‘If we become stronger from within, the world at large will change its perception about us.’ - Shaukat Tarin
Shaukat Tarin shares his views on the future of Silkbank and the state of the national economy in this exclusive interview with Enterprise
What are your key learnings from your stint as Pakistan’s Finance Minister?
I believe there are structural imbalances which need to be corrected. We have to move towards a sustainable and equitable growth in our economy to get rid of poverty and unemployment. To sustain a long term equitable growth, we need to create more resources for the government by increasing our tax to GDP ratio and reducing/ eliminating un-warranted losses and subsidies - so that it does not resort to deficit financing and has enough funds to spend on elimination of poverty, education, health, infrstructure, energy and institutions of governance.
Was it your love for the banking profession that prompted you to resign from the key position of Finance Minister and launch Silkbank?
When I had joined the government, I realized that we needed a comprehensive economic road map to remove our structured imbalances and sustain an equitable long term growth trajectory. To accomplish this task and to advise me on the ongoing economic management I formed the Economic Advisory Council which comprised eminent economists, agriculturalists, industrialists, social scientists and experts from other fields. This committee helped us formulate a nine point plan which was approved by the Cabinet. On the basis of this plan we prepared a Tax reform agenda, a plan to restructure Public Sector Companies, an austerity plan and a governance plan. I wanted to implement these plans and also proceed on the nine point agenda.
But, Silkbank needed more capital and needed my attention and help to do so. I thought it would be a clear conflict of interest given my position as the Finance Minister to raise capital for my bank, so I resigned from my position.
Silkbank has been positioned as a ‘ premium bank’. Would you say there is enough viability for the premium category in the Pakistani market?
Yes, I think the only banks that are focused on the premium sectors are the foreign banks. The only local bank which used to
do it was Union Bank which got merged with a foreign bank. So now we could just go and do what we did with Union Bank.
Would you say that Silkbank is in a stable position today or are there still more bridges to cross?
Of course, Silkbank has turned around and has started making money. We are in the process of bridging the capital gap. Hopefully, that would be done in the next two to three months. We are now rolling out product services which would further strengthen the bank. One of the areas is Islamic banking. I think we are on the right track now and I believe Silkbank in the coming years will be a pretty strong bank.
What are your guideposts for Silkbank’s future growth?
Silkbank has to be a welldiversified financial institution which delivers superior products and services to its customers, which means that we would like to be the best in service, the way we were at Union Bank. We would also like to offer superior products backed by state-of-the-art technology. We will also diversify and will be involved in corporate banking and investment banking, SME sector and in consumer banking on the conventional banking side and, of course, a full menu of products and services in Islamic banking.
So, I can see Silkbank, over a period of five to seven years as one of the top 10 banks in this country. We would also like to pursue mergers with other banks and if we succeed we would be ranked amongst the top five banks in this country.
How was your experience as Chairman of the Karachi Stock Exchange?
Karachi Stock Exchange had been going through turbulence just before I became the Chairman. I brought back the confidence in the Stock Exchange, by being very transparent and by bringing independence. By the time I left, KSE had reached one of the highest points in its history. Of course, our value addition was to bring transparency and good governance.
You have been a banker for a long time. What are your learnings with respect to Pakistan’s banking sector?
Pakistan’s banking sector has been evolving. It used to be
very good in the 60s before it got nationalized. By 1996, it was virtually bankrupt, with only foreign banks and some private banks making profits. They were pretty small and fabricated, as the majority of banking assets were with the government banks. Since then, there have been efforts to reform the banking sector and a fair bit has been achieved but a lot needs to be done. Pakistan’s banking is around 30 percent of its GDP and that is very low as compared to other developing countries. Even in our own neighbourhood, countries like Sri Lanka and India are in excess of 55 to 60 percent and there are other emerging markets which are close to 100 percent of GDP. So, the banking sector needs to expand its outreach. It should not only include all segments of our society but should also do further product development.
Where would you place the professional competence of Pakistani bankers in the international context?
Well, when banks used to be in the private sector in the 1960s, our bankers made a name for themselves. The foreign banks also trained and transferred a lot of bankers to the international market. These bankers made a name for themselves internationally as well. Then came nationalization, the period between 1973 and 1997, when the majority of bankers lost touch with the modern banking of those times. I think now we are moving forward and large banks such as Habib Bank, Allied Bank, Muslim Commercial Bank and United Bank are now leading the way. We have again started producing good bankers who are making a mark for themselves.
In 1997, when Prime Minister Nawaz Sharif asked you to turn around Habib Bank, you left a $ 1 million job in the US to take up the assignment. In hindsight, was it a good decision?
I think it was very gutsy, but, in hindsight a very good decision. I faced a lot of pain after the first year, because Nawaz Sharif thought that he had made a wrong decision. But as Habib Bank and United Bank turned around the banking reforms started. We did a favour to the country and, after all, this is our own country, so no amount of money could stand in the way.
Personally I did not go back to Citibank and ventured with some of my friends into buying Union Bank. I became an entrepreneur from a professional banker. That again was a successful venture, as we sold Union Bank for a considerable profit. So, in hindsight, it was a great decision.
Considering the financial crunch that Pakistan is in today, what would be your recipe for recovery?
I think we should basically start from the drawing board and plan it; let’s figure out what we need. We have to understand that there are two issues which Pakistan faces today - security and the economic conditions. Clearly, if we do not fix security, no matter whatever we do on the economics side, it will not bring the expected results.
