Abdul Razak Dawood, founder of Descon Engineering Ltd, is the text-book example of a technocrat. His first foray into government was in 1999 when then chief executive Pervez Musharraf handpicked him for the job of commerce minister for three years.
He currently serves as adviser to the prime minister for commerce, textile, industries and production and investment.
Mr Dawood comes across as a staunch proponent of a laissez-faire economy. But the so-called hands-off approach to economic governance appears to be in stark contrast to the tax breaks and subsidies that the government announced in the latest mini-budget.
The adviser asserted that an IMF loan is still being negotiated despite categorical announcements from the premier that a bailout from the Washington-based lender would be disastrous for the economy. Mr Dawood also spoke about the road map for state-owned enterprises and claimed that an outright privatisation of Pakistan Steel is unlikely at least in the foreseeable future.
The Business and Finance team of Dawn recently sat down with him to know his views on a range of economic issues. Edited excerpts from the conversation follow.
Q. The PTI government seems to have done very little in the last six months to address longstanding problems in the power sector, particularly circular debt. Why is that?
A. The fact of the matter is that not a lot of attention has been paid to circular debt. And there is a reason for it. We have so many issues of greater priority. Circular debt is a big-ticket item, but there were other big-ticket items. In the Economic Coordination Committee (ECC), if you had a choice to repay the circular debt or repay the money to the exporters, which one would you pick?
Q. But aren’t refunds still withheld?
A. No. Quite a few people have received refunds. We inherited a pretty bad situation. [Ishaq] Dar was pretty smart at financial engineering and so we have problems. Let’s face it. With all these major issues, we had no choice but to put the circular debt at a lower priority.
Q. If this wasn’t your priority, then what was? If building reserves was your priority, then you still have only a seven-week import cover, which is not much.
A. Not much. Not much at all. But if you look at it historically, what has it been? It’s not been much.
Q. The prime minister has been giving contradictory indications about going to the IMF. But wouldn’t doing so have solved the reserves problem?
A. The factual position is that we are in negotiations with the IMF. The fact that countries have helped us has made it just a bit easier for us to negotiate. But a lot of the things that the IMF would have told us had we been in the programme, we’ve already done.
Q. For instance?
A. We’ve devalued, substantially, increased the interest rate and tightened the monetary policy. The benefit of the rupee breaking is about to be seen in coming months.
Q. The Federal Board of Revenue (FBR) missed its half-year collection target by Rs172 billion. Despite that, you’ve given further concessions to different sectors in the mini-budget, which will have an additional impact of Rs7bn. Hafeez Pasha says its cost would be Rs150bn over three years.
A. We have gotten into a consumption mode of growth. Import, consume and borrow. And as a result, we are actually facing deindustrialisation. There were industries coming to me demanding help. Faisalabad and Lahore industries closed. Sialkot, Karachi and Gujranwala were facing tough times.
So the finance minister and I sat down to decide what our priority is. Number one: we needed dollars. The best way to raise dollars is through exports because those are dollars earned. Going to Saudi Arabia is debt.
So then we said how we can make our main export businesses more competitive. Two options: get market access for them and bring their cost of doing business down.
On the cost of doing business, the biggest problem is a very high cost of energy. So we brought down the cost of gas and electricity for these five sectors since they are 60-odd per cent of our exports.
The other way of earning dollars is to compress our imports. Increase duties on those areas that are coming in on big amounts. I’m just waiting on the figures of January and I’m hoping that out import figures will have compressed.
The next thing that we’re doing now, in a bigger way, is to turn the situation around. Every time the FBR has said, “Forget industrialisation, just get the revenue”. Up goes the customs duty, they put additional regulatory duties etc. This time we’ve let the industry loose. By allowing the industry to grow, you’ll have to take a short-term hit.
Put the pressure on the FBR to raise revenue by finding non-tax filers. Go after them. And that’s what we’re trying to do now.
As a result of this, we selected 10-15 sectors to support. We did not touch, deliberately, a very big sector: iron and steel, because it has too many important players.
We’ve just had a little bleep of that feel-good factor that has come into the business community. They said, “How can you do this... give us such a benefit when you are already in the soup?” Now I’m telling the businesspeople that the government has shown its hand, we’re going to support you.
Q. But the track record of private businesses in Pakistan has not been very good. In the last boom under Musharraf, the industry took all the advantages but diverted its liquidity to short-term options.
A. I can’t say to you that businesses have acted in a responsible manner over this period. If politicians and bureaucrats have to take the blame, businesspersons also have to take their share of the blame.
This time the type of policies we’re trying to bring in, I’m fairly hopeful, we’ll be able to get the businesspeople to do what they should be doing. I think every one’s learned their lesson. You’re right that a lot of people made a lot of money on the stock market and property, not through the traditional method of making money.
Q. So what has changed? Why would they behave differently now?
A. That is where I feel the role of the Ministry of Finance comes in. And I think they are now working on that. There are just too many people that are off the books. The bulk of them are traders. We’ve got to stop trading.
Q. The PTI has consistently criticised the PML-N for messing up state-owned enterprises (SOEs). But what has this government done in the last six months to address their issues?
A. This whole concept of having industries parked under various ministries and expecting them to run it is impossible. I have an industry in the Ministry of Industries. How much time do I get to look after it? How well are the bureaucrats capable of doing this? It doesn’t work. That’s why we’re going to move them all out in coming months and let them be under a proper corporate setup.
As for Pakistan Steel, it is a pretty complex issue. I know people are upset at the committee (set up to handle its restructuring), complaining of favouritism and the vested interest of members. I’m willing to take all the criticism. I’m very clear in my mind about the people that we have selected to look into it. The good news is that three Chinese and three Russian companies have come forward.
Q. What exactly do these companies want?
A. We will not privatise Pakistan Steel. We will probably not run it ourselves. We will give the whole facility on lease. You put the money in, you run it, bring in all the working capital for 25-30 years. And you pay us a certain fee. At the end of 30 years, you hand over the whole facility back to the government. The government will make revenue. The other option is just classify it as a bad dream and privatise it. The third option is running it ourselves.
Q. There was talk that any foreign investor that enters the country will have to partner with a local. Is that true?
A. I don’t think it should be mandatory to have a local partner. Just in case of preference.
Q. But this worked in Indonesia and India.
A. Yes, and I’m from the business sector so obviously I prefer that. But India started it back in the 1960s. We unfortunately didn’t and now they’re used to having 100pc control. The only other way to do it is to incentivise it.
Q. You need not make it mandatory but you could tweak the system in a way where if they take a local investor along they’ll have additional benefits?
A. I’ll get back to you after I’ve heard the chambers. I will be the devil’s advocate and then let’s see what they have to say.
Another thing that I want to mention here is our industrial policy. We don’t have one. Our industrial policy was a free for all. Now we want an industrial policy. Some economists I have spoken to say our policy should be not to have an industrial policy and let everybody find their own level. But I’m saying I don’t want to do that. Let’s look at India, Japan, Korea and China. They had an industrial policy. And now Vietnam and Cambodia have one.
Q. When should we expect this policy?
A. I think the basic framework will be out in February.
Q. Finally, your comments on CPEC always stirred controversies. There are still issues about its transparency, the terms of engagement and access to market in China.
A. I’m clear now that there is no issue on the CPEC at all. The corridor was directed towards our infrastructure. It was directed towards getting us out of our power difficulties. And that was the main thrust of the CPEC. We did get that out of it. Now we move to the second phase, which is industrialisation and helping us in agriculture.
Published in Dawn, The Business and Finance Weekly, February 4th, 2019