EXPECTATIONS OF FINANCIAL SECTOR
MULAZIM ALI KHOKHAR
May 25 - 31, 2009
Faysal Abdullah has served as Country Manager of Reuters Pakistan and is currently the Chairman of BMC Pvt. Ltd. He is also an adjunct faculty member at SZABIST Karachi.
The basic motive of conducting the interview was to understand the need of the financial sector and to know his views and suggestion for the upcoming budget. His views are important about the subject as he served on a key position at Reuters-an internationally acclaimed news agency and now he has formed his own company to become the authorized distributor media services for Thompson Reuters Company. You may contact him at email@example.com for any clarification or explanation. The question and answer session went as follows.
MAK: How the last year's budget has affected financial sector? How did you find that?
FA: From my perspective, the last year's budget was quite neutral for the financial sector. The effort of the government was to bring some satiability in the economic system after Dec07 incident and elections, which followed that. To a certain extent, the government has been successful in achieving its goals of reducing inflation. Given the situation last year, it was very important for the government to restrict the unbalanced growth in the corporate and consumer credit market to cool off the market. The current numbers of the corporate and consumer credit reflect a drastic downfall. I believe we should take that as a success factor for the government rather than looking at it negatively.
Under present international market conditions, a fall in local investment and in foreign investment is a natural phenomenon and may not be the direct impact of the budget. Overall, if the last year budget has not brought sheer brightness on the doomed financial sector, it has lightened some candles and chances are bright this year.
MAK: How do you foresee performance of financial sector in Pakistan with reference to the up-coming budget?
FA: I think the impact on the financial sector would be neutral to positive. I say neutral because I think the financial sector has many of its own problems to deal with currently and I don't think that the government is going to burden them with any new taxes. I don't see any change in the CVT; we might even see a delay in the implementation of the capital gain taxes. An increase in CVT would be counterproductive at the current stage similarly if the capital gain taxes are implemented it will have negative impact on the institutional investments in the financial sector. On the other hand, it might be possible that the government might come up with clearer implementation strategy of boosting the mutual fund industry via pension funds and might provide a working framework for the RIETS.
MAK: Budget FY09 was pro Agriculture, which sector do you think will be the focus of the budget FY10?
FA: I don't think the government would deviate from the line set earlier. I don't like to say pro-agriculture rather I believe we should say pro-rural areas. That is a general policy adopted by the political governments. All the governments tend to act in benefit of their constituency or vote bank. I don't see the line changing this year. However, the upcoming budget could be a very pro- poor budget. Given the pressure of IMF on the revenue target, I won't be surprised to see new taxes being added up on the existing taxpayer. This could include industries, services sector, and salaried class as well.
MAK: What are your views about financial sector teams of the Government? Will they play their cards to bring good fortune for the sector?
FA: I think the team is quite strong and capable of handling the current issues being faced by the government. I think it is hard to find a sharper banker than Shaukat Tarin in Pakistan at the current stage. His decision-making capabilities are quite clear from his past actions. He has developed a good professional team around him, and he requires time to take corrective actions. We can't expect all issues to be resolved in jiffy. The bigger the problems the longer it takes to resolve them.
MAK: What reform do you think may be on the cards? In addition, which issues will be addressed? What kind of modifications do you anticipate regarding:
FA: A. TAXES (CVT, CGT ETC.): I don't anticipate any changes in CVT or CGT mechanism.
B. INTEREST RATES, NSS RATES: Interest rate will eventually slide down, I think the growth slowdown will nudge Interest rates to further fall by 200 basis point by December. NSS rates are also at their peak right now I don't think they can go anywhere but south.
C. FOREIGN INVESTMENT: Given the international market condition and our own internal condition, I don't see a huge influx of foreign investment in Pakistan. I would say even if we are able to attract the same amount as we did in 2008 it will be a very good achievement for Pakistan. I think the Telecom and the Oil and Gas exploration sector will continue to attract the regular chunk of foreign investment but the bigger chunk is anticipated in the IPP sector. We might actually receive a lot of foreign Aid in the coming year, which eventually will help us on our external sector.
D. REGULATORY AND POLICY ISSUES: Given the fact that today's judiciary is quite independent and capable of identifying and handling the malefactors with high hand, we can expect better future prospects for regulatory issue, which will be pro-people.
E. CURRENCY STABILITY: I personally believe that the PKR / USD parity will remain within the range of 80 to 82.50 for 2009-10. The international interest rate will remain low in near terms and I don't see any major movement in key import item prices for Pakistan including oil. This should keep the external pressure down. Our position in the war against terror will keep ensuring that we keep receiving foreign aid from different countries. The Factors will keep the currency stable.
MAK: Do you foresee any synchronization between fiscal and monetary policies? Will both the institutions work together to bring the financial sector up on the path of progress?
FA: I believe under the auspices of the IMF we will see a bit more coordinated effort between the fiscal and monetary policy stance. If you look at it earlier it was the diversion in the policy matters that brought the differences in the government and eventually led to the situation where both parties i.e. the central bank and the ministry of finance, were at loggerheads.
MAK: How do you weigh Pak-US relationships to shape budgetary and foreign investment developments?
FA: You are either with them or against them. We decided to be with them hence we have to pay a price in terms of losing our independence to a certain extent. I think it is a reasonable barter regardless of what so many others have to say in Pakistan. I don't think we had a better choice. I think the Developmental support by US will play a crucial role in terms of determining our growth in the rural areas.
I believe the upcoming budget would be full of surprises for the people as the pressure from IMF will be there and the government would have to take some harsh decisions, which might not be supported by the public.
MAK: What issues do you suggest need to be addressed?
FA: 1: Tax net has to be increased, rather than trying to squeeze the existing taxpayers.
2) Subsidies have to be abolished and a level playing fields for all business and the government only as a regulator be provided.