Interview with Mr Nasim Beg – CEO, Arif Habib Consultancy
Mr Nasim Beg is a financial-services professional who has also worked for several years in the real economy, specifically in the automobile/manufacturing engineering sector. He qualified as a Chartered Accountant in 1970 and also holds a bachelor’s degree in Commerce from Karachi University. He is the Founder Chief Executive of Arif Habib Consultancy and was the founder Chief Executive (now Vice Chairman) of MCB-Arif Habib Savings & Investments Limited (formerly Arif Habib Investments Limited), a leading Asset Management Company of Pakistan. Mr Nasim Beg serves on the Boards of several Arif Habib Group companies; and apart from being Chairman of the REIT Management Company also chairs the Board of Power Cement Limited.
He has work experience of forty-nine years in manufacturing industry, as well as the financial sector, in domestic as well as international markets. He was part of the task force set up by the Securities & Exchange Commission of Pakistan (SECP) to develop the Voluntary Pension System. He was the founder Chairman of the SECP sponsored Institute of Capital Markets and was a Member of the Prime Minister’s Economic Advisory Council.
PAGE: Could you give your views on the prospects of foreign investment in Pakistan?
Nasim Beg: The fundamental reason for a foreigner to invest in another country is that the expected return should justify not taking up other opportunities, within the home country or elsewhere in other jurisdictions. For investing in a country like Pakistan, which has had a history of governance issues, structural economic issues, significantly low savings rate (and consequently low investment in the economy), challenging relations with some of its neighbors and unrest in the vicinity, as well as repeated cycles of going to friendly countries and the IMF for bail-outs, the potential investor has significant issues to consider and the potential return must justify the risks being taken.
While there is no doubt that foreign FMCG companies have benefitted from setting up establishments in Pakistan over the years and we continue to see interest in this area, as well as the pharmaceutical space in the past (they are now under transfer pricing scrutiny), in my opinion, we should not take this type of investment as a feather in our caps. Let me elaborate. We have been running a trade account deficit throughout our history (taking 1971 as the starting point, as prior to that we had East Pakistan and jute exports), not a single year of surplus. Even if we take our history since 1947, there were just a few years of export surplus, which you could count on the fingers on one hand. If we include remittances, i.e., export of labor and brain power of our compatriots abroad, there are perhaps three or four years of a net surplus. The FMCG sector extracts foreign exchange in dividends, royalties and license fees, the pharmaceuticals produced here are dependent on importing over 90% of the chemicals, where there are issues of potential transfer pricing, as is that case with consumer durables such as automobiles, where we import the core of the vehicles, i.e. the engine and the transmission/gear box.
The recent price increase in automobile prices after the devaluation reflects the reality of the low indigenous content. What I am asserting is that we are too import dependent, with a very low level of manufacturing. Our desire for foreign investment must be balanced with transfer of technology, which would lead to import substitution and if we really get it right, result in enhanced exports. We do not need investment in consumer goods industry, which is catering to domestic consumption. Will we be able to attract foreign investment? First the local entrepreneurs must have the confidence to invest. The present interest rate environment is not conducive but, in the recent past we have had a few domestic businessmen, who have been investing, albeit in mostly low value-added ventures. We need to move to genuine value addition manufacturing here, which needs investment in skills training as well.
The present, mostly rent seeking industry needs to up its game and be willing to make patient investments, while trying to bring partners from/abroad who are willing to transfer technology. For this patient investment to be viable, the investors must have the confidence that the government will bring in domestic manufacturing friendly policies, rather than pro-import policies; and very importantly, stick with those policies. Thus far we haven’t seen any such moves. On the other hand, portfolio investment has already started coming in, the first major reason for the outflows in the recent years, rather than inflows was our over-valued exchange rate, which indicated an imminent devaluation to the potential investors and they stayed away as long as that threat remained. Now that the rupee is on the undervalued side, it is attractive for equity investors to benefit from low stock prices (lower than the fair value estimates of most analysts. An additional phenomenon is being witnessed, that is foreign investment in government treasury bills, owing to the high interest rates relative to those available on the dollar, coupled with the low likelihood of losing on exchange rate portfolio investment is likely to continue being attractive for foreigners.
PAGE: Kindly share your views on the foreign direct investment from Gulf Cooperation Council (GCC) countries to Pakistan:
Nasim Beg: Investors from the GCC can be private sector as well as governments. It appears that the respective GCC governments have taken political decisions to invest in Pakistan. This works for both. We do not save enough and need to invest in infrastructure, as well as free up the value in projects that our government has already invested in, while the GCC countries can match their political policies with attractive investments. I believe that we will see considerable activity in this area. I do feel that our government should use the best available financial advisors to get best results. The government should also invest in marketing Pakistan, again using the services of the best international marketers.
PAGE: What are your views on the investment in the energy and construction sectors of Pakistan?
Nasim Beg: These are two very different sectors. I will first address the energy sector. Pakistan’s per capita energy consumption is amongst the lowest in the world, a country like Thailand is between four to five times in per capita consumption. There is considerable empirical evidence that economic growth is highly dependent on energy consumption. The point I am making is that we are likely to remain energy short to many years to come. However, in the very short run, we have a miss-match in our energy production, delivery capacity and consumption. The previous government had decided to overcome the immediate problem of load shedding and had used the China-Pakistan Economic Corridor (CPEC) financing for setting up several projects in the public as well as the private sector. These have had an immediate beneficial impact on the energy starved economy.
The Sindh provincial government has done an excellent job in harnessing the Thar coal. This should become Pakistan’s savior as we go forward; our import dependence on much needed energy can be replaced by indigenous energy. While thermal like coal is an important part of our energy, we will need to invest in renewables as well.
As regards construction, just taking housing and not the rest of infrastructure, we are around ten million housing units short, with the number increasing each year. We need investment in housing but it needs to be supported by enabling the middle income families with mortgage finance. Land title is also an issue that needs to be dealt with through digitization of land records. Construction creates a whole range of economic activity for supporting industries and it creates jobs for the bottom-of-the-pyramid unskilled workers as well. A word of caution though, we need to ensure proper documentation of real estate for it to be recorded on the trues transaction value. Currently, it is grossly under recorded, thereby becoming a safe haven for black money, because of which prices are beyond the reach of the genuine home buyers. This problem needs to be addressed.
PAGE: How would you comment on the foreign organizations operating in Pakistan?
Nasim Beg: Generally speaking, if foreign organizations come to a country, it should be seen as a vote of confidence. However, we must at the same time be wary of being exploited as a result of our lack of knowledge. This is particularly important in the case of harvesting mineral resource. It would be in our interest to utilize the services of Pakistanis living abroad by paying them attractive remuneration and seek the benefit of their domain knowledge in areas we are yet to develop.