‘Pakistan’s economy can no longer be rescued without urgent debt restructuring’

During its first tenure, Pakistan Tehreek Insaf (PTI) government was bitterly criticized for lacking any vision on the fiscal front. The federal government appointed four different finance ministers, each of which had dramatically diverging views on macroeconomic management, from Asad Umar’s insistence to resist going to IMF, to Hafeez Sheikh’s reliance on a heavily-Fund led structural adjustment.

Ten months out of power, the PTI leadership now appears to be a lot clearer headed on its future fiscal direction. Imran Khan recently announced that if PTI returns to power as a result of an immediate general election, Shaukat Tarin, his last finance minister, shall resume office. With election cycle now entering full swing after the dissolution of two provincial assemblies, it seemed apt to interview the shadow finance minister, Shaukat Tarin and quiz him on his self-appraisal of his job during his first two stints at the finance ministry, and his plans for the future.

Below are the edited excerpts of BR Research’s full conversation with him that took place in Lahore earlier this week:

BR Research: The first time you were appointed to public office, you joined the government as a technocrat. This time, you have not only joined a political party, but have extended political support to Imran Khan aggressively. What is the difference?

Shaukat Tarin: My father was a student leader in the Pakistan movement and worked closely with Quaid-e-Azam. I had always wished to contribute to Pakistan’s cause and finally found an opportunity to do so when I joined the PPP led coalition government as the federal finance minister in 2008. At that time, I helped Pakistan’s collapsing economy secure a bail out package from IMF. Soon after, however, Silk Bank – where I was a sponsor shareholder – needed to raise capital from financial markets. Unfortunately, I had to resign from public office prematurely to avoid conflict of interest. My desire to help contribute to the national cause remained unmet.

When PTI reached out to me in 2020, I met with Imran Khan and explained to him my vision on how to turn around Pakistan’s economy into a sustainable growth story. Imran not only shared my vision, but also agreed to give me a free hand to run the economy.

Imran and I have been friends for almost four decades. He is not a traditional politician. He truly wants to transform Pakistan’s destiny and has made many sacrifices over his 26+ years political career. I have become his political supporter because I share faith in his beliefs and leadership. Both of us believe that for too long the masses have been waiting for the dividends of economic growth to trickle down. Trickle down is a lie. I wanted to bring a bottom-up approach that focused on Pakistan’s poorest.

Our shared beliefs helped convince me to join the party and become its ardent advocate.

BRR: Consensus on the seventh NFC award was enacted under your leadership at the finance ministry during your first tenure. Of late, however, it has come under criticism for transferring an excessive share of fiscal resources to provinces, leaving the federal government coffers effectively empty. How would you respond to this criticism?

ST: Under the 1973 constitution, devolution should have been completed within the first 10 years. Under the PPP led coalition, we completed the unfinished business by devolving agriculture, health, education, welfare & social protection, law enforcement and several other subjects. When functions of governance are devolved, it only makes sense that resources are devolved too to strengthen provincial capacity to finance expenditure on these subjects in an effective manner. Thus, I still hold that the seventh NFC award was a step in the right direction.

Did it leave too little resources for the federal government to finance its activities? Maybe, but the bottom line is that the federation of Pakistan – which includes the provinces – collects too little in revenue. And until the size of the fiscal pie is increased, you may divide the resources any which way, it will either leave federal government or the provinces with empty pockets. Devolved functions means leaving provinces with more resources is the right approach.

The federal government must look for ways to increase the size of the pie. It is primarily responsible for raising taxes, where it has failed miserably. Similarly, another way to increase available fiscal space is to cut expenditure, such as by reducing the losses by State Owned Enterprises (SOEs). Again, SOEs losses have only worsened since the 7th NFC. Third, the federal government’s expenditure on devolved subjects has quadrupled since 2010, when, in reality, the federation should have eased out expenditure in areas which are now fully in the provincial domain.

