TOKYO -- Despite Pakistan's recent economic downturn, the country's minister for economic affairs, Muhammad Hammad Azhar, expressed confidence of a quick turnaround.
In an interview with the Nikkei Asian Review, Azhar said that new phases of the China Pakistan Economic Corridor -- a major part of China's Belt and Road Initiative -- and a retooled free trade agreement between the two countries are expected to jump-start the sputtering economy.
Pakistan's GDP grew just 3.3% in fiscal 2019, a nine-year low. The figure for the current fiscal year ending 2020 is expected to remain at a dismal 3.0% to 3.5%. Further exacerbating the situation was the weakening rupee, which fell about 11% against the dollar in 2019.
Azhar said the CPEC has entered a new phase, focusing not only on energy and infrastructure but also industrialization and socio-economic development, as well as modernization of agriculture and tourism.
"The CPEC phase two is more about joint ventures, partnerships and technology transfer. And all the country can participate," the minister said.
On Jan. 1, the second phase of the Pakistan-China free trade agreement kicked-off. According to the minister, the first phase "resulted in a huge trade deficit in Pakistan," but the country recognized the need to correct the problem. "Under [the second phase], we can export 313 new items -- especially textile, surgical instruments, sportswear and agricultural products -- to China with zero duties."
Pakistan expects the new phase of the FTA will increase exports by $500 million to $600 million.
The 38-year-old minister noted other bright spots in the economy, saying that "tax revenues in July-November 2019 rose 17% from last year," driving down the current-account deficit by 73% in the same period.
Continuing on the upbeat note, Azhar said that Pakistan rose in the World Bank's Ease of Doing Business ranking to 108th, up 28 places from last year. He also pointed out that foreign portfolio investment has returned after three years, and that the benchmark stock index Karachi Stock Exchange 100, rallied 11,000 points in five months, hitting the 40,000 mark.
Furthermore, ratings agency Moody's upgraded Pakistan's outlook in December 2019 from Negative to Stable, based on a positive evaluation of policy changes and improvement in the country's balance of payments.
"The Pakistani economy has been stabilizing since last year," Azhar said. "Once we've completed stabilization, then we'll shift gears and enter a higher growth phase from [fiscal 2021]. I think we're out of the economic crisis."
Regarding GDP growth next year, the minister said it "depends on whether inflation and interest rates come down, but it will be certainly higher than the current fiscal year."
However, Pakistan is not yet out of the woods. Retail inflation in November was 12.7%. In addition, due to servicing a $6 billion bailout package from the IMF, the country had to hike gas and power tariffs. Inflationary pressure remains high.
"Most of the inflation is in food, and is seasonal. 20% to 25% of our economy is based on agriculture," Azhar explained, adding that suspending trade with India affected food prices. To reverse the trend, the minister stated that "our cabinet is already considering to lift the import embargo on medicines and essential items from India."
Pakistan also needs to increase tax revenues, partly by improving domestic tax collection. "Despite [declining] imports, tax collection is rising," he said. "If you look at domestic tax collection, it's growing at close to 25% to 30%."
The minister added that the government is becoming more aggressive in its approach. "We're using the latest technologies to track the flow of money and [guarding against] smuggling."
Pakistan's industry lobbies are chiming in with more demands for business-friendly policies to promote investment. They also want custom duties lowered and more government incentives. Last December, import duties on cotton were slashed to help the country's textile industry. In addition, Azhar has promised to increase lending to small and medium-sized enterprises, which contribute almost 40% to Pakistan's GDP.
"We've rationalized custom duties on all imports, and are providing subsidized energy and preferential credit rates," he said.
Pakistan would like to see more cooperation with Iran in the energy and trade spheres, but it fears fallout from rising U.S.-Iranian tensions. "Iran is already under sanctions and Pakistan has suspended trade and banking relationships with the country. So we will not be directly affected," Azhar said. "But the U.S.-Iran conflict will also push up global oil prices, which obviously affects everyone."
The impact on Pakistan's energy needs is mitigated somewhat by the country's shift to LNG, especially for power. Hence, the effects of higher oil prices would not be as severe as in the past. Notably, domestic production of LNG accounts for about 40% of the country's needs. "But we want both parties to de-escalate. Conflict will be very bad for the global economy," warned Azhar.
London-educated and a barrister by profession, Azhar formerly worked in management in the steel industry. He joined the opposition Pakistan Justice Movement party in 2011 and was voted into parliament in the 2018 assembly elections. Azhar served as minister of state for revenue before being elevated to the post of federal minister for economic affairs in July 2019.