JAVED MAHMOOD talks to Naeem Rafi, Chief Executive Rafi Securities and a senior member of Karachi Stock Exchange, about issues relating to downgrading of rating, increase in discount rate, its impact on investment and economy of Pakistan Q: How do you see the downgrading of ratings of Pakistan and domestic banks? A: The economic condition of Pakistan was not as worst as was being perceived these days. For example, the earnings of the banks, telecom, pharmaceutical, oil and food companies are much better than last year. Only the cement and automobile sectors have exhibited negative trend in their earnings because of different reasons. Last year the cement prices were above 300 rupees per bag and this year the prices have tumbled to below 250 rupees per bag. Automobile sector is also under pressure because of massive imports of vehicles and sharp increase in the rates of mark-up. Some recent positive developments also endorse the economic strength of Pakistan, which includes the acquisition of MCB Bank's shares by Maybank, entry of Barclays Bank in banking operations in Pakistan, acquisition of Worldcall shares by Omantel and successful launching of the GDRs of Lucky Cement. Barclays Bank of UK had got banking licence from the State Bank of Pakistan and the world's famous bank is set to open its branch here next month. Tax revenue collection is also much better in this financial year over the last fiscal that is a clear indication that the economy was not as much in trouble as is being perceived or drummed these days. I think that the international credit rating agencies often toe the American line and they downgrade the ratings of the country whenever the Americans feel uncomfortable with the Pakistani government. It is no doubt that some of the economic indicators, like twin deficits and inflation, have shown negative trend this year. But we should remember that the last one-year is the period of turmoil in the country because of elections and killings. However, despite turmoil the national economy had shown resilience and its growth was still intact. Q: What could be the impact of change in the rating on the economy, investment and business? A: The downgrading of rating would discourage the inflow of foreign investment in Pakistan and it could trigger the outflow of the capital. As the ratings of some Pakistani banks had been degraded, the foreign and domestic investors would start dealing with foreign banks, operating in the country. Perhaps this was also one of the motives of the downgrading of rating of Pakistani banks. You will be surprised to know that a colossal amount of one trillion dollars is surplus in the Middle East. The investors in ME certainly want to invest this surplus wealth in different countries, including Pakistan. After the downgrading of rating of Pakistani banks, the foreign investors would increase their dependence on the foreign banks in Pakistan. Why the international rating agencies have targeted the Pakistani banks and ignored the foreign banks, functioning in the same country and in the same business climate, is a meaningful question? Q: Do you see any economic meltdown in Pakistan? A. As I have mentioned earlier that the current pace of the trade deficit, current account deficit, fiscal imbalance and inflation have disturbed everyone in the country. As the banks, telecom, pharma and oil companies have shown strong performance, the new government could improve the economic situation by reigning in the deterioration in the twin deficits, inflation and food crisis. In fact the previous government focused on the development of banks, telecom companies, stock market and these sectors have shown an enviable growth and much prosperity during the past few years. Likewise, the previous government focused much on development in big cities like Karachi, Lahore and Islamabad, gave very little attention to the rural areas and completely ignored the agricultural development. Consequently, one can see prosperity in the banks, telecom companies, stock market and pitiable condition of agriculture and rural areas. Q: What about the confusing statements? A. The statements of the coalition partners, especially the PML(N) and its former Finance Minister, are very confusing and contradictory. These statements have also shattered the confidence of the investors and business community. The frequent statements about the failure of economic policies of the previous government and damage to the economy could discourage long-term investment and business deals. On the one hand the coalition partners, especially the PML(N) ex-FM have raised much hue and cry over the economic deterioration that had perturbed the businessmen and investors within the country and abroad. Is it not a shocking development that dollar-rupee parity that had been stable around 61 to 62 rupees during the past five years had edged up to around 70 rupees in just two months of the new government? On one hand some important members of the coalition partners are blaming the past government for the economic failure while on the other they are talking about the continuation of the previous economic policies and this approach of the new government is annoying the investors, businessmen and irritating them. A strange tendency of spoiling the profit-oriented sectors. I would like to point out here that whenever any business sector shows an outstanding performance regarding growth and attracting investment, the government and the policy-makers start targeting the sector on different pretexts. For example, Independent Power Producers (IPPs) came to Pakistan and started generating powers and earned money. The successive government scandalized it as a result neither the foreign nor the local investors dared to make further investment in the power sector that ultimately led to a serious power crisis and the country had been facing hours-long load-shedding for the past many years. Similarly, during the past three years the domestic automobile sector showed extraordinary growth in production and earnings. But the policymakers did not digest this and they liberalized the imports of cars as a result of which thousands of cars had been imported in last two years that caused a blow to the domestic industry. The policymakers should have given a chance to the local automobile industry to expand production and meet the domestic demand by making more investment. In the prevailing scenario when the automobile industry is going through a critical juncture the automobile companies would certainly not like to make more investment in the country. The third example is of the banking sector. During the past few years the banks have performed very well and now the decision-makers were talking of levying heavy taxes on the income of the high ups of the banks. Then comes the case of refineries and the economic managers of the new government are talking about trimming the profits of the refineries. If the government targets the refineries, do you think that the foreign and local investors would venture into this area in the years to come? Similarly, the country's stock market had also showed a marvellous growth during the past few years. Instead of taking this growth as a pride, the decision-makers are talking about levying the capital gain tax. How the industry and corporate sectors would grow and expand in case the rulers continued to target different sectors, one by one, on different excuses and pretexts that could be their political agenda? Q: How do you see discount-rate hike? A: Increase in the discount rate would further jack up the cost of doing business and trigger the growth of inflation. In the developed countries the formula of discount-rate hike works well as the people use plastic money and increase in mark-up rate forces them to trim their spending. However, this formula is not fit for Pakistan because the people in the country are using hard cash and a small very number of the countrymen (perhaps less than 3 per cent) are using the plastic money. Here I would like to mention the era of former State Bank Governor Dr Ishrat Hussain. During his second tenure, the interest rates declined to the bottom-line and the inflation too remained at low level. The local industry, consumer financing showed impressive growth and smooth sailing, but the sharp growth in mark-up rates during the past two years had reversed the earlier trend. During the last two years of new SBP Governor the inflation is going up as much as the discount rate is being increased by the central bank. I think the SBP should change its approach of pulling up the discount rate.