 All this is Islamabad today. I'm your host, Hamza Rifah Al-Sanz for Think Tech Hawaii. Today's topic is the state of the Pakistan national economy. I have with me one of Pakistan's most eminent economists, Mr. Haroon Sharif, who is also the former chairman of the Board of Investment. And we're going to be speaking to him about how to manage crack wires for the very fact that Pakistan's reserves have tanked to only $4.3 billion only is a matter of concern. The conversation will basically venture into different aspects of the economy and whether or not one of South Asia's former largest economies can actually resuscitate itself as it moves forward in 2023 and beyond. So I'm joined by Mr. Haroon Sharif. He's a prominent economist and he was also former chairman of the Board of Investment in the previous government. He's also an economic advisor to the United Nations. Mr. Haroon Sharif, thank you so much for joining me on the show. My pleasure. All right, so we're going to be speaking about Pakistan's economic quagmire. It is something which is extremely disturbing. Many people are unemployed. Inflation has skyrocketed. And if you take a look at the latest stats, the Pakistan economy is tanking right now. Forex reserves have dropped by $72 million to just $4.3 billion. What in your view can avert this economic meltdown? Well, thank you very much. Before we come into this very serious situation, we need to understand a few economic fault lines of the country, which has been predominantly hitting the economic growth in Pakistan. So if we look at the past 30 years, in very simple terms, if Pakistan was exporting $100 worth of products and services, we were importing about 120, okay? So the difference was quite small. Now currently our exports have remained $100. Whereas our imports are touching $250 to $270, okay? So that is the fault line number one that Pakistan is short of dollar, okay? So that we can't pay our external liabilities which are both loans and import payments and other remittances. Second fault line is that the structure of economy over the years have not changed, okay? If we look at the GDP composition, it is still 22% agriculture, the 20% industry, only services have gone up. This is an important point to understand. That meeting rather than manufacturing or production. So when you do trading, what happens is again, you need dollars to import things because the trade cross country. So that is the second fault line that the structure hasn't been modernized as per the requirements of almost 250 million market. Lots of people here. So as a result, Pakistan is importing essential items like wheat and rice and pulses and others and oil, obviously. So keeping that in mind, there are two deficits. The chronic default Pakistan is in two which is number one is the foreign currency deficit which we call current account deficit. And second is that our inflow of revenue is far shorter than our expenditure, okay? So we call it the twin deficit. So now under this situation, so why I'm telling this is that this is basically the history of 30 years and all the results are coming. What has happened is that over the past 20 years or so, Pakistan has been bailed out every time we gotten into this trouble because of our geopolitical or geo-strategic position. We never offered an economic solution. We basically opted for market access, we opted for aid, we opted for IMF waivers, because we were partners of the US. So now Pakistan is used to solving its economic crisis through diplomacy and geopolitics and unfortunately, now times have changed. Now Pakistan is actually asked to put an economic value proposition and Pakistan is struggling and that's why IMF program is not happening that way structure of economy reforms are not happening because over several years, Pakistan has been dealing with it with a different lens, with the security lens, the conflict lens, or our regional proximity lens, so that has changed. Now, answering the question after Sri Lanka, Pakistan's economic indicators are the worst in South Asia at the moment. And that is where the troubles are two, three, which as a development economist and political economist, which I see. Number one is about 2.5 million young boys and girls are entering the labor market every year. With half a percent economic growth, you can only accommodate 5% of those. So first worry is where would 95% educated youth would go? And that is the frustrations in the society which we're seeing and other things, which are coming out of that tube, which is who are looking for a dignified job. Second fault line is that if we do not get confidence of international institutions, now we cannot borrow more because our debt limits are sky high. So where would the money come from? Particularly the dollars, because even if we need to change the export base, it will take about 10 years. It doesn't happen overnight. Now you need investment for that. You need money from that. Now that's a fundamental question. How would the money come in, which needs to be invested? We are short of not only productivity, but we are short of production. We don't produce enough, but we don't produce quality. We are into very basic production. We need to add value to our things. So just wanted to sum up, it's a very difficult situation. The way Pakistani economic managers are dealing at the moment are too administrative measures, meaning you cut down imports so that you save dollars to pay off your debt and other liabilities. Now that is not sustainable because if you cut down imports, this means productive imports like machinery, which is needed, the