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In conversation with Dr. Ashfaque Hasan Khan

In conversation with Dr. Ashfaque Hasan Khan

Principal and Dean of the NUST School of Social Sciences and Humanities, Pakistan’s illustrious economist Dr. Ashfaque Hasan Khan remains at the forefront of economic policy. A prolific writer, he is the most widely published economist in the country with nine published books and over 170 articles to his credit. He is also a member of the Finance Minister’s newly constituted Economic Advisory Council. Prior to his association with NUST, Dr. Ashfaque played an important role in freeing Pakistan from the clutches of the IMF during his tenure at Pakistan’s Ministry of Finance led by former Finance Minister Shaukat Aziz. He has won acclaim as the chief architect of the Fiscal Responsibility and Debt Limitation Act passed by the Parliament in June 2005. He also played a leading role in the floatation of Pakistan’s sovereign bonds, including the Islamic bond (Sukuk) in the international debt capital market. He has also been involved in the issuance of Global Depository Receipts (GDRs) and Exchangeable Bonds in international equity markets. Dr. Ashfaque was conferred Sitara-e-Imtiaz for his contribution to the field of public policy and was awarded the ECO Excellence Award by Economic Cooperation Organization for his outstanding contribution to the field of Economics. He talks to Mashaal Gauhar about Pakistan’s economic challenges and his vision for the future of the School of Social Sciences and Humanities.


What are your views on the much-awaited GSP Plus status being granted to Pakistan?

Dr. Ashfaque Hasan Khan: “I consider the granting of GSP Plus status to Pakistan by the European Union (EU) as a positive development. All those who have contributed to achieving this status over the years should be congratulated.

Why does the EU matter for Pakistan? It is not only Pakistan’s largest trading partner, but the EU is also very actively engaged in social sector development in the country. Although it is a major trading partner, over the years, our relevance in the European market, as far as Pakistan’s exports are concerned, is declining. So the EU as a market is no longer an important export market for Pakistan because in the mid 1990s, one third of Pakistan’s exports went to the EU. Today it has declined to 10% – so it has declined from one third to one tenth. In one sense it is good because it has forced Pakistan to diversify its exports. However, diversification is not taking place at the pace at which it should have.

12% of our remittances comes from the EU. At present, not much foreign investment comes from the EU. At one time, in early 2000, 43% of Pakistan’s foreign investment came from the EU, but now it is about 10% or 11%. So economic relations between Pakistan and the EU are weakening. I think the Ministries of Finance and Commerce should look into why this is happening.

In this perspective, the GSP Plus status is a good beginning and it is a very positive development for Pakistan. Pakistan must get its act together to gain from this status. This status does not imply an automatic increase in exports. There is a misperception that GSP Plus status has been accorded to Pakistan and hence exports will boom. This is not the case. This GSP Plus status has brought Pakistan in league with all the other countries that have been given this status in the past. So Pakistan is no longer in a disadvantaged position as far as tariffs are concerned. Pakistan has now got a level playing field. How much Pakistan will gain from this will depend on how Pakistan competes with those incumbents who have already been given this status.

Pakistan will have to deal with two sets of competitors. One is the EU competitor: Italy, Greece and Portugal in textiles and Romania in clothing. These four EU countries have launched an offensive action against Pakistan because they don’t want Pakistan coming into the market and taking their share. So they are aggressively marketing their products in the EU as far as textiles and clothing are concerned. There are non-EU competitors such as Bangladesh, India and China who have already been receiving duty free access to the European market and they will be taking offensive action as well.

How much could Pakistan get out of this if we remain competitive? If everything goes well, the total gain would be $600 million. That is, roughly $300 million in the textiles sector, $100 million in leather products and $200 million in all other products.

