Turnaround Wizard: how former Citibanker Shaukat Aziz helped save Pakistan's economy - and put it squarely on the world financial map

Since the US launched its war on terror in the wake of September 11, 2001, Pakistani President General Pervez Musharraf has been busy fighting allegations that his country is a breeding ground for Islamic militants. The military strongman, who came to power in a military coup in 2000, had to personally embark on a global PR campaign to impress upon the world - the US in particular - that his government does not condone the training of global terrorists and also will not provide them with shelter.
Previous Pakistani governments have long been suspected of financing and sheltering Kashmiri militants fighting for independence from India. The Pakistani economy has been humming along nicely and is expected to expand by 6 percent this year. Credit must go to Finance Minister Shaukat Aziz, who has been putting in long hours at the office in Islamabad's heavily-guarded Ministerial Enclave amid bombings and killings in the country. Until four years ago, Shaukat was the globe-trotting head of Citigroup's global private bank, working in an office on New York's Park Avenue. He gave all that up for 13-hour workdays, six-day weeks and a beat-up Toyota.
Just before nine every morning, a 10-year-old, beat up Toyota flying a small green-and-white flag makes a five-minute journey from the heavily-guarded Ministerial Enclave at the foothills of Margalla in Islamabad to the near by Q Block, otherwise known as the Ministry of Finance.
The car normally stays put near the ministry driveway until after 9 pm, six days a week, until it makes the short journey back to the residential enclave. "There is no lunch break for me, no half-day (on) Saturdays," says Shaukat Aziz, 54, Pakistan's Finance Minister. By his own admission, he is a man in a hurry. "I came here to do volunteer national service so I am trying to get as much done in as little time."
Until four years ago, Shaukat was the globe-trotting head of Citigroup City's global private bank in New York with an office on Park Avenue and a million-dollar apartment not far away overlooking New York's Central Park.
Now, it's the beat-up Toyota, 13-hour workdays six days a week, no million-dollar salary or zooming stock options, and a small town house in a government enclave in Islamabad.
"After 29 years as an expatriate high-flying banker in 10 countries, I decided it was better to do a few years of volunteer national service," he told Asia Inc in a recent interview.
"He is a guy who leads by example and who works tirelessly to achieve the goals," says Ashfaque Hassan Khan, economic adviser to the Ministry of Finance, who has worked closely with Shaukat over the past four years. "He is very passionate about things and a very driven person."
Fellow cabinet minister Owais Ahmed Leghari says: "Shaukat has brought with him years of private sector experience and professionalism you'd expect from someone who has worked as a senior executive of a multinational in 10 countries." Last month, Shaukat and Pakistan's central bank chief Ishrat Hussain, a former Asia-Pacific chief economist for the World Bank, travelled to global financial capitals as part of a road show to sell US$500 million worth of bonds - Pakistan's first in nearly seven years.
"Our credit rating is now on a par with or higher than Indonesia and the Philippines and sovereign bonds were priced fighter than recent similar issues from Thailand," says Shaukat.
The bond issue was a roaring success, attracting nearly US$2 billion. "The investment banker in me says we've almost arrived," says Shaukat. "Investors are saying: We are willing to buy your story."
Mending the Pakistan economy with band-aid was the easy part. Now, says Shaukat, the hard part begins: How to attract long-term investments, build infrastructure and put in place a system that will allow the economy to grow at a sustainable 6 percent to 7 percent a year for the net five to ten years and tackle issues like poverty.
Suddenly, South Asia, once written off as a lost cause, is the hottest region in Asia. It isn't just India with its burgeoning software and business process outsourcing sectors or Bangladesh and Sri Lanka with their own economic revival and growth of 5 percent to 8 percent per year - Pakistan too is on a roll.
Four years after the military coup that ousted the elected government and Prime Minister Nawaz Sharif and put General Pervez Musharraf in power, Pakistan will chalk up 6 percent growth in the fiscal year ending June, and private-sector economists are projecting 6-plus percent growth for fiscal year starting July.
"I think once we have all the growth drivers in place within the next year or two, we can actually look forward to even higher growth like 7 percent or 8 percent that most Asean countries enjoyed in the '80s and '90s", says Shaukat.
Shaukat Aziz is an odd person to lead Pakistan's slow climb on the recovery trail. Son of a former Pakistani diplomat, Shaukat grew up in Karachi and joined Citibank in Karachi as a trainee at the age of 21.
"I was just out of business school and they sent me to Philippines for training." At 24, he found himself as country manager for Citibank in Jordan. From Amman, he headed first to Athens in Greece as Citi's regional head, then on to New York where he worked in the back office overseeing processing for Asia.
In 1982, he arrived in Kuala Lumpur, Malaysia, as Citibank chief country officer. By 1984, he had left Malaysia to head up Saudi American Bank, then an affiliate of Citibank in Saudi Arabia.
It was in Saudi Arabia that he met and he worked with the members of the Saudi royal family.