technology, it's not coming. It's not coming, your industry will not come. So that is where I think Pakistan needs a policy response, not an administrative response. And we are struggling in terms of capability. We are struggling in terms of the political chaos. We are struggling in terms of fragmentation among institutions. And we are struggling because our private sector has grown basically on subsidies and patronage. So now all these factors have combined. I see a very tough adjustment period of at least five to 10 years. Well, that's rather unfortunate for that matter. Mr. Sharif, we're talking about soaring inflation. We're talking about high unemployment and political instability. That's also driving away foreign investment. And that is really creating a severe economic situation for the country. There's massive unemployment as well. Who do you attribute the blame to? And I want you to be very frank and candid about this. I mean, where does the blame go to? I mean, I'm assuming you're gonna say the federal government, but is it because of lopsided economic policymaking? Is it because of the finance minister? Is it because of both of them? I mean, where can you attribute the blame to? Look, you go back to my again, previous answer. A country which has seeked foreign direct investment because of it is geopolitical positioning. Rather than offering an economic opportunity solution, that was never sustainable. If somebody gives you some money because you are important to them temporarily. So Pakistan, A, it is the capability of bureaucracy. They have never done serious commercial transactions, pre-evaluate privatization, pre-evaluate actually making incentives for foreign and local investors, be it resolving the disputes, what investors are looking at three things. Now, currently Pakistan is missing an opportunity. When I was minister of state, I had basically gotten commitments of almost $21 billion from the region. But I told that time, the prime minister and foreign minister in the plane were flying back from Saudi Arabia that we do not have the absorption capacity. So what we did was with Imran Khan, we gave the signal that we were open for business. But we knew perhaps deep down that we were not ready to do business. Now, what does it mean ready to do business? There are three things. A, investors need physical security in a country where they can roam around freely and their life and goods and services are secured. B, they are looking for property rights. The sanctity of agreements, that whatever they do, there is a strong legal framework which protects them. Number three, they are looking for if there is a commercial dispute, it's amicably and quickly resolved. Okay? Number four, what are the incentives you are offering reasonably your competitors? And are these incentives consensus-based which will hold? I mean, IE, policy consistency. Right. So Pakistan has lacked on these five accounts, the lack of capability in bureaucracy, failing to do a world-class industrial and investment policy where we can create incentives for people. Number three, whatever investors who have come in, when they get into a dispute, our courts have failed to resolve it. You come and look at the record act, you look at the car case, you look at others, it has ended up in disputes. Okay? Okay. And look at CPAC companies. It could have been five times more what we got. So Pakistan needs to very carefully see the transition. We talk about moving from geopolitics to geo-economics, but that geo-economics does not mean that you make fancy policies. Geo-economics actually means a change of mindset and change of institution. So you need to get out of that mindset of being too important geostrategically. And you need to let the actors who understand economics and business take the lead. Now, if you ask the same people for 30 years who are doing security-led dialogues and diplomacy and ask them from tomorrow, you will sell geo-economics. It's not realistic. Yeah, it's not realistic. So I think what Pakistan needs is that we have lost confidence of investors, both domestic and foreign, because of our continuous inconsistency of policy, not creating a level playing field vis-a-vis Vietnam or Cambodia or Bangladesh or other destinations. There is a lot of liquidity in the region, because the money is around us. Now, my good friend Ashraf Wani used to tell me in old days that, you know, Afghanistan has lots of liquidity, informal. The trouble is we cannot convert it into productive capital. The same is the position of Pakistan. There is money eyeing for this market, but Pakistan is not putting forward a proposition to convert it into investment. Now, that is where our GDP, investment to GDP ratio is about 15%. In fact, lower than 15%, our competitors ratio is between 25% to 30%. Yeah, but Mr. Therese, who would you blame? Who would you blame? I mean, when we talk about, you've mentioned all the lopsided statistics which do not go in Pakistan's favor, but who would you attribute the blame to at this point in time in 2023? No, I'm blame all three actors. Number one is the policy makers, which are the politicians and the ruling elite, because they have always gone on a patronage-based relationship or geopolitical-based dealing. I would blame the bureaucracy who has never modernized their systems. They have basically gone into a rent-seeking controlled, again, patronage-based bureaucracy rather than serving the private sector. I would also blame the large private sector houses here who have grown on state patronage rather than growing on basis of competitiveness. So all