Interview with Dr Ayub Mehar — a renowned economist
PAGE: Kindly tell something about yourself:
DR AYUB MEHAR: Currently, I am working with the Asian Development Bank on Infrastructure Financing in CAREC member countries. I am serving as Professor in Iqra University Karachi and also an Economic Advisor of the Employers’ Federation of Pakistan (the largest representative body of the entrepreneurs and investors in Pakistan). Development Financing, Macroeconomic Policies, International Trade and Finance and Economic and Financial Modeling are areas of my research interests.
I have completed several policy research studies for international financial institutions and think tanks including ‘Impacts and Financing Infrastructure Development in Pakistan: Role of CPEC and FDI’, ‘Infrastructure Development by Liberalizing Economic Policies: The Straight Path of Economic Prosperity’, ‘Financial Cooperation in South Asia: Recent Development and Challenges’, ‘Political Economy of Subsidies’, ‘Magnitude and Determinants of the Flows of Investment among South Asian Countries: Considering Economic Prosperity without Politics’, ‘Privatization in Pakistan: Theoretical Evidences and Policy Implication’, and ‘South Asia in New Economic Order: Need of Accelerated Liberalization Process’.
In recognition of my expertise, the Technology Policy and Assessment Center at Georgia Institute of Technology acknowledged its membership in the distinguished panel of international experts for Indicators of Technology-based Competitiveness, which is a project of the US National Science Foundation, United States Government.
PAGE: Could Pakistan attract whopping investment in a year or two to address its economic woes?
DR AYUB MEHAR: It is extremely important to understand that mother of all the present economic crisis in Pakistan is the sharp decline in foreign exchange reserves. This decline is the only cause of depreciation in Pakistani rupee, while growing inflation, poverty, declining domestic investment and unemployment are the ultimate consequences of the depreciation in the local currency. The decline of foreign exchange reserves pushes the government to borrow from the International Monetary Fund (IMF) and accept their conditionalities. The attention of government is diverted to the short-term borrowing from international financial institutions and friend countries. The continuous decline in exports and FDI during the last political regime is responsible for declining in foreign exchange reserves. It created a liquidity crisis in the economy.
To build the foreign exchange reserves and sustainable growth in exports we need foreign direct investment. This is the only solution of current economic crisis. Though government is trying to manage this crisis through inflow of capital in the form of deferred payments, investment and lending facilities; all these are short-term measures. There is no visible policy measures for sustainable growth in foreign exchange reserves or FDI.
Last month (September 2018) the Ministry of Commerce and Textile has introduced a ‘Trade Related Investment Policy Framework (TRIPF)’. Unfortunately it seems another document like several works completed on papers during the last decade. Based on these phenomena, I cannot predict that Pakistan will attract whopping investment in the coming year. If the government is succeeded to prepare a feasible plan to attract the foreign investment – which is possible in the present global context — then scenario will be changed. But the problem is that no policy measures have been revealed till now.
PAGE: What do you think is the missing point in terms of poor investment by the leading investors of the world with regard to Pakistan?
DR AYUB MEHAR: One of the major reasons of deterioration in foreign investment and exports is Pakistan’s inactive economic and trade diplomacy, which is an integral part of the foreign policy. Effectiveness of economic diplomacy can be measured by various indicators including significant inflow of foreign direct investment, enhancement of exports, foreign remittances, the number of workers at abroad, arrival of the foreign delegates and visitors in the country, and the number of joint ventures, mergers and acquisitions with foreign affiliates. A successful economic diplomacy improves not only economic relations, it enhances also the magnitudes of incoming and outgoing professionals, students, tourists, sportsmen, and even NGO workers.
Flow of foreign investment, collaboration and joint ventures among world leading business groups, integration of financial institutions, relocation of the production activities of gigantic transnational corporations, migration of workers, brain drain of experts, mergers and acquisition of foreign companies, imports and exports of goods and services, set up of foreign offices and business outlets, transfer of entrepreneurships and participation in planning of international businesses are including in those activities of private sector which establish the strong and sustainable linkages among the countries.
Unfortunately, the private sector has failed to perform these activities and support to economic diplomacy. The focus of private sector representative bodies is on ‘photo sessions’ and ‘events management’ for publicity. There is a strong need of legislative changes to activate the role of private sector in the economic diplomacy and the inflow of foreign investment.
PAGE: Your views on financing opportunities for the local investors in Pakistan:
DR AYUB MEHAR: This is an important concern and one of the darkest area in Pakistan. The industrialization and investment activities are always routed through private sector, while an optimal combination of debt and equity is always required. This optimal combination depends on the size and type of business and its administrative structure. The financial sector provides a bridging between the savers and investors. Through financial sector the public savings are transformed into investment activities. The commercial banks, non-banking financial institutions and non-banking finance companies (NBFCs) are included in those companies which transform the savings into investment. Unfortunately the Government in Pakistan has become the largest user of public savings. For instance, in the present budget the government has planned for heavy borrowing from commercial banks to finance fiscal deficit. According to budget documents, government has planned to borrow more than one trillion rupees from commercial banks. This heavy borrowing from commercial banks indicates the government intention to utilize public money for deficit financing. Obviously it will provide an easy option to banks to lend the public money to the government. This lending will be safest from the bankers’ point of view as it provides handsome risk free rate of return.
