“Thirty years of experience is not the same as experience of one year multiplied thirty times” — Anonymous
At times we forget the consequences of events once we move away from them. Today, our capital markets have recovered and the wounds of the 2008 global financial crisis have healed for active market participants.
The floor which was placed on the closing prices of shares for 109 days resulted in substantial losses to investors, as a result of which Pakistan was removed from Morgan Stanley’s Emerging Market Index. Market volumes, liquidity and price levels started improving only after a period of three years in early 2012, when the capital gains tax and other reforms were introduced.
What cost did we pay as a nation? The loss of savings caused a number of investors to exit the market, and they will take years to come back. They also missed the opportunity to benefit from the revival of the market in 2012 and 2013, resulting in depletion of their wealth levels.
Only a select few investors managed to ride the bull wave. This further concentration of wealth in a few hands will lead to increased economic disparity in the long term.
The question which we have failed to answer till now is: why did it take so long for us to recover, especially when the countries where the actual crisis took place recovered much earlier?
The answer lies in the collective, cohesive and holistic response to the crisis by their governments and regulators, and their ability to take decisions which took the entire financial landscape into account rather than isolated solutions.
If the government and each of the regulators in the West had worked in silos, the West may have taken a lot longer to recover and the world may have been pushed into depression. Taking a holistic view, they decided to pump in liquidity and provide cheap money by keeping the interest rates and inflation low.
In Pakistan, we did just the opposite. A severe liquidity crunch prevailed in the system and money was kept expensive as interest rates did not come down till four years after the crisis, when the markets had already started recovering.
However, each crisis is also an opportunity to learn, change and adapt. But did the 2008 crisis lead to any change in the way we operate? The answer is an obvious ‘no’.
Decision makers at different levels of financial policymaking are still operating in silos without any cohesive and coordinated strategy. Therefore, if there is another crisis, we will neither be able to pre-empt it nor will our response time be adequate — just like before.
The West identified this disconnect in time. They observed that their financial sector regulators, while acting in line with their respective charters, were operating in isolation from each other, hence actions and policies lacked coherence. They addressed this situation through the creation of a joint forum where all the financial regulators come together along with representation of the state treasury.
Such forums have been developed in a number of jurisdictions. Their primary mandate is to achieve the most cost-effective and collaborative response to various developmental, enforcement as well as crisis issues.
We need a similar forum in Pakistan — a ‘council of financial regulators’ under the leadership of the finance minister, and comprising the State Bank of Pakistan, the Securities and Exchange Commission of Pakistan (SECP), the Competition Commission of Pakistan and the Federal Board of Revenue.
Presently, each of these four authorities are either coordinating bilaterally with each other, or with the relevant wing of the finance ministry.
Resultantly, a situation has arisen where all four regulators are working independently, with no joint strategy or focus to supplement each other’s actions and decisions, and in many cases, we have seen conflicting views and lack of resolution between these institutions over various issues.
Each regulator focuses only on the sector and role under its ambit because of which some sectors are developed at the expense of others.
If such a council is created, with a predetermined frequency of meetings between their heads, it will act as a forum where the government and the four regulators can pool their ideas and perspectives, and better examine the macro- and micro-level impact of each decision.
The council can also provide policy level guidance on economic and financial sector issues and give momentum to various areas including the development of the primary and secondary debt markets, long-term savings schemes, microfinance and micro insurance, activity-based regulation, consolidated supervision of conglomerates and financial sector outreach.
This will also contribute to better prepared responses to potential and actual systemic risks in the country and stability of the financial system.
The strategy team at the SECP proposed the idea of the council along with its objectives and terms of reference to the government in early 2012. However no progress has taken place on its implementation. Given the existing economic challenges faced by the country, now would be the ideal time for the government to formally pursue its implementation.
Every endeavour requires adequate planning and coordination between stakeholders. If even a house cannot be built to specification unless the architect, the owner, and the designer are in sync, how can we succeed in building a vibrant economy without it? The council is a simple but effective solution, and one which is neither financially burdensome on the country’s resources nor difficult to implement. It might be a small step towards the manner in which we take economic policy decisions but a major step towards learning from our past mistakes instead of repeating them.
This article was previously published in Dawn
