Pakistan suffers from an image problem. When all that people see and hear from the country are reports from the Northwest or Kashmir about bombings, shootings and tribal violence, it is understandable if their appetite for investing money in the country is limited.
However, the country has had something of an economic renaissance in recent years, mainly under the watchful gaze of Prime Minister and once Finance Minister, Shaukat Aziz. This former Citibanker has overseen a series of economic reforms that have resulted in 8.4% economic growth in 2004-5.
And despite the CNN-discount, both foreign investment and fiscal revenue collection were at record levels last year and the fiscal deficit is coming under control. Only a sharp spike in inflation from 4.6% to 9.3% blights an otherwise rosy economic picture.
The recent sell off of Pakistan Telecom to Etisalat of the UAE highlighted the renewed foreign confidence in the country. The JPMorgan-led sales process was widely seen as an exemplar of transparency: no changes were allowed to the final sales and purchase agreement and all the final bids were opened live on TV.
That a company from the UAE was able to offer substantially more than two cash-rich companies from Asia does suggest that Arabian companies are ascribing a lower risk premium to Pakistan than companies from Asia-Pacific. But the presence of SingTel and China Mobile in the final round of bidding shows that despite this, Pakistan is very much on the map for Asia's leading companies. This should bode well for the four major privatizations being planned for 2005-6. We discussed these with Aziz.
Are you expecting Asia-Pacific companies and investors to play a leading role in the ongoing privatization programme - similar to the role played in the recent sale of 26% of Pakistan Telecom?
Shaukat Aziz: Absolutely. Pakistan's privatization programme is one of the pillars of economic reform in the country, which is based on three main principles of liberalization, deregulation and privatization. Lately we have moved and accelerated the programme and now there is a lot of investor interest.
When we sold 26% of Pakistan Telecom with management control in open bidding, Etisalat of the UAE won the bid with $2.6 billion. It was a fair price. The other main bidders, which is interesting, were Temasek or Singapore Telecom, and China Mobile. They were very aggressive. And what is interesting is that all these investors were willing to write big cheques for 26% of the company. That is a big change in Pakistan. It shows the confidence the investors have. The reason we chose 26% is to get more people interested. The higher the percentage, the bigger the cheque. We are delighted this has happened.
What is next?
We now have PSO - the state oil company - coming up. However, about 85% of the banks are already in the private sector in Pakistan. No sector and no company that will be privatized in Pakistan is restricted to local or foreign [investors]. One of the things Pakistan has transitioned to in terms of its own psyche and thinking is that there is no distinction now between local and foreign. That is a big change for many countries. There are many countries who will say who can invest how much in which sector. We decided early on that that is not for government to decide. We leave it to the investors. Why should we be telling you?
Now, in the last year ending June 30, we had the largest ever FDI of $1.5 billion. But that is not enough. Next year's target is $3 billion. We think it is very doable and privatization will help.
How about domestic investment?
Every single local or foreign major company operating in Pakistan is operating in expansion mode. We had economic growth of 8.4% last year. We will be in the top couple of countries in Asia in terms of economic growth. This is despite high oil prices. Our goal is 6%-8% a year. So the strong economic situation, the strong structural reform agenda we have followed is really the strength of the country. But it is an ongoing process, like a treadmill and we never stop.
Does the country suffer from Asian investors assigning an excessive risk premium to investments in Pakistan and if so what can you do about it?
There is a bit of a risk factor because of the geography and regional situation. But the smart investors are realizing that the Pakistan story is a good story and it is good paper to have in your overall portfolio. The other thing is that we have never seen as much interest from foreign investors. Our hotels are full; our airlines are full. Many investors are coming in from many Far Eastern countries, Malaysia, Singapore, hopefully Hong Kong, also Japanese companies, Middle Eastern and European companies of course.
We realize that FDI is a major engine of growth. But FDI won't come to a country unless that country's own entrepreneurs invest. And here we are seeing a huge upsurge. There has been a 16%-18% increase in investment this year, which is no small achievement. If you look at our import numbers too, there has been a major increase in machinery imports, which is very encouraging.