three and number four is the rule of law because judiciary and others have never modernized to give quick solutions to investors. So it's a combination of things what we call investment climate. Now, investment climate is not only building nice infrastructure. It is the softer side of infrastructure which actually takes it forward. Now in future, because of COVID pandemic and other things, the movement of people has gone restricted even between China and Pakistan. Now, the future shape of investment is that investment will come from capital controllers and sovereign wealth funds, not from individual companies. That means Pakistan will have to strengthen its corporate governance structure. Pakistan will have to build a capital market where they can trade their companies and very little state intervention because they would not like a state in a political flux and the things get pending. Now for that, Pakistan needs to deregulate massive. We are a very centralized economy. Every decision goes to cabinet. I used to joke with the cabinet that why do we need to clear MOUs? Why do we need to appoint managers? It's not Prime Minister's job to do it. So we need to massively deregulate to capable institutions and put people who inspire confidence of the markets, not confidence of the ruling elite because that is where the meritocracy of professionalism will start getting. I tell you honestly, there is about still $5 to $7 billion chasing Pakistan. It's that Pakistan is failing to put forward transactions which can absorb that transparently and definitely. Okay, so when we talk about Pakistan's risk of default, I mean, you obviously have built this analogy with Sri Lanka, the 6.5 billion IMF bailout package is still pending. Do you see that going through? I don't think that basically that program is ending on June 30th anyways. So it appears that Pakistan will not complete that program now because 9th and the 10th review prior actions in Pakistan is Pakistan had delivered and IMF is Pakistan has not complete, okay? Now, what's happening is I think, but again, looking at the things which have explained you on the external account front, we do need an inflow of IMF money. I think IMF will wait for the next government to come into power and perhaps negotiate a three years program again with some certainty. In uncertain terms, it will be very difficult for IMF to actually take commitments of reforms when faces and governments are in a flux. You know, you need a counter, you can trust. If you know that they're getting into elections, they're coming or, you know, there is a coalition government which is failing to... Or if there's political instability. Or it is political instability. That is what I'm trying to say. Why would any international institution take a longer term risk on that account? So I think they will look for some stability or the next government and their economic team. They need to trust the economic team. That's what I'm trying to say. We have made IMF and everything very political. We need to delegate it to people like Central Bank, Ministry of Finance, regulatory authorities. They can handle it. Why politicians jump into that and make it political and very loose statements on media that hurts Pakistan's image? So I think we need to keep a technical thing technical. I can understand the shareholder in holding patron of IMF as a political dimension. But first you need to clear the technical hurdle. You need to satisfy their managers that yes, you have a game plan. And that is where the capability question, the mindset question, that somebody will come and bail us out. A friendly country will come, put money into Pakistan. Now that mindset is actually damaging Pakistan because in the past this has happened. Now even just to give you a number, friendly countries, China's debt to Pakistan at the moment is about $30 billion bilateral. Now the combined Paris Club debt is $8.5 billion. So Saudi Arabia's debt is touching $10 billion. Now the question is that friendly countries give you money on diplomatic terms. Now it's time because debt has gone high. We need to assure them that you can repay their debt. We need to come up with a proposition that your debt will yield returns. They cannot continue putting money into Pakistan without getting those securities because levels have gone very high. Okay. So when we talk about the policy making process, you do need investor conducive policies. You do need investor friendly policies. If we come up with a comparative analysis of your tenure as chairman of BOI or the board of investment for our viewers in the US under a former prime minister in Rahn Hanh's government. And if you compare that with the policies that are being made with this government or are being implemented with this government, what do you think is the fundamental difference? Fundamental difference is that have you ever seen the investment minister of this government on television or in media? So the priorities are very simple. People don't even know that investment ministry exists because that's not a priority. The priority of the government at the moment is very different. It's all good. It's all the power centric, you know? In Rahn Hanh's first two years prior to COVID, actually there was an attempt to reach out to meaningful investors. And we did. And people responded very positively because we put an economic value proposition as against, I can name some projects. Yes, please do. Yeah. So the Arabia wanted to do an oil refinery over $10 million. So the Arabia also committed basically a solar power facility of $3 billion. Qatar said