Instead of devaluation, tariffs should be placed on all non-essential imports
Also mass-scale marketing effort need to be executed to increase exports
Interview with Mr ISMAIL SUTTAR – Chairman, EFP Economic Council
PAGE: Tell me something about yourself and your career, please:
Ismail Suttar: I am currently serving as the Chairman of the Economic Council at the Employers’ Federation of Pakistan (EFP-EC). The 68 years old non-profit entity is an active constituent of the International Labor Organization (ILO), which serves as the ‘voice of employers’ for its largest single stakeholders’ body in Pakistan, comprising of over 900 organizations and 28 leading industrial and chambers associations. As a professional, I am the CEO of Hub-Pak Salt Refinery, and also work in close liaison with the national government as well as the business community to resolve key outstanding issues faced by industries.
Through our first of its kind membership of the Commonwealth Enterprise & Investment Council (CWEIC), we are strategizing a plan to set up trade and remittance channels in the greater Europe, Eastern Asia and North and South American regions. Later this year, we are also scheduled to host a major road show in London, under the banner of “Invest in Pakistan”.
The EFP-EC also comprises focused subcommittees addressing a multitude of pressing socioeconomic and national issues such as water shortage, climate threat, law and order, cyber crime, etc. We are currently in the process of establishing industry-academia linkages with top business and engineering schools of Pakistan. On the other hand, forming research think tanks through these connections is an integral part of our plan and because we believe there is a lot of untapped potential among the talented youth of Pakistan.
Some of the milestones which we have achieved in a short span of 6 months include acquiring a 0.32 million tons contract of rice from Philippines; facilitating ease of visa regulations for Pakistanis in Qatar; formulating a comprehensive 2025 economic vision and drafting budgetary proposals for the incoming FY20. Moreover, we are well synced with Pakistani missions abroad and are charting out numerous trade exhibitions to further ‘Make in Pakistan’ deep in communities abroad.
PAGE: How would you comment on the remittances received by Pakistan every year?
Ismail Suttar: Pakistan is a developing country, where when it comes to technology it is like going back to days of horse-and-buggy. Plus, the inveterate corruption, butted against political crimes of past governments such as money laundering, stretching from the top hierarchy of state institutions down to the level of local businessman, has subjugated us to influential financial entities. The subsequent unstable state of our economy today, with soaring public debt and inflated trade deficit, has pushed us to heavily rely on our primary [and only] non-debt source of forex earnings from the roughly 9 million Pakistani expatriates scattered around the world.
Qatar promised 100,000 jobs for Pakistanis, improve labor rights for immigrants. In the 2022 FIFA World Cup, there is a great opportunity for employment but the government here, needs to set-up vocational training institutes to upgrade the professional skill set [mix] of workers and familiarize them well with foreign culture and language of host country.
To pace up immigration, efforts should be garnered towards strengthening bilateral connections with Pakistani embassies, to clear hurdles and ensure affordable accommodation. This along with establishing foreign bank branches and an easy money transmit channel will cohesively augment the inflow of remittances. It is motivating to see that the ruling PTI-government has tightened regulations on anti-money laundering, and is working to demolish all informal transaction channels such as hundi and hawala but incentives such as tax exemptions and voting rights to overseas Pakistanis are equally imperative to upscale inflow of remittances. The government should step-up efforts to safeguard migrant rights of Pakistanis abroad and work out a plan to shift focus away from blue-collar to white-collar job opportunities – from cheap technician class to expensive engineer who can be more productive to the foreign labor market.
Remittances are important, but along with it too is keeping a balanced perspective on expanding cultural and social networks of diaspora as it will automatically translate into spurred growth.
Lastly, I would suggest the government adopt best international practices such as the Chinese Model, which came about in the 1980s when the communist country opened up its economy to the world after the exhausting cultural revolution. Through this model, returning overseas Chinese nationals were made stakeholders in special economic zones because they were more literate and had technological know-how. These expatriates [students] helped set up hi-tech industrial parks and research councils for engineering and mathematics. Pakistan needs to learn lesson from Chinese Model and own the Pakistani diaspora abroad in every sense of securing their rights and indulging them in well-articulated projects to attract them back to motherland. This will have meaningful impact not only on remittances but also on export competitiveness of which EFP-EC is especially concerned about.
