In Pakistan, "We've Come a Long Way"

Finance Minister Shaukat Aziz on how the economy has stabilized and foreign investment picked up, and on what still needs doing

Former Citibank executive Shaukat Aziz has headed President Pervez Musharraf's economic team since the military coup in 1999. With Pakistan's newly elected government in place, Aziz is still at the helm of economic affairs, heading the Finance Ministry under Prime Minister Mir Zafarullah Khan Jamali.

Aziz recently met with BusinessWeek Online Correspondent Naween A. Mangi at Aziz' Karachi residence. He spoke about Pakistan's economy, how the government views the potential impact of war in Iraq, and what's next for Pakistan. Edited excerpts of their conversation follow:

Q: Pakistan's economy has stabilized substantially during the last three years. As you anticipate the transition from stabilization to growth, are there any disappointments?


The way to look at it is not what were the gains and disappointments, but what more needs to be done. To do that, you first have to appreciate what the situation was three years ago. We had a high fiscal deficit, a tremendous debt issue that crowded out investment, and our balance-of-payments position was weak. We were living hand to mouth, and when a government is in a crisis mode, it's very difficult to initiate reform.

We've come a long way in three years. The economy has been put on a path of sustainable growth, and there's predictability of economic policy, which is the first thing anybody looks at when they want to participate in an economy. And now investment is picking up, all the indicators are positive, consumer demand is growing nicely, and interest rates are down. So there are no real disappointments. But things are not solved in three years. It takes sustainable action over a longer period.

Q: How was all this achieved?


Two parallel efforts were under way. One was to get the economy on a path of sustainable growth, which is still going on and yielding results. This year, growth in gross domestic product will be over 4.5%. In parallel are structural reforms. If you just fix the fundamentals and don't have reform, you're not leveraging the overall improvements in the macroeconomy.

Even today, we need to focus on more infrastructure, and we need to maintain fiscal discipline, keep our debt profile in line, and transfer the benefits of growth to the common man.

Q: It was said that prior to the October elections, you had a free hand in making economic policy. What's different now that an elected government is in power?


We basically have to ensure continuity of policies and reforms to get the full benefit of what we've done in the last three years. At the same time, feedback and response via the political process and through the National Assembly and Senate are very valuable.

Pakistan faces many challenges, internal and external. The situation in the Middle East looks like it could erupt, and this is the first time in our history that we feel reasonably comfortable with availability of essential items and reserves. Today, we're sitting on $10 billion in reserves.

Q: What sort of contingency planning is the government doing in the event of a war on Iraq?


We have all kinds of contingency plans. In our most recent Cabinet meeting, the Prime Minister asked the Ministries of Finance, Defense, Information, Petroleum, and Interior to form a task force to monitor the impact of the Iraq situation and how it affects all aspect of activity.

What is particularly important is to ensure that there's no shortage of essential items, especially oil. We're pretty comfortable. We've increased our stocks, and we have plenty of money to buy essentials. And the normal commercial activity in the country hasn't been affected.

Q: But businesses are asking what kind of plans they should be making. What impact will a war have on demand?


There could be pressure on oil prices [which could have an impact on] those companies whose raw materials are oil-based.

Otherwise, on the export side, demand gets affected whenever there's tension. Uncertainty breeds reduction in consumer confidence. However, there are no indicators that domestic demand will be affected. In fact, real estate prices are up, stock-market fundamentals are very strong, and the market is holding up well. Sales of consumer goods go on.

Export orders could be affected, some of the sea lanes could be impacted, and there could be war-risk surcharges. But Iraq doesn't have a major coast or a large navy. And our linkage to Europe is through the Suez Canal. Also, unlike Afghanistan, this is not in our neighborhood.

Q: Foreign debt pressures have eased, but domestic debt is still on the rise. What's your strategy to combat domestic debt?


Both foreign and domestic debt growth have been contained. Naturally if you're running deficits, debt is growing. But we have managed single-digit interest rates. That was essential because 65% of our revenues were going to service debt. Now the number is in the 40s. It's still high, but we'll keep working on it.

Being fiscally responsible is important for improving investment. The debt situation is much better.... We're not against borrowing -- borrowing for development is healthy. But we have told the International Monetary Fund that hopefully this will be our last IMF program.... We've also created for the first time the Pakistan Debt Office in the Ministry of Finance, which will be the main center for developing debt strategy.

Q: But the biggest component of Pakistan's domestic debt is the government-run National Savings Scheme (NSS). Despite falling interest rates, there has been no slowdown in the money being put into the NSS. How do plan on tackling this aspect of the domestic debt situation?


The NSS is merely a reflection of a certain investor class feeling comfortable with government paper. It also shows people are chasing yield. Growth remains healthy in NSS. It's now market-based, and from a macroeconomic standpoint, it's a healthier way to borrow.

We used to have fixed rates, and now they're linked to Pakistan Investment Bonds [3-, 5-, and 10-year government securities that are traded]. We need to make the NSS a better-run organization -- more like a savings institute rather than a government department -- but the NSS meets the needs of a certain segment of the investor base, and I wouldn't discourage it. The government has a responsibility to provide certain retail products, but banks are also gearing up and mutual funds [offer other opportunities].

Q: The government has failed to turn around the state-owned utility corporations, Water & Power Development Authority and Karachi Electric Supply Corp. Both still post huge losses, and privatization has been repeatedly delayed. This is also an area where the IMF has repeatedly criticized performance. Do you plan to change course here?


WAPDA and KESC both present tremendous opportunities and risks to the government. KESC loses [a great deal of money] because of high line losses and pilferage of electricity. We have good management in KESC that has reduced losses investing in the infrastructure to prevent pilferage. But it will be a long haul. The only solution for KESC is privatization in some way, but the two bidders we had have their own problems.

For WAPDA, the issues are government receivables and billing, and it's not as acute as KESC. But I agree that we need to be creative about privatization. We can't use conventional methods.

Q: Your government's privatization program managed to complete one major sale -- selling United Bank Limited last year. Not much else has moved. What are your targets?


We're hoping for about $500 million in privatization proceeds this year, about half the foreign direct investment target of $1 billion. We've already got $200 million for United Bank, so if we do one large bank and Pakistan State Oil, we could exceed the target.

If we could list all large government-owned corporations [though the stock exchange] even before they're privatized, that would help the company, ensure better participation, help the stock market, and share the gains with the public.

Edited by Patricia O'Connell

Before it's here, it's on the Bloomberg Terminal.