Two days after he officially took office as the Minister of State for Finance, BR Research sat with MNA Rana Afzal for a quick chat on topical affairs. The conversation touched upon a wide range of subjects including, the NFC, taxation, financing gap and the macro-economic indicators. Below are the edited transcripts of that sit down. 
BR Research: Just to remove any confusion. Is it true that the finance portfolio is with the PM, the advisor to PM on finance is Miftah Ismail with the status of federal minister, and you are the minister of state for finance, whereas the revenue division reports to special assistant to the PM, Haroon Akhtar Khan? If so then what’s to ensure smooth coordination?
Rana Afzal: This is exactly how it is. Miftah Ismail is an advisor. The parliamentary duties lie with me. The FBR reports to Haroon Akhtar; whereas I have the EAD and Finance. But ultimately, PM Abbasi is the Finance Minister, and we all report to him, one in an advisory capacity and one in working capacity. It is a mix of responsibilities; there is adequate clarity over division of responsibilities assigned by the PM, and we all plan to work within the defined limits of our scope.
BRR: What’s your view on currency? Would you let the currency be?
RA: The currency is a currently at a level where everybody is happy in Pakistan. The textile people who are most affected are quite satisfied. If we go beyond this level, then the imports become very expensive. We are an import oriented economy, and any further depreciation will raise the cost of inputs that will check the advantage of exchange rate depreciation for exporters. And then your foreign buyer also starts demanding discounts and concessions. I think the real level that the industry would want, and the government would be happy with is Rs110-112 against the dollar.
BRR: One way to curb imports and reduce pressure on external account is to raise petroleum price at home. What’s your view on that?
RA: The economy is showing adequate strength; the kind of size of LCs being opened for petrol and other imports suggest a growing economy. But the government has to walk a tightrope with the shortage of dollars. This is a challenge for us in the next six months: how do we pay back $3.1 billion to the financial institutions and how to do we finance about $7-8 billion or even more of trade deficit.
This is a challenge for which a road map is currently in the making. We have reasonable clarity about the roadmap. We have some cushion of time of about 4-6 weeks during which we will finalise the optimal strategy. There are certain things in pipeline with the World Bank, the Asian Development Bank and others, and we will make announcements in due course. It would be premature to give details at this point.
However, there are some silver linings as well. In the textile sector, new players have come in. Russia has given a good order. We have already seen an increase in exports by more than 17 percent, and we should be able to cross 20 percent growth in textile exports for the full year FY2018. With the currency change, people are having a lot of incentive to send remittance to Pakistan. These together with regulatory duties and relatively expensive imports since the PKR depreciation, have narrowed down our challenge. Monthly trade deficit has started to reduce from 51 percent in October to 11 percent in November.
But to answer your question, the recent increase in petroleum prices have not gone well with the public. I hope the winters with high demand in the west are over soon, and we have lower oil prices before the elections. Plus, you can’t keep on rising the cost of steel and petrol imports because that also increases the cost of government’s own developmental projects as 30-50 percent of the cost is import components. We have to draw a balance.
BRR: Do you have a full year FX reserves target in mind?
RA: We have no plans to run away with low reserves, because we believe the next government is ours. We want to have reserves equalling at least two and a half months of import cover, if not three and half months of import cover, which we will be able to defend politically.
BRR: So Eurobond or Sukuk are still on the table in so far as the roadmap is concerned?
RA: It is on the table. No options are closed except for the IMF because it is more of a political stigma, although when a country needs financing, it should go to the cheapest source without any apology. IMF is one such source, but we won’t be knocking on that door, that’s for sure.
BRR: Even if that option was open politically, with Uncle Sam playing arm twisting and saying do-more, would the IMF have responded positively?
RA: We should take every word of Uncle Sam very seriously, even though he is a poker player. So we have to draw the middle line.
BRR: Are the regulatory duties really working? Do we have any evidence?
RA: It is beginning to show. The number of LCs are declining, though I don’t have the numbers off the cuff at the moment.
BRR: Tell us about the limits, modes, modalities; impact of opening the LCs in yuan.
RA: When you can open an LC in euro, British pound, and the USD then why not in RMB. This would ensure that $15 billion plus would not have to be routed through New York, which will help reduce the cost of doing business. One of the requirements to open LCs in RMB is that on both ends banks have at least some reserves of $250 million yuan to facilitate the trade. That planning is currently under way.
BRR: If we are so concerned about rising imports and imposing regulatory duties then why are we going ahead with the FTAs?
