1. The current government has now been in power for over five months. How do you see Pakistan evolving under the PTI government?
In the past five months, Pakistan has started to deal with some of the core issues that the country has faced in terms of economic policy, foreign policy and security policy. An attempt is being made to fundamentally put Pakistan on a sustainable path of peace and progress and instead of looking at short- term issues and quick wins; the government has decided to deal with the core issues that have been hindering the progress of the nation.
2. The economy, which a year ago was growing at 5.2% annually, is slowing down due to a balance- of-payments crisis (expected 3.7% for 2019). The cost of food, electricity and clean water has gone up. What are the key government strategies to combat this economic slowdown and to develop a sustainable GDP?
Firstly, Pakistan was facing one of its worst, if not the worst balance of payment crisis ever when the PTI government came into power. We had just ended the year with the highest current account deficit in the history of the country and foreign exchange reserves were plummeting. The first order of business was to put severe demand compression measures, they are designed to slow down the economy and bring the external deficits down to a sustainable level and in doing so, we are trying to reduce the fiscal deficits and the loses in the energy sector, which means price increases. We could have taken the easier approach but we did not, instead in the first 100 days we rolled back the tax cuts which had been for the richest Pakistanis, we increased the gas prices, the electricity prices and the reason we did that was because we were running on sustainably high deficits in those areas. The State Bank has increased interest rates; the currency was devalued so for the first time in history we have initiated a stabilization program without having the need to go to the IMF. This stabilization has finally started to show results and if you look at the stock market in the month of January it compensated and went even higher than the loses of the entire year of 2018, in just one month, the stock market went up by more than 10%. Similarly the Pakistani bond prices have improved significantly in the international markets. In January 2019, Pakistan had the highest increase in bond prices in all of emerging Asian countries proving that the stabilization measures have started to show results in both domestic and international markets. On January 23 rd we launched the new finance bill in which we approved all the measures, which are part of our economic reform program, we have reduced taxation and taken measures to improve the ease of doing business.
3. Congratulations on your new role as Minister for Finance, Revenue and Economic Affairs, what are the objectives of your Ministry for 2019?
First, as I mentioned earlier is the continued stabilization program. We have made significant progress, our current account deficit has reduced, and our trade deficit has also gone down significantly but more needs to be done especially to bring the fiscal deficit under control. The second objective is to make Pakistan a more business and investment friendly country by improving the ease of doing business, Pakistan was ranked 136 th in the ease of doing business ranking by World Bank in 2018 our objective is to be in the top 100 in two years and in the top 50, five years from now.
4. You said at the National Assembly, that your aim had been to eliminate all factors that necessitate a return to the International Monetary Fund for a bailout package by successive regimes. How is the ‘mini-budget’ ((technically the Finance Supplementary (Second Amendment) Bill of 2019)) going to help to generate more revenues for the government?
This is not designed as a shot term revenue measure; this is an initiative to generate long-term revenues. We are trying to incentivize investment and industrialization, so we have cut taxes on investments and on key areas such as renewable energy. We want to make a big shift away from thermal to renewable energy in Pakistan so we have given very good incentives for manufacturing equipment related to renewable energy such as wind turbines and solar panels. We have given additional incentives for special economic zones so the whole thrust of this finance bill were for increased investment and industrialization.
5. The government has launched five-year dollar-denominated Diaspora bonds at an interest rate of 6.75%, which is higher than the price at which Pakistan had issued the last two bonds of the same tenure (Pakistan Banao Certificates). How will this measure help solve the balance of payment crisis? Why should the Diaspora invest in these bonds?
It is actually not a bond but a certificate because it is not trade-able on the capital market. It is a Diaspora certificate that we have issued and the pricing more or less matches the price at which the Pakistani bond is trading right now. It is an attractive price and it offers better returns than what the Pakistanis can get for their investments in different markets like Europe, USA and even the Middle East. The Pakistani bond is only available for high net worth individuals, you need a quarter of a million dollars minimum to participate in that market, however, this one is retail investment so all you need is $5000 to be able to invest. It helps Pakistanis raise foreign exchange financing and helps the Diaspora make attractive investments. In the first two days of the launch of this certificate, 2300 people have gone to the website and registered themselves so it is a very good beginning and we are hoping that this will grow ever further.
6. During our interview with Minister of Commerce, Textile, Industry and Production, Hon. Abdul Razak Dawood, he talked about the importance of diversifying Pakistan’s export base. What role will the Ministry of Finance play in encouraging economic diversification and helping to create national wealth?
The objective of the new finance bill is to achieve exactly what the Minister of Commerce is talking about. We are targeting export lead growth and that is why we want to bring in both Pakistani investors and foreign investors to invest in new technologies and export based industries. For that, as I had mentioned earlier we have reduced taxes, we have given more attractive incentives and most importantly we are making it easier for businesses to operate. Another example is the withholding tax statements which companies had to fill on a monthly basis, they now just need to fill it twice a year.
