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Dr. Abdul Hafeez Shaikh’s speech at the Woodrow Wilson Centre discussion on Pakistan’s economy

Dr. Abdul Hafeez Shaikh’s speech at the Woodrow Wilson Centre discussion on Pakistan’s economy

“Thank you, sir, for that very nice introduction. I should hang around here in the US more often if I keep getting such recognition. Nobody seems to have much to say good about me in Pakistan. So, I’m delighted to be here. It’s an honour for me and thank you for the invitation.

I think we are meeting at a critical time. The Pakistan-US relationship has acquired a significance that it never had before. It’s seen as important both for the peace and security of the region and perhaps indeed for the whole world. The need to learn from the past, as well as our recent experiences, and to shape and configure the relationship to fulfill the expectations and the needs of the two parties is more critical than it has ever been.

The US and Pakistan have enjoyed a long relationship. It has been episodic and transactional at times. And sometimes, there has been a desire to make it strategic and on a sustained footing. I think one of the key features that have characterised this relationship is the degree of variation that it has seen, where Pakistan has sometimes been labelled as the most allied ally, and at other times, is the most sanctioned ally, and all this within a period of years. And right now in the post-9/11 scenario, it’s labelled as a major non-NATO ally.
Political security considerations have often led to government-to-government external assistance on the economic front as well. And the growth spurts – the three growth spurts that Pakistan has had – in the ’60s, the ’80s and the 2000s – have somehow been linked to the US external assistance, or at least have coincided with periods of external assistance from the US.

A key feature of this external assistance from the US has been that it has coincided with wars; in the first case, the Cold War; in the second case, the Soviet-Afghan war; and in the third case, the so-called terror war. Sadly, in each case, when the war has ended, so has the external assistance. And this departure of the US from the region has had tragic consequences, at least in the last case.
Now, it seems like we’re entering a new era or we have entered a new era. And the question that we want to ask is: Why did the US walk away in the past? And how can we learn to put this relationship on a sounder, more solid, more sustained footing, which is not subject and vulnerable to shocks?
I think one of the answers that the US could find it easy to walk away is because the relationship was based primarily on non-economic considerations. And therefore, this is one of the lessons we have to draw, and this is an area that we need to focus on. And I think the new administration and our government appear to have recognised this missing dimension in the relationship and are trying to remedy that, and we will see how it unfolds.
The second point, apart from this variation and the need to learn from the times past, of our engagement of the past, is that economic relations have always been there between the US and Pakistan. They have chugged along. There has been significant interaction, but it has never realised its true and fullest potential. So in spite of that, there’s a significant degree of economic interaction that has been there throughout and has
survived the vicissitudes of politics. Trade, for example, is roughly $5 billion a year, FDI from US roughly half-a-billion dollars on average per year, remittances approaching $1.8
billion to $2 billion a year from the US, and government-to-government assistance now targetted at $1.5 billion for economic matters per year.
So, the second question that we want to think about is how to seize the potential that exists and to build upon this major level of economic integration to a new plateau which
truly realises the full potential and is truly insulated from happenings on the political and other fronts.
Let us turn to Pakistan now and see what’s been happening there. First of all, democracy is back and it’s back with all its vibrancy, with all its hullabaloo, noise. And the
parliament is functioning. It has passed landmark legislation. It has been a period where the president has voluntarily handed over powers back to the parliament and, in turn, the federal government has voluntarily handed over responsibilities and additional resources to the provinces.
A dramatic development has been the passage of the new National Finance Commission Award in which $300 billion to $400 billion extra rupees are going to be transferred to the provinces, which is what most people in this room would want, which is what most Pakistanis would want, because the things that matter to the people – education and health, and drinking water, and municipal services, and police, and law and order, and security – at the local level are all departments within the provincial mandate. And so, the more resources they have, the more they will be able to respond to the demands of the people. And so the service delivery can be improved, and this has been, I think, a dramatic and far-reaching step, and its consequences will be seen over time.