PAGE: What are your views on the recent depreciation of rupee and is rupee depreciation the real cause of economic woes in Pakistan?
Ismail Suttar: Devaluation is not the solution to the warrying economic woes of Pakistan. The bigger problem is corruption, money laundering, circular debt and lack of civil awareness among the general public. In the past, we only had to go to the IMF because economic planning had failed to materialize. At the onset of PTI-government, we were at crossroads with bankruptcy, and internal political conflict fueled by foreign elements. The country was [still is] in deep trenches of inescapable web of social dominance by the avarice over the destitute and the imminent threat of climate change owed to marginal forest cover. The resulting shortage of water supplies, malnutrition, and dwindled employment and literacy levels have pushed us far into a mess created by our own rulers who remorselessly looted public treasury into their offshore accounts.
The former government had artificially maintained the exchange rate to a fixed Rs.105 for far too long which sent imports sky-rocketing. Now, it seems the IMF wants the PKR close to its theorized true market value of Rs.170. In the present state, thankfully global oil prices are calm because on one hand, amid geopolitical tensions and trade pattern ambiguity, there is more than enough oil supply; whereas in another market of the world there are manifold supply shocks and the result is cancellation effect. However, in future oil price might surge and if devaluation continues unabated, then let me reconfirm that it will break the backbone of our industry and with it also of the common man. The common Pakistani, so as we speak, is faced with surmounting pressure of utility bills because of the hike in inflation which has diminished his purchasing power. Petroleum and palm oil capture 25 percent of our imports. The high input cost associated with devaluation will stall the import of raw materials and machinery and equipment necessary for growth. The high trending interest rate will reduce competitiveness of our exports, negating the very purpose of devaluation and if it really has to work then export volume must increase.
However, as per statistic of past 8 months, there has been no growth to match the over 40 percent devaluation since December, 2017. So, I think instead of devaluation, tariffs should be placed on all non-essential imports and mass-scale marketing effort be executed to increase exports. We should send trade delegations and promote ‘Made in Pakistan’ in various road shows abroad. The free trade agreement with Chinese on 313 tariff lines is one such measure and the other could be encouraging exporters to market their products directly to consumers through convenient e-commerce platforms.
PAGE: What needs to be done to ameliorate the economy of Pakistan?
Ismail Suttar: The economic crisis is getting out of hand especially in the downward spiral of our currency against the dollar. This is causing inflation, slowing growth, and increasing our debt burden. Following are some steps economic advisors and policymakers can adopt:
1. The first order of the business is to reduce chaos and perception of lack of control of the situation. We are in dire straits but it is not an existential crisis. All politicians should refrain from making any statements that add to uncertainty and chaos. The government should improve its communication and transparency. Their spokesmen should be carefully selected and then explain their strategy in as much detail as possible. Regaining lost trust is critical and it is achievable.
2. Countries that have weak institutions, polarized politics, strong vested interest groups, and high trade deficit cannot afford to have a free-floating currency. According to Dr. Aadil Nakhoda, a renowned International Trade Expert working at IBA Karachi as an associate professor, China has over $3 trillion worth of foreign reserves, which is more than 36 months of its imports. He quoted saying that this allows China a lot of flexibility in the foreign exchange market. Pakistan requires dollars to be able to control its currency rates. Most of the fluctuation is through speculation and that requires State Bank of Pakistan (SBP) to counter their influence through dollars. SBP can only do so if it has enough dollars to play with. The previous government left minimal reserves with SBP. There was no effort to increase exports. The capital goods imported were power plant machinery with little focus on industrialization of the country. Now we may have an issue with excess electricity capacity, which is costly for the government.
