Interview with Ehsan Malik, CEO PBC
‘Exchange rate needs to be adjusted by a further
5 percent in the near term’
Ehsan Malik is the CEO of Pakistan Business Council (PBC), a research based business advocacy body representing the leading businesses in Pakistan, including 24 multinational companies from 12 countries.
Prior to joining PBC in January 2016, he was the CEO of Unilever Pakistan for nine years, a period in which the business quadrupled in size. In a 24-year career with Unilever, Malik served as CEO of Unilever Sri Lanka, led the consolidation of Unilever’s regional businesses in Egypt, Lebanon, Jordan and Syria, and spent several years in the head office in the UK.
Malik is Member of the Board of Directors of Abbott Laboratories Pakistan Limited, IGI Life Insurance Limited, National Foods Limited, Gul Ahmed Textiles Limited and International Industries Limited.
BR Research caught up with Malik again post PEF to feel the pulse of the industrial sector as we run up to the general election time. Here are edited excerpts of the conversation:
BR Research: When we met the same time last year, you were “cautiously optimistic” about the economy. What is your stance now as we run up to the elections?
Ehsan Malik: Absolutely the same. In the middle, perhaps, the position had slipped to being less optimistic, but my optimism has since improved back to being cautiously optimistic. My primary reason for feeling optimistic is that in the current leadership of the government, I see a refreshing change. The PM and his financial team are willing to listen, have the ability to understand, and eager to discuss ways of improving the business climate. They are trying to bring the ministries together to align polices to promote industry in Pakistan.
BRR: You mentioned last time that you will turn “positive” or “bullish” once the government goes about doing risk-based audits, freeze the FTAs, and basically fix the taxation structure in general and the FTAs. How would you review the situation now?
EM: If you take the FTAs first, I think now beyond any doubt there is a general recognition that the main FTA that we have with China was not very ably negotiated. And as you know, the team in the Ministry of Commerce led by the current Secretary has had several rounds of negotiations with the Chinese. To give him credit in particular, and the ministry in general, they have been listening to PBC. PBC has proposed a list of export items for which Pakistan needs to get parity with ASEAN countries. As you know China, subsequent to the agreement with Pakistan, signed a more preferential agreement with ASEAN on items such as rice. The list that PBC provided to the ministry has a theoretical export potential of $3.3 billion. It is theoretical as it assumes that China would buy all its needs to the extent that Pakistan has the ability to supply.
I am told that the Chinese are very much in a listening mode. Within the broader geo-political perspective of CPEC, China could take a more liberal view of the FTA.
BRR: Agreed that there has been recognition, and that it is being re-negotiated. But it all seems wishy-washy at the moment. Even if Pakistan gets 50 percent of the concession on tariffs, even then ASEAN would have an advantage. And why peg our tariffs only to ASEAN?
EM: The items we listed for parity with ASEAN are those that either attract zero duty or significantly lower than imports from Pakistan. Rice from ASEAN, for example attracts half the duty. Other than ASEAN and Australia and New Zealand, China has not given better terms to anyone. It is true that tariffs alone will not boost exports. The reason why we are unable to compete is higher input costs – labour and energy in particular, as well as the absence of scale.
At the end of the day you have got to recognise that industry here has been significantly undermined by free trade agreements, fiscal policy, energy shortfall and non-competitive energy cost. Then our labour policy is also defective, and our agriculture output lags behind the global best. Labour and agriculture are of course devolved issues, we can talk about that when you are ready.
Let me give you an example, EU’s GSP plus offers 0 percent duty access to textiles from Pakistan. What is the market share that Pakistan has taken in EU textiles? It is 4.5 percent. If we divert the entire export of textiles from USA and all the other countries into EU, what will our market share become? It will move from 4.5 percent to 6 percent. China is sitting at about 19 to 20 percent; India is sitting with 12 percent; despite the fact they pay duties to get in - anywhere between 12.5 percent to 16 percent - while we pay 0 percent. We don’t have cotton; our energy costs are significantly higher than our eyeball competitors, particularly Bangladesh, India, and even Vietnam. Unless you are able to address those fundamentals, you will continue to have those problems. It is not only about the tariffs; tariff is just one of the issues.
BRR: What about other FTAs?
