INTERVIEW WITH MUHAMMAD FARID ALAM, CEO AKD SECURITIES LIMITED

KHALIL AHMED
(feedback@pgeconomist.com)

Feb 20 - 26, 20
12

PAGE: TELL US SOMETHING ABOUT YOURSELF?

FARID ALAM: By profession, I am a Chartered Accountant and by occupation I am an investment Banker. I currently serve as CEO at AKD Securities Limited, which is proud winner of the Best Equity Brokerage House by the CFA Association of Pakistan for the last two years. I have had a wonderful experience so far both in the private and public sector - although I could not bear the public sector for more than a year and a half. My childhood memories are from Model Town, Lahore where I was a student at Divisional Public School. I was a good student till class 8 but after that I really shined. I remember how great feeling it used to be when my parents visited school for parent - teacher meetings and every teacher had to tell good things about me. I recall that I was good at every subject especially languages but bad at mathematics. In sports, I was School Champ of Badminton and I was a Prefect. I did not do well at Forman Christian College (F C College) from where I did F. SC. As mentioned earlier, I was an excellent sportsman so I got admission in B. SC with double maths physics as a subject at the famous Government College Lahore. Switching from science to commerce after about six months in session was a u-turn in my academic career and leaving Government College was also a bold step I took. I must share with readers here that although commerce as a subject was new to me but my father had been teaching me and my younger brother how to do business since we were lad. How can I forget my first day at college where on reaching my Classroom at B.Com, I came to know that it was an assessment day and I was asked to appear in the test. I remember the test was about Journal entries of which I knew nothing and secured zero marks. To my utmost surprise, the teacher while announcing the results asked me to come forward and receive the answer sheet and ridiculed me generously in front of all students including my female classmates, which added insult to injury. As I missed out half of the academic session and knew nothing about commerce I could not do well in part I, but the final year was my year not only I enjoyed the subjects but also cleared the first year deficit and topped the Punjab university in the subject of Auditing while securing overall 3rd position at the college.

My first job: I joined CresBank - Pakistan's first investment bank as an internal auditor. I must share with you especially if you are young and starting your careers that one should start his/ her career from internal audit but must not and I repeat must not end up as an internal auditor. I joined before I qualified as a Chartered Accountant and I could not go back to profession on one pretext or other after qualifying as I got used to regular cash flows and the fact that I was youngest CIA, CFO, Equity Strategist, and Treasurer probably at any bank in Pakistan. I left CresBank to join CIRC Ministry of Finance Government of Pakistan. The organization had the then strongest and most talented board comprising of the following members: ex-Governor SBP Dr. Ishrat Hussain, former Minister for Privatization Altaf Saleem, ex-Minister for Commerce Razzaque Dawood, Mueen Afzal, and private sector notables representing chambers with Shaukat Aziz as Chairman.

I joined PICIC to head the mutual fund division, which had acquired 14 closed ended mutual funds from Investment Corporation of Pakistan. I did exceptionally well not by my own standards but also by the standards of a very demanding and experienced board. My performance was second to none especially vis-a-vis a group which had also acquired 13 funds from ICP and had an already established asset management company and was in the business for long.

I was lucky in the sense that the organization headed by Mohammad Ali Khoja had its best time 2003-2006 when I was there and I contributed to its glory and that I sensed that post merger things will not be the same for PICIC and its staff. So, I left the organization. I feel pride in stating that exactly the same happened. I had always aspired to work for the World Bank/Asian Development Bank and by the grace of God it did come my way when I acted as a Domestic Consultant for ADB. I can tell you that after doing the assignment I have stopped narrating all the jokes, which I used to crack about consultants as I realized it was no joke to be a Consultant. I was migrating to Geneva to join Merrill Lynch where my old friend was doing exceptionally well in the private banking group that I was called by legend Aqeel Karim Dhedhi (AKD) who convinced me to join AKD Group where I subsequently took over as CEO AKD Securities. I enjoy the work and, am enduring ups and down of the economy and the capital markets.

PAGE: CAN WE LIVE WITHOUT IMF?

FARID ALAM: Living with or without IMF is a matter of choice for any nation suffering from economic turmoil. There are two ways to look at this option:

a. Massive internal restructuring, broadening of tax base, cutting down subsidies, control inflation, and minimize imports - The way to avoid IMF and be self-sustainable.

b. Knock at the door of IMF and burden your nation not only with a massive loan but also with numerous conditional terms, based on the 'Structural Adjustment Program' of IMF, that destroy the long-term fiscal growth of a developing country.

