HE new governor of the State Bank should start off his term in office by rejecting the directive sent to him by the finance minister to launch an inquiry into last week`s depreciation of the Pakistani rupee. The directive has been issued under highly dubious authority and bowing before it will send the wrong message to the governor`s own team and the markets, the consequences of which could haunt him for the rest of his term. The finance minister claims he is issuing the directive under his authority as the chair of the Monetary and Fiscal Policy Coordination Board, but the latter has no powers to order any such inquiry. In fact, Section 9B of the State Bank Act, under which the board was created in 1994, specifically states that `the Coordination Board shall not take any measure that would adversely affect the autonomy of the State Bank of Pakistan`. The board was never intended, nor is it empowered under the law, to issue directives to the centralbank,least ofalldirectives to launch an inquiry into decisions made at the bank. A simple reading of the law makes that abundantly clear.

The new governor needs to realise that the `clever` action that brought him to his current position will not serve him going forward. In the years to come, there is a growing likelihood that he could find himself sitting at the head of the central bank as the country`s external accounts push the economy towards a serious balance of payments situation, meriting an appeal to the IMF for assistance. He should take a sober look at the external accounts the mushrooming current account deficit and the composition of the reserves and realise that his words and deeds of today could be held against him should matters not improve on their own as hoped for by the finance minister. In the days to come, many complex decisions will need to be made at the central bank, including what signals need to be sent to the markets regarding the external accounts. His emphasis at the start of his term should be to carve out the space within which to take those decisions autonomously, rather than cementing his place in the finance minister`s heart. His credibility is now on the line, and credibility is the biggest tool with which a central bank exercises its stewardship of the markets.