Pakistan still needs major steps to control waning economy

Interview with Muhammad Azam Khan — Economist/Capital Market Expert

PAGE: Tell me something about yourself, please:

Muhammad Azam Khan: I have more than 20 years of experience in financial sector including Investment Banking, Capital markets with Primary and Secondary market activities, Mutual Funds, Equity brokerage (local and international), Block deals & Corporate Finance within and outside Pakistan.

Over the last 12 years, I have performed as CEO/Nominee Director of leading brokerage house, have provided expert Advisory services to equity desk of major Institutions (local and international), Portfolio Management, Portfolio Advisory of high networth individuals (local and international), Administrative, Operational, Research, Accounts/finance, Compliances and Sales & Marketing objectives in the financial world of Pakistan.

I started professional financial career with international exposure at Mashreq Bank Dubai in a highly professional environment with dedication and commitment. Subsequently, contributed my skills in the growth and development of Atlas Investment Bank-A subsidiary of Atlas Group. Furthermore, I used my abilities as Chief Operating Officer at Standard Capital Securities Private Limited and brought structural reforms in the institution and succeeded with effective exit strategy before the financial crunch of capital markets in 2008.

I started career with M/s: Bhayani Securities Private Limited (formerly Kausar Abbas Bhayani Securities) as “Head of Research” way back in 2001 and then joined Atlas Investment Bank Limited in Equity Research and Corporate Finance Department as Investment Analyst in 2004, later was promoted as a Senior Investment Analyst and assigned to handle International Corporate Client (JP Morgan Chase & Co) with other local Corporate Institution like Abamco (currently JS Investments), PICIC Asset Management, Arif Habib Investments etc.

All World Harvard acknowledged my efforts, dedication and performance. In 2014, HARVARD accredited me the best entrepreneur in Pakistan capital market.

PAGE: Your perspective on celebrations of Independence Day this year in the wake of pandemic?

Muhammad Azam Khan: 14 August is the finest and proud moment for all of us. We always celebrate and this year we as a nation are celebrating this great day but with complete SOPs. Pakistan’s Independence Day is marked on August 14, as the transfer of power took place on the midnight of August 14 and 15, 1947. For the people of Pakistan, flag-raising ceremonies, cultural events, patriotic songs and parades are a big part of the day. We also purchase national flags, badges, shirts to show our national pride.14th August 1947 is a very special date in the history of Pakistan. It is the date; our country emerged on the world map as an independent country. Freedom is the need of every individual as well as a nation, which is why, Independence Day celebrations is a very special and biggest part of our country’s yearly rituals.

Every year, 14th August is celebrated with full zeal and zest all over Pakistan but this year we need to be more careful and follow SOPs because of unfortunate COVID-19 pandemic.

It is very important to teach the children, the importance of Independence Day. One of the best ways to teach them, other than telling them about the history and sacrifices of their forefathers is making them a part of the Independence Day celebrations.

PAGE: What change have you observed in Pakistan?

Muhammad Azam Khan: Pakistan was seen as a model of economic development around the world with a GDP growth rate of 6.8% during the 1960s and there was much praise for its economic progress. Karachi was seen as an economic role model around the world, and there was much praise for the way its economy was progressing. In particular, West Pakistan’s high rate of economic growth during this time period brought wide regard to Pakistan as a model of successful implementation of capitalism in a developing country — in 1964, GDP growth was 9.38%. Many countries sought to emulate Pakistan’s economic planning strategy — one of them, South Korea, directly copied the Pakistan’s second Five-Year Plan to kick-start its own meteoric economic growth, with the World Financial Centre in Seoul modeled after that of Karachi. Later on though, economic mismanagement in general and fiscally imprudent economic policies in particular, caused a large increase in the country’s public debt, and led to slow growth in the 1970s and 1990s.

From one of the least developed countries in the world at the time of independence, Pakistan is now the 26th largest economy in the world in terms of Purchasing Power Parity while it is 44th in terms of nominal GDP. With a per capita income of around US$ 5000(PPP), Pakistan is at 140th place in this world ranking, thanks to burgeoning population of more than 210 million people.

Pakistan is one of the Next Eleven, the eleven countries that, along with the BRICs, have a potential to become one of the world’s largest economies in 21st century. Pakistan has changed specially in last two decades in the field of social media and awareness capacity but unfortunately not change positive neither tries to or even in some fields this new Pakistan is far behind the progressive old Pakistan. In Pakistan only 24% people are using internet but as the population is gigantic and in the figures the numbers are nearest 50 million people. They should realize their strength and use this forum for their rights and realize regulators about mismanagement and missed commitments.

1. There are 47.5 million Internet users in the country.
2. Overall 35 million users are active on social media networks.
3. The country has 44.6 million mobile internet users.
4. Out of 109.5 million unique mobile users, 32 million are accessing social network using mobile.
5. 8 million mobile users are active on social networks.
6. Out of total population, 82% of people are mobile phone users.
7. 31% use smartphones.
8. 10% of users have a laptop or a computer, however, only 1% is tablet computer users.
9. Every day at least 58% of people make use of the Internet.
10. 71% of users access the Internet over a smartphone, while 8% use them via computers.
11. 32 million monthly active Facebook users.
12. 91% use Facebook via mobile.
13. 77% are male and 23% are female Facebook users.
14. The country has 5.20 million monthly active Instagram users.
15. Five million people are active on Twitter.

Now, it is very difficult to hide any type of corruption, mismanagement and misguidance in Pakistan because of this social media drastic growth which is a very positive sign but people of Pakistan are very careful or reluctant to express their views openly because the regulators sometimes more aggressive to proof democracy is the best revenge. Although we have democracy but most of the laws and rules are still carry forward from Martial Law era.