Among the people he got to know fairly well was Prince Al-Waleed bin Talal of Saudi Arabia, currently the world's fifth-richest man. By 1991, when Shaukat had moved to London as head of Middle Eastern business, Citibank was reeling under tens of billions of bad loans in Latin America, its stock price plunged and the US Federal Reserve wondered how a global giant like Citi could be saved from disaster.
The failure of Citi would have ripple effects throughout the banking world. To save the bank, Citi's then CEO John Reed put together a massive restructuring plan that included a rights issue that would inject several billion dollars of new equity into the holding company then called Citi-corp.
A bad stock market and reeling economy just kept derailing Citi's restructuring. In the end, Reed sent his troops around the world to tap wealthy individuals who might be willing to bet on Citi's revival.
Enter Prince Al-Waleed, who injected nearly US$600 million into Citicorp. The legend goes that a bunch of Citibankers had convinced the Prince that it was the best bet he'd ever make. Among them, Shaukat Aziz, who had known Al-Waleed as a friend and client for years.
"I think my role in convincing Prince Al-Waleed has been exaggerated but I did play a role along with a couple of other Citibank veterans like Paul Collins and Rick Grant."
The rights issue was a success and Citi stock zoomed from under US$10 a share to nearly US$ 100 a share at its height (before its merger with Travellers Group to form the current Citigroup).
Al-Weleed sold a lot of his stock early but he still made billions from his investments. He remains a large Citi shareholder and his remaining Citi shares are reportedly worth US$3.5 billion at current prices. Citi's legend and gossip mill has it that after the Al-Waleed deal, Reed called Shaukat to say he could have any job he wanted, something Shaukat vehemently denies.
"My meteoric rise at Citi had absolutely nothing to do with the Al-Waleed deal. Citi's culture doesn't reward one deal. I had a long track record at Citi which got me to where I was when I quit to join the [Pakistan] government."
After a stint as head of Asia-Pacific corporate and investment banking in Singapore, Shaukat moved to New York in early 1996 to become Citi's chief planning officer, answering directly to chairman and CEO Reed. In 1997, he moved to head Citi's global private bank, the third-largest private bank in the world. In the mid-1990s, at a retreat for top Citi executives, Reed pointed to three or four men who he thought had CEO material in them; Shaukat was one of the four names, says one Citi insider. By the time Musharraf summoned Shaukat to Islamabad and asked him whether he would take up the challenge of mending Pakistan's economy, the country was not only under economic sanctions and a pariah state, but Reed was on his way out of Citi following his stand-off with co-chairman Sandy Weill.
Shaukat denies that he left Citi because his mentor was on his way out. Pakistan needed an economic saviour and Shaukat was just the right man for the job. By end-1999, Pakistan's balance-of-payments position was precarious - it had sufficient foreign reserves to cover less than two weeks of imports and runway foreign debt at US$38 billion, of which nearly a third was short-term debt. Pakistan was on the verge of defaulting on some of its foreign debt.
On taking power, Musharraf asked senior advisers who was the most qualified, incorruptible Pakistani whom he could task with turning the country's economy around. He was told that among the top echelons of Citi in New York, a Pakistani banker had been identified as a potential CEO by its then co-chairman John Reed. But getting him to come home and take the job of Finance Minister would probably be next to impossible.
Musharraf, a former commando who knew something about undertaking near impossible tasks, told his aides that night I to get Shaukat on the phone right away. For his part, Shaukat had never even heard of Musharraf until he was invited to help rescue Pakistan's faltering economy.
"The first time I heard General Musharraf's name was when I saw him on CNN after the military coup in October 1999," recalls Shaukat. "I remember thinking: another military coup in Pakistan, another general." Next morning, the phone rang in his Park Avenue office at Citi, Musharraf's secretary was on the line saying the new military leader wanted to meet with him. So he flew to Islamabad that weekend. "We talked for an hour or so mainly about what he was going to do following the coup."
Pakistan was bankrupt, with foreign reserves down to almost nothing. There were economic sanctions following the 1998 nuclear tests and political sanctions after the coup.
"General Musharraf asked for my advice on how he could put the country's economic house in order," recalls Shaukat. "One thing led to the other and was invited to join his Cabinet as Finance Minister."
What followed was days of agonising over whether he should take the offer. Shaukat talked at length with his wife and his mentor and boss Reed. "Until then, I had been an expatriate armchair critic of Pakistan but had always felt that the country probably had a lot more potential than what it got credit for.
I had always felt that if it was run a little better, it wasn't that difficult to produce results in Pakistan."
After a few days of agonising over the offer, he decided to take the job. He took leave of absence as head of Citigroup's global private bank and asked his wife to call in the packers. Just before New Year's eve in 1999 as the new millennium dawned, Shaukat arrived in Islamabad to take over as Finance Minister.