7. Less than 1% of Pakistan’s population pays income tax. You said the government has taken several new initiatives aimed at enhancing the tax base and revenue to facilitate the socio-economic development of the country. Could you talk more about those initiatives, please?
We are trying to deal with this issue in two different ways. The first one is, to make it simpler for people to file taxes. Starting from July onwards, we will simplify the process for tax payers. I want people to be able to file tax returns from their mobile phones. Tax laws are not given on the website in Urdu and a lot of people do not understand English so these types of small modifications need to be made. Secondly, we are establishing a method to be able to identify those who are not paying taxes. We want to move away from the old system of the Federal Board of Revenue (FBR) which used to do raids and put primary reliance on the use of technology, data analytics and use of global experts in identifying tax gaps. We have gone and made changes in the tax laws that will allow this anonymized data to be shared with global experts. This experience is part of the World Bank program and we are expecting the first report to come in by the end of February. Our focus is to move the tax administration into the 21 st century model and use information technology, data analytics, artificial intelligence in order to achieve the right results.
8. There is a rapid pace of credit growth in the banking sector (13% growth in 2018) but SME’s have a real issue in the sense that they do not have or have very little access to funding. What is your insight into the growth of the Banking and Financial sector and the lending to the real economy?
The private sector’s credit growth in the last six months has been fantastic; it has more than doubled so while the economy has been slowing down the private sector credit offset has been very robust. For SME’s and in particular for the ones involved in agriculture and housing, we have cut the tax rate from 39% to 20% of the banks income when they lend to these sectors. For instance if banks lend to the government of Pakistan or to a large business they will pay 39% tax on the income they generate from it however if they lend to an SME, they will only pay 20% tax. We have created a very good incentive for banks to lend to SME’s.
9. Pakistan’s capital market is likely to remain volatile and reactive to the new flows in 2019. What role will international and domestic capital markets play when it comes to financing the federal government’s budget?
The capital market has played a very limited role in mobilizing savings in the country, this needs to be changed in order to finance the government borrowing needs. We have put together some reforms we think are necessary in the banking system as a part of our economic advisory council’s work. Furthermore, we have also changed the government’s structure, the Securities and Exchange Commission of Pakistan (SECP) had a policy board which used to be led by the finance ministry itself, for the first time we have removed ourselves from the board and asked market participants and experts in capital market to lead and develop the right policy. This has been done in order to identify the bottlenecks in the capital market such as stopping it from mobilising debt capital for the private sector and the government and stopping product innovation from taking place. This year, significant steps will be taken to increase the role of the capital market in mobilizing these resources.
10. Where do you see Pakistan in the next 3-4 years in a Financial and Economic sense?
In 3-4 years time, Pakistan’s economy will have embarked on a sustainable path of prosperity. We have been following a growth model that leads us to a boom and bust cycles every 4-5 years, we have probably done more IMF programs that any country in the world; 12 in the last 30 years alone, 18 or 19 over the life of this country so this model is broken. We are trying to address the core fundamentals of Pakistan’s economy, the first 6 months were about stabilization, we are now starting to lay the foundations and therefore from year three onwards you will see Pakistan’s economy starting to move towards a sustainable growth path and that growth opportunity is very significant because the potential of Pakistan’s economy is enormous. Look at what India has achieved, the basic endowment of Pakistan are no different so there is absolutely no reason why we cannot compete, catch up and even surpass India. It is a fantastic time to invest in Pakistan.
11. You have been President and CEO of Engro for 8 years. How would you compare your precedent roles for one of the biggest group of Pakistan with your current position as Minister for Finance, Revenue and Economic Affairs, as you are on the other side of the spectrum now? And what do you feel most proud of?
There is an enormous difference of scale but it is more about the management. Engro is a management machine, it has a very well developed system with high quality manpower, and strong performance based reward systems, which makes it very efficient. The government of Pakistan on the other hand has weak capacity, close to non-existent performance based reward systems, very little accountability and as a result is a very slow moving machine. Being in the ministry, you are not only trying to deal with issues which are on a far greater scale but you also have to deal with an organizational capacity which is significantly weaker. Therefore, while we are doing crisis management and resolving immediate issues, we are also in parallel starting to improve the capacity of the Ministry of Finance. We need to have a far stronger and much more robust organization within the ministry to be able to deal with all the challenges faced by the Pakistani economy. I am proud of the fact that in a system which is marked with deep distress and corruption, I am still able to carry a reputation of integrity in my 7 years tenure. Even my opponents who are scathingly critical of my performance and capability would acknowledge this.
12.What is your final message to the readers of USA Today who consider Pakistan as a potential investment destination?
If you really want to find something that you would have never expected, visit Pakistan. No amount of reading about it, no amount of storytelling will prepare you for Pakistan’s reality and I can assure you, that the beauty of this country will take your breath away.
