Institutional Investor, December2006/January 2007
Shaukat Aziz became Pakistan’s prime minister in 2004. A Karachi-born career banker and a Citibank executive for 30 years, he entered public life when invited to become finance minister by General Musharraf following the General’s assumption of power in 1999. He has found out the hard way about the perils of public service – he survived a suicide bombing that killed his driver – but is credited for bringing about much of the financial reform which has underpinned Pakistan’s economic revival. Smooth and charismatic – and, to private sector eyes, an agreeable counterpart to the military-uniformed President – he spent half an hour with Institutional Investor’s Chris Wright in Islamabad.
II: We’re speaking at a time of very strong economic growth in Pakistan. Is it sustainable?
Our medium term outlook is based on a growth target of 6 to 8 per cent. This financial year will be the fourth in a row we will be within that range. The reason these are sustainable growth rates is the transformation and transition of the Pakistan economy over the seven years since President Musharraf came in and all of us joined the team and started the reform agenda.
It was a two-track approach: one, address the macroeconomic issues; two, a structural agenda covered a very holistic menu from the justice system to security, agriculture, manufacturing, banking and so on. A fundamental philosophy drives everything: deregulation, liberalisation, privatisation, accompanied by governance, transparency and stability. If you have these ingredients you will have sustainable growth.
They stand out as one of the more pronounced reforms of any developing country in the recent past. We’ve made a lot of headway. Tax reform has increased tax collection dramatically and reduced corruption; the financial sector is totally deregulated with a level playing field, consistency of policy and a strong regulator; the economy in every area is growing, and has more than doubled in seven years, per capita; and Pakistanis are arriving on the global capital market scene for the first time [through government bonds and corporate GDR issues in London]. The Pakistan story is being heard louder and louder.
Like any country we have our challenges too: we have to sustain the path of reform, we have to show consistency and continuity of policy, we have to have total transparency and improve the quality of governance.
Last year total foreign direct investment was US$3.52 billion. And this year in the first quarter it is a record, over a billion. It all points to an economy which has a lot of promise.
II: Those FDI numbers are vital given your trade balance and current account deficit.
Oil prices have been a big challenge and the FDI numbers have helped a lot. More than that, it is a vote of confidence by people who have a choice, they don’t have to come to Pakistan.
II: You mentioned privatisation as a key initiative, and for a long time it has been seen as a success. Would it be fair to say progress has stalled with the situation at Pakistan Steel Mill [see privatisation article]?
No. We have had one, only one transaction which the honourable Supreme Court will not agree to. We have of course appealed. But the momentum of privatisation will continue unabated. We have a whole calendar, we have the Pakistan State Oil company [after the interview the deadline for bidders on to complete statements of qualifications on this sale was extended to January]. We have lots of entities on the list. That reform will not stop, because it is a cornerstone.
II: How damaging do you think the Pakistan Steel Mill decision was in terms of Pakistan’s perception in this regard?
Obviously it impacted our program but we have to look ahead. Since the attractiveness of the privatisation program in Pakistan is based on reform, strong growth and the prospect of strong returns to investors we think we will ride over it.
II: Is it chiefly strategic sales you are looking for in these programs or sell-downs into the market?
We have both. We are looking at strategic sales which take longer, and selldowns through domestic and international equity markets. We have this month a very important GDR for Oil and Gas Development Corporation [it raised US$813 million at the end of November].
II: That’s foreign stock markets rather than domestic. Do any of your current privatisation initiatives involve the domestic market?
Yes, this particular company already has a listing. When we do a GDR we do it only when there is a domestic listing. We allocated a little chunk here.
[We then discussed the National Savings Scheme; see asset management article for his comments on this theme.]
II: When people talk about impediments to future growth in Pakistan they focus on infrastructure and power. Are you on top of those needs?