RA: The understanding of FTAs in this country is like the understanding of CPEC. Not only do many people think that CPEC is only a road, they also think it is a road from China to Gwadar, and no one thinks that it’s a road from Gwadar to China as well. FTA is a big facility to Pakistani businessmen to sell a wide variety of products to other countries at lesser duties. But it is unfortunate that businesses have been unable to capitalise on it; the government’s job is to provide the opportunity, its up to businesses to benefit from it.
BRR: But the problem is that we have been more generous to our FTA counterparts than they have been to us. They have given more concessions to other countries than to us.
RA: Yes, a lot of those are being redefined and revisited, especially with China, based on advice from the industry.
BRR: What’s the status of plans to get oil from Saudi Arabia on deferred payment?
RA: It would be great if we can have it at this crucial moment. It’s an option on the table, although no decision to that effect has been taken as yet. Basically, we have a time gap to fill. We are currently in the investment cycle, and therefore more demand for dollars, but that requirement will gradually taper off and things will stabilize. Which is why we are considering different options right now, and a road map for that with many options is there.
BRR: What’s the financing gap, and when are you releasing the official position along with the working behind it?
RA: This confusion is due to some anomaly or lack of clarity in reporting of data. The amount of increase we have seen in imports does not mirror a corresponding reduction in the reserves. And the reason is that payments for a lot of these imports were made from outside Pakistan particularly for CPEC projects. Neither you see that money coming in the FDI; so there is an accounting aspect to it.
To respond to the queries of the financing gap, an understanding gap has to be filled jointly by the central bank, the SECP and the finance ministry. We are pursuing it closely and over the next 3-4 days we will have a clear picture about the extent and the sources of the financing gap until June 30, 2018. It will be reported accordingly.
BRR: Any chance that the NFC may be awarded before elections?
RA: In my opinion, we don’t have time for that neither is the opposition pressing us on that. It is unlikely before the elections. We will have to give this task to the next government.
BRR: But that means that even in the next budget, Islamabad will not be able to dish out money for the National Security Fund before the divisible pool is divided.
RA: It appears so unless the parties arrive at a consensus.
BRR: Do you not even want to account for the new population numbers or the FATA merger?
RA: The population figures will only be used for election but not for anything else. We don’t have time. Nor does the opposition have time to open a new Pandora’s Box, unless the final population numbers are released by March or early April 2018, then we may have a possibility. And if the FATA merger is formally announced, then the PTI government in KPK should be very serious about it, and should be able to take a deal.
BRR: There is a kind of a trade off between giving refunds to the industries, especially export oriented ones, and finishing the developments projects in the last mile of the marathon. Where does your balance of opinion lie?
RA: This is a tussle in the government, who gets what in the last round of the marathon race. This is where we have to draw a balance. My intellectual bias lies with the industry because I think the future lies with the industry, but the political weight lies with the completion of flagship projects. More power houses and more roads etc.
BRR: Can any tax reforms be expected in the last mile? Any recommendations from the TRC that might be rolled out between now and June 2018?
RA: Tax reforms are always long term. Harsher measures cannot be taken in your last year. That doesn’t make political sense; nor is it administratively feasible. Structural and policy measures are best taken in the first 1-3 years; in the last two years you just push through the earlier decisions. However, ten thousand FBR notices are currently being sent out as per plan.
BRR: But notices have been sent out before. Plus, there is a dire need to fix the WHT-isation of direct taxes.
RA: This time it’s different. This time the notices are being sent out along with the evidence that the FBR has gathered. I cannot put a number at the expected on-demand tax collection for FY18, but given the circumstances getting direct taxes under WHT is the best we can do. Besides, the whole world is on withholding taxes; I am not convinced that WHT is a bad idea.
BRR: Expected date of budget FY19?
RA: No fixed date has been decided as yet. We should be announcing it in May 2018.
BRR: Your expectation for inflation in FY18?
RA: We trying to keep the inflation below 6 percent for FY18, though ideally we would like it to be less than 5 percent. With the bumper crops coming in, commodity prices will be fairly contained.
BRR: What’s your GDP growth expectation for FY18?
RA: We are confident that we will achieve 5.8 percent.
BRR: To what extent can the government absorb the additional cost of domestic debt if we go for monetary tightening?
RA: We may be able to absorb up to 50 basis points increase in the MPS over the next six months, but this is for SBP to decide.
BRR: Can one realistically expect the long-pending payment from PTCL?
RA: May be some, but not really.
BRR: The bond calendar for the next quarter is rather high. Lately banks have been shying away from taking aggressive positions because of low rates offered by the government, whereas your demand seems high given the election season. You think the government would eventually offer better rates this quarter?
RA: We might have to offer better rates. But we are also trying to curtail our demand by trying to ensure that provinces come up with a surplus.
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