‘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

Enterprise - - Interview -

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

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