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Public sector input and more FDI attraction can help gas, oil and energy grow up

Inflationary pressure will aggravate economy; must to uphold investment and industrialization

Pakistan private sector should take active role for the benefits of CPEC
Corrective and important policies needed to get country into while list of FATF
Interview with Dr. Ayub Mehar — an economist

PAGE: Kindly tell me 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 ‘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: How do you see inflationary pressures on the economy by the end of this fiscal?

Dr. Ayub Mehar: The present inflationary trends in Pakistan are entirely different from past inflation. These trends are different in their basic characteristics; so their consequences may be different. At least three basic characteristics of present inflationary trends explain the nature of present inflationary trends in Pakistan: First, the growth in sensitive price index (SPI) is higher than consumer price index (CPI) which shows that prices of essential commodities which are used by common peoples are growing faster than other commodities. In other words, you can say that poor people are being more affected than higher and middle income groups. It is extremely a dangerous indicator. In past the growth in Consumer Price Index (CPI) was higher than Sensitive Price Index (SPI), which means lower income group was less affected by inflation. Second, pre-Ramazan growth in the prices of goods and services does not reflect the surge in their demand.

The producers and sellers are facing a recession-like situation where is the lack of buyers in the market due to decline in the buying power. An increase in prices despite lower demand of goods and services reflects the cost-push nature of inflation in the country which does not relate with the growth of GDP. Third, the depreciation in the value of Pakistani rupee has become a major contributor in the high rate of inflation. It means the cost and profits on local production is not a major cause of inflation. The depreciation in Pakistani rupee is transformed into prices of imported industrial raw materials, petroleum products, machinery and spare parts, chemicals and pharmaceutical products, which lead the higher inflation. The consecutive increase in oil prices and change in Consumer Price Index (CPI) tells the difficult situation at the end of this fiscal year. The peoples will have to face a further hard time.

PAGE: How would you describe the surge in the discount rates over the period of last one year?

Dr. Ayub Mehar: Unfortunately, the interest rates in Pakistan (including profits on Islamic banking products) are not based on market mechanism. These interest rates follow the discount rates, which are determined by the State Bank of Pakistan in its monetary policy statement. All interest rates including Karachi Inter Bank Offering Rate (KIBOR), profit on saving accounts, profits on all term-deposits certificates, interest on lending from commercial banks, rental of assets leased by the financial institutions and interest or rentals of the leased real estate follow the discount rate announced by the State Bank of Pakistan. Consequently, the monetary policy determine the cost of doing business and the rate of inflation in the country.

In this context the present trend of increasing discount rates over the period reflect the increase in cost of investment and doing business. This situation will lead the lower growth in GDP and investment activities. Naturally, lower employment opportunities and higher inflation are its consequences. The monetary authorities think that tightening in monetary policy through interest rate mechanism is required to control over expected inflation. But historically it has been observed that monetary policy is not effective in Pakistan because of various economic and political constrains. In fact, in determination of the discount rate the timings are more important.

The surge in the discount rates at the time when Pakistani investors have to face a tight competition with their foreign counterparts (particularly with Chinese investors) is not an appropriate policy. The foreign investors can arrange money for investment in Pakistan at a much cheaper rate of interest from their domestic banks, while Pakistani investors have to pay the higher cost of debt which mean they will not be in a position to compete with their Chinese counterpart. Though a good aspect of the increasing rate of interest is the attractive return to the depositors. But it will be beneficial only for those depositors who are not running their businesses. It will not help to those who are seeking for employment opportunities.

PAGE: What must be done forthwith to tackle the precipitous devaluation of the local currency over the period of last one year?

Dr. Ayub Mehar: First it must be understood in this respect that value of a currency is determined largely through the quantum of foreign exchange reserves in a country. The value of local currency will be strengthen and appreciate if the country has attractive stocks of foreign currencies. It reflects that country will not buy the foreign currencies from the international markets, so demand of foreign currencies will be lower in this country. The situation will be reversed in the presence of lower reserves of foreign exchange. Unfortunately Pakistan is facing a severe crisis of foreign exchange reserves, which are lower than its current requirements to pay its import bills and external debts installments.

It is noteworthy that the present depreciation in the value of Pakistani Rupee against US dollar has badly affected the expectations about the future of Pakistan economy. However, it is noteworthy that this decline was quite expected. How one can expect that there will be no depreciation in the currency in the presence of growing current account deficit. There was no significant inflow of foreign investment. So, decline in the foreign exchange reserves was quite obvious. How in this scenario we can ignore the devaluation. It was quite expected. After a stagnancy now the value of US dollar in term of Pak rupee once again appreciating which mean weakening of Pak rupee. This may be a harmful trend for the economy because it will lead to inflation and poverty and the quantum value of external debts will increase in term of Pak rupees. It means government need more money to repay its debts and debts servicing. This situation indicates the imposition of further taxes mainly GST.

Now, either we have to arrange foreign exchange through agreement with the International Monetary Fund (IMF) to save the country from default or buy the foreign currency from open market. This heavy buying of foreign currency will appreciate the value of US dollar and other trade dominating currencies.

The sustainable solution of this problem is only the growth in exports and inflow of Foreign Direct Investment (FDI). All efforts to attract FDI and enhancing the exports have been failing in past 10 years. In fact, the enhancement in exports and inflow of FDI require some structural changes. Through traditional policy and cosmetic measures we cannot improve the situation. We will have to improve physical infrastructure and regulatory frameworks to support the investment activities. We cannot enhance exports through production and exports of traditional primary and intermediate goods. We will have to enhance the capacity to produce knowledge base products. The integrated policies are required for this purpose which is a domain of the Planning Commission. The Planning Commission in Pakistan has become an ineffective organ of the state. Its plan and policies are not integrated with the monetary and fiscal policies. It is responsibility of the Planning Commission to prepare feasible and visionary supply side policies to promote the investment and industrialization in the country, while the monetary and fiscal policies should be harmonized with the investment and industrial policies.


