Is Pakistan the Next Hot Emerging Market?

According to Karachi city government estimates, the population will hit 27.5m by 2020. Bilalhassan88/Wikimedia Commons CC BY-SA-3.0


What was the best performing stock market in Asia in 2016? The answer may surprise you: Pakistan. It turns out the country that often makes headlines for its frontline status in the ‘war on terror’ has also been making headlines for its blistering stock market. By the end of the year, the Karachi 100 Index was up 43% – making it the best performing market in Asia and the fifth worldwide, according to Bloomberg.


But it wasn’t just the stock market that displayed strength: The economy grew 4.7% in the 2016 fiscal year and is projected to hit 5.2% in 2017, according to the Asian Development Bank. At a time when Western economies and even major emerging markets are muddling through, it appears Pakistan’s economy is on a roll.


Take foreign direct investment, which has risen dramatically, albeit, mostly down to a $46bn investment from China into the China-Pakistan Economic Corridor, a programme which will see construction of highways, upgrades to railways, and new infrastructure to support 10,000MW of additional power.


The latter is of particular importance: Pakistan’s long-running problems with electricity shortages have led to widespread blackouts across urban and rural areas, slowing economic growth prospects. Back in 2013, on the campaign trail, Nawaz Sharif pledged to improve electricity access. Now, ahead of the 2018 election, the prime minister has gone some way towards achieving his goals, but the road ahead is long.


However, whether or not he succeeds, the lights will get a little brighter on one part of the country, specifically, the Pakistan Stock Exchange, which is expected to receive a further boost in mid-2017 when MSCI adds Pakistan to its prestigious Emerging Markets Index.


The world is beginning to pay attention to Pakistan’s rise: The Wall Street Journal recently published a piece on the country looking at the steep rise in consumer spending, decrease in poverty, and fall in terrorism, while IMF Chief Christine Lagarde declared that Pakistan today faces “a moment of opportunity” to leverage its growth momentum.


On the whole, it would seem Pakistan’s economic prospects are on the rise.


emerge85 co-director Afshin Molavi sat down with Dr Ishrat Husain, former governor of the State Bank of Pakistan and former dean of the Institute of Business Administration in Karachi, Pakistan’s leading business school.


The following are lightly edited excerpts from the interview:


Molavi: Let me ask you about Pakistan’s growth prospects. In 2016, it seemed as if all the economic indicators were moving up and to the right, so to speak, growing and expanding, but can Pakistan keep up that momentum?


Husain: Let me remind you that Pakistan was one of the top 10 performing emerging markets until about 1990. It was ahead of India; it was ahead of Bangladesh; it was ahead of Vietnam and many other success stories later on. For 40-45 years, it was consistently achieving a 6% and 6.5% growth rate. So, what this government is trying to do is to simply regain that lost trajectory and move back to 6% and 6.5% growth.

GDP Growth Rates of Pakistan, India, Vietnam, and Bangladesh, 1970-2015

GDP Growth Rates of Pakistan, India, Vietnam, and Bangladesh, 1970-2015

Source: UNCTADstat, 2017


There are certain reasons why I feel this is doable. First is that there is a continuity and consistency of economic policies over the last five years. There are no reverse gears which create uncertainty and unpredictability for investors. The direction is very clear. These are the priorities and we have to tackle them.


Energy and infrastructure; these are the deficiencies and the shortcomings which will keep our growth rate down to 4%-4.5%. If you invest in them and you make them operational, investment from the private sector will flow in and that will spark the 6% growth rate.


The second is there is a huge middle class which has purchasing power. That demand coming from the middle class is adding to the productive capacity. First, your capacity is utilised, and, because the capacity is now reached, you have to expand it through new investment.


In cement, steel, automobiles, you name it, all these industries are in the process of expanding their production.


Molavi: If you were a global multinational consumer company looking at Pakistan, what are some of the sectors that you would be looking at for growth?


Husain: All the fast-moving consumer goods manufacturing firms like Unilever, Procter & Gamble, Nestle, are making 25% to 26% rate of return on their investment, in dollar terms, which is one of the highest they can fetch because there is not much competition. As you pointed out, Pakistan was known for facing problems of security, terrorism, so new investors shied away. Those who were already there, or went in, are reaping huge dividends.


