Talking at Credit Suisse's conference in Hong Kong this week, Dr Shah said that when President Musharraf took over, the biggest task for his government was restoring investor confidence in the economy. As part of this effort, the government embarked on a programme to reduce the countryÆs û at the time û high level of dependence on IMF funding.
Dr Shah outlined an act passed by PakistanÆs parliament in 2005 - the Fiscal Responsibility and Debt Limitation Act. This act was modelled on a New Zealand Act which had successfully helped New Zealand to reform in the 1980s and 1990s.
This stated that public debt to GDP should be brought below 60% by 2013 (a feat which has been achieved in 2006) and should continue to reduce by 2.5% per year. Meanwhile the government should not take on contingent liabilities, while current revenue and expenditure should match û with borrowings only used to finance long term asset creation.
The recurring theme in Dr ShahÆs speech was how successful Pakistan has been with privatisation. "You name it and we have something on offer,ö he joked.
He said that privatisation of the country's banking system was the first initiative the government embarked upon. Five years down the road and 85% of Pakistan's banking sector is now in private hands.
He added that the country has benefited, since resource allocation is now determined by ôhard nosed bankersö. Dr, Shah also touched upon telecom, steel and oil and gas sector privatizations. He said they been immensely advantageous to the country by releasing capital and making the companies far more efficient.
He commented that the Karachi power company was, ôa real dog" and as such a good example of "the white elephants the government got rid ofö. He said the ongoing privatisation of the power sector was proceeding well.
Dr Shah said that a stable exchange rate and a booming stock market û which had surged from 1,600 in 2001 to 11,400 in March, 2006 û could be viewed as surrogates for an economy performing well. He argued that the stock markets are not a bubble, since increasing valuations continue to be driven by strong fundamentals and good corporate earnings.
He added that price-to-earnings ratios average about 12 times and still represent a major discount to India and other Asian markets. With respect to the improving fiscal situation Dr Shah commented that since ô9/11, overseas Pakistanis' remittances to the country have increased from $1 billion to $4 billion to $4.5 billion."
Dr Shah noted, however, that the unexpected earthquake last October will add to the deficit this year but he maintained that PakistanÆs deficit (at about 4%) is still the best in South Asia. He said the rating agencies have rewarded PakistanÆs steps towards higher fiscal discipline with rating upgrades in quick succession
Pakistan is currently rated B2/B+ levels and Dr Shah said he is optimistic of another upgrade soon. He further noted that the government recently issued 10 and 30 year dollar-denominated bonds, a first for the country which hitherto only raised five year money. He said the bond offering closed 2.5 times oversubscribed and concluded that this shows that Pakistani risk can be appropriately priced.
Dr Shah was asked how PakistanÆs population feels about privatisation and foreign investment. In his reply he was adamant that the public is ultimately interested in good services and therefore does not care about whether a company is state-owned or private.
He cited the recent takeover of Pakistan Telecom by Etisalat as an example. He concluded the successful takeover reinforced this point. Etisalat intends to move Pakistani labour to overseas markets where there is a shortage of skilled labour and will be outsourcing various back office operations to Pakistan creating more jobs.
He concluded by quoting Deng Xiaoping: ôIt does not matter if the cat is black or white as long as it catches the mouse.ö