The loan from IMF is a necessity. I think it will be wise not to overvalue the currency again as that will lead us to a more precarious condition in 2023 than in 2018. Unfortunately, we have little option than to be dictated by IMF. Managed float can still work but SBP will have to be more sensible this time around. However, SBP policy will be subject to politics as everyone will have a different opinion on this matter. All items that are manufactured locally and are not essential should be banned from importing. We don’t really need Swiss cheese or BMW cars. Another problem arises when China, in order to keep its producers, retain a competitive edge against other manufacturers in the global market, asks us to keep our currency undervalued so that it can benefit from lower labor and lower inputs costs in Pakistan (cotton, agricultural raw materials etc.).
As we have a large current account deficit, the demand of dollars by Pakistanis is much more than otherwise supplied to it so a managed float might not work for Pakistan either unless SBP maintains the float within a certain threshold of the actual value or at a certain fixed rate (like in the previous government).
The natural tendency for Pakistani currency is to depreciate, and even with a managed float we may witness devaluation if SBP keeps rate on hold, say within 5 percent of its equilibrium value. On the other hand, China runs a large surplus and the natural tendency for its currency is to appreciate. Hence, SBP will need to counter speculation in the market and that will require close coordination with money exchangers. Also, there needs to be a strong check on under- invoicing by importers and over-invoicing by MNCs, the latter contributing to capital flight. We need to discuss these pertaining issues in forums where established business leaders are present.
3. Smaller Japanese cars had a larger share in terms of import value than BMWs and luxury cars. Majority of the import value for cars was from those that are below 1500cc. The capability of our automobile industry is highly limited and the quality produced is one of the lowest in the world. Better business leaders recommend policies to upgrade quality of production in country and make them exportable than ask for items to be banned. In this regard, Dr. Aadil suggested against banning items as it clearly does not serve its purpose and might instead contribute to the growing informal economy in the country (less taxes and increase in illegal payments etc.).
The most important imports for Pakistan are mineral fuel and machinery (power generating machineries saw a significant increase between 2013 and 2018, but now have been halved as demand has been satisfied). Hence, in my opinion, the government needs to direct attention towards development of renewable energy sector than to discuss banning small consumer items (in terms of total value).
4. It is pertinent to wonder why Chinese exporters would invest in Pakistani rupee given its volatile nature and why would a Chinese exporter assume the risk of rupee volatility when it is the risk of the importer. We should first stop Pakistanis from getting involved in currency speculation. It is also important to remember that China has one of the most stringent position on technical measures it imposes on imports. If products do not meet their requirements in terms of standards and quality, they are ready to reject consignments no matter their size. We need to improve our quality of products and ensure that they meet minimum requirements as imposed by our trading partners.
5. Budget preparation is an opportunity to send a message to the market and investors that the government is serious in tackling the structural issues to improve our economy. The budget should be carefully prepared and ideas should be discussed to build consensus. It should not be done in isolation which is the preferred modus operandi of the current government.
6. The tax system has to be completely overhauled and amnesty schemes should no longer be offered in the future.
7. Our export base is too narrow and we can no longer rely on traditional items of textiles. After US imposition of 25% tariff on China, it is a good time to ask them to relocate some of these industries to Pakistan purely for export and these items should not be sold locally. Pakistan is a resilient nation. We have faced earthquakes, floods, and terrorism so we will face this economic crisis as well and get over it soon Inshallah.
PAGE: What role could exchange companies play in terms of dollar-rupee parity?
Ismail Suttar: My opinion is that the proliferation of so-called exchange companies is one vivid example of volatility of currencies. These exchange companies graduated from assisting bona fide citizens who needed to buy or sell a limited amount of foreign currency and became the conduits for blatant money laundering, transfer of ill-gotten wealth, and manipulation of the exchange rate. In effect, these exchange companies became parallel banks or regulators despite the presence of a central bank in the country. The prescribed rules were openly flaunted by them and the lackadaisical over these companies by State Bank of Pakistan were some of the reasons terror-financing became so easy. The exchange companies must be heavily regulated and must operate within the defined and prescribed parameters. This would enable SBP to ensure exchange rate stability, reduce chances of erratic rate volatility, and increase transparency in determining demand and supply of various currencies.