This status is also conditional upon implementation of 27 international conventions in human rights, labour standards, environment and governance. Pakistan has ratified all these conventions, but now they have to implement these. Implementation will be monitored by the EU through NGOs and civil society. So if Pakistan continues to implement these 27 conventions and attains certifications for these, this status will continue. The moment we stop, this status may be revoked. Interestingly, because of the 18th amendment, lots of responsibilities have been shifted to the provinces. The question is whether the provinces are ready to implement these standards? The federal government through its efforts has received this status and it is the federal government who will be answerable to the EU.

One way to handle this is to form a committee or a supervisory body to coordinate between the federal and provincial governments to ensure implementation of these conventions. It is up to Pakistan to use this status to enhance its exports. This status has been granted for three years. If Pakistan improves its quality and productivity and shifts from supply-driven to demand-driven production, three years is enough time to make an inroad in the EU market.”

What are your views on Pakistan’s loan programme with the IMF?

AHK: “My views are very clear. There are people who believe that Pakistan should not have gone to the IMF when the new government came to power. My view is that five years of the previous government’s mismanagement brought the country to the verge of collapse. So there was no alternative for Pakistan, but to go to the IMF and seek balance of payments support. Going to the IMF was a right decision because Pakistan had absolutely no option.

Regarding the design of the programme, I think it was put together in haste. The IMF was here for a routine Article 4 consultation. But when they were here, the newly elected government decided to negotiate a new loan. So they requested the IMF to extend their stay for a few more days to finalise the programme and hence they extended their stay for about ten days and in this short period, the programme was put in place. Naturally when you put in place a programme in such haste there are risks.

Many have described this loan as ‘defensive lending’ from the IMF side; others have said it’s a ‘self-serving’ programme. The IMF wanted its money back as it had lent more than $8 billion to the previous regime and they were nervous because if Pakistan defaulted, their $8 billion would be gone. So they designed the program in such a way that Pakistan’s entire macroeconomic policies have been entirely geared towards building reserves. The IMF has asked the State Bank of Pakistan to enhance its discount rate to attract foreign capital; the IMF has also asked the State Bank to aggressively buy dollars from the market. On the other hand it has asked the Ministry of Finance to float bonds in the international market such as euro bonds, Islamic bonds, GDRs etc. to build up reserves and to go for aggressive privatisations. In addition, the IMF has asked the Ministry of Finance to seek early releases of resources from the World Bank and the ADB and also to seek early payment of Coalition Support Fund from the United States.

Some people have said that this has always been the case with the IMF: that they are more interested in their own money rather then helping their member states. I found this very painful because this institution was built to help member countries and it is in their mandate to assist member countries: to provide balance of payments support whenever they are in difficult situations. But now I have been reminded by one of the former employees of the IMF that this has always been the case. He described this as ‘defensive lending’. The IMF will always go for the return of its own money rather than assisting countries in terms of policy. This is a surprising attitude of the IMF for me because I have dealt with the IMF for over a decade. I consider the IMF to be a thoroughly professional institution. You will find top class economists from all over the world working at the IMF. But this time I see a totally different IMF. Perhaps because of a changing geopolitical environment, Pakistan is no longer as relevant as it used to be in the past.”

What are your views on the Prime Minster’s recently launched youth loan scheme?

AHK: “Such a scheme is good provided we have the resources. We cannot run such scheme on borrowed resources”. Rs100 billion is a huge amount for a country which is resource starved. So we should use this resource wisely. Is there any alternative to the youth loan programme? This question must be examined. If this Rs 100 billion was spent on education, health and building the country’s infrastructure, perhaps this would be more powerful than giving loans to the youth. We have assumed that every youth will set up their business. Not everyone can enter into business, only those who have a mental affinity for business. Family background is important. If my father is in business, there are good chances that I will go into business. But if my family has never been in business and you give me Rs 500,000 to set up a business, I will have no idea how to do it. This is the drawback: not every person will be in a position to set up a business. Not everyone is an entrepreneur. If you ask parents if they would allow their children to go into business, several will say no because most want their children to have a profession ­– going to engineering school, medical school, entering the civil service, becoming chartered accountants, getting a PhD etc. you would hardly find 0.1% of parents wanting their children to go into business. It is risky and they don’t have experience in establishing and running a business.”

