Dr Hussain served as governor of the State Bank of Pakistan for two terms (1999 to 2005). In May 2006, he was appointed Chairman of the 'National Commission for Government Reforms', where he undertook an exhaustive two-year review of civil services and oversaw production of a two-volume report on governance reforms.
In March 2008, Dr Hussain was appointed the Dean and Director of IBA, Karachi. He is currently a member of Middle East Advisory Group of the IMF and the Regional Advisory Group of the UNDP. Dr Husain joined the Civil Service of Pakistan in 1964, held mid-level policy making positions in the Finance, Planning and Development departments, and moved to Washington in 1979 to join the World Bank. He was conferred the prestigious award of "Hilal-e-Imtiaz" in 2003.
While a number of economists believe that price structuring is the key solution to Pakistan's economic woes, Dr Ishrat Husain, the ex-governor of the central bank, has refreshingly different ideas. "The economists have this massive obsession that pricing will solve all issues, they have to see the distortions, rigidities and frictions in the market," says Husain, pointing out that there are constraints on the supply side as well.
He asserts that pricing is a secondary issue and the primary concern is the inability to take timely decisions, as a result of which the problems keep piling up. Husain is of the view that the exchange rate does not bother the exporters as much as the energy shortages. "The real effective exchange rate is not acting as a constraint; it is the provision of gas and power which is the main impediment to growth in the current scenario," says Husain, adding that Pakistan can still take advantage of its low cost production base if these infrastructural issues are addressed.
On the fiscal front, Husain cites the highly inflexible expenditure pattern of the Federal government as the core issue. "The revenue base of the federal government is decreasing while the provincial share in the divisible pool is rising. At the same time, the demands on the Federal expenditures on Defence, Debt Servicing and Internal Security are inflexible and are on an incline for the reasons well known. There is only one way to reduce fiscal deficit, and that is that the federal government runs a higher fiscal deficit while the provinces run surpluses," adds Husain.
A staunch advocate of local government empowerment, Husain believes that local governments, along with provinces can raise at least 1 to 2 percent of GDP in taxes, from the sources assigned to them. Such is the potential of revenue collection that if you change the valuation base of property in Karachi only, you will get 1 percent of GDP from the city, according to Husain.
His vision for the future revolves around removing disparities between the districts, an element which, he says, has to be at the core of the fiscal policy. The main role of the state is to ensure that the gains from economic growth are shared equitably and the less well to do are the main beneficiaries of the government taxation, expenditure and regulatory policies.
"The fiscal policy should be completely geared not only to contain discipline in public finance but also to shift the balance from the federal government to the provinces and districts," he adds in support of the local government. His idea of sustainable growth revolves around empowering the provincial and local governments. Ishrat fears that unless there are provincial finance commissions and allocation of resources to districts, access to basic public goods and services by the poor will remain hindered and regional inequities will keep rising.
Husain's argument on taxation is a simple one, where he wants everyone earning income beyond a minimum threshold level ought to be paying taxes irrespective of the source of income. "This is a simple formula applied all over the world, we should be no exception. Our income tax is very much distorted because of the presumptive tax regime," he said.
Despite being an advocate of agriculture income tax, Husain believes it will not yield you much tax revenue as 89 percent of the farmed area is always exempt. Yet the reason why he stresses on agriculture income tax is that it could help address the issue of concealment and understatement of income in the non-agriculture avenues.
Husain seems to share the views of many others in pointing out that the NFC Award and devolution process were carried out in haste and proper implementation plans were not made. Pointing out the unclear picture he believes that at some point of time, you will have a complete picture as it is an ongoing process and may give rise to unintended harmful consequences unless properly managed by paying attention to the details during the implementation phase.
The IBA Dean tends to disagree with the notion of devaluing the currency to gain advantage on exports; he says the impact of commodity prices in Pakistan is of a balancing nature, as the gain on exports is offset with the increased cost of imports-both of the final goods and the intermediate goods. Husain is wary of the dependence on rising remittances which is keeping the current account intact. "The driver of our current account is not trade balance; it is remittances. If the remittances keep growing, current account will be fine, otherwise we will be in trouble," asserts Husain.
While Husain does acknowledge the private sector crowding out, he believes it is overhyped as the level of investment is abysmal due to demand side constraints as well. "No one will ever think of expansion if one's not even able to utilise the existing capacity. The capital intensive industries are operating well below optimum efficiency levels, if you are not getting gas and electricity, how will you ever invest in expansion," says Husain.
Taking the holistic picture and looking at the real economy is what Husain believes to be the need of the hour as it is the lack of investor confidence in the continuity of policies, energy shortages, fiscal indiscipline and weak governance that are slowing growth more than any other factor.
Husain minces no words when he talks as an educationist saying that Pakistan is not ready to take advantage of the demographic transition that it will be having in the next ten years. It is the lack of skilled workforce that is hurting Pakistan and the root lies in the education system, according to Husain.
He hits the nail when he says that "we have a mismatch in the demand and supply, especially in the area of skilled workforce; we have to encourage vocational training and education. Jobs such as plumbers, electricians, mechanics, tractor drivers, paramedics and nurses etc are begging for well skilled people, and we are producing MAs in English and Urdu instead."
While devolution of primary education is a must in Husain's opinion, he does not support the devolution of the HEC, which, he says, is doing a phenomenal job and should continue as it has grown into a well-reputed and matured institution. Despite having distanced himself, Husain still keeps an eye on the overall financial sector, stressing the need for more investment instruments to the individuals. "For the individuals, there are primarily banking deposits, mutual funds and NSS. Engro has started to tap the retail market - corporate debt market is a good development but we still have a long way to go," says Husain.
Husain believes the banks other than the top-5 should not sit back idly, develop new lending instruments and liability products for reaching out to rural population which for the last few years has recorded substantial increase in incomes. For this they have to decentralise the decision making and credit approval processes.
He stresses the need to increase competition by enabling the midsize banks, other than the top-5 ones, to capture the market share of big banks. He believes that banks have to be innovative to compete; they should adopt branchless banking and such other strategies instead of just complaining. A former World Bank employee, Husain, also believes that Basel-II regulations are skewed in favour of government borrowing from banks as it carries zero risk weight and frees up capital requirements upon the banks.
On the other side of the balance sheet, "the banks' deposits are more on the current side which fetches zero interest rate, giving them the advantage of not paying any interest on a large part of their deposits. A combination of lending on high rates to the government and lower average deposit rates results in higher spreads for the banks. To the extent these profits are used up for boosting up capital of the banks it is a win-win situation," asserts Husain.
Interview by Zuhair Abbasi
An interview with DR. ISHRAT HUSSAIN
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