Haroon Sharif is the Head of the Economic Growth Group at the UK's Department For International Development (DFID). He has over twenty years of international policy experience in the areas of financial sector development, economic policy, regulatory reforms and management in Asia, USA, Europe and the Pacific.
He has also provided financial sector policy advice to the G-20 Task Force on Financial Inclusion, Global Steering Committee on Islamic Finance, DFID offices in South Asia and the Middle East, Government of Pakistan and the State Bank of Pakistan.
Following are the excerpts from his recent interview with BR Research. The views shared by Haroon are in his personal and professional capacity and do not necessarily reflect DFID's official position.
BR Research: In what capacity are you working with the DFID Pakistan and what are the areas that you are currently working on?
Haroon Sharif: I am heading the Economic Growth Group at the DFID Pakistan office. The portfolio which I lead is roughly about £300 million for three years, and it's all grants-based. I strongly believe that a right policy environment will improve Pakistan's growth manifold. The Group has three broad components. One deals with the macro level policy reforms, which is less capital-intensive but requires a lot of time, research, data analysis and policy dialogue to bring local and international policymakers together.
Second, we invest a lot of money in building evidence - to experiment and find out what works and what does not - to influence the policymakers on their thinking. For instance, the development of the New Growth Framework at the Planning Commission was supported by my group. We are now investing in private sector think-tanks. For instance, the International Growth Centre at LUMS is funded by DFID. We have also had a partnership with the Institute of Public Policy at the Beaconhouse National University. We also work with SPDC in Karachi. Think tanks in Pakistan are small and we are working with most of them in their areas of expertise.
We are also working on finance, markets and skills for the youth. We are leaders of a new model for Skills' Development in Punjab which encourages private skills providers to compete with the public sector for better quality. Punjab Skills' Development Fund aims to train 80,000 poor people in three years. At the moment, DFID is leading on the Financial Inclusion agenda with the State Bank of Pakistan. We are investing in this area significantly and have leveraged around $150-200 million.
The third area is outreach to the poorest of the poor. We are currently putting money in cash transfers. We did that for the flood-affected persons when we took part in the Citizen Damage Compensation Plan post-2010 floods. We made sure that all payments were made through the private banks using the Watan Cards, a technology funded through our financial sector initiatives. We have also funded Tameer Microfinance Bank for their Branchless Banking service, Easypaisa.
BRR: How do you go about implementing your Group's seemingly broad agenda?
HS: I do not believe in conditionality-based aid. Instead, we tend to develop ownership of our programmes by the implementing partners. We conduct research, come up with evidence-based results, and present it as a public good - but the decisions rest with the policymakers. That's what I am doing with the Skills project with the Punjab government, where DFID actually challenged the structure of vocational training through TEVTA and others. We told them if the private sector can come into schooling, it can come into skills' development as well. So, we set up a Skills' Development Fund in Punjab, with £25 million, which does not provide skills training but invites bids from the private sector to provide skills. We received 147 applications in the first year, and 43 of them were far superior to state training schools. Now, the CM Punjab, after viewing the evidence, has decided that his government will scale up this model. We have a lot of focus on evidence and tangible results. Our financial inclusion programme has transformed the Microfinance sector which now stands on much stronger footing and corporate governance. All we can do is to put global evidence and good practices on the table and support the development process.
BRR: What are the challenges that you have had to confront so far?
HS: There are many challenges. First, the answers to a lot of structural macroeconomic reforms are political, not technical. We do engage with the technocrats and we know the solutions, but this is not enough for implementation. Secondly, the consistency in policies is an issue, for it is usually uncertain whether future governments will take a specific policy forward. That is the biggest risk at the policy level.
Our commitment to Pakistan and the UK public is to bring the inclusive growth back in Pakistan. For that Pakistan will have to prioritise a few structural changes - it will have to change the governance of SOEs, drastically change the taxation structure and administration and work on improving its global competitiveness. The UK taxpayers demand results in return of their contribution to the DFID. So, I try to work closely with the World Bank and the Asian Development Bank as DFID cannot commit in areas where other bring better value. Keeping in mind the frequent policy changes, we keep on trying to build consensus among international donors, key policymakers as well as think tanks.
BRR: Financial intermediaries are not playing their due role in Pakistan. Haven't we liberalised or deregulated enough?