Another aspect of the new democratic dispensation is that we have institutions that are working for transparency and for accountability, the likes of which have never been seen before. And again, in a first in parliamentary history anywhere, the chief accountability officer of the government of Pakistan is a person whose official title is the leader of the
house – leader of the opposition in the parliament. The leader of the opposition in the parliament is also the chairman of the Public Accounts Committee, which is the chief accountability organisation of the government. So you have this wonderful experience of the leader of the opposition in a position to summon anybody, to scrutinise anybody, ask any question from anybody and demand explanation from anybody from the prime minister down to everyone, and he does that with relish.
You also have a supreme court where the chief justice and the court is highly active in scrutinising, in investigating, in probing, in summoning, in asking all sorts of questions from everybody in the government. This again, I think, is an exciting development and makes our society open.  It makes our officials accountable. We also have a free media, and I think it’s there. Again, totally free, able to comment, and critique, and question, and quiz, and criticise. And every evening, there are at least 15 channels which from 7 p.m. to 11 p.m. have talk shows, which do very little else but focus on public issues. And I think they perform their job with zeal and enthusiasm.

Turning to economic matters, this government inherited a difficult situation and an economy at the verge of collapse. A lot of steps have been done to try and restore macroeconomic stability, try to mobilise taxation, try to cut down expenditures. Even in this most recent budget, expenditures were frozen at nominal levels of last year, which means a real production of 10 to 12 percent. New taxes have been levied on capital gains tax, on stockbrokers. New sectors have been brought in like fertiliser, and pesticides, and tractors, and textiles, and leather and others which were excluded before. Seven hundred thousand new people with multiple bank accounts, with international travel, with the best addresses of Pakistan who were not paying taxes are being pursued to broaden the income tax net.

And so you have a new drive, a new initiative, and the goal is to raise the abysmally low tax-to-GDP ratio from less than 10 percent to closer to 14 percent over the next
three to four years. At the same time, while these painful decisions, including passing the energy prices, passing the international rise in oil prices to the consumers, there has been a conscious attempt to have a social safety net, to not forget the already forgotten, and to try and reach out to the poorest of the poor through automated systems of cash transfers. And this is a system that now even the World Bank has accepted as one of the best managed and best executed in the world.
And so a combination of balance is being struck between looking after the very poor during the transition, while going on with the most difficult decisions in the political environment that is also not very conducive and remains fragile.
On top of this, Pakistan has had multiple challenges to face. Over this last year, we have the continuing expenditures on security and on war. And our soldiers have sacrificed their lives. Our citizens have been targetted. And the exchequer has had to bear a great burden. But this is a war to which we are committed. And naturally, in the middle of a war, you cannot starve your soldiers, so the fight has to go on, and the monies have to be paid.
Second, we had the greatest disaster of our history because of the great floods of 2010, when 20 million people were affected, crops were destroyed, infrastructure was damaged, and lives were shattered. Over $10 billion of damages were incurred and 2 percentage points from the growth rate of the GDP was wiped out. And third, we now have to struggle and get exposure to the rising prices of oil, which we had targetted at $70 a barrel in our budget-making, but it has hit $120 and at least is likely to remain above $100. And in spite of that, like I said, the government and the people have shown resilience. We have continued to pursue the economic reform agenda, trying to focus on public sector efficiency. Even the federal cabinet has been slashed by two-thirds from 160 to 22. Our government budget for development programs for government projects was slashed from 280 billion by 100 billion to 180 billion.
So the idea is to ensure the security of public finances, to maintain a fiscal discipline, to bring down fiscal deficit, which when the government came into power was above 7.5 percent to around 5 percent to 5.5 percent, and to try and create a platform for growth. So, we’ve been working on a growth strategy to try and give jobs to our young people and to get back on the trajectory of growth approaching 6 percent or so. Some of the results are beginning to show and I’m happy to share those with you. On the external front, the
exports have shown dramatic increase of 26 percent in the last nine months. If you compare February with February of the last year, the growth is a phenomenal 46 percent, and the exports are likely to cross $24 billion, the highest ever. Similarly, the remittances are approaching $1 billion a month and are likely to cross $11 billion this year, the highest ever. The benefits of these two is being shown in the reserves of the foreign exchange, which have also reached the highest ever level of $17.5 billion.

