Miftah Ismail is the force and the face of PML-N’s economic team. He is a former finance minister of Pakistan and a leading political economist who has worked for the International Monetary Fund and served as chairman Pakistan Board of Investment.
Najma Minhas: Recently, you did a series of tweets on PTI government’s performance in the past two years. What are the key issues that stand out for you?
Miftah Ismail: I think the most important statistic in any economy is how the incomes of people are growing. When we left the government, we left Pakistan’s GDP growing at 5.5%. This year the growth declined by 0.4% and this includes the COVID-19 effect. However, even last year, the economy only grew by 1.9%, just less than the population growth.
Over the previous year, an average Pakistani became poorer. This year, even before COVID-19, the economy was not doing well, and after COVID-19, it further contracted. That’s the number one concern with regards to a country which has a population growth rate of 2.5% and sends about 1.5 million people into the workforce every year. We need to grow by 5%-6% just to absorb the new people coming into the labour market.
Since the economy is not growing, unemployment is rising. Even before COVID-19, probably 1.5-2 million people were added to the unemployment numbers in Pakistan. Since COVID-19, the number has increased. We have close to 6 million people who have been pushed below the poverty line (less than $2/day).
Millions more are food insecure, so they don’t know where their next meal will be coming from. They have to choose between paying their children’s tuition, paying medical bills for aged parents, and paying for food rations. That’s the dilemma, that’s my concern.
The second concern that I have since PTI came into power is that they made a huge deal out of that current account deficit, as if that is the only statistic to worry about with regards to the economy. It was a large current account deficit at 6% of GDP, however, about the same as what the PPP inherited in 2008.
Najma Minhas: I thought that the $19bn current account deficit in 2018 was at historically high levels?
Miftah Ismail: Yes. $19bn – 6% of GDP, and you measure these things in percent of GDP, as is done in the US and many other countries. In 2008, Pakistan ran a similar deficit. In 2016- 17, several countries had an even higher current account deficit as a percentage of GDP. The first thing they did was devalue the currency.
To devalue the currency, two-three things happen. One, you have domestic inflation. That’s understandable, if you’re going to devalue the currency, your imports are going to become more expensive, and you will have higher inflation. The second thing that always happens is your tax revenues go up. The reason is that half of our taxes come from imports.
If your currency is devaluing, even though the dollar value of imports goes down, the rupee value of imports goes up. If half of your revenue comes from imports, and your imports in rupee value have gone up, you collect more taxes. Plus, because of the inflation, the local goods also become more expensive. A toothpaste selling for less than Rs.30 previously, and now paying more in sales tax, sells for Rs.40. For the same goods, you’ll get more sales tax.
So you should have seen the increase in revenue. In two years in a row, they have not increased to what we left (sales tax). Our last year’s revenue is higher than their first year’s revenue. Even in the second year, they claim that their revenues are a little higher than us, by 100 million, but that’s not true.
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Najma Minhas: But, isn’t that because to compress demand, PTI implemented higher customs duty which meant that actual volumes of imported goods went down and that’s why, we didn’t see a rise in revenue, on the customs front, for example.
Miftah Ismail: No, but if you have increased custom duty, that means the revenue should be even more. Plus, with imports, you collect 5%-6% withholding, tax depending on your goods. Then you have a sales tax of 17% on all goods and services which are imported. By any measure, anywhere in the world, you will see, wherever there is a devaluation, you will see an increase in imports value and increase in taxation revenues.
The third thing you should expect as an effect of devaluation is that you make Pakistan 40% cheaper in goods and services. So you should see an increase in exports. Now, PTI, as you know, in the election campaign, used to say a lot about PML-N not doing well for exports. They were criticizing us a lot. Well, it turns out that, in their first year, after a devaluation of 40%, their exports are less than ours by $500 million.
This is the first year, and not in COVID-19. This year, of course with COVID-19, the exports have decreased by a couple of billion dollars, or a little bit more, but let’s just forget that, and consider the first year. These are three effects of devaluation, two positive and one negative. We got the negative impact of depreciation, but not the two positive ones.