HS: The economies that have not grown are because the institutions there have not been inclusive. The banking system and the capital markets are a classic example of that in Pakistan. The financial sector has largely catered to the upper class's financial services or as these days it has become the state's lender. Less than 20 percent of eligible population have access to financial services. That's the market failure, in that not only there is no price discovery, the consumer is not getting the product. We identified it about as a priority area three and a half years back, when Dr Shahmshad was the Governor SBP. The resources have to reach the productive users; otherwise they will not be able to contribute to the economy.
On the wider financial sector, the distortions are clear. Banks are reluctant to downscale, so the missing middle, what they call the SME sector, is too big and not being catered to. Banks have very little incentive to go down. I keep on telling the successive governors that they have to intervene to and change the incentive structure where the banking spreads are just huge. This banking model does not work for growth and will not reach out to the poor. Pakistan has had a huge market failure in the credit market, and the central bank as a regulator needs to intervene where such market failures are. The whole pressure is on commercial banks right now, which by nature are a risk-averse business. They are not the long-term project financers.
BRR: So, how can be these distortions removed?
HS: Pakistan's financial sector is a bank-based model, not a capital-market-based model. We need to develop alternate financing mechanisms for the state and corporate sectors' borrowing needs, but the debt market is missing right now. We need to get people who have the relevant skills to advise Pakistan to develop these markets. In an environment where Pakistan cannot go to international capital markets, a properly-developed debt market could have taken pressure off from the commercial banks.
Pakistan liberalised its financial sector under compulsion, therefore, it did not sequence it properly. The liberalisation was based on IFI's recommendations and was not modeled indigenously. There are other elements of market and infrastructure that need to be in place, too. We have gone wrong in building an inclusive financial market. The commercial banks will never be able to reach the missing middle; so you need to look at alternate structures. The SBP is overloaded with regulatory burden and the SECP does not have adequate capacity. I feel, if you need innovation and job creation, it's the SMEs that are going to provide that!
BRR: What role of a central bank in a country like Pakistan should be?
HS: I believe that the central banks in the developing countries have a much larger developmental role. Yet they are being run on the model of developed economies, focusing only on monetary policy, supervision and debt issues. I think that the policy orientation needs to go on the development economics side as our neighbouring country India has done. Institutions like the SBP must strengthen their capacity by attracting the right talent, particularly at the second and third tiers of management. SBP must be totally independent to resist the political pressures. .
I think the incentive structure of the financial sector needs to be reviewed seriously by the SBP. The segmentation hasn't really worked in the world, that you make a bank for agriculture, another for technology or SME. The private financial sector must be given the right incentives to innovate and reach out to non-traditional sectors. Private sector credit is essential if we need the growth to pick pace. Moreover, debt products like infrastructure bonds, municipal bonds, etc. have to be tried in Pakistan. If you look at the public-private-partnership model that has been successfully implemented in countries like the RSA, the state can reduce a substantial amount of brick and mortar investments by going to the debt markets.
BRR: Do you think Pakistan will be applying for the IMF facility any time soon?
HS: I think Pakistan may decide to go back to the IMF in the next 12 months. My advice to the IMF will be to look at a broader growth oriented programme which is owned by the Pakistanis. Perhaps they would prefer to negotiate with the new government, because it will be difficult for the IMF to come in an election year, for it will be all about belt-tightening on the fiscal side. Two things are imminent here. This time the Fund will look for prior actions for releasing a tranche, rather than waiting for things to be done in the future. Secondly, without energy or revenue reforms, I don't see any programme to succeed in bringing the desired change.
Pakistan, on the other hand, must have a home-grown plan of action for the Fund. A policy agenda, which is indigenous and has a buy in from the political actors, can help the country negotiate with strength. I do not see Pakistan prepared for it at this point in time. Countries go to IMF when there is no other option, but then, there defences are down. But, if a country negotiates a bit earlier with a plan of action, things are different.
BRR: DFID has been supporting the Planning Commission's New Growth Strategy which was launched amid a lot of hype last year. Why wasn't the new thinking incorporated in policymaking?
HS: I firmly believe that Pakistan's GDP growth can be accelerated by a rethinking of policies and frameworks. The new growth strategy was a Framework for Economic Growth, which challenged the model of centralised planning (five-year plans). It also challenged certain myths, including the restructuring of the planning process itself. It challenged the approach to keep on doing projects, and suggested that we should look at markets, innovation, youth, etc. The framework was endorsed in the NEC meeting in May last year, the highest body of the Federal Cabinet.
The Framework couldn't take off the way we had envisaged, primarily due to the lack of debate on economic growth because of the complex institutional and political situation. It also had to do with the capacity of the Planning Commission to get traction among the key decision makers who happen to be both in provinces and in the centre. Unless the narrative changes in the private sphere, that is, until the corporates, the media and the civil society start demanding it, I don't think that the political elite will challenge the ways of doing business.
