GDP to dip before returning to 5-6 percent

Interview with Asad Umar, the Finance Minister

Asad Umar needs no introductions. Earlier this week, BR Research sat down with the finance minister in Islamabad and picked his mind on issues ranging from macroeconomic stabilisation to governance reforms. The interview also ran on AAJ TV as an Exclusive on Wednesday, December 5. Edited, translated excerpts from that discussion are produced below:

BR Research: It’s a bouncy pitch for you today. The market’s criticism is that in you sounded overly pessimistic in your first month in office when the situation wasn’t that bad on the macroeconomic front. Now, after the two months that followed and in the wake of PM’s visits to Saudi Arabia, UAE and China, you sound too optimistic, categorically stating that the balance of payment (BOP) crisis had been resolved. We are afraid that this oscillation between pessimism and optimism is weakening the credibility of the finance ministry in the market.

Asad Umar: My earlier pessimism was in line with the economic conditions. And the markets themselves notice everything. Markets noticed when your current account deficit (CAD) was coming in at $2 billion per month in May, June and July. The markets also noticed when reserves were falling fast and loans were increasing. The markets noticed that between December 2017 and July 2018, PKR had depreciated by 23 rupees and interest rate hike had gone up to 2.75 percent. (As for the BOP crisis resolution), even prior to elections, I always said that a bailout was inevitable; the only question was who would do it.

When I recently explained at the 100-day ceremony in Islamabad that CAD had come down from $2 billion per month to $1 billion per month, people started clapping. I told them it’s not the time to clap, for much more needs to be done as Pakistan cannot afford to have a CAD of $1 billion per month. I never said that the conditions are excellent. I will repeat for you what I have said earlier many times: I have met the external financing requirement for FY19; therefore there is no immediate crisis. But unless we definitively control this shortfall, we need to continue working hard.

BRR: Let’s pivot to the central bank. On paper, it looks autonomous, as it takes decisions to raise policy rates and adjust the currency. But if we look at the last ten years, political interference has been high. Few governors had to resign; few others were compromised; and eventually we couldn’t find a governor from abroad and had to fill the post from within Pakistan. Strong deputy governors either left or retired. Now we don’t have competent advisors to run the monetary policy committee. Don’t you think it is imperative to first build further capacity at the SBP and then give them policy mandate?

AU: First we need to establish whether an autonomous central bank is good for our economy or not. It is. But they do need to build more capacity, which is still higher compared to other civilian institutions. Such a capacity will not build itself through political interference; top-notch professionals will serve when there is no political interference. The SBP has to take difficult decisions. I am not taking those decisions, but I think their recent decisions are justified to a large extent. Now you can raise questions on execution whether it is being done in the right manner or not.

BRR: On the issue of exchange rate, do you think Pakistan should adopt free-float mechanism or managed float? If we go with the managed float, should we peg it with the real-effective exchange rate?

AU: This goes back to the issue of strengthening the capacity of the central bank, especially the technical management of exchange rate. If we both agree that exchange rate management is the central bank’s role, then providing market guidance and signaling is also the job of the SBP’s, not the finance ministry’s. It cannot be that decisions are taken by the central bank and explanation is given by the finance ministry. Do you really think finance ministry has a lot of capacity? I think we need more capacity-building at the finance ministry than we do at the SBP. Though I would also say that finance ministry has better capacity than other ministries.

BRR: Your personal capacity is also important. You are found seated on some 22 committees. This is less than half of the 48 or so committees that Mr. Dar was part of. But it is still a big number. Are you not over burdened?

AU: My situation is different. Mr. Dar was part of many committees in his personal capacity. I am heading or associated with the committees that I am part of only in ex-officio position of the finance minister. I myself requested the Prime Minister to narrow the limit (of the portfolios) of the finance minister. Finance ministers in the past also used to head divisions like Privatisation and Statistics. The portfolio that I have right now is itself a big challenge.

BRR: There are rumors in the market that the PM may reshuffle his cabinet members after his 100-day performance review. Do you think your portfolio might see a change?

AU: The PM had made it clear early on that he will evaluate the 100-day performance of each cabinet member. That exercise is going on. In fact I have myself reminded the PM that he needs to do my evaluation. Thus far he has given no indication (of a change). As for the rumors, the PM’s view is that attempts are being made through a concerted campaign to destabilise the government. Rumors are being spread, including differences between me and Jehangir Tareen, who is a gentleman and whom I have known for the last 15 years. On the same day today, Dr. Shamshad Akhtar was rumored to be becoming finance minister and governor SBP. This is all part of a systematic campaign against the government.

BRR: Coming back to the economic issues, are we going to the IMF or not? Expectations from friendly countries, it seems, have been misplaced.

AU: We are negotiating with the IMF. If we get an IMF programme that is in Pakistan’s interests, then we will enter that programme. It’s only responsible to not rely on something that is uncertain – that’s why we have been exploring alternatives. We have arranged those alternatives; some of the details have been made public.

BRR: What is your idea of economic revival?

AU: We are looking to fundamentally transform the economy. For decades, economic growth has come from local consumption financed by borrowed/imported capital. But it lasts only three to four years as productive capacity in the economy is not built. We are moving towards a productivity-based growth model that is built on export orientation. We have to undertake structural changes – change the DTRE regime, introduce bonded warehouse facilities, etc. We have already reduced tariff rates for gas and electricity for the export sector; we have started refunds, which will be accelerated; we have dropped RDs on inputs which will be dropped further. All steps taken so far are with a clear export focus.

