ishrat husain : pakistan ’ s financial sector - a roadmap for 2005 - 2010 keynote address by mr ishrat husain, governor of the state bank of pakistan, at the 54th annual general meeting of the institute of bankers, pakistan, karachi, 14 october 2004. * * * the first generation of reforms in the financial sector of pakistan is about to be completed successfully and we have to lay down the proposals for eliciting wide discussion on the second generation of reforms. the reforms should be implemented in the next five years, although they have to be reviewed continuously to adapt them according to the changing circumstances both domestically and internationally. the objective of the second - generation reforms is to further deepen the financial sector and integrate it into the global economy. before we lay down the proposed road map, let me recapitulate briefly as to what we have learnt from our experience so far and what we have accomplished so far. lessons learnt : first, financial sector functions effectively and efficiently only if the macroeconomic situation is favourable and stable. the need to maintain macroeconomic stability will thus remain imperative for the coming period too. second, reforms can be successfully implemented only if there is consultation, involvement and consensus building among all the stakeholders throughout the process. an institutionalized mechanism for this interaction and collaboration has to remain in place. third, there has to be an active champion for conceptualizing, formulating, sequencing, implementing and monitoring reforms. in the absence of such a champion, there is a serious risk of derailment, reversal or abandonment. fourth, application of technology, intensive use of human resource competencies and managerial skills are the key tools for achieving results and have to be carefully nurtured and upgraded continuously. fifth, the regulators have the responsibility to communicate and explain the rationale, progress and outcomes of their policies and keep the market players fully informed. results accomplished : ( a ) financial markets in pakistan have been liberalized and have become competitive and relatively efficient but still remain shallow. ( b ) the array of financial instruments available for various types of transactions in the market has widened but the evolution of new instruments has to remain on track. ( c ) financial infrastructure has been strengthened but the legal system is still too time consuming and costly for the ordinary market participants. ( d ) regulatory environment has improved and the capacity of regulators to oversee and monitor is much better today but the enforcement and prompt corrective action capabilities need to be further enhanced. ( e ) financial

expectations about the possible effects of policy changes makes it difficult to model the monetary and financial behaviour in a robust way. furthermore, the central bank ’ s own credibility is an endogenous variable that affects the outcomes and expectations. a model or rule based framework may, therefore, be inadequate at present to guide the sbp in meeting unanticipated exogenous shocks and managing unforeseen crisis or crisis like situations as our understanding of the empirical links between instruments and targets of monetary policy is incomplete and rudimentary. we must all remember that the recent episodes of financial crisis in the 1990s occurred in countries where inflation was low, fiscal deficits were small or even absent and the public debt burden was at tolerable levels. models based on the past data missed these episodes as they would have emanated danger signals only if the countries had high current account deficit, unsustainable external debt burden and serious fiscal imbalances or a combination of these. in hindsight, a better way to detect the signs of danger would have been to complement the sound monetary and fiscal policies with flexible exchange rate, better regulations and supervision of the financial sector, greater disclosure, transparency and communication. this could have been possible if the policy makers did not concentrate on mechanistic tools but took a more holistic and broad - based view of the economic variables, their movements and assessed their relative impact on the macroeconomic outcomes. in this perspective, i hope that the present conference will provide a stimulating intellectual impetus to sbp research and policy staff to chart out alternative courses of monetary strategies for the future. it has already been envisaged in the 5 - year strategic plan of sbp that the current internal monetary and exchange rate policy committee will be transformed into a conventional monetary policy committee with decision making powers about altering the monetary policy stance in a transparent manner in future. i am also sure that the papers presented today and tomorrow will also give ample food for thought to journalists and academicians alike who will be listening carefully to form their own views and expectations about future strategy of sbp that is best for enhancing the economic welfare of pakistan.