The continuation of democracy in Pakistan, with this democratic election last June, has raised the investors’ confidence around the world that Pakistan can make huge improvements on the main challenges that this country is facing. What is your opinion on the economic outlook of Pakistan?
You know Pakistan is a country of almost 180 million people and an average per capita of a thousand dollars. We have to get into the next level of emerging economies. We need equitable and sustainable growth of between 8 to 10 per cent over a long period of time. And to achieve growth of that magnitude, one of the things that we clearly need is a very clear road map.
And that road map should not be limited to 3 to 5 years. It has to be a long-term economic road map, which means, in some fundamental economic issues, it needs to be a consensus amongst all the political parties.
That consensus will never be there if there is disruption in democracy. I think at least we are past the first test. There has been a, , very smooth transition from one democratically elected government to another democratically elected government. So, hopefully this will continue and if this continues, then comes the second question that of having a road map. An economic road map, at least on some of the fundamental issues, like taxation, privatisation or rather managing of public sector companies;, and energy sector reforms is necessary.
The next important thing for the economy is the law and order, because, unless you have a kind of stable law and order environment in a country, you can never push the economic growth. On the economy, we should also look at what are we doing in the social sector, meaning health and education of our people…
These are some of the things which need to be agreed upon, on which we need to have consensus. We have neglected them in the past, and over a period of time we have not made rapid progress.. So it’s fundamentally important that we have consensus.
Sir, the recent achievement of the GSP-plus status has also been taken as a positive sign for Pakistan. How big is this for Pakistan’s exports and how will it impact the industrial development?
It will help. Clearly, this will be a boost to our manufacturing sector. We have two sectors in our economy who are major employers of people one is the agricultural sector and the other is the manufacturing sector. Both of these sectors have to be looked at as far as planning and investments are concerned.
In manufacturing we basically have a very narrow base, and very little, value addition. If I can give you an example, a one million bales of cotton give us around a billion dollars, which is around 4 billion dollars in China, and probably 6 or 7 billion dollars in Turkey. So we are way off as far as value addition is concerned. GSP-plus is going to give us that incentive to actually add value in the textile sector. Overall what we need to do is to make our manufacturing competitive. We have to concentrate in those areas where we do have the advantage, where we can stand up against the best in the world. That will not only help our exports, but it will also limit the imports.
Yes, a stronger industry as well. Sir, regarding the foreign direct investment, I know that the first step for foreign direct investment is domestic investment. Now, Pakistan is fighting a perception war. Reality at ground level is not the same as what you read in foreign newspapers, for example. Do you think Pakistan has to correct this in order to attract more FDI? What would be the proper steps?
Pakistan has to firstly, recognise that there is a law and order situation in Pakistan. We should not become ostriches.
There are cities like Karachi and some of the other cities that basically are affected more than others. If you take Karachi or Peshawar or Quetta, among others, the people are suffering due to violence. So we have to take effective steps to take care of this issue. Now comes the 64 thousand dollar question, how to attract foreign investment. Foreign investment is not going to come in just because we conduct some kind of PR sessions and do some PR activity.
I think investors will see what is happening on the ground. As you said correctly, the first ones we should focus on should be our own domestic investors, the Pakistanis who basically are sitting on the fence. That’s number one. Number two should be the Pakistanis overseas. These non-resident Pakistani entrepreneurs are investing in the Gulf, UK or in the United States.
We should go to them and say, ‘by the way, why don’t you come home and invest? These are the kind of incentives we are giving.’ I think there are more chances that those guys will come in, because to them Pakistan’s risk is minimal.. And if we are able to bring in the domestic and the non-resident Pakistanis then comes the international investor. For them we’ve got to also look at some ways of placating their concerns, like making specialized industrial parks; which should have security, should have golf courses, residential areas. What happens in Africa, in South Africa and in so many other places, we can also do.
Like Port Qasim, right?
Yes. People there are protected and this is what people require. Safety becomes important for people. So that’s the third level. But in the meanwhile what we need to do is, as we discussed earlier, that we should have a clear road map of policies, which are enabling and where there’s very little intervention of the government. The government should act more like a facilitator rather than an obstacle.
Once that environment is provided, the foreign investor will start trickling in and then it gets bigger and bigger as the confidence grows.
The snowball effect… Regarding the banking sector, sir, there around 25 million of banking account users, while the country has 180 million plus inhabitants. There’s a lot of population and due to this, the mid sized banks specially have an aggressive competition among themselves, this is why they developed new products going into agricultural belt, having more branches, branchless banking… I want to know what your opinion is on the path forward for mid sized banks and what role Silk Bank will play on this.
Frankly speaking, banking sector has done well over the last 15 to 20 years I was one of those people who was brought in 1997 by Nawaz Sharif, to fix Habib Bank - which was technically bankrupting 1997. I was brought in from Citibank and with a small team we turned it round. So in the last I would say 15 or 17 years, banking has done relatively well, but banking is nowhere where it should be. The banking coverage of the GDP is only 33%. The lending coverage is no more than 18 %, which is pathetic. This is the real problem.