Najma Minhas: I read the interesting article you wrote in 2018 in The News where you actually subtly criticized your government for delaying devaluation and saying we should have done this in 2016. But by postponing it till 2018, in essence, the State Bank was subsidizing our imports and our exports suffered. So, you would have liked to do the implement the policy (devaluation). How is it their fault that exports have not gone up?
Miftah Ismail: My perspective is that once the devaluation was done, in a very haphazard and clumsy manner, you remember when the Rupee was 125, a PTI minister was saying we will see it at Rs.140. You do not say this in government, because as a minister, you are giving the market the wrong signal.
The PM was saying ‘I did not know this’, the finance minister was saying ‘no I told him.’ You know, all sorts of confusion. The Rupee went up to 140 and then came back down to 128. Even today, in the last week, the currency has gained about 5%. I mean, there’s something to be said about stabilizing the currency. Look at UAE, and Saudi Arabia – for 20 years now, they have the same rate.
Najma Minhas: But, we don’t have the kind of economy where we can use our resources, our foreign exchange reserves, to stabilize the economy. I mean, this is one of the criticisms your government has got from experts, that we used our foreign exchange reserves to stabilize the currency.
Miftah Ismail: What I am saying is that you need to stabilize these things. So, when you go from 140 to 128, and then again to 140 the next year – if we had done this, they would have said, ‘Oh, this is a rigged market! They’re making money, there is this or that account’ – just think how many times the currency has gone up and down by now. You have to understand there is a lag.
Just because you devalue today, doesn’t mean your exports will increase tomorrow. This was a crazy thing, to devalue like this, importing inflation into Pakistan but not increasing exports. Crazy like hell. This is one of the things I did, and Ishaq Dar did before me. In the last two years, when we saw that our exports were not moving, we understood there were structural issues, not just currency issues.
PTI is only now recognizing, but we sort of understood this a couple of years ago. We started giving rebates, knowing that our power, gas energy is more expensive than India, Bangladesh, Vietnam and other countries. We were giving them rebates, 3%-5%, for targeted exports. PTI came and dismantled the whole thing. They also increased the price of exports by increasing the price of gas and other utilities.
So, the only advantage the exporter had from the devaluation of the currency was the fact that it had made workers poorer. When you were giving them Rs.15,000, which was $150 during our time, now it was Rs.15,000, or $90. You made the workers poorer, and that advantage accrues the exporters.
However, at the same time, you made the electricity more expensive, and the gas more expensive. So, no real advantage benefited the exporters. Plus, you did away with the dismantling of the whole structure of export rebates. Dar jad understood there were structural issues which required the government to support exports and we were able to do that.
In my opinion, in PML-N’s last year, exports increased by 13 percent. These guys (PTI) came, and exports dropped by 2 percent. These are my primary concerns about PTI’s economy. One other thing, as you remember, PTI was always criticizing us. PM Khan, even after he assumed the government, was still talking about the debt taken by democratic dispensations since 2008.
I would say that rather than doing a 2008-2018 review by the debt commission (which has not reported yet), let’s start from the last year of Pervez Musharraf, 2007-08, and add a couple of years of this government to it as well, and people will understand the debt situation.
Now, the PML-N took about Rs. 10,300 billion (in debt) over five years. PTI, in just 2 years, has received Rs. 11,000 billion. This whole notion, that somehow we were stealing money or were loose with people’s money, and did not implement enough austerity measures, has all gone out of the window. What are you doing when you are raising debt to GDP ratio so crazily?
Najma Minhas: But when your Rupee/Dollar devalues by definition, your debt increases, right? At the same time, Rupee debt became more expensive when the PTI government raised interest rates.
Miftah Ismail: Yes, there are interest rates, and now they have raised interest debt. They brought back interest rates too, and the sky has not fallen. I don’t know why they raised interest rates by so much. They were criticizing us for borrowing dollars for 6%, 7%, but now these guys are borrowing at 13%.
The notion that debt has increased because the currency devalued is faulty. Only 25% of Pakistan’s debt was in dollars when I left office. 75% was Rupee-denominated debt. Don’t say to me that debt has increased because we devalued, as that’s only 25% of the debt.