Hence, I believe the current macro environment is very challenging but yet manageable in the short run and living without IMF is definitely possible but for that we need a different approach towards fiscal and economic development.

The economy has shown significant positive with tax collection up 27 per cent YoY in IHFY12 to Rs841 billion and CPI inflation in single digits in Dec'11 and hence stringent reforms are needed for economic discipline. That said Pakistan economy is still vulnerable to shocks and question marks remain on long-term economic sustainability. Considering propensity for populist decision-making by the government of Pakistan ahead of 2013 general elections, fiscal slippages remain a key cause of concern, particularly if US-Pak relationship remains strained. But, we must keep in mind that several of today's growing economies have faced bitter times in the past but they never went to any of the Bretton Woods Institutions because they had stringent policies to make their country a self-sustainable and growing success story.

PAGE: OUT OF THE TOTAL NINE IMF PROGRAMS PAKISTAN HAS JOINED, EIGHT HAVE BEEN UNSUCCESSFUL. YOUR VIEWS.

FARID ALAM: The criteria of success and failure of any IMF structural program is not based on the success and development of the borrowing country, instead it is judged by the completion of pre-determined objectives of IMF that comprise of various fiscal/monetary motives. Objective of the structural adjustment program in the longer term is the integration of the economies of adjusting countries into the world economy, through outward orientation and alignment of domestic prices with international prices. The best possible development strategy for a country may call for greater emphasis on the domestic market and for a degree of protection or even a period of relative insulation from external influences.

The objective of structural adjustment programs majorly focus towards stabilizing the balance of payments position and thus enable a country to service its foreign debts; but this would not necessarily be the development priority of the country itself. IMF deals with the government and not the public / private sector of the borrowing country and this actually shows half picture of the economy, its potential, and problems.

The reason for Pakistan's failure in eight of the total nine IMF program is mainly due to the fact that the objectives of the program differ from what is in the best interest of the development of the country. Lately, when Pakistan went for the IMF program there were three preset motives of the lender behind the funding:

1) Measures to stabilize economy while protecting the poor.
2) Seeking additional donor support to improve safety net.
3) Tightening of monetary conditions to help combat inflation.

While the government of Pakistan had two basic objectives:

1) Restoring economic stability through macroeconomic policies.
2) Social stability and adequate support for the poor during the adjustment process.

I believe our economic managers focus on achieving short-term stability due to political uncertainty and the unwillingness to take tough decisions. While the IMF focuses on devising long run strategies in order to achieve long-term stability/economic discipline, we fail to implement the structural reforms in place. To make progress under the IMF program, economic reforms need to be reinvigorated. They are needed to strengthen public finances and improve financial intermediation and to raise economic confidence to stimulate higher savings, investment growth, and employment going forward. A structural adjustment program can be called successful if it achieves the objectives of the program itself while the program can be termed as unsuccessful from the country's optimum development point of view. So, this failure of IMF programs is basically a misnomer from the adjusting country's point of view. Pakistan could've successfully conducted all the desired measures of IMF but its impact on the ongoing economic stability of the country would have been very weakening.

PAGE: THE GOVERNMENT'S INABILITY TO IMPLEMENT THREE MAJOR ECONOMIC POLICY COMMITMENTS - LIMITING FISCAL DEFICIT TO 4.7 PER CENT OF GDP, INTRODUCING INTEGRATED VALUE ADDED TAX (VAT) AND POWER SECTOR REFORMS - HAS LED TO TECHNICAL COMPLETION OF AN UNSUCCESSFUL $11.3 BILLION PROGRAMME OF IMF. WHAT IS YOUR OPINION?

FARID ALAM: The government of Pakistan failed in the following terms:

Failure to control inflation up to the desired level due to price hikes in various commodities.

Tightened monetary policy slowed down business growth due to high interest rate environment.

Fiscal deficit was not controlled due to massive spending and minute increase in the revenue base.

Electricity subsidies to improve safety net was a short-lived initiative that backfired soon and eventually the subsidies had to be reduced from the energy sector.