Absolutely. There is remarkable growth in electricity demand: 8 to 10 per cent a year, very high by international standards. We have encouraged the private sector and the public sector to come in and install new capacity, and several thousand megawatts are being planned. The power needs of course are seasonal, so in the peak season, the height of the summer, we will face some pressure at peak times. At the same time many companies have gone for self-generation and we are introducing more efficiency into our production. We have massive investment in power, lots of foreign interest, lots of local interest.
Then on infrastructure we have a major program of improving our logistics chain from Karachi, our major port, up to the north. We have plans to build more major motorways, we will have by end of next year one from Peshawar to Lahore, and are now starting one from Lahore to Multan. The ports are being made more efficient, they are being outsourced and managed by companies like Hutchison and Dubai Ports. We have good airports in Karachi and Lahore and have started work on a new airport in Islamabad. The railway system is being revamped: we are getting new rolling stock, improving the tracks. Then for oil movement in the country we have pipelines. This is all part of a logistics chain we are looking at comprehensively with the help of the World Bank, and I personally chair this committee.
We are also exploring oil and gas exploration domestically, and import of LNG, and a pipeline from Iran to Pakistan…
II: Is that ever going to happen?
We reman optimistic but there’s a lot of work to be done. Then we are offering energy corridors, trade corridors, transportation corridors for the central Asian countries through Pakistan on to the Arabian Sea. Western China is very close to the Karachi port, and we have a road which is being improved jointly by Chinese and Pakistani governments. If you look at Pakistan in the next decade or so we see ourselves as leveraging our position by linking more to China, central Asia and Afghanistan, using these corridors to create economic activity.
II: As someone who has lived widely overseas [he has lived in 10 countries and was based in New York when called back to Pakistan to become finance minister] do you consider the world’s expectations of Pakistan to be realistic?
The perception of Pakistan does not necessarily reflect reality, so we have work to do. People who have lived here, worked here and invested here are very comfortable. But people who do not know Pakistan are influenced by events in the region. We need to get the relevant people to come here and see for themselves what this place is all about. Pakistan is a moderate nation with tremendous human capital, playing a stabilising role in this part of the world, managed transparently where the leaders have a no-nonsense approach. The perception of security gets highlighted in the press, but you can see our biggest problem today is finding hotel rooms. The flights coming in are jam-packed.
II: Do you feel the perception is damaged by the fact that the country’s president is also head of the military, and leads an administration did not come to power through conventional democratic methods?
Actually him having dual office is a unique phenomenon which was necessary at the time for facing the challenges which occurred due to the situation in the region, particularly Pakistan. Pakistan is an evolving democracy. We have a very active political process, vociferous opposition, media which is very free, with almost 50 TV channels. We are a functioning democracy where the people have a voice, and we are also very conscious of gender involvement. We are a very tolerant society, everyone is allowed to practise their faith freely. I’m elected, I fought a direct election, so did the entire parliament.
II: So given that progress, why is it still necessary to have a dual role as head of the military?
As I said, it’s evolving.
II: Do you feel that the renewed prosperity of Pakistan is flowing down far enough?
In the last seven years almost 14 to 15 million people have come out of poverty. Poverty levels have come down in Pakistan from almost 34 per cent of the population to 24 per cent. We have to work harder and that is exactly what we are focusing on now, to transfer the benefits of economic growth to the masses. You can see the emergence of a larger middle class. Sales of consumer goods like motorcycles and cellular phones in the rural areas going up. People’s expectations are rising and they are meeting some of those expectations.
II: You left a successful and presumably well-paid career at Citibank for a job which has very directly threatened your life. How do you feel about the move you made?
It was a very good move for the country, for me personally, because any time you get the opportunity to serve your nation, you can influence things, take policy decisions, implement them, make a change. We brought a professional government which is chasing a multitude of challenges and creating many opportunities for its people. I feel very privileged that I’ve got this opportunity, it’s an opportunity of a lifetime, to help improve, enhance and build my country.
Author’s note: this interview was part of a 42 page report on Pakistan distributed with Institutional Investor in January 2007. Other articles will be added to the site in the near future.