EM: On Turkey and Thailand, PBC has been advocating that the government needs to move significantly more cautiously than they were originally planning to, given the mismatch between our respective export capabilities of at least 3:1 in favour of the two countries. Also both Thailand and Turkey already offer very low tariff rates to Pakistani goods. Both countries are likely to seek tariffs commensurate with what we offered Sri Lanka and China. Both are eyeing our automotive, rubber, and plastics industries that are emerging after years of energy shortfall.
On the fiscal side, unfortunately, the progress to date is not that good and there are fundamental flaws. The main flaw is that policymaking and tax administration are all merged into one under the FBR. Unless you are able to separate policy from tax collection, we will continue to have knee-jerk, short-term, revenue hunting measures that undermine the long term health of business.
BRR: What is your take on PML-N’s performance so far?
EM: On most of parameters, whether economic or socio-economic, Pakistan is significantly in a better place than it was in 2013. But it is well short of all the targets that the government and Ministry of Planning at that time had articulated. So there is progress, but we are not where we need to be.
BRR: And what is your reading of exchange rate?
EM: The PBC has been stating for the last two years that our FX rate is not competitive; so have the IMF and many others. I think what the government has done is pragmatic in adjusting the rate by approximately 5 percent. I think it will need to be adjusted by a further 5 percent in the near term. The near term could be 2 months, 3 months, or it could be by the end of the financial year. That is what is required to balance export competitiveness with inflation management.
BRR: Tell us, what are your views on the distribution of gas between provinces, and its pricing?
EM: There has to be some equity in pricing. We are one country. Actually it is not so much about the pricing of gas between the provinces, but about something more fundamental. Currently we are basically giving away gas for peanuts to domestic users. Priorities have to be right. We must strengthen industry so that jobs are created and people have more disposable income.
BRR: The constitution says that every province has the first right of usage to its resources. When you say there should be equity in terms of provincial distribution of gas, how do you arrive at the equity?
EM: In the usage of resources, yes; not in the pricing of resources. Let’s say for example a province has all of a particular rare resource, it would be extremely foolish to price the resource low in that province, deplete the resource and force other provinces to import at a much higher cost from elsewhere. Take water, it is not priced correctly currently, which is why we are running out of water. The same thing is happening to gas, as you know Sui reserves are depleting.
The non-system gas has been brought into the country, in order to meet the entire needs of the country. It is not like Punjab has its own external account for which it imports which does not even pass through Sindh but passes through air. This is Pakistan, we have one external account, and we have got to manage that. Non-system gas and natural gas prices should be averaged out.
BRR: Let’s talk about NFC Award. Why is it that businesses in general are not talking about fiscal federalism and its implications?
EM: The PBC does not have a stance on this. My sense is that businesses are partly not able to understand how it works honestly. Some who go a bit deeper find that a lot of money is not even spent because of inefficiencies and other reasons.
I think businesses do not appreciate the fact that as much as 60 percent of the total cake is being diverted into provinces, and that the federation is actually becoming poorer. The businesses and association need to be more aware that if a road needs to be built, it is the province’s job, not Islamabad’s.
BRR: Do you think PBC will be picking NFCs as a subject in the next PEF?
EM: Potentially yes. The next PEF is about a year away. Who knows what the major priorities will be then. I don’t know how relevant NFC would be next year but definitely one could look at that.
BRR: A suggestion floating around in the policy community is that similar to the integration of the energy ministry, Pakistan should integrate the ministries of commerce, textile and industries. How would you respond to that?
EM: I think that would make a whole lot of sense. We were at the Ministry of Commerce recently, because it is working on the Strategic Trade Policy Framework for 2018-2022 following failures of earlier polices. A major reason in our opinion is that no one ministry can make a national strategy without a full buy-in from all related ministries. Certainly you can’t do this without Finance and Industries on board; and also the provinces, since labour and agriculture are in their domain.
The government needs to scan and align all the polices that impact trade in general, and exports in particular. It then should have a very high level body, ideally led by the PM to oversee a national strategy. This is what Bangladesh and Vietnam have done. There are many gaps and conflicts between trade, fiscal, labour and agriculture polices that need to be resolved. At PBC’s Pakistan Economic Forum in January, the PM had agreed to establish a body to align policies. We are waiting for the announcement.