The IMF programme was suspended due to the government's inability to implement major economic reforms. Although some progress was made in modifying the existing GST by reducing exemptions and strengthening the refund mechanism, the RGST could not be introduced. Little progress was made in order to eliminate the circular debt. Furthermore, the NFA and NDA targets were breached and legislation needed to strengthen banks supervision (STA) and central banks autonomy could not been enacted. While I broadly agree with IMF structural reforms, at the same time contend that IMF has the same recipe for all countries to contain inflationary pressures. In my view, monetary tightening is a misadvised policy for Pakistan by the IMF as inflation is cost push in nature. The completion of this program on technical grounds without achieving the objectives is actually a burden on the economy of Pakistan. If all adjustment measures on the basis of fiscal development and with growth perspective had been initiated back in 2008, the economy would've restored itself to the path of sustainability as of today. But, now we stand on the same road to economic disaster suffering from twin-deficit, circular debt, rising inflation etc. along with a total payable of US$11.2 billion that would become a nightmare on every installment payment for the already depreciating Pak Rupee.

PAGE: THE GOVERNMENT COULD NOT INTRODUCE THE VALUE ADDED TAX IN AN INTEGRATED FORM AND THEN IT COULD NOT SHOW A GOOD PERFORMANCE ON POWER SECTOR REFORMS WHICH ALSO CONTRIBUTED TO HIGHER THAN ANTICIPATED FISCAL DEFICIT. YOUR COMMENTS.

FARID ALAM: VAT taxation has been a question mark for Pakistan's economy right from the beginning as major tax initiatives were left unanswered. Various governments have failed to tax the agriculture sector in the past 65 years and all new taxes have been marked as a negative indicator not only by the masses but by all political participants as well.

Implementation of VAT to enhance the revenue base was a commitment made by the government to the IMF while going in for a funding program but the integration and implementation never sufficed. The addition of VAT in revenue would've brought the tax-to-GDP to a respectable level and would've been replaced by GST later on.

RGST could not be implemented in an integrated form where the government would have been able to raise Rs800 billion (50 per cent of FY11 tax target), if the aforementioned measures would have been implemented. The RGST was opposed by majority of the political parties due to inflationary concerns. Further, impediments included bringing the entire manufacturer to consumer chain into the RGST net and the credibility of the refund system. In this regard, it is more appropriate for economic managers to gradually remove tax exemptions and improve tax administration.

Sadly, the government failed to implement this tax in the desired manner due to various political reasons and conflicts in the implementation phases within the federal and provincial governments. The implementation of VAT would have not only increased revenue but it also would have to force more people to enter the tax system. On the other hand, tax on input is a discouraging thing which results in increasing cost of production making exports uncompetitive in international market.

Power sector reforms have been a major cause of massive fiscal spending because no long-term structural policy has been set up to streamline the power sector, rationalize tariffs, and reduce/erase heavy subsidies. IMF had asked Pakistan to cut down subsidies and increase tariffs but the government failed to implement power sector reforms due to fear of price hikes and social panic while on the other hand the line losses/theft was also left uncontrolled. In terms of circular debt, so far the government has primarily focused on eliminating incremental circular debt creation by aligning tariffs with generation cost (rising power tariffs). At the same time, the government formed a power holding company acquiring substantial portion of circular debt on its balance sheet and issuing circular debt related TFCs. The settlement of this debt would translate into an increase in subsidies beyond the budgeted and poses continuing risk on the fiscal side.

PAGE: THE GOVERNMENT WOULD HAVE TO REPAY $1.2 BILLION TO IMF DURING THE CURRENT FISCAL YEAR. HOW DO YOU SEE THAT?

FARID ALAM: The government of Pakistan will retire the first tranche of $1.2bn for the IMF funding in two installments, $700mn in Mar'12 and $500mn in Jun' 12. The repayment will pressurize Pakistan's already depreciating currency and weaken Pak Rupee further to an estimated level of Rs94/USD, instead of the projection under normal circumstances of Rs92.5/USD by June 2012. The Pak Rupee normally depreciates up to 5 - 6 per cent per annum against USD but with such massive repayments insight this could further go up to around 8 per cent per annum. In order to avoid high volatility and massive depreciation in currency, the government will have to speed up its run for identifying sources from where these scheduled repayments can be funded. A few sources such as the auction of 3G Spectrum License, Etisalat's remaining payment etc. can raise up $2.5bn in foreign exchange during the coming months. While macros remain challenging we believe the economy is somewhat at ease in the current year with approximately $16.5bn reserves and adequate import cover. However, medium term risks remain with import cover falling to three months by 2012.