Banking only supports the GDP, no more than 17 to 18%, whereas this is in excess of 50% in India , and 180% in Korea. So just look at the gap, which means, as Allana said, we actually have not done any banking in this country. So the Central Bank of this country should start taking note of this situation. We are taking away resources from most of the country and actually channelling them into four or five major cities; Karachi, Lahore, Faisalabad, maybe a couple of other cities in Punjab, that’s it. We have 550 billion rupees plus of deposits from KPK, and loans of only 50 billion. One tenth! This statistic is just shocking. Same is the case with Baluchistan, Northern Sind, Southern Punjab and Azad Kashmir.
Where is the money going then?
It’s coming back to these major cities. 60% into government securities, 40% into loans and those loans are in these four or five major cities. So there’s a distribution issue.
The second issue is sectorial distribution. Mostly funds are given to the corporates. SME that used to be 17% only seven years ago has shrunk to7%. . Consumer loans used to be 12%, are down to 6%.
The rest goes mostly to corporate sector. Agriculture is also only 7%. So there is a sectorial distortion, as well as a geographic distortion, and the overall banking is not reaching the people. Therefore there has to be a major rethink of how we do banking in this country. . Not many companies are going directly into the market. The role of smaller banks or mid sized banks will become crucial now, because large banks are basically becoming risk averse.
Look at the loan to deposit ratios of these banks that is less than 40%. Silk Bank, on the other hand, is closer to 65. That is because of the philosophy of the management, and the board of directors. We are in the business of doing banking and we are not in the business of lending to the government.
From a perspective of actual banking, the central bank should become strict with banks who just lend to the government and sit back, that is not banking. They should pay higher taxes or they’ll have to be penalized for not lending to the private sector.
What are the things you think could be exchanged in terms of the banking sector between the UK and Pakistan? In terms of technology or know how? To broaden also the banking sector here in Pakistan, what do you think could be learned between the two countries?
We can learn from them , as we are still way behind in banking. From the UK we need to learn investment banking, and how to set up private equity. The financial sector over there needs to educate us, on how to create debt markets, consumer products such as mortgages. The mortgage market is very small here.
Sir, I know you must have, like every Pakistani, a very resilient and hopeful spirit, what do you think is the true potential Pakistan can achieve?
Amazing potential. You see, it’s one of the few countries where the number one resource is the human resource. And it’s one of the best. I used to manage Citibank in Dubai. I used to have twenty-four nationalities in one building, and Pakistanis were one of the best.. Second, if you look at Pakistan’s geographic situation, Gwadar is a territory where if we can have peace and tranquillity we can have a free port. Then from western China to central Asian republics, all their trade can be moved through this channel. By the way, China and Pakistan are working on this corridor.
This is God’s given geography, because the Japanese and the western countries and everybody else can come and set up industry over there, and send their products to China, Central Republics, Iran, Afghanistan and to Gulf and Africa..
Then, we have the mountains, the long seacoast, the plains. I mean, if you look at Pakistan, from material resources to human resources, we are very rich. The only thing we need to do is to exploit these resources productively. In Pakistan if we can provide our people a level playing field Pakistan will progress and that is why I think Pakistan is a great destination.
We’ve identified some sectors to show kind of what is next for Pakistan’s economy. What do you think is the next step? We have identified IT and telecom ports and shipping, for example, infrastructure development and real estate… what would you say is the next step for Pakistan?
Agriculture. You have to understand that Pakistan is an agrarian economy. And one of the things we have not exploited is the agricultural sector, whether it is how we distribute water or how we just go and market our products. We do nothing. Fifteen years ago India and we were producing the same amount of cotton, which was about 14 million bales. Today India produces 34 million bales and we’re still at 14 million bales. So look at the potential we have and we have not harnessed this potential.
Agriculture could be one area where we should work on better seeds, mechanisation, and integration into manufacturing of fruits and juices and then better marketing..
If you had to choose one strategic decision that changed many things in your professional career, what would it be?
I wouldn’t change anything. I would go to Citibank the way I did. I learned a lot from that school of banking called Citibank. Coming to Habib Bank was then a leap of faith. And then I just jumped off and went into government, although I suffered a lot, but it was challenging, it was for the country. Many things I have done have been very challenging and also very rewarding. I’d like to do the same. Banking first and then becoming a politician and an entrepreneur.
When I left Habib Bank I bought Union Bank with a couple of other people, we bought it for about 12 million dollars and sold it for 350 million dollars, in six years, so we made some money. Not too bad.
Silk was rebranded from Saudi…
That was very interesting. Landor is a company that does this rebranding; they did British Airways and some other companies. They came with a list of names and Silk was one of the names. -People questioned why Silkbank, my answer was if a computer company can be Apple and a mobile company an Orange, why can’t a bank be Silk!