Q. Tell us the positives that Imran Khan can bring to the table as Prime Minister? What can the global business & investor community expect from him with regards to the economy? What are the negatives they should watch out for?
A. Frontier Markets, such as Pakistan, that are lying at the border of the low-middle income trap, generally have major governance issues. The entrenchment of political, bureaucratic and military systems creates an ego-push for whosoever is exercising the authority. As such, lesser long-term governments find it difficult to enact strategies, and see them through, which could improve the core issues of the society – corruption, conducive business climate and law and order among local risk-takers. Few key factors that the world – and Pakistanis themselves – would monitor include the redistribution of wealth, reduction in fiscal imprudence (austerity for the governors and not just the masses), improvement in the Tax-to-GDP ratio to 15% and, alas, investments in Human Capital – education and health of a young median-age society.
Q. Which sectors might hold most prominence as per PTI’s campaign? Cement has been Pakistan’s success story, but investors would seek diversified sectoral stories if they are to move from tactical allocations to more strategic allocations. How do envisage this trend to play out under the new PTI government?
A. Their offered roadmap is pretty clear, at least theoretically. With a population size of ~207 million and one-third of the population below 35 years of age, the most pressing issue for a reasonably well-versed economic team is job creation. Job creation eventually leads to increase in the purchasing power of the nation that can uplift the people out of poverty levels. The Imran Khan-led government wishes to act as a facilitator to encourage investments in labour-intensive sectors, such as manufacturing, construction, tourism, textiles and agriculture. Proxy-ing this through capital markets, foreign investors can deploy reasonable amount of capital in such industries, targeting conglomerates with a strong manufacturing profile.
Q. Affordable housing is a key issue in our countries, as is the access to affordable housing finance. Most Pakistani parties spoke of housing in their campaigns. What can be done to boost affordable housing finance in Pakistan?
A. In an economy which is heavily undocumented and with a lower GDP/Capita ratio, it is safe to assume that the lower-middle class is bereft of owning a “roof” (chatt – as they say in local language). Banks would, understandability, not be willing to offer mortgage to such customers whose source of income is unverifiable, let alone unpredictable. This is where the government has to step in and offer insurances on mortgage default, and offer a subsidized rate of mortgage lending to ensure that we see a S-curve movement in the housing sector – and of course create those jobs in the private sector.
Q. Corporate loan asset quality has come under the scanner in India & Bangladesh. What is the scene on Non-Performing Loans in Pakistan? Is it a cause of worry? What are the initiatives being done to reduce such quality issues?
A. Thankfully, Pakistan’s Non-Performing Loans are in a much better shape than its regional peers. The regulator has been prudent, and the economic shock of 2008 suppressed the demand from the private sector to the extent that the banking sector’s balance sheets are in a decent shape. With private sector loan to GDP ratio at less than 20%, we would be less worried about this aspect of economy.
Q. Pakistan has seen better growth in corporate profitability than most emerging markets. At the same time, it has one of the lowest domestic savings rate. So the continuance of future consumption by current earners may be circumspect. Do you think this can be rectified with political stability now in place in Pakistan?
A. This has generally been a perennial issue for Pakistan unfortunately. We could partially attribute this to the high rates of inflation, undocumented economy and “fat-bottom” triangle of income distribution as younger graduates/employees earn just about enough to make their ends meet with lesser tendency to save because of the high cost of living in the urban cities. In my understanding, political “sincerity” is more of an issue than political “stability” and that would require medium term reforms to improve governance to rebuild the nation through job creation, as mentioned above.
Q. Low domestic savings also implies a continued reliance on external borrowings, which in turn has forex implications. Has the PTI made any noises on how it will handle Pakistan’s forex challenges if it comes to power?
A. In the short term, they would fill-in-the-blanks through borrowing – howsoever prudently as they can. For first two years of the business, they may blame it on the predecessor for ignoring the export potential. The Imran Khan-led PTI is banking on creating an environment for manufacturers to have an “exportable surplus” and tap the large diaspora of affluent Pakistanis settled abroad to plough money back into country, as the faith in governance and taxation system improves. The designate Finance Minister – former CEO of Engro Corporation, Mr. Asad Umar – is a proponent of currency free market and manufacturing-led growth in exports by providing them regionally competitive cost of doing business, lower energy and financing cost.
Q. One area where many emerging markets have missed out on is spending adequately in soft-infrastructure. If one looks at Korea, a high share of education spending created the base for the innovative thinking its corporate chaebols saw. Has the PTI given any hints on these areas?
A. Rich countries learned it earlier – while middle income never found the means nor the vision – that investing in training, education and healthcare (note: of global standards) is what drives the knowledge economy of a nation and determines the long-term prosperity and sovereignty of the nation. Imran Khan’s PTI has precise priorities such as intangible infrastructure investments, coupled with IT and R&D allocation, to spearhead growth in Industry 4.0.
Q. Most emerging markets emphasise manufacturing & services as the drivers of growth, despite a large portion of people still employed in agriculture. African frontier markets are now partnering with European tech firms to bring innovations in agriculture. How can Pakistani agriculture evince similar interest from techies?
A. The government machinery needs to be effectively deployed to encourage the farmers to deploy more cost-effective means of increasing agricultural productivity. In such cases, available of financial capital to the farmers is an issue, who are generally indebted to the landlords until the time of harvesting. The government needs to partner with the private sector and overhaul the agriculture sector. For a majorly agri-based population like Pakistan, that would be an easiest start to bring people out of the poverty level.
Q. What do you think holds for Pakistan’s foreign trade? Apart from textile, Pakistan is primarily a materials exporter. It is seeking to trade more with Central Asian neighbours who are also materials exporters. In which areas can synergy occur? Also, how do you envisage the growth of Pakistan’s exports to China?
A. The areas in which new partnerships can be envisaged with the Central Asian neighbours could be energy imports and exports of textiles and other agri-based products. On its shelf, Pakistan doesn’t have many more products in the offering at this moment. However, such economic partnerships are devised essentially to foster a better climate for regional geopolitical alliances. Growth in exports to China would be contingent upon the renegotiations of Free Trade Agreement (FTA). The key surprise factor here would be the sea and land-trade through the China Pakistan Economic Corridor (CPEC).
Q. Lastly, how do you foresee the monetary policy of SBP to move? Can it be the enabler to boost growth?
A. From where we are right now – current account deficit (CAD) at 5.7% of GDP and forex reserves at less than 6 weeks of import – it is only natural for the monetary policy to tighten a bit more – say 100 to 150 bps. In the initial years, a policy rate at less than double digits would keep the growth momentum going on somewhat. For it to give a real booster, we would like to see the Tax-to-GDP ratio increase to 15% and the fiscal deficit to go below 4% so that the natural rate of interest rates comes down in an otherwise fiscally vulnerable economy.