BRR: Which sectors are you looking at as priority sectors?

AU: With an eye on exports, we are looking at enabling the tourism sector. We also want to encourage small and medium, export-oriented industrial units in sectors like garments, light-engineering, etc. Then we have a major focus on IT and digital services.

BRR: There is a view that Pakistan is facing import pressure to this extent because it has opened up its foreign trade a lot over the last two to three decades under successive IMF programs. What is your view on this?

AU: Indeed. It is unwise to sign an IMF program without doing proper homework. There can be an IMF program that is in a country’s interest and there can be an IMF program that is not in a country’s interest. I have posed this question to the IMF MD, Christine Laggard: How can we ever exit the IMF programmes for good without ever building our export base? Unless we strengthen industrial sectors and remove anti-export bias from the system, we cannot move towards sustainable growth. We now also have a good opportunity to review our FTA with China and that will help our exports.

BRR: Coming to the fiscal affairs, you need to raise revenues and cut expenditures. Fiscal reforms are needed, but you need new people to deliver on that front.

AU: On the revenue side, the Chairman FBR and majority of members in the second layer are all new faces. The finance secretary is the same, but he is not from the Dar era. The Additional Secretary Finance is a new individual. I have both new and old players in my team and I think such a balance is good. In the end, I have to provide the direction to my team.

BRR: Tell us the real measures where you can cut expenditures to bring fiscal deficit under control.

AU: Dr. Ishrat is leading on the work of fundamental restructuring of the government, as to how many ministries and divisions are required. That work is almost complete, and I believe later in December we will discuss and debate the future shape of government. As for our large expenditures, you know their structure. After the Eighteenth Amendment and the subsequent 7th NFC Award, the federal government has effectively gone bankrupt. Now the federation needs to mentally and fiscally adjust itself with this new Pakistan. The federation can no longer do things that it used to do until five, ten years ago.

As there is no fiscal space, the provinces need to take their due responsibilities. We need to discuss sharing of costs in areas like higher education, BISP, etc. All these things need to be discussed in the 8th NFC Award, which I think will take some time to come through. The biggest responsibility of the federation is to stop the hemorrhaging at the PSEs, mostly in the power sector. We need to address technical losses, thefts and recoveries. I want to congratulate the Power Minister and his team that they have saved Rs13 billion in October on account of additional recoveries and lower line losses.

BRR: A recent ECC, decision was to provide subsidised gas to textiles and other zero-rated sectors so they could run their captive power plants (CPPs). This is despite the IPPs having large capacity, on which capacity charge has to be paid. In winters, there is less electricity demand. Isn’t the government incurring double expenditure and wasting it through inefficient CPPs?

AU: The issue right now is that even though we have decided to lower the power tariffs, it’s a long process that goes through Nepra and the public hearings thereof. Our assessment is that once the tariff is lowered to 7.5 cents after Nepra notification in the next ten days or so, very few industries will run their captive power plants due to cheaper electricity (from the grid). (The decision was taken because) We didn’t want them to face loss as electricity was expensive this season.

BRR: There is also criticism that you are not picking up the right battles at the ECC. Early on you picked up fertiliser and LNG terminals when circular debt and furnace oil uptake were bigger issues.

AU: The priority focus of the ECC in its first two months was on energy, power and gas. At that time, the Cabinet Committee on Energy wasn’t formed, so the ECC had to (pick it up). We spent time on fertiliser because there was severe urea shortage for the Kharif season on account of black marketing and farmers were being looted. We committed to avoid shortages and we made available additional gas supplies and allowed additional imports. Your question betrays urban bias; please ask the farmer how essential urea is.

BRR: Speaking of farmers, the wheat support price has been distorting the market. We produce wheat that is expensive compared to the world. The surplus is left to rot in silos. Then we give subsidy to export the grain that can be salvaged. Will you consider ending the support price regime or at least bring it closer to the international prices?

AU: It is true that Pakistan’s agriculture sector has become uncompetitive, due to which both the grower and the consumer are suffering. But we need to look at the whole value chain in agriculture. The wheat price is higher compared to the world but also note that inputs’ cost to the farmers is also higher compared to the world. What we can do is have the provinces share some of the burden.

BRR: FATF compliance is a serious issue. You have lately held meetings with the relevant institutions. The bigger threat is terrorist-financing, as opposed to money laundering. Will your government be able to make progress where others failed?

AU: Indeed, FATF review is focused on terrorist financing. For the last one week, I have been reviewing comprehensive FATF compliance efforts. It concerns not only financial institutions like SBP, FBR and SECP, but also the Interior ministry, the FIA, provincial counter-terrorism departments, and the intelligence agencies. I am confident that by the time we enter the next review in January, we will have fulfilled all the asterisks due until then. All institutions have a role in these efforts.

BRR: Lastly, what GDP growth numbers are you expecting during the third, fourth and fifth year of your government?

AU: By year four and year five, Pakistan will return to GDP growth rate of 5 percent to 6 percent. Before that, there will be a dip. If our export orientation really takes off – and I am not predicting – then it is possible to hit a growth rate of 7 percent in the terminal years. But it would only happen if today we take difficult decisions to reorient the economy and be prepared to take the flak for it.