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Pakistan opens to the world

Interview - September 18, 2015

United World talks to Mr. Ashraf Mahmood Wathra, Governor of the State Bank of Pakistan, who feels that all the country’s parameters are improving, making him very optimistic looking at 2016.


We would like to start with an overview of the country. In the last weeks, there have been many headlines, in Bloomberg and Forbes for instance, about the growth that Pakistan is experiencing. Two years after the first peaceful transition of power, we could say that Pakistan is still on a journey of transformation. How would you evaluate these two years until now?

I think it is very relevant to have a little bit of perspective from the past. When the present government started around mid-2013, our fiscal deficit in May of that year was 8,8% of the GDP, and it had been growing steadily since 2008. I do not intent to comment much on the previous government, but it is fair to say that they had to meet a very different sort of challenge. The government was not formed by a single party; they did not hold a majority so they were a coalition, and managing the coalition in itself was overwhelmingly challenging and they could not focus on many other important issues related to the economy. Therefore, there was a bit of neglect in many areas. When the PML government came in, they made this a priority and in the past they have been identified as a business-friendly and more economic reform oriented party.

The PML was elected in May 2013 and later that month an IMF team was here for a review, which was just a coincidence. During that interaction, we talked about going into a new program with an Extended Fund Facility (EFF). About that time, in June, we were also preparing the budget for the 2013-2014 period. During those discussions, the IMF, the finance minister and the other stakeholders, including us, realized that the IMF thinking and our thinking on how we wanted to tackle our challenges is very close. That really helped us build in a lot of subsequent reform, which was to come in the very first annual budget, and since then, in the last 2 years, some major shifts have happened.

Fiscal deficit, as I have already mentioned, was 8,8% of the GDP in 2013, but before the end of that year we managed to take some measures, specially the Minister of Finance, and we were able to reduce it to 8,3%. Since then, the deficit has been reduced and on June this year it stood at 5,3%, which was below our target of 4,9%. There were two primary reasons for why we missed the target: unbudgeted expenditure due to last year floods, which was totally devastating and unforeseen, and the operations in the north. The expenses came soon after the budget had been done, and on top of the disaster in itself we were confronted with nearly 300,000 internally displaced people coming out of the  affected areas, who had come closer to cities for safety. The government is supporting them and they have to be sent back and rehabilitated as well. Some rehab expenses have already started, and all these expenses were not budgeted, which is why there was a deviation in the fiscal deficit figure. We missed our target of 4.9% and we are close to our review with the IMF, but we are hopeful that they will understand that these were clearly necessary, though unbudgeted, expenses.

The other aspect that was very worrying in May-June 2013 was our foreign reserves situation, which was as low as $8 billion, while now we are close to $19 billion. This was achieved through a combination of factors, especially foreign exchange remittances, which are a very substantial contribution. Then, we issued a bond for $1 billion and we also got support from the ADB and the World Bank as well, which had not been coming forth since 2008 because we were not fulfilling a number of basic parameters to qualify for it. Once we reached that stage, we started to receive support from the World Bank for energy projects and then from the ADB.

Having said that, the weakness in our external sector is growth in exports, which is a major worry. We could have done better but there are a number of issues that are hindering us, particularly energy shortages and the security situation. Furthermore, we have a weak demand of our products from our major exporting partners, such as the EU and the US. For the first time in our economic history, there has been a slight decline in exports, which makes us even more worried. Therefore, that is an area we need to address and we have a lot of work to do towards that direction.

In 2014, Pakistan got the GSP+ status from the European Union, which was highly celebrated and praised. Now this summer the US is meant to also renew your GSP+ status.

We have benefitted from the GSP. Our exports increased around one billion dollars, but we could have benefitted more from it if our internal import situation was better.

There are some discussions about a bilateral investment treaty between the US and Pakistan. Would that help the country?

That would certainly be very helpful. This discussion has been going on since 2004, it became very active and it was close to happen but it went back for some time and since 2012 it has been active again. I think there are some details that still need to be sorted out between both sides.

Another interesting topic is the lowering borrowing costs, which are the lowest in 42 years in Pakistan. For the private sector that would be really interesting, as it would foster production and at the end improve macroeconomic aspects.

I think that is a very important tool of motivation for our businesses. I keep telling the exporters that their import costs are lower and that their interest rates have reduced by more than 350 basis points. In addition, we have a very low priced export refinance schemes. This is a time they should benefit more from that and besides inflation is low right now: in the month of July it was 1,8%, marking a 12-year low, and for the end of 2015 we estimate an average of 4,5%, compared to 8,6% in the end of 2014. Hence, there is a reduction in the import cost for businesses, particularly the exporters.

