External funding process needs more encouragement, incentives

External funding process needs more encouragement, incentives

Interview of Mr. Zia ul Mustafa, President ICMA Pakistan


Zia ul Mustafa is currently the President of the Institute of Cost and Management Accountants of Pakistan (ICMA Pakistan) for a three-year term i.e. 2021-2023. He also served as the President of the South Asian Federation of Accountants (SAFA) in the year 2020 and held the Chairmanship of the SAFA Committee on Governmental and Public Sector Enterprises Accounting. SAFA is a regional forum representing over 3,75,000 accountants having membership of the national chartered accountancy and cost and management accountancy institutions in the South Asian countries namely Bangladesh, India, Maldives, Nepal, Pakistan, and Sri Lanka, Afghanistan. Zia ul Mustafa also served as an elected Board Member of Pakistan Institute of Corporate Governance (PICG) for three years and as a Member Board of Directors of Zarai Taraqiati Bank Limited with the additional responsibility of Chairman, Board Audit Committee for three years. He has professional exposure of almost twenty-five years in corporate and public sector organizations i.e. manufacturing, construction, services, banking, and education. Presently; he is serving as the CFO & Business Administrator of Pakistan Expo Centers Private Limited, a corporate entity owned by the Government of Pakistan with a mandate to develop, operate and promote Expo Centers in major cities of Pakistan. Earlier, he worked with Descon Engineering Ltd. as Financial Controller of the Mangla Dam Raising Project & Mirani Dam Project and with Rustam Group of Industries as GM Finance & Administration.

PAKISTAN & GULF ECONOMIST had an exclusive conversation with Mr Zia ul Mustafa vis-à-vis home remittances, depreciation of the Pak rupee, impact of rupee-dollar parity on exports, the bottom line of the national and multinational organizations in the wake of dollar appreciation etc. Following are the excerpts of the conversation:

Remittances received from the overseas workers are considered a significant and stable source of external funding for most of the developing countries, including Pakistan. Home remittances are an engine for the socio-economic growth of a country. It stimulates economic prosperity by raising national savings, domestic consumption and income level of poor people which collectively help to reduce the poverty. It is reassuring that remittances received from the overseas Pakistanis are rising persistently and becoming a major and sustainable source of our foreign exchange earnings. As per the latest figures available from the State Bank of Pakistan (SBP), remittances surged to an all-time high of $8.03 billion in the first quarter of FY2022 [Jul-Sep] – showing a 12.5% growth from $7.14 billion during the same period last year. During the last FY2021, Pakistan received record remittances of $29.4 billion which helped curtail the current account deficit. Assuming average remittances of around eight billion dollars in every quarter, it is expected that we could be able to have remittances someway near to $32 billion by the end of the current fiscal year. Because of the high current account deficit, the government needs to make concerted efforts to set a target of at least $35 billion remittances by end of the year and provide lucrative incentives to the overseas Pakistani to send their remittances through the official banking channel. SBP is already doing a commendable job on this front; however, I think there is a need for more encouragement and incentives. The Kingdom of Saudi Arabia and the U.A.E. are the two major countries where the majority of Pakistani workers are settled and employed. In the first quarter of FY22 [Jul-Sep], we collectively received remittances to the tune of $3.5 billion out of a total of $8 billion from these two jurisdictions. While our government needs to focus on these two countries to enhance the number of skilled migrant workers, they also need to explore other potential labor markets such as Malaysia, Qatar, Oman, China, Japan, and GCC countries. It is worth pointing out here is that only increasing home remittances would not suffice. The Government also needs to devise policies and strategies to convince the remitters and recipients to invest a large portion of the remittances for productive purposes. The present tending is that the remittances are mostly used for domestic consumption by the local people which, though, increases money circulation, but does not directly stimulate economic growth. This suggestion, therefore, merits the attention of policymakers.