Moving from the private sector in New York to a minister's desk in Islamabad was a huge leap. "Some of my friends and colleagues thought it was foolish of me to leave a promising career at Citigroup end become Finance Minister of a country that was a political and economic pariah with all sorts of political and economic sanctions," he recalls. "Others thought I should go back and do the national service. But really, the more I thought of it, the more I realised it was a great challenge.
How many people are asked to become Finance Minister of their country and to help save their country from economic ruin?" Shaukat says. He tackled three or four basic things to put in place a platform for sustainable growth. "First, we tackled our precarious balance-of-payments problem. Foreign reserves have gone up from the equivalent of two weeks of imports at the end of 1999 to just over US$12 billion, which is almost 12 months or 50 weeks of imports."
The second was to reorganise Pakistan's debts. From about US$38.5 billion, Pakistan's total foreign debts are now down to just over US$34.5 billion. "We have almost no short-term debt and we recently pre-paid Asian Development Bank 14 loans amounting to US$1.17 billion," he says. This was expensive debt, which was due for payment between 2009 and 2019. The pre-payment would save Pakistan some US$300 million in future interest payments since the loans carried high interest rates of 8 percent to 11 percent. "Before the end of the year, we expect to pre-pay another US$1 billion to US$1.5 billion in international debt," says Shaukat. That will bring the total stock of foreign liabilities down to around US$33 billion. "Our plans is to pre-pay another US$3 billion or so of US$4.5 billion in expensive foreign debt by 2007," he adds.
The next thing he tackled was the burgeoning budget deficit. "When I took over, local economists told me not to worry about deficits and just borrow and grow your way through it. As a banker, I knew borrowing for growing wasn't a great strategy when 50 percent of Pakistan's total revenues went to debt servicing," says Shaukat. The fiscal deficit has come down from 8 percent to just 4 percent this year. "We want to bring the deficit down further to a more manageable 2 percent to 3 percent of the GDP," he adds.
Inflation is down from double digits to about 2 percent. Pakistan has also undertaken structural reforms and a massive privatisation programme and focused on putting proper drivers of growth in piece.
The results have been nothing short of spectacular. The Karachi Stock Exchange index is up 300 percent since Musharraf took over, and property markets in key cities like Lahore, Karachi and Islamabad are on a tear. "Low interest rates and deregulation have freed up money for housing finance that's behind the housing boom. Cheap consumer credit is helping boost consumption," says Shaukat.
Another thing driving the economy is burgeoning foreign exchange inflows from overseas Pakistanis. Last year, overseas Pakistanis sent US$4.24 billion home. Shahid Javed Burki, a former Pakistani Finance Minister and senior World Bank official who is now a director with investment company Emerging Markets Partnership in Washington D.C. says: "Pakistan can easily raise remittances from its overseas workers to US$6 billion or US$7 billion in a couple of years."
Moreover, deregulation and better market access have lifted exports to US$12 billion a year. Some US$5 billion has been invested in new machinery to upgrade the textile sector in the last two years. "Once the global textile quotas and walls come down in December, our textile exports are going to go one way - up," says Shasta. But his critics say he and Musharraf have just been lucky. In a recent telephone interview from her home in exile in London, former Prime Minister Benazir Bhutto, who heads the Pakistan People's Parry, the country's second-largest political group in the parliament, told Asia Inc that Pakistan's "economy has indeed turned around from the depths it had fallen [to] in the final days under [former Prime Minister] Nawaz Sharif." But Bhutto says "most of the improvements have been due to Pakistan's emergence as a key ally of the West in the aftermath of September 11, which has resulted in enormous handouts."
She says "huge increases in foreign exchange reserves are just a mirage because of all the extraneous factors. Musharraf has been lucky because of September 11 and Osama bin Laden.
Short-term foreign loans were rescheduled, there was debt forgiveness, increased foreign aid, the blocking of unofficial money-transfer channels like the hawala and hundi systems, which means remittances of overseas Pakistani go mostly through official channels." Moreover, says Bhutto, the international climate has led to insecurity among Pakistan's affluent expatriates who are now repatriating more money as a nest egg back horns. Without these factors, the reserves might be half what they are now".
Still, even Bhutto grudgingly concedes that Shaukat has transformed things. She says I know Shaukat Aziz personally and a lot of other expatriate technocrats who were lured back by Musharraf to do national service. I will concede that they are a very talented bunch of people and they have a good reputation overseas. So far, they have not been tainted by any scandals. But do they have the ability to speak up and say no when Musharraf needs more money for some unexplained military expenditure? No. They are just henchmen who are at his beck and call." Bhutto says "a real economic turnaround can only follow when internal drivers of growth are in place (but), they are not. Sure, there is property bubble in Pakistan and the stock markets has tripled or quadrupled since September 11 but under Musharraf, the unemployment rate has risen and the latest UNDP (United Nations Development Programme) report says poverty has increased.
"Yes, we have huge foreign funds coming in to prop up a military regime that claims to be the bulwark of moderate Islam in the region but those funds are not going into the social sector where they are needed most."
(Interview of Finance Minister Shaukat Aziz to Asia Inc's)