Najma Minhas: You started by saying that devaluation was too extreme, too soon. Yet by the time you left, the Rupee was devalued from 105 (December 2017) to around 115 (May 2018). During the interim government, it went to about 130 in the open market. And since then, obviously, we have seen it above Rs.135 over the last two years overall. How would you have managed the exchange rate differently? Given the fact we did not have foreign exchange reserves. When you left, foreign exchange reserves at the State Bank were only $12bn, and we had debts of $9bn coming up in that year that we had to pay.
Miftah Ismail: Every year, we have this money, and every year, we have to roll all this. The idea that we have to borrow money to repay the debt, every government has said this to previous governments. But you also get the previous government’s assets. They have borrowed a lot more, their economic ministers say, “Oh, we have to repay $5 billion back.”
That’s shameful, because they’ve got 35 billion, and they’ve to pay 5 billion back. So, a very valid question now is: How do we have debt? When I left, the Rupee was 115, and when the caretakers left, for instance, it was 122-124 (interbank rate). However, this went to 128 during the election campaign. Now, my idea of the rate, which I discussed with the PM at the time, was that by the end of December, we will see the Rupee at 120-125.
Suddenly, by June, I saw it going to 130. That was the number in my head, and I wasn’t talking to anybody, and I was certainly not saying this on TV. Now I want to take you back to April 2018. Credit Suisse had lent us $400 million, and the money was rerolled. In May 2018, the month we left, Citibank came to us and said they want to lend us an additional $2bn dollars. And they were lending us at 8%.
I said that’s too high, I don’t want to borrow right now, and I said let the caretakers or the new government decide. So, in April and May, they were very willing to lend us so much money. In August, PTI comes in. and Asad Umar says, ‘Pakistan is at the edge of bankruptcy.’
Razak Dawood says, ‘Pakistan is about to default.’ No, Pakistan was not about to default. Pakistan is not even defaulting now, when the debt to GDP ratio is so high. Pakistan has not defaulted in 70 years. We are not about to default. We were growing very fast, lots of people were willing to invest.
Asad Umar never used the word ‘bankruptcy’ when he was head of Engro, even though Engro was the most leveraged company in Pakistan at the time. Descon, Razak Dawood’s company, also borrows all the time. They don’t use these words, default and bankruptcy, when they’re talking about their own companies. Why’re they talking about this when they talk about my country?
Najma Minhas: Moody’s, the rating agency, downgraded Pakistan in 2018. Pakistan went from being stable to negative, our credit default swaps were increasing. So, therefore, I’d say that international markets were already recognizing that we were living off borrowed time. So my question back to you once again is, how would you have maintained the exchange rate?
Miftah Ismail: First of all, I think the ratings for credit went down from positive to neutral, not from neutral to negative, but, I could be wrong. Secondly, if you look at the bond market – Pakistani bonds, in international markets, were not selling at a discount.
Since October or November of 2017 to May 2018, our exports had done well, given we had devalued a little bit. In OctNov 2017, I, along with the then Governor of State Bank, Tariq Bajwa Sahab, and Secretary finance, went to sell $2.5 billion of Pakistani bonds. We were still able to get money.
For our finance minister and other ministers to use these words, and for our PM to say, ‘All Pakistan is just corrupt, only Imran Khan is this blessed being from heaven and everybody else is corrupt’ – this is how you destabilize Pakistan. Otherwise, we were growing at 5.5 percent. Look at where we are today. Our reserves are no better. We borrowed a lot more. We borrowed from friends, and that has affected our foreign policy as well.
Najma Minhas: We have just had a current account surplus after a very long time. One of the biggest issues obviously, you recognize yourself, is not the devaluation, but the structural impediments in exports. What are the structural impediments that you think the government should be working on, which they have not been able to do so far, and which you would do if you were in government today?
Miftah Ismail: The last time we had a current account surplus, one-month surplus, I think it was October 2015. Now of course PTI has a current account surplus. It is like something new, the best thing since sliced bread. PML-N also had a current account surplus in 2015, but the media was not so ecstatic about it. However, one positive thing that’s really happened, which I’m pleased about, is the increase of about $500 million in remittances over the last two months each.
