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Pakistan's economic revival

Interview - February 17, 2014
Sartaj Aziz is the Foreign Affairs Secretary of Pakistan. His politiccal career started in 1984 when he returned to Pakistan after a time abroad to become the Minister of State for Food and Agriculture, a position he occupied for four years. He served as finance minister from August 1990 to June 1993 and again from February 1997 to August 1998. He first becam Pakistan’s foreign Minster from August 1998 to October 1999. A renowned peace activist, Mr Aziz resumed his political career in June of last year when he joined the cabinet as the Prime Minister’s Adviser on National Security and Foreign Affairs. According to Pakistan Muslim League sources, veteran politician Sartaj Aziz had emerged as a strong presidential candidate to be sworn in September 2013. He talks to Worldfolio about stability and security in Pakistan and coopeartion with the UK, and discusses foriegn investment
Considering that this is the first democratic transition in Pakistan, as National Advisor to the prime minister, what message do you think Pakistan is sending to the international arena?

I think the democratic transition is one of the most important features of our present situation, but it also encompasses not just the election – but several factors. I would call them strengthening of the democratic process.

As you know, Pakistan has been under military rule for more than half of its independent existence, and that has been the source of many problems, because democracy ensures the stability of the federation, not only at a federal level, but at a sub-national level and a local level. People manage their own affairs, which is critical.

This election is important, because at this particular time, there was great uncertainty as to where the election would be held and if it was going to be free and fair, and then of course the extremists started threatening the elections and saying that they should not be held and that people should not take part.

Despite that, we have had record voting participation. The proportion of female participation is also the largest in terms of voters and the number of female candidates. In that sense, the elections were different.
As you were saying, the plans for economic revival need to be made in conjunction with the opposition in the country as a whole.

In our election manifesto, economic revival is a top priority. The basic reasons are of course not difficult to find. First of all, our two major problems are unemployment and poverty. These cannot be eliminated unless we accelerate the growth rate, which over the last six years has slowed to about 3% on average, which is very low by south Asian standards and by our standards.

Our population is increasing by 2% plus, but there is not much increase in per capita income, so we need to grow by at least 6% to resolve our poverty and unemployment problems, as well as our budgetary and balance of payment problems.

You will also note in your investigations that these elections were partly performance-based and partly program-based. Parties that did not perform well over the past five years lost, and those that had better programs won. Our manifesto received the highest score compared to the other four manifestos by independent ratings, because it was concrete, realistic and well-directed. 
The first issue is the energy crisis, which has pulled us back. The prime minister and his team have spent more time on the energy crisis over the last three months than any other subject and the results are already visible.

The hours of load shedding that the country was facing have come down by at least 50 to 60%, although they are still there. The second is investment – investment has slowed down as well, and the third is fiscal management. Our budget deficit has become very high, and we have brought about a 2% GDP (Gross Domestic Product) shift in the budget by reducing expenditure by 1% and by increasing revenue by 1%. This 2% shift in our deficit was almost 8% of GDP, which is very high. This year it will come down to 6 and subsequently hopefully down to 5 and 4%. 
The other area of fiscal management also requires better governance. There is inefficiency and corruption – you spend the money, but you do not get the results. One model for better governance concerns how services are better delivered to the people.

This is more at a commercial level, but systematic returns are being made to identify those areas. We are introducing a service delivery monitoring system. We identified 7 or 8 areas and fixed benchmarks to see what is happening. The man who helped Tony Blair in establishing such a system, is now helping us establish this service delivery monitoring system. 
Also, we are now developing a very comprehensive counter terrorism strategy, which combines political dialogue with using force where necessary to be able to deal with this problem. Part of it is not in our control, because it depends on what happens in Afghanistan after the forces leave this year, and to what extent we can protect ourselves. We are tackling it, but it is not entirely in our control.
How important is UK as an ally for Pakistan regarding the pacification of the region? The UK’s Security Secretary met with you as soon as the new government was elected.

In fact, the prime minister (David Cameron) was the first head of state to visit us. They obviously showed great interest in our security as well as the welfare of our people.

This is partly an issue of assisting sectors like education, but also in terms of exchanging views on security issues. We have a regular strategic dialogue with the UK, which takes place once or twice a year, where we learn from each other. In this case, one of the important institutions is the cabinet committee on national security. The US has had a national security council for a long time, but the UK has established one more recently. 
Of course, the relationship with the UK does not just encompass security issues – it is about increasing bilateral trade and enhanced strategic dialogue. How do you see this relationship in terms of economic diplomacy?

I think it is very important. Right now our trade with the UK amounts to £1 billion, and our target is to get it to £3 billion by 2018. For us, trade is critical. One reason why all the developing countries have suffered was because during the 2008 crisis, countries such as the US were in financial decline, so that is why demand for imports and our exports therefore went down.

As a result of that, obviously trade prospects that an economy depends on to finance its imports have declined. But if countries take special steps, like giving preferences in trade agreements, and remove some of the obstacles in trade promotion, that will definitely help. Our focus in the coming years will be on trade, and not aid.

Aid is alright in a limited way for social areas like education and health, but across the board for an economy as a whole, borrowing money and financing projects and trying to pay back loans is not good enough. It is much better for investment to come in to build infrastructure projects even. If that happens, you do not carry the liability of debt.
What does Pakistan do to attract the FDI that is required?