they wanted to buy out some of our power projects. They wanted to invest in our airports, okay? Because they have gained good expertise in running airports. They also wanted to take strategic states in some of the port companies. Similarly, lots. I signed the first industrial cooperative MOU with China because CPAC was all infrastructure. I said, now unless infrastructure attracts investment, it will not yield desired economic gains. So we identified projects, but we were supposed to make economic zones for that. You know, where Chinese investment could come in. Now my point is that when my job was to line up these potential interests, the job of the machinery was to create an investment climate where deals could be done quickly. Now that is where I'm again saying the capability and also the crony capitalist influence who are scared of competition on policymaking stopped it because these old networks who have grown on patents, they do not like to have international company. So they have enormous impact on public policy. So they buy out basically in simple terms, they buy out bureaucracy and public policy minds, the consultants and then they try and delay things. So I resigned after a year and a half because I knew that the momentum I have built will not materialize because I'm not either. They delegate it to me, me, meaning the institution. If I'm dependent on a host of fragmented institutions who are neither capable nor willing, it will backfire. And unfortunately the same thing happens. Okay, okay. So you mentioned CPAC, obviously the $62 billion project is considered to be a flagship of the BRI, the Belt and Road Initiative. There is this perception that CPAC or Chinese investments broadly will contribute to rising sovereign debt. I mean, we've seen a few cases in countries like Nigeria where sovereign debt has actually spiraled out of control. Neighboring Sri Lanka, I mean, neighboring in the region for that matter, the Porta Pambantota when it was actually given to China resulted in a considerable backlash, not from the Rajapaksa government, but from the general public that this is contributing to rising sovereign debt. And do you think that this sovereign debt, you could say theory carries merit? Do you think that a sovereign debt is going to be a problem for Pakistan given the fact that foreign reserves have decreased? Or do you think it's just a myth and the $62 billion project would reap dividends for the country in the long run? Look, I have been the lead minister on industrial cooperation in CPAC for a year or so. Let me explain again. China has a game plan for the region, okay? China wants to build regional markets to basically offload its surplus production. China needs the regional proximity to be an economic advantage in future, right? These are China's goal. But then it is up to the host country to come up with a strategy to basically leverage on China's ambition in our own favor. If you outsource your mind to China or any external player to do whatever they want to do, they will only look at their interests, not our interest office. Pakistan's problem in CPAC has been, as I said, that infrastructure alone will lead to what you are saying. Okay. Because these are the contracts, these are roads, these are ports, these are power projects, which actually put a country under debt burden because these are contracts. If Pakistan comes up with a strategy that we attract investment, that infrastructure leverages investment, which creates jobs, which increases production, which increases productivity, which adds value. And generates employment as well. Generates employment too. That's what I said, creates jobs. Number one, there are four filters, any economic policy of Pakistan should look at. Number one, does it create jobs? Number two, does it bring in dollars, like foreign currency? Number three, does it actually enhances our productivity? Number four, does it actually do technology transfer to the country so that we modernize our economy? So unless these four filters are done on a policy to, and for that, China's model was that built economic zones where our people feel secure and give incentives to those zones, okay? Pakistan has struggled to actually build world-class economic zone. That was Pakistan's job, not China's job. That's what I'm saying, that there is too much government. If we just take it out of government, give it to private sector, they will do it because there's an incentive. So to answer your question, that if any connectivity project like BRI, a country just relies on infrastructure development and China's fault is that they have not studied Pakistan's macroeconomic fault lines in detail. They are just going on government guarantees, sovereign guarantees. Now sovereign guarantee holds if you have something in your pocket. If you don't have something in your pocket, how would you honor a sovereign guarantee? Now moving forward, I think Pakistan needs to get some respite in debt. And the only situation is, I think certain assets will have to be swapped because you need to give either shares of the state-owned countries or you need to offer some other assets because from the inflow of dollars and inflow of internal revenue, Pakistan cannot sustain the debt, the Chinese and the other debt. Second is that you need to replace debt with investment. And that is where China and the Middle East are keen, provided we can get out of this, the circus going on of instability, provided we can actually give incentives to one or two sectors of priority, which meet the four criteria which I mentioned, and provided that Pakistan ensures