Also trade policy shouldn’t only be about exports. There is an export target of $61 billion by 2025, but what about imports? Without import substitution. This is only possible when our industry gains scale to become competitive. PBC advised the Ministry of Commerce to factor import substitution and import incorporation into the trade strategy.
BRR: Are export packages working in your view?
EM: We get very excited by short-term blips. I see people taking credit for increase in exports and for growth of large scale manufacturing when no fundamental change has occurred. Short-term export package is transactional in nature. It won’t transform industry. Only long-term polices that are consistently implemented will give industry the confidence to invest in more value-added lines and move to greater sophistication.
BRR: There has been some criticism that Make in Pakistan is about protectionism. The PBC has provided sufficient evidence to support the view that manufacturing has become a sin in Pakistan. But the PBC has not provided enough evidence to support the view that its Make in Pakistan banner is not protectionism.
EM: What did China, Japan, and South Korea do 20-30 years ago? They provided some protection to their industries to allow them to gain scale and become competitive. They also managed their currencies, indeed do so even now. Is that protectionism? How come world’s largest economies are not accused of protectionism but Pakistan is?
You have to provide a certain level of protection, but you need to do it intelligently. You have to ensure that consumer interests are safe guarded, but you also have to make sure that the disposable income they rely on is also boosted through employment. Jobs have to come first.
BRR: What is not Make in Pakistan?
EM: Indefinite protectionism
BRR: Is there any industry in Pakistan that is foolishly protected?
EM: To be honest, I cannot think of one. The auto industry was protected for some time by restricting the number of players. But that too has been opened and at least 4 additional players are entering.
BRR: Would you support cotton imports without RD?
EM: Yes, if we have a shortfall in local production. Do you want to make cloth and be happy with that or do you want to turn it into apparel? Apparel is better and for that, if cotton is limited, it should be imported.
If the spinners are very interested in protecting themselves, then that is wrong and that would qualify for the foolish protectionism title.
BRR: What if there is an industry that produces raw material for a value-added industry within Pakistan but that raw material is costlier than imports? Especially if the higher cost is not because of higher labour and energy costs but because of that industry’s lack of efficiency. Would you protect that local raw material provider or support import of those materials?
EM: I don’t think that is a situation that will remain forever. There may be odd periods of time, for example cotton grown in Pakistan becomes more expensive for a variety of reasons. But I don’t know of any significant industries that are grossly inefficient and have no scope of becoming efficient and are protected.
BRR: Do you think you have a constituency for Make in Pakistan?
EM: I think we are getting a much stronger constituency than we perhaps had. When I go to any of the ministries, they are much more tuned in. I find that there is the realisation that backing the trader, the commercial importer in particular, is a short term foolish approach.
One of the things we are advocating strongly is to do away with the presumptive tax, the full and final tax on importers, which gives incentive to heavily under invoice. FBR’s concern is the impact on revenue, which is a valid concern given that it is not only a policymaker, but also a revenue gatherer, and taxing imports at that rate is an easier task than to hold businesses accountable on the basis of profit. We said; convert Presumptive Tax to Minimum tax. The commercial importer will have to give minimum 8 percent tax but they will be held accountable for their full profits like everyone else in a taxable activity.
BRR: Make in Pakistan cannot be divorced from documentation, VAT, taxation, etc. And we know attempts to roll out VAT mode or to document real estate have failed. So is there really a constituency for Make in Pakistan?
EM: I believe that if the type of leadership we currently have is sustained then yes, it is possible. You got people like Haroon Akhtar and Miftah Ismail and the current Prime Minister who are determined to streamline taxation. It can be debated whether they have the time to do this, but the intent is very much there and they can certainly get the ball rolling. Without fundamental changes, we will be knocking on the doors of the IMF every 3 years or so; this by the way is the average lag time in the last 28 years in which we have been to the IMF on twelve occasions. That is clearly not sustainable.
BRR: Could we expect the PBC to make strategic alliances with say the FPCCI, or other chamber and associations?
EM: We have done a whole lot of work on trade. Going forward, we are focusing now on competitiveness. So for example one of the studies we are doing is on domestic appliances. There could very well be a domestic appliances association, so of course we would have to go to them. But it is not only going to the trade association or the trade bodies; it is also about going out to other centers of excellence. For example, Lahore School of Economics has a wealth of information on competitiveness. So we are looking at their studies and finding ways to collaborate.