During the last two years, GDP annual growth has averaged 4%. Which sectors are responsible for this growth and which sectors do you see sustaining this positive trend in the future?

Over the time we have demonstrated that our economy can grow anywhere between 6% and 7%, which I would call our growth potential. However, the security situation in the country with terrorism in itself and also the resources deployed in combating it have been obstructing our way. Between the period 2008-2012, we did an average of around 3%, which is way below our potential. But with all the later reforms, which have been endeavor since 2013, we think we are now on the path to recovery, and last year our GDP growth was about 4,3%. For this year, the annual budget forecasts a figure of 5,5%, which is quite ambitious in my opinion, while the IMF forecast is 4,5%.

With this whole program put in place in 2013, how would you evaluate FDI? Have you seen any substantial increase due to the reforms?

In the year 2013-2014, FDI increased about $1.8 billion but there has been a bit of a reversal in the recent year that we have just finished, though I think it is a very temporary phenomena. All our parameters are improving, the security situation is getting better and we have many developments in the energy sector as well, so I am very optimistic that 2016 will see a growing trend coming back again.

Pakistan is the best undiscovered investment opportunity in emerging countries. I think the investors are starting to realize about that and they are starting to take action.

Many large corporations and multinationals have been around for a very long time, such as GE, P&G, Mitsubishi, Siemens and others, and they are very happy with the profitability and return on equity they have been making here. I find that their management style and the way they handle operations make investors that come very comfortable, as they quite adjust to the environment because they have local experience.

The security situation was very discouraging for any newcomers and it is always very important for an investment destination to be a place where people can visit. Unfortunately, in the last 8-10 years Pakistan was not a very prominent destination. In fact, many of our export buyers would try to hold the meetings in places close by such as Dubai or Colombo. But now we have started getting back visitors as the situation is improving and we have lesser pressure on us from the media.

Positive communication about Pakistan is rarely seen in the media. American investors and the American audience in general see Pakistan as a war zone and they equal it to Afghanistan. But like you said, there are more visitors coming in and there is more knowledge of the sectors, of the market and of what is happening on the ground. What would be your message to American investors on why to come to Pakistan?

Let me second you on that. There is indeed a perception issue the country is confronted with right now. We need to work hard to improve this perception and at least make it realistic and not negative beyond reality. We do have some problems but those issues are being tackled very successfully and the environment is getting better. The US investor has traditionally been one of the larger foreign investor in Pakistan and right now we have a very large population with a growing middle class. Therefore, it is a huge market and the country has had a very strong traditional history with the US in a number ways, be it socially, culturally, educationally and on defense. This would be a very friendly place for US investors, just as it has been in the past.

In terms of the banking sector in particular, Citigroup decided to divest a lot of its shares and a lot of its interest here. How do you think you can attract more of the US banks back to Pakistan?

I think there is a tendency among international banks in which they follow their customers. If you have 20 new American corporations in Pakistan, one of the US banks will perhaps think about coming here. If you see the history of US banking in Pakistan, we used to have more, such as Citi, American Express bank and Chase. A lot of them came in the 60's and there were a lot of US government business that used to be in this region.

But besides the business side, the perspective of global banks is changing because of the Basel conventions, which are changing standards and risk parameters. These aspects sometimes depend on the country as well, so there is a wholesome of other factors. Therefore, there is a growing tendency among global banks towards shrinking and that tendency is to stay in the areas where they have a lot of strategic interests, so these days for a marginal interest no new bank will go to a different market. We have seen that tendency with HSBC, Standard Chartered Bank, Berkley and several others, who have been shrinking in the last 4-5 years.

We are getting ready for two publications, one for the G20 and the second one for the World Islamic Economic Forum. You recently said that globalization has shown the need for a regional economic and financial cooperation between the nations. What would be your message for the leaders when they sit in Turkey this year to discuss new ways of framing and making a better financial system worldwide?

In the present day we seem to be getting into these currency wars, which I do not find very positive. I think many of these tendencies can be sorted out with thoughtful discussions, instead of just blindly getting into currency wars that can lead us to greater dangers in the world economy.

I would like to ask you something a bit more personal. Your position has many demands and requires many hours behind that desk, and I can imagine how hard you must work to keep everything together. What is it that drives you everyday to come in and make a change for your country?

Around the 60's and 70's, Pakistan was progressing extremely well. In fact, in my younger years I was getting job offers from the UK and from countries in the Middle East but I decided to stay and work here, as I want to make a difference in this country. However, I did spend a lot of time outside Pakistan and I think the country has lots of potential. Those of us who have the skills and the drive to make a difference should do it unabated. I work on weekends too and it does not tire me; I think it is ambition that energizes you and I have a mission, which is to see this country prosperous and in a better position in the world.

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