On the economic side, we obviously have a nine point agenda, where we start with the stabilization of the macroeconomic environment. This requires enhancement of the resources by expanding the tax net and obviously reducing the losses and subsidies which are not targeted. Then we go into targeting the poor. We have left those 50 million people of this country below the poverty line and at the mercy of the trickledown effect. Successive governments have been saying that ‘ let’s grow the economy and the trickledown effect will take care of poverty.’ This is nonsense. We must have a concerted strategy to alleviate poverty.
The third is the social sector. We do not spend enough money on education and health. If we do not make this nation educated and healthy we may not be able to achieve the targeted goals. Then, there are two very important areas where we need to pay attention and also make efforts. One is agriculture where 65 percent of our population lives. We have neglected it in the past and we really need to work on agriculture. This should be followed by manufacturing and trade, which again is an important part, contributing 18 percent to our GDP. We have not paid attention to it. We have not organised it and we will not be able to do any one of these things if we do not have the infrastructure and the energy. So, I think we need to first take care of the energy crisis, as the power and gas shortages are affecting everyday life.
In the presence of resources like Thar coal, and recently announced additional 100 trillion cubic feet of gas, we should not have energy shortage. Then, infrastructure cannot be improved unless we do not bring private capital into it, because the government does not have enough money to spend on it. I recommend public-private partnership which needs to be pursued at least to build the infrastructure required for sustainable growth.
The capital markets are also important. Everybody relies on banks in this country which are only 30 percent of GDP, so we need to develop capital markets. Our stock market has made a few people and few companies rich. I think it has not helped the economy in the broader sense.
I believe that we need to improve our governance. We need to improve the way our bureaucracy works. The government is no longer an employer of choice and we basically must make the government an employer of choice. For that we need to bring in 21st century human resource management that means introducing meritocracy, pay for performance and accountability into our government.
You have been advocating revamping of the country’s tax structure. What should be the key areas in this regard?
There are three distinct things the government has to understand. One is that progressive taxation entails tax on income and consumption. There should clearly be no other tax. Everything else, such as excise duty and special taxes have to be eliminated. Moreover, everybody who has income over a certain level must pay tax. So no matter, if you are an agriculturist, in the service sector, a businessman or a salaried
person, everyone has to be taxed. That’s a progressive tax structure.
Secondly, we should also have a progressive consumption tax. The Value Added Tax ( VAT) must replace the present General Sales Tax ( GST). Unless we do not tax every level of consumption, it will not be fair.
Third, to support the above two things we need to have a modern and dynamic Federal Board of Revenue ( FBR), as it needs surgery. I did not conduct this surgery and just tried strong antibiotics. But that place needs as much surgery as the one I conducted at Habib Bank, where I absolutely removed layers of management.
Would you recommend comprehensive taxation on agricultural income?
Every income has to be taxed. I also want to highlight that there are other taxes which need to be recovered by the provincial governments. Provincial governments have been failing in their duty of tax collection. Today, the total taxes collected by the provincial governments are less than half a percent of GDP. It is not even one percent. They can collect agriculture tax, tax on real estate, capital gains, tax on services sector, motor vehicles and property taxes; all these have come under their purview after the 18th Amendment and the NFC Award. While the latest budget shows that they will probably collect less than half a percent of GDP in taxes; this is a crying shame as at the provincial level, India does more than 4 percent, Turkey does 10 percent and Brazil does 16 percent. I think this area needs to improve if we have to become a progressive country.
You played a key role in bringing about consensus on the National Finance Commission Award. How did you manage to bridge the mistrust between the provinces and the federation because it was quite a tough task?
I got everybody into a room and asked them to bring to the table all the issues and irritants. I stayed with the idea that unless all the irritants are not removed there cannot be any building of trust. The first thing I tackled was the compensation issue of hydel profits to the government of Khyber Pakhtunkhwa amounting to 110 billion rupees. I actually settled that issue within 48 hours. The KPK government was impressed and thought that the Federal government is going to remove all the issues. Then we tackled the gas development surcharge issue between Balochistan and Sindh. The third issue I handled was sales tax on services, which the Sindh government had been claiming over the years. We brought in a constitutional lawyer who said that this belonged to the provinces. So by solving these problems, I removed the mistrust between the provinces and between the provinces and Federation.
Then we started tackling the real NFC issue of vertical and horizontal distribution. The Federal government used to charge 5 percent as administrative expenses before you could disburse the money and that was a big amount. I realized that the actual cost was just 1 percent, so I brought down that 5 percent to 1 percent. Everybody thought that we as Federal government were being very fair and wanted to resolve issues in a fair manner. That was the starting point. So by the fifth NFC meeting, we had concluded what had not been done in 19 years. This was one of the defining NFCs, where, for horizontal distribution, the new formula was based on four elements rather than population alone. Earlier, Punjab had never agreed on any basis other than population but they gave in and accepted the three other elements, inverse population density, revenue and poverty. This had never happened before and was a unanimous document. I think the people who were part of the NFC Committee should be proud of the document.
In recent times, the International perception of Pakistan has taken a number of negative hits. How is this impacting our credibility in the finance and banking sector?
I think everybody suffers, when Pakistan suffers. What we need to do is prepare a plan, a roadmap regarding what our issues are and try to resolve them. This should not be done for the sake of perception, but for our own sake. If we become stronger from within, the world at large will change its perception about us. But when we show good governance at home and go out and try to do a good marketing job to change perceptions, it does not work.
What should the government do to put Pakistan back on the path to sustainable growth?
If the very well-thought out nine point agenda is basically worked on and pursued, we can achieve sustainable and equitable economic growth over a long period of time