I don’t know why this happened, maybe we will figure out what has changed, but this is excellent news. On exports, one thing that Dar and I understood was that since our power and utility rates are more expensive than neighbouring countries, we need to give our exporters rebates. Pakistani markets are very, very narrow. We sell to a few European countries and North America.
The diversity of our goods sold is very limited, textiles and a few other things, and that’s all. So, we need to make it more export friendly. There are certain structural issues. Ours is an Import Substitution policy, where we like to have these huge factories making things which compete with our region. I mean, if you look at Bangladesh, Vietnam and all that, these guys have grown based on sewing machines, you know.
But for sewing machines, you need to have better security. One of the reasons Bangladesh has done so well in exports is female participation. Bangladesh has a lot more female participation than us. That’s why their wages have not increased; their real wages are actually below Pakistan. In Pakistan, you know, the wages were higher because there was lesser female participation in the labour force.
So I mean, these are cultural issues and other issues. These are not easily dealt with by economic policy. I can’t make a budget and say from tomorrow, a lot more women should work. I think the power generation and power distribution is crucial. In 2013, when there was hardly any power in Pakistan – there was load shedding, you know, every hour.
Not just in Punjab but all of Pakistan, Karachi – it was lucky at that time. Now, of course, even Karachi has a considerable amount of load shedding. Load shedding was a big issue. Energy is expensive in Pakistan compared to other countries, and we are much less efficient. We have, for instance, right now around 19 percent line losses, transmission and distribution losses.
Internationally, it is 11-12 percent for countries which are at our level of socio-economic development. More developed countries have much lower. When we got in, it was 22 percent, which we brought down to 18 percent. This has gone up again now, under PTI’s government.
When we came in, electricity bills collected were at 84 percent, which we took to 93 percent – this has gone down again. Government has to try and go back to where we were. Plus, now the government has done a deal with IPPs, so this situation should improve.
Najma Minhas: On the IPPs, as you mentioned yourself the importance of cheap power. Your government signed very expensive contracts with IPP which the government has been able to renegotiate. How did your government end up signing such expensive rates? On, for example, LNG contracts, experts at the time were saying that gas prices are going down.
Miftah Ismail: The premise of your question is actually not true. There are two agreements that the government of Pakistan signed. One is, for the 2002 power policy which was set up in Pervez Musharraf’s time. You realize that at that time, Nawaz Sharif was not in Pakistan. He exerted very little policy influence at that time.
So we cannot blame Nawaz Sharif for the power plant set up in 2002-2003. The earlier power plant agreements were those signed for the power plants that were set up in 1994 when Mohtarma Benazir Bhutto signed them. Again, you cannot blame Nawaz Sharif. So, these are the two ones. The agreements that have been signed in our government are owned by the government of Pakistan.
Two are owned by the Government of Pakistan, and one is owned by the Government of Punjab, so whatever tariffs that you are paying – if you are paying excess then you are paying to the finance ministry of Pakistan. If you want to bring it down to 15% or 14% return – you can. After we set up all these power plants, which we needed, we said that from now onwards, there’s not going to be a fixed return on investment, but we are going to have people bid so that real market rates can come down to maybe even less than 12%.
On LNG, we signed an agreement in January 2016 with Qatar Gas and in December with Gunvor, and we did open bidding, and we got a price of 13.37 percent of Brent crude. When Gunvor got this lowest bid, the second-highest bid was by Shell. And we said to Shell that if you match Gunvor’s price, we will also give you orders, but they refused to match.
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That was how we set the pricing. They finally agreed after much discussion on 13.37. A month later, India signed, and to this day, India is buying more expensive gas in India. So, if we were corrupt, and Nawaz Sharif is corrupt, then Indians are also corrupt, since they’re paying much more.
Seventy-five percent of the gas in the world is sold on long term contracts. Nobody at that time was saying it’s expensive. Still, there are idiots that, without knowing anything, say “Wah ye barra mehnga lia…chori karlia” and all that, but nobody said that it was expensive. Look at the contracts signed by other countries like Japan, Korea, India, and Bangladesh.