On the demand side, when you have a middle class, their standards of living mimic those of the South-east European or emerging Asian countries. Therefore, the sales of autos, apartments, consumer durables, and fast-moving consumer goods move upwards and a multiplier effect sets in, which comes in from the backward and forward linkages of these industries.


Molavi: You spoke about some of the challenges, particularly, infrastructure and energy. And that’s where China comes in. China has pledged enormous amounts of investment in infrastructure and energy, and has doled out some of that investment for the China-Pakistan Economic Corridor (CPEC). So, how important is China to Pakistan’s future?


Husain: I think for the time being the more optimistic scenario of Pakistan’s economic growth is built on Chinese participation. They have pledged $35bn for our electricity and energy sector. So, in three years’ time we would be adding 10,000MW which is a 50% increase in the existing capacity.


Our exporters were unable to deliver goods to their markets because of the energy shortages. They will now be able to go back to the international markets and capture their lost share. That will boost the economy itself.


Secondly, Gwadar Port is being developed. The port, right on the Arabian Sea, has a lot of characteristics which are unparalleled – even in the Middle East and the Gulf – and it reduces the distance from Kashgar, the western province of China, to Gwadar by one-third.

Gwadar Port will serve as Pakistan’s third international deep-sea port, alongside Karachi Port and Port Qasim. umairadeeb/Flickr CC BY 2.0


Right now the main routes [for goods are] the highways, but the Chinese are also going to construct a railway line and they’re also going to construct oil pipelines so the oil from Gulf countries can come through Gwadar Port and then pump through these pipelines all the way to provinces in Western China.


A tremendous amount of economic activity will take place along the route to Kashgar, opening up many very backward districts of Pakistan that are not integrated in the economy because they don’t have the infrastructure; they don’t have the electricity; they don’t have the roads. So the stepped up economic activity generated by provision of infrastructure and electricity in these deprived districts will add to social cohesion and harmony, and a reduction in poverty and regional income inequality.


CPEC won’t be limited only to Punjab and Sind: Two provinces, Balochistan, which is next to Iran and Afghanistan, and the north-west frontier province which is Khyber Pakhtunkhwa, will get most of the benefits out of this investment.


Molavi: Obviously, there’s a new American president, Donald Trump. How do you think this will change any of what you’ve just talked about?


Husain: Pakistanis very firmly believe the US has not played a major role in trying to normalise relations between India and Pakistan. It has been a rivalry since 1947.


Mr Trump is considered somebody who means business, and who is a dealmaker. We think that if he puts himself to this task and starts bringing India and Pakistan together, the 70-year-old problem which we have with India will come to a solution.


Therefore, the two arch-rivals, both of which are nuclear armed nations, will have very decent, normal, neighbourly relations which will be good for world peace. The international community is always scared, and wondering, ‘is there going to be a confrontation between those two countries’? Among all Pakistanis there is a great hope Mr Trump will use his office in order to bring an end to this problem.


Molavi: Just think about the prospect you just laid out. Imagine a scenario where Pakistan and India do have more normalised relations. I would imagine that would have enormous benefits for Pakistan’s economy.


Husain: Absolutely. We have carried out studies of India/Pakistan trade. Right now, trade is only $2 to $3bn. If all these restrictions are removed and the most favoured nation status is given to India, these will go up to $10bn/$12bn. Consumers will be better off. Producers will be better off, and prices in Pakistan will go down for consumer goods, so it’s a good situation for India, too, as it sells goods to Pakistani consumers and firms. It is a win-win situation for both countries


Molavi: You’ve held many senior positions, including governor of the State Bank of Pakistan, but your most recent position was as the head of Pakistan’s leading business school, the Institute of Business Administration (IBA) in Karachi. Tell us a little bit about what the entrepreneurial environment is like in Pakistan.


Husain: I’m glad you asked that question. I looked at the age profile: 50% of the population today is below 25. You cannot generate 9 to 5 jobs for every one of the new entrants to the labour force.