Consequently, public savings will not be transformed into investment and industrialization in the country through ‘Banks’ Credit to Private Sector’. This is the highest planned bank borrowing in the history of Pakistan. This magnitude of planned public borrowing from commercial banks is greater than annual borrowing by private sector in the country. The budgeted quantum of bank borrowing was Rs.228 billion in fiscal year 2014-15, Rs.283 billion in 2015-16, Rs.452 billion in 2016-17 and Rs.390 billion in 2017-18 (though actual borrowing was Rs.586 billion). However this year government has planned to borrow Rs.1015 billion from the commercial banks. It is obvious that this policy will reduce the bank’s ability to finance the local investment in the country. Another important observation from the economy of Pakistan is that the aggregate debt to equity ratio of the commercial enterprises in the non-financial sector is lower than international practices. The aggregate portion of debt in the capital is 32 percent only, while globally it accounts for more than 50 percent. Even the share of debt in the total capital of private sector companies is less than the share of debt in public sector commercial organizations. It indicates that private sector in Pakistan avoids from debt financing.
The small, inefficient and inactive bonds’ market is another reason of lower debt financing in Pakistan. The debt financing is more difficult for Small and Medium Enterprises (SMEs) in Pakistan. The role of banking sector in SMEs financing is grossly discouraging.
According to the World Economic Forum (WEF) statistics the banks credit to SMEs as a percentage of total banks’ credit is 40 percent in Bangladesh. This ratio is 25 percent in India, while less than 4 percent in Pakistan. These statistics are enough to explain the financing for investment in Pakistan and particularly in SMEs sector.
PAGE: What are the enormous challenges being faced by the newly-established government of PTI?
DR AYUB MEHAR: Apparently, the new government has to face several challenges on economic fronts. The lower GDP growth, increasing trade deficit, high fiscal deficit, depreciation of domestic currency, sharply declining foreign exchange reserves, growing losses of public sector organizations, the circular debt of energy sector companies, accelerating rate of inflation and high rate of unemployment are the obvious problems. There is no disagreement that government has to face these issues along with the implementation of its economic agenda and election manifesto.
In its manifesto, government has promised to create 10 million employment opportunities, construction of 5 million low income houses, 7 percent GDP growth, and collection of 8 trillion rupees in taxes. What is the plan to achieve these targets?
According to the State Bank of Pakistan, the country is facing shortage of 11 million houses, while the World Bank has estimated that every year 0.33 million houses shortage is added in Pakistan. These estimates indicate the severe problem of houseless peoples in Pakistan. In this context the ambitious target of the construction of 5 million houses during the next 5 years seems a step in the right direction. But without financial feasibility it will be mere a wishful thinking. One of the important considerable point in this connection is the size of finances for housing in Pakistan. The housing finance to GDP ratio in industrialized countries is 59 percent where it is supported by mortgage and sub-mortgage financing and derivatives markets; this ratio is 7 percent in India and one percent only in Pakistan. To bridge the six percent gap in terms of housing finance to GDP ratio the country is required 17 billion dollars or Rs2040 billion. On the other side the cost of an average 120 square yard house with 2 bed rooms, one drawing/dining and 2 bath rooms to cater the average household size of 6.31 person is Rs1.5 million. It covers the cost of construction and land in the suburb areas. It gives an idea that Rs7500 billion ($62.5 billion) are required to finance 5 million houses, which is not seems possible in the current scenario. The mobilization of public savings in financial institutions and commercial banks to finance housing sector may damage the growth in other industrial sectors.
PAGE: Your comments on the trickle-down effects of the current economic policies:
DR AYUB MEHAR: In the socioeconomic context of Pakistan, the fiscal and monetary policies take 2-6 weeks’ time for their trickle-down effects. It means if government takes a decision to impose new taxes or change in the tax rates or increase/decrease in prime rate of interest, its effect will be reached at the lower income groups between 2-6 weeks. However, first round effect of the indirect taxes and administered prices is trickled-down immediately. The peoples have already suffered the drastic effects of increase in electricity, gas and petroleum product prices.
The Finance Minister and the State Bank of Pakistan have indicated the difficult time in near future. These effects do not cover the possible impact of the ‘Austerity Measures’ which have not been taken yet. Though government is planning to take austerity measures to create fiscal discipline in the economy. Other than the adverse effects of policy measures, the government is expecting positive effects of its policies in long-term. According to government expectation, the enormous employment opportunities will be created in response of its policies in future. However, what are the policies, it is not yet clear. The future cannot be predicted without revealing the policies.