PAGE: How would you comment on Pakistan capital market?

Muhammad Azam Khan: Currently Pakistan Capital market is used as a tool to show government progress through electronic and social media, further the main participant of PSX are also used this forum to manipulate and force government to accept their business conditions without any action from regulators otherwise there is zero growth in our capital market since 2016. Since 1947, we have only 218,000 investors till July 25, 2018 but unfortunately till now we have only 118,000 investors including foreigners individual and corporate. On the other hand Bangladesh after the independence in 1971 has 4.5 million capital market investors and this is only because of the wish to control Pakistan Stock Exchange from the few known investors and their appointed staff posted in PSX, CDC and NCCPL.FY 2019-2020 is not lucky for PSX investors as other industries because of cut in GDP growth from 5.5% to 2.5% by the Government of Pakistan, Interest rates almost double from 5.75% to 13.25%, CPI inflation from 3.5% to 12.67% and the most important Pak rupees devalued by almost more than 40% till March 2020.

July 25, 2018 was the general election day in Pakistan and at that time the PSX 100 Index was 42,500 with a market cap of $60 billion but after taking regulatory actions from regulator, which found serious irregularities on main investors including very heavy tax evasion, the Index shrinks to its actual position to 28,500 levels in August 2019 with a market cap of $42 billion. The confidence given by Chief of Army Staff to the business community is boost for the PSX as 100 Index once again marched towards 41,000 levels till mid of December 2019 but still trying to achieve levels where started by 24 months ago.

There was no major development in the capital market of Pakistan since last 2 years and we had witnessed this zero development since many years as far as new products and options are concern, only focus is to develop regulatory framework, which subsequently increase the expenses of exchange including all other regulator like SECP, CDC and NCCPL that’s why some times it feels, Pakistan capital market is overregulated. FY19-20 was zero gain or performance year for all investors and specially big loss for the Chinese investors who took first 40% than 20% PSX shares at the rate of Rs. 28.75. Almost all indicators are same negative but the confidence given by COAS to big investors and industrialist about regulators specially NAB, FIA, SPB and FBR boost the Index once again at 40,000 levels.

We hope for the better progress of this current government, no doubt there are lots of challenges faced by this government but as a Pakistani we all wish for successful, secure and progressive Pakistan. Pakistan capital market has huge potential to perform as compare to region but need to make it independent from the hands of some known manipulators called investors and their own regulatory staff.

PAGE: Where do you see Pakistan in next decades?

Muhammad Azam Khan: Pakistan can face several major challenges going forward, as the inflationary pressures have become quite intense in the last 8 months; serious efforts have to be made to bring inflation under control. The poor, vulnerable and fixed income groups are the worst affective by this menace. On the demand side, monetary policy is being tightened and interest rates have been raised. On the supply side, the new wheat crop should be able to quell the food inflation. There is still great uncertainty about oil prices. If they start receding from the peak levels this will have a favorable effect on the general price level and help in moderating inflationary expectations in the coming months. The other challenge is the management of balance of payments situation. As Pak currency is already deprecated by 40% and now government have to control imports of machinery and equipment along with the higher oil bill has once again can pushed the level of imports and trade deficit can widen again.

So far, increased flow of workers’ remittances, foreign direct investment and other concessional flows have been able to finance this deficit but, in the long run, widening of our export base, penetration in new markets and increasing the productivity of textile exports are the only safe ways to minimize trade imbalances. Pakistan’s Tax to GDP ratio has remained stagnant at low levels of 11.5% and the tax net is limited to 2.4 million tax payers of which 35% are salaried tax payers and 30% are NIL filers. Thus, the dependence on regressive indirect taxes has created a disproportionately high burden on the middle and lower income groups.

Tax reforms underway should aim to increase the buoyancy and elasticity of the tax system. The biggest problem that has retarded equitable growth in Pakistan has been low investment in human development, particularly the female education. Finally and the most important bottleneck, in my view, is the way of rapid economic growth and poverty reduction will be the lack of capacity of Civil Service, Police and Judiciary to function as effective institutions in implementing the policies and programs, treating the citizens equitably and with respect and redressing their grievances in a just manner. The politicization of these institutions has ingrained an attitude of risk aversion and apathy, an instinct of survival and an indifference towards competence and merit.

Remedy:

In my opinion, Government can take three major steps to control the waning of the situation.

1. Transparency in Federal Board of Revenue (FBR) tax collection System and make fresh appointments from private sectors.
2. Government owned white elephants are making annual huge losses of around Rupees. 400 to 500 billion which should be capped at least for two years.
3. Trade deficit of at least $30 billion creates big pressure on rupee and monthly import bill of around $3 billion is out of contest with $18 billion foreign exchange reserves and annual remittances from our overseas Pakistanis are $20 to $22 billion. But, this deficit is in control in last 6 months because of COVID-19 and now government should control this at least till the foreign exchange reserves reach to $30 billion and remittances to $30 to $35 billion annually. The unnecessary imports of luxury items either belongs to any sector should be completely ban at least for two years with immediate effect.

Unless comprehensive reforms of these institutions are undertaken, we will have serious difficulty in maintaining the speed of growth and spreading its benefits to the poor. Next, FATF decision can help to stop this fly of capital and encourage investment and confidence otherwise we can witness major 2 to 3 billion outflows in the coming months because of this high discount rate and devaluation of Pak rupee.

Pakistan is a golden bird in this region and we have witnessed every one eye on it but as a nation we have to respect and realize the potential of our beloved Pakistan and only for once we need serious and sincere leadership with this land of opportunity.