February Issue 2019
“Markets are not interested in whether you are going to the IMF or not” -Asad Umar
By Amir Zia | Cover Story | Published 4 years ago
Your ministry’s performance is seen as a ‘make or break’ for the PTI government. Are you satisfied with what you have achieved so far?
Yes, definitely. To know why, you have to look at the situation when we took oath on August 20, 2018. At that time, our current account deficit had averaged $2 billion for the three consecutive months of May, June and July. At that rate, it would have soared to $24 billion on an annual basis. Pakistan had never seen anything even close to this in its history, given the country’s [forex] reserves and net reserves position at the time.
Compare this situation with 2013, when the PML-N came to power. Even at that time there was a balance of payment crisis. I will share two simple numbers; in the fiscal year 2012-13, the current account deficit was $2.5 billion and our reserves were $6.0 billion. That means the reserves were twice the number of the annual current account deficit.
When we came to power, Pakistan had a current account deficit of $19 billion (overall), which was well on its way to hitting $24 billion. The reserves at that time were $8 billion, which weren’t even sufficient for a year. The situation was five times more stretched compared to when the PML-N came to power. And if we analyse it just by net reserves, the situation was even worse.
Managing the economy for more than five months without any IMF programme was unimaginable at the time, but here we are.
It is the first time an elected government has, on its own, taken strict measures outside an IMF programme. These measures were required to handle the dangerous situation. And now we have started to see results. Our trade deficit – responsible for the mess – has started decelerating. In December, there was more than a $500 million reduction in the trade deficit. According to preliminary data, the numbers of January are even better.
How have we managed this? Of course, Prime Minister Imran Khan has played the central role. We gave our bilateral partners and friendly countries the confidence that we are trustworthy and are serious about reforms. And we got their unprecedented support.
The situation demanded harsh steps, which [inevitably] result in higher inflation. But under the PTI’s watch, the increase in inflation is slower compared to the initial six months of the PML-N and the PPP governments.
No doubt the prices of commodities are up and people are facing problems, but the impact of inflation has been managed. We protected the most vulnerable while making all our decisions, even while raising gas and electricity tariffs.
Why have many economists – even in the Economic Advisory Council – been complaining about the lack of direction?
You can accuse us of taking the wrong direction, but not that we lack one. Our actions are consistent. From day one, we have been saying the same thing and doing the same thing.
The ambivalence regarding whether Pakistan will go for the IMF programme or not is seen as a key dampener. According to critics, that reflects a decided lack of direction.
There is no lack of direction. Financial markets are cold-blooded. They don’t have a heart. Tell me how the Pakistani stock market has increased by 10.8 per cent in January alone – higher than what it lost over the period of one year. Why are foreigners, who were net sellers for the last 11 months, now buyers? Why have our swap and bond rates improved in Asian markets? Uncertainty is a great item for discussion on a dinner table, but markets are not interested whether you are going to the IMF or not. They are interested in whether you have a strategy or not.
The easiest way to calm nerves would have been to go to the IMF. If I had announced this, it would have immediately calmed the markets. But we have to assess at what price we want to end uncertainty.
In my pre-election interviews, I said that some kind of a bailout would be needed, whether from the IMF or other sources. After the elections, I maintained the same position. Where is the lack of clarity or absence of strategy? You may disagree with us and say that we should have signed an agreement with the IMF on day one, but it is absurd to say that there is a lack of direction.
The question is, why am I not going to the IMF if it is so beneficial for the markets? It is because the cost of uncertainty is temporary and small. The price of availing an IMF programme – which is not good for the economy and the people – was higher. I weighed both options – the short-term cost of uncertainty versus the long-term cost, which was heavy.
There are many IMF programmes in the world which have failed. Not every IMF programme is designed alike, and not every programme is successful.
Look at Pakistan. We had 12 IMF programmes in 30 years and look where we stand today. People say ‘take the bitter pill,’ but we have taken it 12 times and it hasn’t worked.
To sum up, I still want to go for the IMF programme, but only that which is in the best interest of the Pakistan economy and its people.
Sentiment improves first and then the fundamentals… markets and investors seem to be wary.
You are absolutely right, but this happens under normal circumstances. Again, I will draw your attention towards the situation when we took office. The analogy I always use is that if you wish to win a medal in Olympics, you go to the gym and playgrounds, but when you have a heart attack, you go to the ICU.
Our first order of business was to manage the unprecedented balance of payment challenge, and stemming the out-of-record current account deficit. In this situation, you don’t build positive sentiment first. You have to sharply compress the demand, and when you do this, it invariably has a negative impact on the economy. But that’s what was needed: chemotherapy. As soon as the situation stabilised, it was the right time to go for the supply-side expansion. Our problem is the gap between domestic demand and supply and it is reflected in the current account and trade deficits. Demand compression was needed for immediate relief, but in the long run, domestic supply-side expansion is required. After the January 23 package, there has been a positive response in business circles across the board.
I agree that initially there was uncertainty and a fear of default, but now sentiment is becoming more positive. Earlier, banks were reluctant to invest in the long-term government paper in PIB auctions, but in the auction held on January 23, Rs 350 billion worth bids were received, out of which Rs 137 billion bids were for the 10-year paper.
On the international level, during the first 11 months, there was net selling by foreign investors in the stock market. On an average, $60 to $70 million were being taken out of the country. In the last 10 days of January, $27 million net buying was witnessed by foreigners. All this reflects a growing positive sentiment.