Pakistan’s foreign exchange reserves stand at $8 billion, what are your views on this?

AHK: “It is not $8 billion. We should be very careful when giving the numbers. $8 billion includes commercial bank reserves with the State Bank of Pakistan as well, but these cannot be used as reserves for the country. When calculating the reserve, what matters is the State Bank of Pakistan’s reserves, which is about $3.2 billion as of 3rd January 2014. It is critically low, sufficient only to finance two to three weeks of imports; this has made the country highly vulnerable to any kinds of external shocks. What can be done? I think that is why Pakistan went to the IMF to seek balance of payments support and to build up reserves. But what is happening is that the IMF is giving us a tranche of  $550 million and taking back $1 billion from Pakistan  – so there is actually net outflow taking place with the net result that Pakistan is losing reserves. When Pakistan signed the agreement with the IMF, its reserves were $5.0 billion, today it is $3.2 billion, so the IMF programme has failed to build Pakistan’s reserves.

We have to do many things to build reserves, including floating bonds for our expatriate Pakistanis. This can be called a ‘Remittance Bond’ or ‘Quaid-e-Azam Bond’ to attract expatriate Pakistanis so that they can invest in our paper while being abroad. We have to come up with innovative ideas and there is no dearth of ideas, the only thing required is political will. Also, we have to look at our imports. Do we really need all these expensive foreign items? Pakistanis can live without imported cheese, butter and milk. So there are areas where we can cut down on imports to reduce our dollar requirement for import purposes.”

As former Dean of the NUST Business School, you have built up a centre of excellence, what is your vision for the future of the School of Social Sciences and Humanities?

AHK: “I came to NUST five years ago as Principal and Dean of the Business School. I have tried to build this institution with active support from Rector NUST and the management of the university, and in a short period of time it has gained recognition in the country. This school was established in 1999 so the first graduates came into the market in 2004 – so it has only been 10 years. However, in these 10 years, our graduates have made an impact. We are now competing with IBA and LUMS. It is relatively young, but it has built its reputation.

In September 2013, we established the School of Social Sciences and Humanities. I am now the Principal and Dean of this school. We have established a Centre for International Peace and Stability and will be establishing soon the Centre of Human Development Studies. Our new building is currently under construction. We plan to add departments of Linguistics, Anthology and Sociology as well. We are launching a MS programme in Mass Communication and Government and Public Policy departments.”

You are an economist of international renown, what are your views on the Federal Reserve’s tapering policy and what impact will the slowing down of QE have on the global economy?

AHK:Last July the Federal Reserve wanted to start tightening its monetary policy. Right now, global interest rates have historically never been so low and for so long a period. It was the Federal Reserve’s policy to keep interest rates as low as possible to encourage investment, create more jobs and revive economic activity. To some extent the U.S has succeeded.

Under this policy, the Federal Reserve has been injecting $85 billion a month in the market. You cannot unwind in one go, so it was decided to gradually taper bond buying. People were initially very nervous, since the U.S was injecting cheap money into the system, money started flowing out of the U.S. in search of good returns and came to Asia-Pacific region. These countries started building up their reserves. China’s reserves are close to $4trillion today. Overall in this region the reserve is about $6 trillion. So the bulk of reserves are in the Asia-Pacific region. As a result, their currencies started appreciating and their exports became expensive, imports became cheaper.

When the news came that the U.S. will start tapering, investors became nervous and took their money out of Asia-Pacific back to the U.S. Therefore exchange rates in the region came under tremendous pressure. The Indian Rupee lost 20% of its value in just a few months. There was a panic situation so the Federal Reserve postponed tapering. Now they feel that there will be less disruption in emerging markets, which have adjusted to the new reality, so there will not be a violent reaction in Asia-Pacific and their currencies may not come under pressure.” Global economy is inching towards recovery but European economies have not yet come out of wood.”

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