Pakistan Labour Force Participation Rate by Age, 2014

Pakistan Labour Force Participation Rate by Age, 2014

Source: Pakistan Bureau of Statistics, 2017


We at IBA changed our tactics and established a Centre for Entrepreneurial Development in collaboration with Babson College, in Boston, which is the world’s leading school for entrepreneurs.


We have had a tremendous response. There are 50 incubating firms established by our students. There are accelerators. There are companies which were set up only six months ago which have been bought out by larger companies. Some of these companies have stepped up their operations. If every new startup company established by these entrepreneurs can create 10 jobs – only 10 jobs – our youth unemployment problem would be resolved and we would enter into the production of goods and services which do not exist right now.


For example, a lot of IT companies are now coming into Pakistan through these startups and accelerators because our cost of labour in IT is much lower than India. India is now getting saturated. That is another area where Pakistan can supply talent to the rest of the world.


Molavi: Could you see a Pakistani version of Tata Consultancy Services emerging?


Husain: Eventually, I hope so. But, you know, Tata Consultancy, Infosys, and Wipro started small but then they grew up. Infosys and Tata are $10bn companies. If we can start with companies which will become even $1bn companies, that will be a great contribution to Pakistan and to the countries which are looking for a very skilled but cost-effective labour force.


Molavi: When you have conversations with some of Pakistan’s leading business figures, what do they point out to you as the key challenges they face?


Husain: One of the problems was the security situation. But I must give credit to the Pakistan military which has cleaned up the border area between Afghanistan and Pakistan where all the terrorists used to find safe haven. All of their infrastructure has been broken, all the communication command structures have been dismantled, so they [terrorists] are out of that area.


Similarly, the Taliban migrated to Karachi [which is our financial hub] because Karachi is so big they could just hide themselves. The army took action against them and cleaned up Karachi, so for two years there have been no major incidents of terrorism in Karachi.


That gives satisfaction to businessmen that the security situation has improved and now we can do business. Otherwise, foreigners would not come to Pakistan because they were scared their lives were in danger. But that has changed. Now, hotels are full. Emirates has five daily flights between Dubai and Karachi that are full, so things are changing and that was one of the major challenges.


That, I think, has been one of the major stumbling blocks as far as Pakistan’s growth was concerned.


Molavi: Karachi is such an important part of Pakistan’s economy. As we note in the emerge85 lab, cities are vital economic engines. Tell us a little bit about Karachi’s role in Pakistan’s economy.


Husain: Karachi is the major port of Pakistan. Gwadar is now being developed but Karachi is the major port of the country. All the large industrial units in Pakistan are located there. It has the best universities, professional colleges, and technical and vocational training institutes. The literacy rate in Karachi is almost 100%. The middle class is about 50% or 60% of the population. Infrastructure has been under stress because Karachi is a microcosm of Pakistan. You can find Punjabis, you can find Balochis, you can find Pashtuns, you can find Sindhis all coming to Karachi because it is a booming city.


However, infrastructure in Karachi, the mass transit system, the bus system, the water supply, have not kept up with the speed of migration which is taking place. So, now we have a mayor and an elected local government who I’m hoping will try to fix some of these problems, which include congestion and trying to figure out how to minimise the costs both for citizens as well as for businesses in Pakistan.


Molavi: There was a very important business transaction that took place in Karachi recently. Global private equity investor Abraaj Group, which owned Karachi Electric, sold that stake to Shanghai Electric. How important was that?


Husain: That’s very important because in 2009, Karachi Electric was losing money and Karachi was under outages most of the time. Abraaj Group turned the company around and their share, which is 60% or so, is now being sold for $1.8bn. From a loss-making company to a company which now has a market value of $3bn is a tremendous amount of work which has been done by them, and outages have gone down. Billing has improved. Collections have improved. Transmission and distribution losses have gone down. They have done a fantastic job. That’s why we are arguing that other electric companies in, for example, Lahore, Faisalabad, and Islamabad should also be privatised.


You will see they do a good job as far as consumer satisfaction is concerned, but also make money as far as profits are concerned.


Molavi: And that’s a great way to end. You can really turn around a business and generate profits in Pakistan. Thank you for your time today.