They are still buying more expensive gas than us. As the oil prices have come down crashing, the price of LNG has also come down. Today, the LNG that we imported is cheaper than the local gas which you buy. You pay $5.10 or so for gas from Karak or Kohat.
Najma Minhas: I would like to ask you two more things. One is the revenue minus expenses issue that the Pakistani government has had for decades and the fact that we have a fiscal deficit. I wanted your thoughts on the NFC which is now becoming a huge factor and secondly, the looming pension issue, we have recently seen a lot of numbers come out which tell us it’s becoming unsustainable. What is PMLN’s stance on it?
Miftah Ismail: Let me start with the budget deficit – the NFC first. NFC is about 57.5% of the money going to the provinces. I believe that power should be devolved to the provinces; in fact, it should devolve further to local governments. However, you have to understand in fiscal federalism that if you have the authority to spend money, you should also have a responsibility to raise revenue.
So, the local governments and provinces in Pakistan should try and raise some of their revenue. The issue right now is that four provinces, plus one government of Pakistan, plus AJK and GB – spend about Rs.11,000 bn and they only raise about Rs. 6-7bn. There is a huge deficit. However, even with the NFC award, somehow, PMLN was able to keep the deficits under 6.5 percent, PTI’s not been able to manage it.
Last year’s deficit was 9.1 percent, and this year they claim it to be 8.2 percent, but I think it is more. So, even with the NFC award or without the NFC award, there’s no substitute for good management – the fiduciary duty which they have neglected. But the NFC award, I think, has to be revisited. We must spend money on provinces, absolutely, I mean, education and health. But you cannot bankrupt the federation. I mean you cannot have a weak federation and strong provinces.
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So I think the provinces and all stakeholders need to sit together, come up with a viable plan so that you make provinces whole, but you also make the federal government whole. This is the unsustainable high federal deficit which I think is not sustainable. I believe that there has to be some change in this. As far as pensions are concerned, I think some stuff happened a few years back.
I think it was in Musharraf’s time, where these pensions were allowed, now they’re about Rs.400- 350 billion, and these are going to keep growing. We don’t fund these pensions, one of the things we should require is that this year’s pension should be funded by the government. You know, put up a fund like the US has its social security plan.
Najma Minhas: This all requires the opposition to work with the government to make sustainable policies for the nation. On this, I would like to ask you about Pakistan Steel Mills and Pakistan’s State-Owned Enterprises. In 2015, the PML-N government closed down PSM due to its losses. However, this year, when PTI laid-off workers with golden handshakes under the Supreme Court’s orders– you came out and opposed this. Is this because you now don’t believe in the vision, or is this because you just want to oppose everything PTI does?
Miftah Ismail: No…this is not the policy of PML-N. We’re better than PTI. PTI used to oppose this as well, if you remember, Imran Khan, Arif Alvi, and Asad Umar went to Pakistan’s Steel Mills, and they were saying it was wrong to close it down and they would turn it around and so on. I think it’s important to remember the historical context and then understand where PML-N’s politics was of a constructive nature, and PTI’s was not.
These guys were the ones who were playing politics. I told many people that this is your money and my money – that we are losing $45mn in PIA every year. You’re losing large amounts of cash in PSM. They both have negative equities. You try to sell them, and you will get no money. I joked that if somebody buys Pakistan Steel Mills, I will give them PIA free. So, to this day, PTI is quoting this as a serious comment. We believe in privatization.
We think that privatization should be the agent of growth. Not to close it down, there are some issues with PSM, but I would have just said that instead of closing it down, first at least try. Asad Umar used to say, they will turn all these around and return them to profit, and we don’t know how to do this.
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In which case, why are you shutting it down, why aren’t you privatizing it? Our idea was just to privatize it. We would not oppose privatization of either PIA or Pakistan Steel Mill or the power discos. I honestly believe that the only solution to circular debt is to privatize the distribution companies.
Whatever PTI wants to privatize, we will be supporting them as long as it is done transparently. But when the real estate markets are down by 30% in New York, and you know, all of a sudden it occurs to them to privatize the Roosevelt Hotel, then given their track record, one has to question them.