Interview With Shaukat Tareen

Transcript: FT interview with Pakistan’s top finance official Published: May 21 2009 05:23 | Last updated: May 21 2009 05:23

Shaukat Tarin, the advisor on finance to Pakistan’s prime minister – a position that makes him the de facto finance minister, spoke to Farhan Bokhari, the FT’s Pakistan correspondent, ahead of a May 21 conference of representatives of western governments in Islamabad. The conference, to be chaired by prime minister Yusuf Raza Gilani, in the country’s first comprehensive effort since the war began in the Swat Valley, to seek emergency aid from western donors. Here are excerpts of Mr Tarin’s interview in which he talked about immediate emergency needs, the outlook for the economy ahead of next month’s annual budget and overall stabilization plans. FT: How much money does Pakistan need to deal with the humanitarian fallout and security cost of the ongoing operation in Swat valley? Shaukat Tarin: There are three aspects to the humanitarian issue. First, it is relief, then rehabilitation then reconstruction. When we talk about relief and rehabilitation, our own sense is that we are talking about anywhere between $600m to $1bn. The reconstruction depends of course on how badly the infrastructure of the area has been damaged. As far as the security is concerned, we have already said that this war on terror is now costing our economy $8.5bn a year in terms of lost exports, lost investments, increased expenses and loss in revenue. I believe direct annual cost of the security apparatus is about $2.5b-$3b in the next two years. This is for trying to raise another force and give them equipment, which is what we said in the Friends of Pakistan meeting [in Tokyo on 7 May]. FT: Are you now going to make another international request beyond the Friends of Pakistan? ST: On the 21st (of May) we will make an appeal to representatives of countries and donors who are here in Islamabad. And on the 22nd the UN will send out an appeal worldwide. FT: How much are you seeking on the 21st [May]? ST: At least $600m for the IDPs of Swat. FT: And on security, will you also be seeking money? ST: This is only going to be for IDPs. But that [security] is going to be separate for which we will go to the friends of Pakistan. That will be in Turkey later on, later this year. FT: In the next few weeks you will be presenting the first budget after the IMF loan was agreed? What are the big items going to be? ST: We have now stabilized the macroeconomic indicators. The main thrust next year is going to be growth. That means, apart from targeting poverty and stepping up social development for which we have just received promises from donors, from the Friends of Pakistan, we will definitely go for utilising the fiscal space to spur economic growth. We will concentrate on important sectors of the economy such as agriculture, manufacturing, infrastructure development and energy. Those are the areas where we would like to spend some money on. This is apart from spending on poverty alleviation and human resource development which is through education and health. FT: Do you reckon you will be spending most of the money (in the next financial year) from the $5.5b you were promised by the friends of Pakistan in Tokyo.

ST: That is a promise for the next two years. We have now got fiscal space of 1.2 per cent of GDP which is around $2b plus to spend on soft targets (next fiscal year) which is education, healthcare and poverty alleviation. But whatever else we have in our budget, we would like to spend on the growth of our economy which is agriculture, manufacturing, infrastructure and energy. FT: Given that this has been a difficult economic environment in the recent past and issues like inflation have hurt the image of the government, how close are you now to beginning to develop economic benefits for ordinary people? ST: The stabilisation and soft landing of the economy is going to benefit everybody because inflation is going to come down to single digits in the next fiscal year (July-June). We’re assuming that next fiscal year is going to be single digit inflation. That is going to help everybody including the businessmen and middle class. But for the very poor, we have targeted poverty alleviation programs. This year we had put aside Rps34b($425m) for the Benazir income support program. And frankly even Rps34b($425m) was not spent. Next year we are talking about almost two to three times of that. This is because we had conducted the household income survey through the World Bank. In a very transparent manner we are not only going to give subsistence through the Benazir Income support program but also skill development to at least one person from each poor household, provide medical insurance and create temporary jobs for the poor. Those are targeted programs. That means we are targeting the very poor because we would have done a survey first and identified those who are very poor. Its not a shotgun approach, it’s a very rifle shot approach. We first identify the households which are poor and we then give targeted help. FT: The documentation of the economy is very weak. Identifying households which are genuinely in need, how big is that a challenge? ST: That is why we are now using the World Bank’s survey to determine this. We are not conducting this ourselves. We are using third parties to conduct this, using a World Bank designed survey. It’s a blind survey which goes to each and every household of the country, its not only the poor. They will do household income analysis for all the households in this country and then we will figure out how many people are actually poor and live in poverty or abject poverty. This is a change from even last year or this year. FT: How soon do you think this survey will be completed? ST: Up to 16 pilot districts have this survey already underway and this should be completed there by 31st of July. The whole thing will be completed by end of this calendar year. What we don’t want to do is delay this. As we get the data from the districts in July which are completed, we’ll start rolling the program. FT: In the budget which is due in the first half of June, how will you deal with tax reforms and the need to mobilise more resources? ST: There will be a major emphasis on this. We are not going to raise tax rates, we are going to spread the tax net to areas which are not being taxed today. FT: Such as?

