Mixed evaluation of Pakistan's economy, first by the State Bank of Pakistan, then by the World Bank and IMF, has dominated the discussion in the corporate sector. The government is saying look at the half glass full of appreciation and over 6% growth potential. The media and critics are pointing out to the half empty glass filled with multiple challenges.
At a small dinner last week some Pakistani bankers sounded quite optimist. They were of the view that if the teams of economists at the leading foreign banks and investment holding companies are advising their employers to invest in Pakistan, they must be having positive projections about the country's economic future.
Just a few months back Standard Chartered Bank acquired Union Bank to expand its base at high share price. I had an opportunity to see the presentation of the Chief Economist of Standard Chartered Bank in London a year back in which he was pretty positive about the country's economic reforms and future growth. This followed SC's acquisition in Pakistan. Led by low profile Badar Kazmi, Standard Chartered Bank will now have 113 branches network after the merger of Union Bank.
Earlier, Singapore giant holding company Tamasek had bought NIB. And now through NIB, Tamasek is in the process of buying out major shareholders of the country's premium Development Financial Institution, PICIC. With the acquisition of these shares it would also have access to what PICIC's Managing Director Mohammad Ali Khoja proudly projects as "a financial supermarket." He has to his credit expansion of PICIC into a supermarket by establishing PICIC Asset Management, PICIC Insurance and acquiring major shareholding in PICIC Commercial bank which has over 130 branches. Khoja says he is happy that a strong international group has bought 46% share. Tamasek sources say that eventually they will acquire the majority shares.
The other market reports are that Barclays, which is the leading British bank, is looking to buy a bank in Pakistan. The Dutch ABN AMRO bank is buying Prime Bank and would soon have around 75 branch network. HSBC, which was considering closing its operation at one time, is also now planning to expand its base in Pakistan.
In most of these cases foreign investment will come in because the majority shares are held in the country. For instance in the case of 'PICIC supermarket' Tamasek, which has 70% of NIB equity, would contribute according to its equity.
But in some cases, such as Union Bank, much of the money brought in by Standard Chartered Bank has gone to the Saudi shareholder. A few years back when the country's economy was slipping downhill, the foreign banks were planning to leave.
True, foreign investors' interest in Pakistan banking sector at present is also stimulated by the high profit margins, but it would be foolish to believe that they have not taken a long term view. Foreign banks are known for advising their clients on long term investments, their interest in Pakistan is indeed a good signal to other investors in their respective countries.
It should also be noted that though SBP list shows that only 11 foreign banks are operating in Pakistan, there are some banks like Alfalah, Faysal Bank, Dubai Islamic Bank, Saudi-Pak Commercial Bank, Habib Bank, United Bank which are incorporated in Pakistan but have major foreign shareholding, mainly from the Gulf.
Confidence reposed by the foreign investors in Pakistan's economy does not mean that the economic managers can relax. They know the challenges and recent reports of SBP, World Bank and IMF are a strong dose of caffeine to keep them awake. Most immediate challenge is the high external current account deficit. Exports performance has been much lower than projected by the government. A mere four percent growth recorded in the last five months is not going to narrow the yawning trade gap.
Present sluggish growth shows that the exporters and trade managers have no or ineffective long term plan. Everybody knew that the competition is going to get tough. Some big exporters, who have resources and are farsighted, prepared themselves, but others are waiting for the government to dole out some concessions.
Their plea is that cost of doing business in Pakistan is higher than in India, China and Bangladesh. It may be true to some extent. But there is a lot they can do by cutting down the cost inefficiency. Most of them are family run companies, with low grade professional support. A good number of textile companies have learnt to make money the easy way - through government rebates and evading taxes on the production for domestic demand. Still local yarn market in Faisalabad is operating on cash basis.
On the other hand the government has to save every penny on imports. It should discourage the import of luxury items. Why do we need to import luxury fuel guzzler cars? There is no justification for reducing duties on such items. A substantial amount can be saved by cutting down import of war toys, as no major war is on the horizon. Strong economy is a better defence than weak economy and strong weaponry.
All the three reports on the economy also pointed out that devaluation of rupee may boost exports and discourage imports. The government may not be able to resist this temptation and the pressure from the international donors for a long time. But its predicament is that it might raise the energy cost at home which is already an irritant for the industry, exporters and the people. Devaluation would also push up the inflation. The way to handle this is that the government should cut its taxes on the fuel and electricity to absorb the rupee depreciation impact.
Economic managers have an unenviable job. They will have to continue walking on the thin tight rope balancing growth with low deficit and inflation. As the fiscal space provided by debt rescheduling is narrowing the disbalancing winds are getting stronger. The game now is to consolidate the gains made so far and address the challenges without getting complacent. ayazbabar@gmail.com