The Pakistani Rupee has remained under high pressure in recent days and depreciated considerably. The key reasons for this deprecation are rising imports and widening the current account deficit. During the first quarter of FY2022 [Jul-Sep], the current account deficit has reached $3.4 billion as against a surplus of $865 million during the same period last year. Pakistan heavily relies on imported energy supplies to meet local demand which has continuously been on the rise. It is expected that imports would further increase in coming months as most of the raw materials is being imported by our industry. This would have far-reaching implications at the micro-level with a further rise in inflation which is already breaking historical records. Secondly, the surging oil prices in the international market are also going to add to this pressure. It is satisfying that our great brotherly country, the Kingdom of Saudi Arabia, has again come forward to support Pakistan by extending its financial support package of $4.2 billion. This would shore up our forex reserves, which have been shrinking recently, and also ease pressure on the country’s balance of payments. Already, this news has been taken positively by the market and the value of PKR against dollar has stabilized. There is a need to take measures to restrict the imports of luxury items to prevent the build-up of imported inflation and bring down the pressure on the exchange rate. There is a need to balance the demand and supply of dollars to stabilize the currency. It is suggested that the government should take a step to ban imports of luxurious items and appreciate their currency value as we cannot pay higher bills of imported goods. Secondly, the government needs to take measures to improve the confidence of investors to invest money [dollars] into the country as experts believe that decrease in portfolio investment is also one of the many factors that lead to currency depreciation. So, the foreign investors must be facilitated by the Government to bring portfolio investment and flourish market capitalization that would eventually increase the supply of foreign currency into Pakistan. It must also be noted here that the PKR depreciation is a transitory phase and with steady economic growth and other policy measures being taken by the Government, the situation would improve. During last year, the dollar had risen to Rs. 169 and then fell to Rs. 153. Hence, I feel pressure on PKR would come down. Our market players need to be patient and especially our stock market needs to avoid any decision on speculations.

In terms of economic theory, depreciation or devaluation of currency increases the volume of exports and reduces the volume of imports, both of which have a salutary effect on the trade balance. The local currency becomes cheaper and the country’s exports also become more competitive for foreign buyers. This provides a boost to the domestic demand and leads to job creation in the export sector. In the perspective of Pakistan, the exports during the first quarter of FY2022 indicates a growth of almost $1.5 billion from the corresponding period of last year. Pakistan’s exports stood at $6.94 billion in 1QFY22 as against $5.47 billion in 1QFY21. However, due to the increase in imports, the trade deficit has also widened significantly by almost 88% to $10.95 billion in 1QFY22 from $5.81 billion during the same period last year. A higher level of exports leads to an improvement in the current account deficit. The World Bank (WB) in its recently issued [October 2021] titled ‘Pakistan Development Update: Reviving Exports’ has suggested that Pakistan must focus more on increasing exports instead of discouraging imports. The WB has made this suggestion in the backdrop of the recent announcement by the Government to increase regulatory duties on ‘non-essential, luxury’ imports. WB thinks that this would not help curb imports and the share of such luxury or non-essential items is quite negligible and these are already subjected to high import duties. The WB has identified in its Report certain bottlenecks that are hindering exports that need to be removed; for instance, high effective import tariff rates; limited availability of long-term financing for firms to expand export capacity; inadequate provision of market intelligence services for exporters, and low productivity of Pakistani firms. I think the Ministry of Commerce must work on these suggestions for boosting exports.

All multinational companies are dealing with exchange rates as they have to buy or sell foreign currency as part of their daily business as well as they import raw materials or other items and some of them even export. Hence, these foreign companies are much concerned about foreign exchange risk which can affect their business productivity and profitability. Any volatility in local currency rates can affect their financial inflows and outflows as well as their asset and inventory prices. As far as the national companies are concerned, they also experience similar challenges and issues; however not in the larger context as the multinational organizations. With dollar appreciation, their cost of imports of different inputs used in production increased which eventually makes their products in the local market expensive.

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