At the same time, Pakistan is going through a transfer of centralised powers to the provinces. This process will take some time before the new institutions develop implementing capacity. The co-ordination among ministries and the provinces remain weak. You have got to give teeth to an implementer and that implementer ought to have the power to generate debate and negotiate. You cannot implement by authority - there has to be a buy-in.
BRR: What is your response to the criticism that the Framework didn't talk about agriculture?
HS: The Framework was not sector specific, it had fundamental shifts. It challenged the traditional thinking on export promotion and protection. It looked at developing markets and domestic commerce. Nothing is perfect but it encouraged changing policies rather than merely focusing on investments. Now I confess that this is a much longer term process and needs multiple actors to play their due role. In other countries, specific growth commissions have been set up under the prime ministers' offices. But for DFID, it was a risk worth taking as the Planning Commission made a good attempt to bring the growth narrative back in the policy debate.
BRR: What are your thoughts on the private sector development in Pakistan?
HS: We are working for a Private sector-led growth, in which we are looking at ways to address key distortions in the markets, foster innovation, and encourage the public private partnerships. But, as long as a protected and patronage-based private sector is developed, the rent-seeking culture will continue to dominate. We need to look at markets to incentivise them through self-regulation mechanisms where new players emerge and challenge these structures. DFID is setting pilots, and showing the policymakers what works and what does not work. We are doing pilots in the financial sector, the labour market, the skills market. It is to change that thinking as to what the state can do and what the markets and private sector can do.
Pakistan is at an all-time low in attracting investments. We are trying to create conditions where investors could come and look at the markets, particularly in the agriculture and dairy sector. I think it's the geopolitical situation and the image problem that is forcing investors not to take long-term risks, including the local investors. DFID is encouraging the likes of IFC, CDC and others who are willing to take higher risks. What DFID can do is guarantee the investors that should they incur losses; we will cover some of the risk premium for some time. Rather than directing the aid money to small projects and subsidies, I'd rather go this route and ensure that investment does come in.
BR Research: Microfinance in Pakistan is not at a level seen in the region. What are the factors behind that?
HS: Microfinance started in Bangladesh 20-25 years back. In Pakistan, it remained a state-sponsored activity and was never seen as a business. We recommended the central bank for a structural shift from NGOs-led microfinance to dedicated Microfinance Banks. It had three advantages. One, the sponsors are allowed to take profits when they come into the regulatory net. That is why the growth in deposits in MFBs has been phenomenal. Two, the corporate governance improves because the entity is regulated and the transparency element goes up, making the business more marketable. Three, the sponsor base is diversified in case of MFBs.
I also sit on the board of CGAP at World Bank, and in my experience, things will change for better if you manage to set up the systems that can indigenously deal with the population, without totally depending on external support. That's what we have been doing for past three years. The day I started our Microfinance programme, 80 percent of the microfinance industry was unregulated and informal. Today, over 80 percent is formal and is actually following the banking regulations and code of corporate governance. We have converted the incentive structure for that.
At the moment, we have around 2 million microfinance users. There is a macro distortion that is hitting us, and that is the availability of credit in the private sector, because, if the money were there, these institutions would have been ready to absorb. Due to tight monetary policy and the weak fiscal situation, we still have to wait another 3 to 5 years. But, I am very pleased that on every pound of DFID investment, we are raising two pounds from the market. We have put in £50 million, which is leveraging £100 million from the market.
BRR: Please elaborate on your engagement in the budding branchless banking sector in Pakistan.
HS: The sector was non-existent a few years ago. There is a huge potential in the BB sector to bridge the financial divide, as around twelve million transactions are now happening every month on mobile banking platforms. What has worked so far will be scaled up by the DFID Pakistan team. We have set up a Financial Innovation Fund to encourage new products in the market. Though SBP is our partner, we are putting world class, private sector professional to lead the programme. We have been successful in linking the public with the private sector to form policy.
The myth has been broken that poor people cannot use technology safely and securely. We have seen in our emergency response through the Watan Cards if one needs the money, s/he will learn to use the technology, so the incentive is very clear. Pakistan has a conservative bank-based regulatory model, but other models operative in the world are also being looked at as the market grows further. Three products are on the cards currently; including savings and deposits, and government to people payments like BISP cash transfers. The transparency and efficiency gains will be huge for the BB sector.
The views shared by Haroon are in his personal and professional capacity and do not necessarily reflect DFID's official position.