NEWSMAKER-Tough days ahead for Pakistan's new cenbank chief

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Saturday September 11, 2010 01:17:11 AM GMT

* New central bank governor faces big challenges

* Seen pressing government to control spending

* Economic conditions mean he likely to keep rates firm

By Faisal Aziz and Sahar Ahmed

KARACHI, Sept 9 (Reuters) - Pakistan's new central bank governor, Shahid Hafiz Kardar, is expected to adopt a tougher line on government spending than his predecessor to try to bring fiscal policy more into line with monetary policy. The economist takes charge at a time when massive damage from flooding has strained the already fragile economy. Food prices are fuelling inflation and the flood damage is seen dragging growth back to between zero and 2 percent this fiscal year from a year-earlier 4.1 percent.

"We all know what the issue is -- the issue is mainly fiscal discipline," Kardar told Reuters in response a question on how how he plans to tackle inflation.

"If we can correct the fiscal side, the pressure on government borrowings, then the inflationary impact can be eased too."

Analysts say the inflationary pressures will probably leave Kardar little choice but to maintain the current monetary policy settings for now, although Kardar was more cautious about the outlook.

"It's too early to say. It will become clearer by the end of the month," said Kardar, when asked about the direction of monetary policy.

The central bank raised interest rates by 50 basis points in July to 13 percent to try to control a pick up in inflation, which hit a four-month high above 13 percent in August.

But he has already flagged that he is likely to push the government to control its expenses, a bone of contention with the International Monetary Fund.

In newspaper articles in recent months, Kardar has called upon the government to launch a serious austerity drive, cut non-development expenditures, replace general subsidies with direct cash transfers to the poor, and increase revenue.

His views are likely to wear well with IMF, which is concerned by Pakistan's inability to meet reform targets under its lending programme, including narrowing the fiscal deficit and raise tax revenues.

Pakistan turned to the IMF for an $11 billion loan in November 2008 when it was on the brink of defaulting on its debt.

The government has already overshot its IMF-set target of zero net borrowing from the central bank by 133.6 billion rupees from July 1 to Aug 20.

But officials and analysts say he will also need to remain firm in the face of interference from the government. Kardar's predecessor, Salim Raza, resigned in June, citing government interference.

"It will be a tricky situation for him," said a senior government official, requesting anonymity because of the sensitivity of the issue.

"He will need to draw a line somewhere and take a firm stance on issues such as the government's borrowing from the central bank, and I think he has the capacity to do that," he said.

However, the task will be a challenge especially given the need to support the economy following the floods, which caused an estimated $43 billion in damage, equal to about a quarter of GDP.

"He will face the challenge of aligning the tighter monetary stance in line with the fiscal stance at a time when the fiscal deficit is bound to rise further because of the floods," said Mohammed Sohail, chief executive of brokers Topline Securities.

"But Mr. Kardar is pretty energetic and active and will hopefully try to bring more discipline in line with IMF targets."

Kardar turns 58 next week. The son of Pakistan's first cricket captain, the younger Kardar briefly played first-class cricket in Pakistan before earning a degree in economics from the University of Oxford.

Kardar served briefly as the finance minister of the central Punjab province under former country president Pervez Musharraf.

He was a member of the prime minister's consultative committee on economic policy in 1988-90, and currently sits on the board of the Royal Bank of Scotland Pakistan.

"He is a thorough gentleman and under the circumstances, he is probably the best choice," said Ashfaque Hasan Khan, director general at NUST Business School in Islamabad and a former government economic adviser.

(Editing by Chris Allbritton and Neil Fullick)

(For more Reuters coverage of Afghanistan and Pakistan, see: http://www.reuters.com/places/pakistan)

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