced village-level telephone banking services. To that end, Tameer recently sold out to Norway’s Telenor Pakistan.

Ratings agency Fitch’s BMI Research concurs that Pakistan is on the rise: “The gradual improvement in the country’s fiscal accounts and the reduction in direct government financing from the central bank are structural forces that are likely to improve banking sector profitability and the efficient allocation of resources, which should enable a steady increase in banking sector leverage without disrupting financial stability.”

Gubernatorial terms at the SBP are legally three years, though full terms have been rare in recent times. Indeed, it is 11 years since an SBP chief last served out a full term – Ishrat Hussain, who served during the military rule of General Pervez Musharraf.

Since democracy was restored to Pakistan in 2008, there have been five governors; Wathra has been the longest-serving of that quintet.

Before he was formally appointed governor in April 2014, Wathra had been acting SBP governor since January that year, having been deputy governor since March 2013.

Wathra is seen as close to Pakistan’s finance minister Ishaq Dar, who has held the portfolio three times since 1998, each time under prime minister Nawaz Sharif. 

Wathra was already deputy governor at the SBP with responsibility for the banking sector by the time Dar came to office a third time. 

When Sharif was re-elected in June 2013, he again sent Dar to the finance ministry. 

Dar wasted little time in elevating Wathra from deputy governor to acting governor when Yasin Anwar stepped away a year short of filling his designated term.

Wathra is now four months into his third year at the SBP, and bankers in Karachi say that with executive stability at the central bank, it is no coincidence that the economy has also steadied, thanks in no small part to a sharply falling oil price.

StanChart’s Dada agrees the falling oil price has been a “big helping hand” but, importantly, that opportunity was recognised by economic managers like the SBP and has not been squandered.

A frontline state in the international struggle to contain Islamist extremism, Pakistan was in dire shape when Wathra took office. There were daily power outages, while inflation and unemployment were rampant and the rupee was volatile.  

Pakistan was in effect excluded from international capital markets, and entered the IMF’s emergency ward with a three-year, $6.7 billion structural assistance programme to save it from default in return for reforms on tax and privatization. 

“The only thing that had gone well at that time,” Dada recalls, “was that we had a successful transfer of power from one democratically elected government to another.” Dada says security has also improved since 132 schoolchildren were killed at an army school in a 2014 bomb attack by the Pakistan Taliban.

“We cannot declare victory on security and nor can we declare victory on the economy, but we have certainly made great strides on both,” says Dada.

In the year before Wathra took over as acting governor in January 2014, the SBP counted its net reserves at just $6 billion, the lowest point since 2000/01. In August 2016, the SBP reported that it held reserves of $18 billion, with another $5 billion held at other banks.

With growth and confidence picking up, Pakistani stocks have also been among Asia’s best performers since then, prompting debate as to whether Pakistan will still need further IMF loan support.

That confidence has been evidenced in the healthier numbers in Pakistan’s conventional banking sector. Fitch’s BMI calculates that at the end of 2015, total banking sector assets stood at a 50.9% of GDP, a new record high but still low by international standards. 

Pakistan’s banking assets expanded by 20.3% in 2015, Fitch says, thanks to a 14.2% increase in loans and a mini-boom in bonds as the banking system moved towards a more transparent system of government deficit funding.

“Pakistan’s banking system is in relatively solid shape, with low leverage hinting at strong credit growth potential and high levels of capital keeping the risk of a crisis in the sector remote”, says BMI, while also noting Wathra’s firm hand on regulation of what had been a wobbly banking sector.

“Under its Extended Fund Facility agreement, the IMF has encouraged the State Bank of Pakistan to engage with under-capitalised banks to ensure their compliance with the minimum capital requirement and capital adequacy ratio.”

BMI adds: “According to the IMF’s latest country review, only two small banks were noncompliant, representing just 1.5% of total banking sector assets. In spite of the rapid increase in asset growth, capital adequacy has actually improved over recent years, with total assets relative to total equity falling to 8.5%, down from 13.7% a decade ago.” 

The improvement in the banking sector is reflected in the capital markets, where Pakistan is once again attracting the interest of international investors after several years when they thought it wiser to stay away. 

The clearest example would be last year’s secondary offering for HBL (formerly known as Habib Bank), a landmark trade that raised $1 billion for the state and managed to attract international investors into a domestic issue rather than the more familiar but illiquid path of a GDR. It attracted five separate orders of more than $100 million apiece, unthinkable just a few years ago. Pakistan’s finance ministry also raised almost $1 billion in successful syndicated term facilities last year.

One foreign banker says he is so confident in Pakistan’s improving fortunes that the country represents his single biggest personal exposure. “There is a much brighter mood there now, and international investors can sense it,” he says. “I certainly can. It’s my largest personal investment as we speak.”

Pakistan’s upgrade to emerging markets status in MSCI indices in June will boost markets further; local brokerage Elixir Securities has said the upgrade could trigger as much as $500 million of liquidity inflows. IPOs are expected, with June’s sell-down of a fertilizer subsidiary of Engro Corp an example of momentum in share issues.

On the wider economy, Pakistan’s government has forecast GDP growth of 5.7% in fiscal 2016/17, up from an expected 4.7% this period, which itself has been the quickest growth since 2008. Fitch’s BMI is not as optimistic, expecting 4.2% for 2016/17 and adds that “we continue to see significant growth headwinds”.