Of course, provinces can help alleviate the situation by collecting taxes, where the performance of all provinces has been abysmal. However, in my considered view, the criticism on the revenue-sharing formula under the NFC is a red herring. The way the federation is run needs a re-think.

BRR: You raised the issue of SOEs losses. However, during PTI’s tenure, no progress was achieved on the privatization front. Similarly, efforts to reduce power sector circular debt and reform DISCOs failed. How do you grade PTI’s performance on this front?

ST: Your criticism is spot on. Privatization remained on a standstill during PTI’s four years in power. However, plans were laid out to contract out the management of LNG power plants and SOEs to the private sector under a competitive bidding process, to be followed up with privatization later. However, those plans could not meet fruition due to political instability.

If people of Pakistan give PTI another chance, the unfinished agenda of privatization will be our top priority in the next term. First, the balance sheets of the fourteen loss-making enterprises will be cleaned by parking them in a different SPV, which will go a long way in making the value proposition attractive for private investors.

Second, privatization will only become successful if competent personnel are placed at the helm. During the last tenure, the PTI government did not nominate any chairperson for the Privatization Commission. Instead, PC was parked under the ministry itself. Unfortunately, the minister too was very conservative, and the bureaucracy had become enfeebled by NAB, which hounded officers throughout our term.

If given another chance, PTI will bring clear headed managers from the private sector with a proven track record of successful turnarounds. Once the right intent is in place, rest will follow.

BRR: How do you grade PTI’s performance on tax collection and widening the tax base?

ST: No private sector individual or enterprise wants to deal with FBR. If everyone is critical of an organization, there must be something wrong with it. The first step, therefore, must be to overhaul the structure of FBR completely. It must be made more independent, lean, and public friendly.

Pakistan only has 3.5 million tax payers. During our tenure, we made genuine efforts to study and improve broadening efforts. Artificial Intelligence was deployed through collaboration with NADRA. Using database from both organizations, we were able to identify 43 million individuals who could be added to the tax net. The data was going to be uploaded on FBR’s portal in April 2022. I advised FBR that if 43 million new taxpayers are added all at once, the system might choke. Instead, the activity should span over a year and a half to ensure sustained results.

Unfortunately, the vote of no confidence torpedoed all our good efforts. Ever since, the PDM government has muzzled the project.

Second, the Track & Trace project became a reality during our tenure and met with enormous success. We started with three industries: tobacco, sugar, and beverages. Track & trace was going to be extended to twenty other industries. Instead, I am told that the incumbents are making clandestine efforts to roll back the results achieved in the initial three industries as well.

The third area targeted is the retail sector. Pakistan has nine million retailers, with an estimated turnover of twenty trillion rupees, of which sale of only three and a half trillion is captured. First, we implemented the Point of Sale (POS) system. Second, we sought to capture the supply chain. Our plan was to capture supply chain by deploying the CNIC database. These efforts were going to be rolled out beginning May 2022. It too has been placed on backburner.

Fourth, Pakistan Single Window was launched led by Pakistan Customs. The project has been completed and is one of the most robust Single Window initiatives launched across the globe. The incumbents have sidelined it as well, and have failed to utilize it in any way.

Finally, tax collection grew by thirty percent during PTI’s final year, from Rs 4.7 trillion to Rs 6.1 trillion. Of this, direct taxes grew at the rate of 42 percent. We planned to raise the same to Rs 8 trillion.

Were PTI not robbed of the opportunity to complete its tenure, we would have rationalized taxation completely in the final year, by removing all taxes except tax on income and consumption. Tax rates would have also been reduced with robust growth in tax collection.

BRR: Your tenure as finance minister is critiqued for causing overheating by rolling out what many term as a ‘loot sale’ budget. What is your take on this?

ST: Any economist worth his salt would tell you that Pakistan needs a high growth rate to sustain its population of 220 million. This requires adding at least two million jobs every year for the youth entering the labor force. This means that Pakistan needs growth, but growth that is both inclusive and sustainable.