them that what incentives we are doing will not be reversed with a change in government because people don't trust. It's the people who change. Look at the IMF program. It was doing stabilization. The previous finance minister, Chaukat Tereen came and he announced basically a populist growth-oriented budget and that reversed everything. Similarly, this current prime minister came. He announced that he does not agree with the program and he would like to make changes. Now that changes meaning you are not consistent to your international commitment. Personalities dominate institution. And that is where the trust of investors and international institutions go down. Pakistan needs to work hard to rebuild it. The only thing is to de-politicize. If you de-politicize it, because if you keep it under the political institutional structure, it will be populist. It will be a short-term horizon and it will be personality-driven. If it is, and I give you very clear example. If Pakistan's cabinet takes a decision that country has no business, government has no business to run business, okay? Look at our state-owned enterprises just building the country, okay? Now, they just need to take that decision. They don't need to privatize themselves. They need to dismay, privatize in ministry, finish it, make it an independent body, give it to a CEO, give them targets, it will start working. Once you make it political, where political leadership has basically put in all the employees and ghost employees in these companies and bureaucrats are taking perks and privileges, there's a huge conflict of interest. It will never happen. So in modern economies, they insulate these things from political influences under the law and institution. And that is where Pakistan is struggling because we try to give politicians to do things. The incentive structures are very different. Politicians, at the moment, they are so insecure, they can only think for a few days. We need to give certainty to capital. Capital is the most covered thing in the world. With a push button, it flies up. So what you need to do is the certainty will come with sound institutions like Central Bank, like the Securities Commission, Board of Investment, Privatization Commission. I would actually say privatize the Privatization Commission and Board of Investment. It's not your job to do that. Then Pakistan will start regaining confidence of China and the Middle East and where the capital is. In the current situation, institutional structure, I'm afraid the political flux is not going to settle down overnight and investors will shy away. I would even worry that existing investors might, some of them might, they are shrinking their operations due to economy and instability. If an existing investor moves out, that gives a very bad signal to the future investors because they are the ones who should give confidence to future investors that this country I'm enjoying, I'm making money, you know? And then foreign investors, the biggest struggle is because of lack of dollars. They cannot expect to create their profits. Now, how do you send profits when government puts internal capital controls to stop it? Now, these are factors of trouble to Pakistan. I think Pakistan needs to demonstrate on one or two things that they can do it. There are professionals available in the private sector. State has to take a little backseat in doing everything under the earth. They are miserably failing to deliver. Very briefly, and this is going to be the final question, Mr. Harun Sharif. Do you think that the current government has the capacity to take Pakistan out of this economic pipeline? Not at all. First of all, it's a coalition government. Secondly, the uncertainty is very high that nobody knows what's the political future of this government. And thirdly, they are mostly look at the faces. This is the old school thinking. It's the same old mindset of look what happened. When floods came, we blame the West and we seeked for grants without looking at the change happening across the globe. So we are still looking for favors. We are still looking for patronage. We are still looking for market access rather than making a competitiveness policy that this is what we offer or where we are better than Cambodia and Vietnam and China and Turkey. You need to, that mindset and capability of bureaucracy remains the same. That's why I'm saying that will take time. If we delegate three priorities to professionals who come up with this game plan, the global investors will perhaps look at it far more seriously. No government, even this one or even the one I was part of, that's why I parted ways because you cannot continue delivering things with that mindset and old school mentality that we are far too big to fail. We are too important geostrategically and somebody will come and solve our economic problems. We have to solve our economic problems professionally in a transparent way with our own resources and the debt and external flows will only aid that. That's how a progressive looking economic policy goes at. Thank you so much, Eminent Economist Mr Haroon Sharif who was also former chairman of the Board of Investment here in Pakistan. That's all from me, Hamza Rifan. You can follow us on our social media pages as well and to get all the latest updates. Until next time, take care. Thank you so much for watching Think Tech Hawaii. If you like what we do, please like us and click the subscribe button on YouTube and the follow button on Vimeo. You can also follow us on Facebook, Instagram and LinkedIn and donate to us at thinktechhawaii.com Mahalo.