First of all, our investment regime is quite liberal. In other words, we allow foreign investment to come in without any restrictions. We have no restrictions on the remittance of profits and capital.

Our regime to employ experts outside is totally liberal, so the policy framework is very good. We have a lot of opportunities in sectors that have not yet been fully exploited. That includes telecoms (where a lot of investment has come in), and energy has emerged as a big sector. Then we have other sectors like electronics, and chemical engineering. Pakistan is located in a very strategic position, between central Asia, West Asia and South Asia, so it is the bridge between three very important regions. Central Asia and west Asia have an energy surplus, and south Asia is energy deficient, so if Afghanistan becomes peaceful, a lot of gas and electricity can come from there.

Those regions need imports, and south Asia has a surplus in engineering technology, as well as food products and many other things, so it can become a very vibrant area for trade. 
That is why I think one of the things our government is doing right now is building a major corridor to link up to central Asia. That will open up the whole region. Before the Russians came in the 1920s and integrated central Asia as a part of the USSR, in the past centuries there was a lot of trade between central Asia and undivided India at that time. That can easily be revived. 
Regardless, FDI decreased by 40% last year. How can you instil confidence?

I think one of the things is that PM Sharif has a very positive image in the business community. He is from a business background. The policies are OK, but right now it is the extremism and law and order situation that is discouraging. Governance has improved in terms of less corruption, and there is also more objective decision-making.

Institutions take time to change, but things are improving. So the message that the Prime Minister gave was that if you want foreigners to come, you have to invest yourself, and then you will attract others.

Right now, in our manifesto, while foreign investment may take time, there are some sectors where foreign investment can come more readily.
One of them is agriculture. In the Middle East, there is a tremendous emphasis on products for importing and they are ready to invest in livestock and in agriculture irrigation etc. The second area is information technology, which does not require that kind of manpower. Everything is online. As you can see, we started late compared to India, but we are now catching up. The third area is mining. We have a lot of copper mines and a number of petroleum and gas resources. Finally, we need investment in our own infrastructure, which is partly energy and road and other networks, and housing is a very big sector, where we can attract a lot of investment.

The demand for housing is very great, particularly low cost and middle class housing. That requires public-private partnerships (PPPs) and the public sector will provide land, facilities and infrastructure and the private sector will come and build.
These are the areas that have been identified as the initial framework for attracting investment. In due course, I hope our efforts to control extremism and other related issues succeed, and as a result we will attract more foreign investment.
Congratulations on the loan that was recently approved by  the IMF. That is not just money, but it is also a sign of confidence.

The IMF loan has been a good development because the previous government borrowed $8.7 billion in 2008 when it came in. The loan was 11 billion but they were able to reduce it to 8.7.

The repayment of that loan was not due, and the next three years we had to pay back five billion plus. So this 6.7 billion loan will be used to repay that other loan. But, as you said, this opens up the opportunity for other lenders (the World Bank, Asian Bank and bilateral donors), and we hope that this loan will facilitate at least $3 to 4 billion of additional investment. Those are in areas such as power and infrastructure, which the economy needs. It meets the requirements very well. We have two very big dams that are on the drawing board now.

If agencies like the World Bank and the Asian Bank provide the base amount, then foreign investors will be encouraged to come in, it plays a catalytic role.
Pakistan’s foreign affair policy as it not only being centred on national security, but also on economic diplomacy. This is not usually seen elsewhere. 

In the very first week of the prime minister taking office, he wrote a letter to all our embassies, where he said our focus from now on is economic diplomacy, which means the promotion of trade and the promotion of investment.

This has led to a number of mechanisms, where we receive reports of what they have done, with the commerce ministry, the finance ministry and investment promotion and export promotion bureau to coordinate these efforts at a country level. Right now with the recession, there are some obstacles because demand for exports is not as high, so we are focusing on Asia. The Far East and of course China is a very good trading partner and  very big investor in Pakistan. We are also encouraging Middle Eastern investors to come.

In the meantime, we hope that things improve economically in Europe and the US and it will be supplemented by investment there.
When Prime Minister Cameron was here, he said in his speech that we care about Pakistan and its people, but we care the most about its future. You have been a high profile figure in Pakistan for a long time now. Where do you see Pakistan’s future? 

We have been through a bad patch over the last few years. In the 1990s when Nawaz Sharif first came, we carried out major reforms in the economy. We liberalised the old system and the public sector was removed, and we started growing very fast.

Investment quadrupled and foreign investment doubled and the stock market went up threefold. In fact at that time, our program was heading the right way, but unfortunately there was political instability and the Government was dismissed. When we came back in 1997, there was a bad situation, because the nation was experiencing an economic crisis and we had our own judicial crisis. There was nuclear testing and sanctions, so we could not take full advantage. Now it is the third opportunity for this government. We have been very determined to revive the vision that was guiding us towards getting Pakistan to a new threshold of growth and progress.

I hope that if the international factors remain favourable, our own capacity will be limitless, and I think we will be able to achieve it. I see the next five years as very hopeful years for the people of Pakistan to overcome their issues of poverty and unemployment, and at the same time, build a Pakistan that is more harmonious. We have been plagued by ethnic and religious provincial polarisation in different ways, so building a harmonious society in itself is a very major objective. We hope that as we make these efforts and overcome extremism, then Pakistan will be able to live with itself and the rest of the world as a peaceful and progressive nation.