There is also criticism that you are banking mostly on the PML-N’s selected team.
Look at this one by one. The term of two Monetary Policy Committee members expired in January and they have been replaced by Dr. Hafeez Pasha and Dr. Naveed Hamid.
Our economic policies’ driving force is coming from the Economic Advisory Council, which is operating in five sub-committees, headed by veterans like Saleem Raza, Naveed Hameed, Faisal Bari and Ejaz Nabi.
Not one of these persons is responsible for the PML-N’s economic policies.
Dr. Hamid Mukhtar, an ex-World Bank official and an expert on fiscal policies, is on board in my Finance Ministry team. Saim Ali has also joined, and we have advertised for the position of advisor to the finance minister.
The Asian Development Bank (ADB) has provided us technical assistance and a grant to hire experts, and they are working full-time with us.
We have to go to the ADB because government recruitments and salaries are an issue. Under ADB’s technical grant, we are picking up people. The Finance Ministry’s team needs to be beefed up further. As far as bureaucrats are concerned, that can’t be changed. We don’t want to act like the PML-N.
Your plans of reviving sick state-run units is being questioned under the planned Sarmaya Pakistan initiative. Why is there no focus on privatisation?
The PML-N calls itself a champion of privatisation – what was done by it during its term?
We say that privatisation is not the only solution to the problem of state-run enterprises. I can give example after example where state-owned enterprises across the world remain profitable and play a critical role.
The most profitable companies in Saudi Arabia are state-owned, as are others in the UAE and Qatar.
But they are not democracies like ours…
I know this theoretical debate… we have the examples of Malaysia and Singapore. In China and in India – the two fastest-growing economies – state-owned companies play a vital role.
I don’t agree with the argument that we should not have state-owned companies. However, this doesn’t mean that we don’t see the private sector as a primary engine of growth.
Now come to those we want to privatise. Our electricity sector is worth Rs 1400 trillion rupees. Do you think our financial market has the capacity to absorb even a trillion rupees worth of privatisation? The PML-N could not sell even a dime’s worth of assets in the electricity sector. So what do you do –just keep on debating?
In our first CCOP meeting, we determined what had to be privatised and what did not. There are institutions on the active privatisation list for the last 25 years. They are neither privatised nor managed. So we removed some from the active privatisation list and plan to fix them. Others remain on the privatisation list and we are pursuing them on a daily basis.
Ours is a governance problem. These institutions were destroyed because they were given to politicians and bureaucrats to manage, who weren’t trained for this job – [not to mention] their motives and corruption.
Why Sarmaya Pakistan? It is designed to solve the governance problem of these institutions. The governance authority has been taken away from politicians and bureaucrats and given in the hands of those who know this job.
Experts say that the crisis in the energy sector could pull the entire economy down. What is the government doing about it?
Some very good work is being done to fix the power sector. We are clear that every decision should be well thought-out and deliberated, but even when we do this we are accused of being confused and lacking direction.
I approved the tariff structure after six ECC meetings because I don’t want to put the entire burden on consumers. So in the tariff structure, we protected the most vulnerable people.
On the administrative side, we fixed a Rs 140 billion performance target for the Power Ministry, which includes recovery of past bills and curtailing losses. It has been reporting to us on a monthly basis since November. Thousands of FIRs have been registered and action taken against hundreds of employees. And this is happening in all four provinces.
We are also focusing on reducing the cost of power generation. This means less reliance on imported fuel and greater dependency on renewables.
A revised policy on renewable energy will be finalised by March. The PML-N had stopped all work on the renewables, including hydel, wind and solar projects. Our thrust will be towards renewable energy. We want its equipment to be manufactured here. Therefore, we abolished all customs duties and taxes on this sector in the Jan 23 package. We also gave this sector a five-year income tax exemption.
Our transmission and distribution network suffers from massive under-investment. In future, there will be more funds allocated for this in the Public Sector Development Programme (PSDP).
Along with this three-pronged strategy, we are also working to change the regulatory structure, which was basically geared around the 20th century energy market, when big capital-incentive projects were rolled out for economies of scale by a few producers and distributors.
Now we are going for a system, where every house can be a potential energy producer. For this, we need to completely change the regulatory structure.
And are any measures underway to expand the tax base? We see the same set of people and sectors being squeezed.
It is absolutely necessary to widen the tax net. The old FBR system being used now won’t work. We need modern technology and 21st century methods. Within four weeks we had changed the laws, as the old ones barred data-sharing. Now data can be shared and the World Bank is working on a detailed report on this, which will be submitted soon.
We have also separated FBR’s policy-making and the tax administration’s role. Right now we are focusing on structure and not revenue generation, which is reflected in the numbers. But we don’t want to go for a temporary increase at the cost of long-term goals. For better tax collection, provinces will also have to play their part by taxing and collecting property, agriculture, and service sectors. This will be discussed in the 9th NFC.
Is the NFC a constraint on budget-making for the federal government?
There is no doubt that the current NFC has eroded the fiscal sustainability of the federal government, but the constitution says that resources once given to provinces can’t be taken back. So we have to respect this and that will be the challenge for the 9th NFC.
Amir Zia is a senior Pakistani journalist, currently working as the Chief Editor of HUM News. He has worked for leading media organisations, including Reuters, AP, Gulf News, The News, Samaa TV and Newsline.