As I explained before, our first goal was to ensure a bottoms-up approach. We focused the fiscal incentives on the productive areas of the economy, such as agriculture and housing. In retrospect, the housing initiative could have been more fine tuned to avoid the speculative activity in real estate, which admittedly, is an unproductive exercise. The allegations of overheating, however, are unfounded.

Two adverse effects were witnessed at the macroeconomic level due to the high economic growth rate achieved during PTI’s last two years in power. Inflation and current account deficit. It must be emphasized that till the time PTI remained in office, domestic inflation did not rise. Imported inflation rose due to the commodity super cycle, such as oil, coal, steel, and edible oil.

We were acutely aware that the current account situation will exacerbate. However, our bet was premised on continued political stability. Afterall, super cycles cannot last forever. Under normal conditions, the economy could have weathered – in fact, outlasted the commodity super cycle if growth momentum had been sustained. Of the $16 billion current account deficit accumulated during PTI’s last ten months in power, $13.25 billion was due to crude, coal, edible oil and vaccine imports. Once international prices had tapered off, macroeconomic fundamentals – including CAD - would have soon returned to normalcy.

More importantly, our entire focus was on export-led growth. First, the expansion in productive capacity in textile due to TERF was yet to come online. Second, our focus was on increasing IT exports. We had studied the Indian model, where it took them 10 years to add the first billion dollars in IT exports; and reached $100 billion over the following decade due to the multiplier effect.

We not only had firm plans in place, but they were also being implemented. We allocated six billion rupees for IT boot camps to develop the human resources. I have just found out that the budgetary allocation was axed under the latest austerity drive, and not a penny has been spent.

Second, the freelancers had demanded for a 5-10 year tax holiday, and permission to open FE accounts to withhold forex. The PTI government granted both of these requests. Unfortunately, both initiatives were rolled back.

BRR: What immediate measures would you have taken to rescue Pakistan’s economy today were you to be reappointed to office?

ST: As an immediate measure, we would rationalize the mayhem in the forex market by allowing the interbank, open market, and black market rate to converge to a fair, market-driven value. Two, Pakistan would have to immediately enter negotiations for debt restructuring with both international and domestic creditors, including local commercial banks.

The first step would to be appoint a commercial bank as financial advisor with the full mandate to design a restructuring plan. Second, we shall approach the multilateral partners such as IMF, which is currently restructuring debt for Ghana and other countries. We must include all debt in the restructuring effort, and not leave out any immediate payments which may create undue pressure on the external account.

Third, we must replicate the South Korean example from their 1998 restructuring. When South Korea faced a balance of payment crisis, it renegotiated all present and upcoming commercial import repayments from Sight to deferred payment basis (LCs). The usance period was extended for up to three years’ supplier’s credit. Fourth, we must enter crude oil import arrangements with the Russian Federation, which is currently offering a discount in the international market to most buyers. Fifth, deploy innovative ways to utilize support from overseas Pakistanis such as in RDA, and use gold deposits to avail external financing. Lastly, request multilaterals such as IMF, WB, and ADB for an extended and enhanced program of $8 - $10 billion over the next three years. This requires restoring credibility by immediately resuming the IMF program.

BRR: How will you restructure domestic debt? Will the banking sector not enter a liquidity crisis if the biggest borrower – especially the sovereign – were to enter restructuring?

ST: By reprofiling the short-term debt held with commercial bank to longer term tenors. Government of Pakistan can ask commercial banks to take haircuts in immediate term, which will help reduce the debt servicing costs. Commercial banks will instead be paid back larger chunks of both the principal and the coupon in later years. Similarly, rationalize the interest rate on various national saving schemes, which currently pay exorbitant rates.

BRR: What are your inflation expectations over the next year?

ST: If the IMF program is not resumed immediately, Pakistan’s economy will simply not survive. Inflation may enter upwards of 30 percent over the next 12 months.

BRR: What are your expectations for the currency?

ST: I expect currency to stabilize between Rs 250 – Rs 260 in the near term.