PAGE: How beneficial is CPEC going to be for the economic growth of Pakistan in the not-too-distant future?

Dr. Ayub Mehar: There is no disagreement that China-Pakistan Economic Corridor (CPEC) will be a game changer plan, which can accelerate the economic growth. This project is a part of ‘One Belt, One Road (OBOR)’ initiative of Chinese Central Planning. The objective of this project is to provide linkages to all Asian and European countries through surface roads. CPEC is most important part of this mega plan because it connect to Eastern corridor with the Southern corridor at Kashgar. It means six Central Asian Republics, China and Afghanistan will be connected with the Arabian Sea. An important economic aspect of this plan is the construction of Economic Zones in Pakistan adjacent to the corridor. Seven economic zones are in the priority list. These zones are managed by their management companies in private sector and certain incentives will be available to the investors in these zones. One of the zone is China specific while Pakistani and other foreign investors can invest in other six zones. The investors from Europe, Korea, Japan, UAE, Saudi Arabia and China have shown their interests to invest in these zones in various sectors including Chemical, Petrochemicals, Electronics, Automobiles, Information Technology, Textile and other industries. There is no doubt that investment in these zones adjacent to the CPEC will enhance investment and business activities, industrial value addition, GDP, employment opportunities and supply-chain activities. However, foreign investors will be allowed to transfer their earnings outside Pakistan. They can employ foreign workers in their industrial units subject to implementation of Pakistani laws and regulations.

The important question in this regards belongs to the share of Pakistan in all these developmental activities and economic progress. Naturally, the share of Pakistan in industrial growth, employment, tax revenues, and earnings will depend on the contribution of Pakistani investors in the new ventures and activities. Though no visible significant contribution of Pakistani investors can be observed till now. While one of the major reason of the insignificant contribution of Pakistani investors is the ‘Unawareness’. There is no effective mechanism to attract Pakistani investors to participate in this mega project. The stereotype seminars in hotels and other institutions, columns in the newspaper and booklets by the various organizations do not provide required information to the prospective investors. They need some economic and technical information to prepare their feasibilities on the basis of long-term initiatives. No institutions is working seriously on these aspects.

To get the bigger share in the benefits of CPEC the private sector of Pakistan will have to participate actively in the investment activities. No doubt, the most important question from the general public and policy makers’ point of view is that who will own these projects and who will get how much benefits.

PAGE: Could you give your views on the impending IMF deal?

Dr. Ayub Mehar: The deal with IMF at this time has multiple aspects. First, it is important that Financial Action Task Force (FATF) has included in Pakistan in its grey list. It does not mean that Pakistan is black listed. International Monetary Fund (IMF) is the observing member of FATF and its follows the decision made by FATF. The inclusion of Pakistan in grey list was initiated by India and it was seconded by USA. Pakistan is not a member of the FATF decision making body. Now, at this stage IMF may be reluctant to sign an agreement unless Pakistan ensures the implementation of FATF recommendations. The FATF includes those countries in its ‘Blacklist’ which are proved to support terrorists’ activities or corruption through financial activities.

According to FATF recommendations Pakistan needs to change financial regulations to create transparency in the monetary transactions. These include bio-metric requirements in opening bank accounts and appointing directors in joint stock companies etc. Pakistan has already taken necessary steps to implement these recommendations. However, the proposed ‘Amnesty Scheme’ may be another point of disagreement. So, Pakistan will have to realize that this scheme is not to protect the corruption but the objective of this scheme is to bring the financial assets on record for future transactions.

Another important aspects of this scheme which must be in the minds of policy makers is the corruption in taxation system particularly in the indirect taxes (GST). The evasion of direct tax (income tax) reflects that the corrupt peoples have concealed their income and wealth and they have not paid the taxes on their earnings. Naturally it is not a justifiable action by any manner. However, the corruption in indirect taxes (GST) is extremely bad which damaged the entire morality of the economy. There are two possible ways of corruption in GST. The producer (or seller) collect the GST from end consumers but do not deposit into national exchequer by hiding its sales volume. It is not only a tax evasion but eating the public money. In most of the cases the producers or sellers collect GST from the poor peoples, so these peoples have to pay higher prices of essential goods. But these taxes are not deposited in national exchequer. So this money which was collected from poor peoples in the name of taxes is transferred to the wealth of rich peoples (producers of manufacturing goods).

The other way of corruption in GST system is to claim and receive the unlawful ‘Refunds’. The taxation system in Pakistan allows the refund of sales tax to the exporters if they have paid GST on the purchase of raw material and intermediate goods. However, there are several examples where refunds have been received without exporting anything. It means that the money which was deposited by the peoples into national exchequer was fraudulently used by corrupt peoples. To stop such practices the effective administrative measures are required. No doubts, judiciary and National Accountability Bureau (NAB) and other institutions can play an important role to stop this type of corruption. These institutions can create more transparency in monetary transactions. According to the various economic think tanks it is estimated that effective administrative measures to stop the corruption in GST can increase the collection of taxes by Rs.3000 billion, which is a significant handsome amount to enhance fiscal capacity of the federal government to launch the required development projects. It may be helpful to deal with IMF and bringing back Pakistan into the white list of FATF.

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