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"Pakistan has a tremendous amount of economic potential and has shown a tremendous amount of resilience over the past few years"
Shamshad Akhtar, State Bank of Pakistan |
Pakistan is a country of contradictions. On the one hand, economic growth is relatively healthy and the stock market is hitting record highs. On the other, inflation is a worry, as is a growing current account deficit. Which is the more accurate barometer of Pakistan’s medium-term prospects?
Pakistan has a tremendous amount of economic potential and has shown a tremendous amount of resilience over the past few years. The outcome in 2007 was, by all yardsticks, a decent one. What is complicating the situation, aside from our domestic politics, are inflationary pressures emerging from the food sector and higher oil prices. So there are a few problems.
Given these issues, what is the single-biggest financial problem facing the country?
This year we’ve had an exceptionally high level of pressure on the fiscal side. In addition, we had hopes that foreign inflows would grow for the year. We were expecting fairly high inflows given the level of commitments. While we’ve had a growth trend, the rate of increase has not been that great.
Net private investment plunged by $1 billion during the first six months of the financial year. As someone whose job is to promote Pakistan’s economy, what message are you conveying to foreign investors?
One has to separate the current situation from the country’s medium-term prospects and also consider its performance over the past few years. It’s a country that had a high growth rate of 8.6% in fiscal year 2005. So it has great potential. One has to look at the large population in terms of domestic demand and a fairly high level of natural resources. One needs to look too at the country in terms of its huge infrastructure requirements, which for investors translates into decent [potential] returns. So overall it’s pretty fertile ground.
The coalition government includes people who have been enemies for a number of years. Isn’t the election result in a sense the worst possible outcome for Pakistan?
Of course there is a lot of noise but there is urgency among the parties [Pakistan People’s Party and Pakistan Muslim League – Nawaz] to form a coalition [which they have subsequently done]. When that’s formed, the parties will have to work together. If they don’t cooperate then this parliament will not work. They know that the stakes are pretty high. Also, both parties have a track record of being fairly liberal and have a progressive economic reform programme. The issue has always been one of implementation. So, while upbeat would be too strong a word, I am quite optimistic about the country’s medium-term prospects. This year has been more complicated than last year. For example, the oil price has gone up phenomenally and if you actually exclude the oil price hike over the last year then our current account would have been manageable.
Isn’t one of the problems of the current account that the government has been too dependent on foreign exchange inflows in financing that deficit, and those inflows are volatile?
Foreign inflow dependency is not unique to Pakistan. There are lots of countries that rely on foreign inflows. Obviously, Pakistan needs to move forward and develop its domestic infrastructure but foreign inflows are critical to that. We have seen that, during periods of a stable economic and political environment, Pakistan has attracted foreign inflows. We know that a lot of people are waiting to come back to the country; it’s a question of time. There is widespread interest from the Middle East, and the US and Europe too. We recently met several private sector investors who are willing to come. But we take the point that foreign inflows are no substitute for domestic investment. For that we need more resources and the answer lies in enhancing tax revenue collection.
What is the government doing on that front?
Tax collection and the tax base have gradually improved. In the past there has been political resistance but the Federal Board of Revenue has a forward-looking tax reform agenda. They are working with the World Bank. They have plans to raise the tax revenue over the next few years.
In terms of inflation what are you doing to try to rein it in?
I’ve raised interest rates. We’ve had monetary tightening since April 2005. We have raised interest rates by almost 300 basis points since then. We did see visible results from the monetary tightening and in May 2007 core inflation came down to below the annual average target of 6.5%. So we were hoping that would be the last round of interest rate tightening. But government borrowing [has risen] largely because we have an ambitious development programme and [because] the government was not able to pass through the impact of the oil price hikes. This year too we have had to import substantial quantities of wheat because of local shortages. These issues have complicated the situation more than was expected. We’ve had to finance the fiscal deficit quite heavily. So in January we raised interest rates [by half a percentage point following a half percentage point rise last July].
Will you need to tighten monetary policy further?
That depends. Despite the noise on interest cycles that every country faces, we have been quite bold in the way we have operated.
Are you worried that the rate increases will adversely affect growth?
Yes, there is always a debate about this. It’s a difficult trade-off between inflation and growth. Inflation introduces instability in a number of ways. We’re in that cycle; we have inflationary pressures so we’ve had to contain this. The food situation [makes things] complicated. It is a big a challenge. But the government is very conscious that the food crisis needs to be addressed.