At the same time, we have rationalised our government programme, and we feel that a combination of all these must be shared. Emerging benefits in the economy must be shared with large segments of the people. And the government has adopted pricing policies for agriculture sector to incentivise them to grow more and benefit from the commodity boom, and as well as share in the global prosperity that is emerging from the rise in the price of food products. And this is paying off. We are expected now to have
a bumper wheat crop, the highest ever, and because the pricing is geared in such a way, this will lead to large-scale prosperity in the countryside.
So these are some of the emerging areas of positive results. And I turn now, in my last set of comments to US-Pakistan economic relations. I believe that because there’s a reformist government in Pakistan, a democratic government that is not burdened with trying to do funny things to achieve legitimacy, and we have a global configuration in which the destinies of the two countries appear to be tied for some time and hopefully for a longer time, that a new way of thinking about how to secure the foundations of this relationship is indeed the responsibility of leadership of the two sides.
I think that the US government has responded or tried to respond to this challenge, and a new external assistance law has been passed, the Kerry-Lugar-Berman, which attempts to give $1.5 billion every year.  In reality, the amounts disbursed are less, but I think a platform and an institutional arrangement exists under which the two countries can work out. Five areas have been identified under the Kerry-Lugar-Berman institutional arrangement for a special focus. These are energy security, food security, economic
growth, a particular focus on the affected areas in the tribal region, and social sector, including education and health. I believe that if the money is disbursed and if it’s widely used, this can have far-reaching consequences.
At the same time, given the demands and the requirements of the country, and the potential that exists in the private sector, and the lesson from the past of not relying
upon governments alone, it’s very important to think of platforms for business-to-business dialogue and for ventures in which US businesses can make money, so that they remain motivated and participate in the economic development of our country, while also benefitting their shareholders.
So several opportunities exist, one of which, of course, the Kerry-Lugar-Berman is itself trying to develop, and that is the idea of a Pakistan-American Enterprise Fund, which would be $300 million. It’s under the process of legislation, and we’re optimistic that once that’s passed, it will be a vehicle from which the US businesses can draw and it can be leveraged to do larger projects and it will be potentially a magnet for attracting some kind of investors to Pakistan.
About Pakistan in general, it is a country with tremendous opportunities. Sometimes I’m asked which are the sectors that people should focus on. And my answer is that government ministers are particularly inept in answering such questions because if I knew which sectors, I would be in business myself. But I think what I can say is that everywhere – and I’ve had the opportunity to work in two dozen countries, and I think the as a student of development, the opportunities in Pakistan are second to none, compared to all the 24 countries that I have worked in. There are opportunities in agriculture and in services and in telecommunications and in energy and in mining and in oil and gas in particular. And everywhere you look, you will see opportunities.
The question is: is there a liberal investment regime that allows people to come and participate? On that score, let me share with you the nature of the Pakistani investment regime. I believe it’s the most liberal or one of the most liberal in the entire world. We do not discriminate against foreigners. Foreigners are welcome in any sector of
the economy. They can participate 1 percent of equity or 100 percent of the equity.  There’s no requirement for any local partner like in some countries. There are no limits on how much capital you can bring in or take out. There are no limits on how much money you can repatriate in the form of dividends or profits or licenses or whatever.
So here is an environment which is very conducive, very welcoming. And the government is beginning another hopefully exciting program of privatisation in which government assets in electricity, and in oil and gas, and manufacturing will be available.  And I think above all, what one needs to do is, instead of listening to the speeches of ministers, is to talk to your own colleagues who are already there.
There’s an American business association of Pakistan. You can talk to them. Most of them are already expanding. In the last two to three years, the state bank governor has been telling me have been the best for most of them. And they will share this information with you. If they want to keep Pakistan as a secret for themselves, then of course you can always look at their books. They’re available. And they will corroborate the story.
So, I think I will stop now and hopefully we can have an interactive discussion. I’d like to learn from you. Let me also, in closing, appreciate the US government and its
leadership for the focus that they are giving to Pakistan, for their recognition of the strategic nature of our relationship and the benefits that will accrue to the world if we invest into this relationship and recognise each other’s strengths and each other’s capacities to contribute; and the fact that they have initiated a strategic dialogue between our two countries to which Pakistan has responded, which covers a large set of areas, including security and defense and energy and economy and trade and so on.
And also, I want to end by thanking the US government for the support they gave us, particularly the initial phase of our floods and rescue and relief operations, and for being a part of the international coalition through the United Nations network in supporting our suffering brothers and sisters, and also for the support they’ve extended to us in trying to help us at other multilateral settings.
Thank you very much.”

— 18 April, 2011

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