Published On: Wed, Feb 19th, 2014

Pakistan Unveils Plan to Boost Economy

Pakistan Unveils Plan to Boost Economy

By Yaroslav Trofimov and Saeed Shah

A Pakistan International Airlines plane before take-off from Benazir Bhutto International Airport in Islamabad. The government plans to split PIA into two before selling a stake in the carrier. Associated Press

Pakistan’s government expects to sell several stakes in companies this spring, the country’s finance minister said, in moves aimed at dispelling concerns about the pace of economic reforms.

The government of Prime Minister Nawaz Sharif also hopes to reap as much as $5 billion from auctioning off third- and fourth-generation mobile-phone licenses, Finance Minister Ishaq Dar said in an interview. Another plan is to split the loss-making flagship carrier, Pakistan International Airlines Corp. PIAA.KA +0.37% , into two companies ahead of selling a stake, he said.

Mr. Sharif, who came to power in June, inherited a troubled economy, plagued by an energy crisis and a deteriorating security situation. Since then, the government has taken steps to cut subsidies and eliminate debt in the electricity sector, reducing the blackouts. It also negotiated a $6.6 billion deal with the International Monetary Fund to stave off default.

The economy has since shown signs of reviving, though growth is barely keeping up with the country’s birthrate. The IMF this month acknowledged a tentative turnaround, especially in the large-scale manufacturing and services sectors. It raised its forecast for economic growth in the fiscal year ending June 30 to 3.1% from its previous estimate of 2.8%. The government is more optimistic, expecting growth of some 4.4%.

“I am quite happy and satisfied that things are moving the way they should be. We are right on track,” Mr. Dar said. “We are pursuing and taking the most difficult decisions, a few of which are politically unpopular. But to fix the economy, those stabilizing measures as well as structural reforms were necessary.”

But economic overhauls have been relatively slow so far, especially efforts to privatize businesses. Soon after taking office, Mr. Sharif’s government pledged to sell stakes in 31 state-owned companies, a move that could help boost the country’s depleted foreign-exchange reserves. Many of those companies, however, are still in the process of selecting new management teams.

“It’s all entangled in this sense of going cautiously, which in turn has adverse impact as far as economic expectations are concerned,” said Ishrat Hussain, the director of the Institute of Business Administration in Karachi and a former governor of Pakistan’s central bank.

“The investors don’t see anything happening of a dynamic, vibrant nature. If they see a few privatization transactions successfully completed, they will bring in their money and invest. They are waiting for privatization to take place before they go for greenfield projects.”

First on the block, Mr. Dar said, would be government stakes in petroleum companies and in lenders such as Habib Bank Ltd. HBL.KA -0.62% , Allied Bank Ltd. ABL.KA -0.11% and United Bank Ltd. UBL.KA +0.15% The government expects to raise between 200 billion rupees ($1.9 billion) and 250 billion rupees through these sales via capital markets—some for hard currency as global depository receipts listed on foreign exchanges. “We will have this process on the fast track,” Mr. Dar said.

These asset sales could bolster the Karachi Stock Exchange, which—while soaring in recent months—still isn’t taken seriously by many global investors because of its low volume of transactions and the resulting susceptibility to speculators.

The sales of government stakes “will encourage more participants,” said Jahangir Siddiqui, chairman of JS Bank Ltd. JSBL.KA -2.30% and one of Pakistan’s leading businessmen. “Today, only a small float is available. If you need to have true price discovery, you need to have a float available. Otherwise it won’t be possible for serious players to come to the market.”

The government also is planning to restructure Pakistan International Airlines, which flies routes around the world, including to North America. PIA has already put out a tender to lease new aircraft, to improve its capacity and save fuel with more-efficient planes.

As part of the restructuring, PIA is likely to be split into two companies. A holding group would retain some 250 billion rupees in debt and excess personnel, and a “new” PIA would hold the lucrative landing rights and new aircraft. Afterward, the government plans to sell a 26% stake in that new PIA to a strategic partner, Mr. Dar said.

“This will have more attraction to potential investors: they will enter into a clean transaction and not be evaluating and calculating the legacy and the bad negative numbers of a poor balance sheet,” the finance minister said.

Privatizations have long been controversial in Pakistan. Opposition parties and the judiciary have often stepped in to block these deals. Some of the country’s leading businesspeople caution that the government may be too ambitious.

“There is going to be a political backlash because all sorts of people have vested interests,” said Hussain Dawood, a tycoon with interests in the fertilizer, chemical and power industries.

This backlash, however, isn’t necessarily insurmountable. “When there are privatizations, you can’t satisfy all the participants,” said Mr. Siddiqui of JS Bank. “But if the will is there to privatize, and the intention is to do it in a transparent manner, they should not be afraid of criticism.”

In addition to selling government assets, the government is planning to raise money this fiscal year through the long-delayed sale of 3G and 4G mobile spectrum. Pakistan is the only major country in the region that still doesn’t have 3G service—overtaken even by war-torn Afghanistan to the north.

The government has yet to decide whether to auction off just 3G, or 3G and 4G spectrum together, Mr. Dar said. Selling just 3G licenses could raise between $1.2 billion to $2 billion, and bundling them with 4G spectrum could generate between $4 billion and $5 billion, Mr. Dar estimated. He added that the government is considering issuing more licenses on top of the four cellular providers that currently operate in Pakistan.

“We want new entrants to compete,” he said, “to give better service and to provide more money to the auction.”

Leave a comment

XHTML: You can use these html tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>