ST: There are four areas and we will definitely include two and hopefully the other two we will include in the next couple of years. We are now focusing more on taking those difficult policy decisions. FT: What are those areas? ST: The four are services, real estate, stock exchange and agriculture. These are the ones which are out [of the tax net] as of now. Nobody has touched them. FT: Which of these two will be subjected to tax? ST: Before the budget I usually don’t say that. But services and real estate will be this year. Hopefully stock exchange the next year and agriculture the year after. We also intend changing the mindset of the FBR (Federal Bureau of Revenue-the federal tax collection agency) so that we basically should be able to improve the administration. Clearly there are many leakages. We would like to make FBR as FBR inc and give them market based salaries. That is the name of the game because we have to increase our tax to GDP ratio over the next five years to 15 per cent plus. This year it is nine per cent. FT: How difficult are these decisions politically? ST: They are pretty difficult. But we never shirked away from taking difficult political decisions on the economy since we came to power and we don’t intend shirking away from them. FT: Going forward with the IMF program, are you seeking an increase in the size of the loan agreement? ST: We are not seeking an increase. We want an insurance and by that I mean if the recession deepens in the world economy and I have risk to my exports or workers remittance and I have risk to my fiscal side, I have asked the IMF that they will basically create a line of credit which basically we will use if required. FT: How much is that? ST: In dollar terms almost between $4b-$4.5b, but in insurance. FT: Have you formally begun the process? ST: Actually we have talked to them. Probably we’ll put in this request of standby line of credit by end June. We are not going to pay anything till we use it. FT: As far as foreign investment is concerned, in this environment where you have security challenges and on top of that the global economic slowdown, are you worried that in spite of successful stabilisation, you won’t be able to attract investors from outside. ST: No, frankly, FDI is holding. But on portfolio investment there was an attrition. If you remove the portfolio investment, which happened with all the countries, on foreign direct investment we have seen some good numbers. There was a nominal reduction from last year because foreigners are investing in only a few highly profitable areas such as oil and gas, telecom, financial institutions and some of the multinationals like consumer product companies. They are all doing very well. But we have to open other areas. That would take a little time. FT: Are there areas which are top priority for you?

ST: There are areas which if given good incentives can attract good money. Pharmaceuticals is one, minerals is another because we have some of the largest deposits of mineral resources. I would think that leather which is processed and brings value addition could be another one, while marble, gems and jewellery could yet be further ones. I believe the cement industry can attract more money. There are several areas which could be upgraded and surplus could be exported. FT: What about agricultural land? That has been talked about recently. ST: We have talked to various countries and frankly we’ll be spending a lot of attention and money on up-gradation of our agriculture in terms of yields, storage, value addition in vegetables and fruits, water resources, all these things. The same principle which is that we have gone to our friends and said, there are large tracts of land which is available and which can have access to water if you want food security, and also increase our export potential. FT: Within this group of friends, which are looking more promising? ST: UAE, Saudi and even Libya. We went to Libya and Libya was very interested. FT: In tangible terms, is there anything beyond expressions of interest which has been put on the table. Have people, for instance, expressed interest in certain parts of the countries? ST: These are early days. Our board of investment is working with these countries. My own sense is that the recent food crisis has alerted most of these countries to have food security. FT: You are not concerned about issues, especially warnings that such policies of giving land to foreigners could be controversial? ST: We are not going to just go crazy. First, we are talking about some very close Muslim friends where the public at large usually has very little objections. But we have to be careful, we should not overdo it. FT: You must be worried over the fallout from insecurity for the economy. You have just mentioned a figure of $8.5bn in terms of costs which are incurred by Pakistan in different ways. Pakistan doesn’t have the capacity to meet this cost and so far the global assistance promised comes nowhere near this figure. Does that mean that the outlook for the economy will be pretty weak as long as the war on terror continues? ST: The war on terror is certainly affecting our economic growth. But what we hope is that what we are now doing in Swat and other places is to roll it back and then get all the benefits of our efforts translated in economic growth. But the world at large must understand that this is affecting us. When we don’t grow the economy, they are asking for trouble because unemployment and economic frustration usually pushes people towards poverty, and poverty inflames terrorism; it creates despondency which is used by terrorists. FT: Obviously you are not satisfied with the global response so far? ST: I believe they are coming around, they have helped us. We are very pleased with what happened with Japan. We are also very happy with the multilaterals and the bilaterals. But they will have to look at the bigger picture and frankly help us more.