By Steve Herman
Karachi
17 March 2008
http://voanews.com/english/2008-03-17-voa8.cfm?renderforprint=1
Volatile Pakistan does not, at first glance, seem to be attractive for those looking to invest money in a stock market. But the Karachi exchange has gained a reputation as one of the world's top performers. In recent weeks it has again been setting new highs for share prices. VOA Correspondent Steve Herman in Karachi visited the exchange which has been defying the global trend and the direction of Pakistan's economy.
Pakistani traders read newspapers as they sit beside the Karachi Stock Exchange's board, 02 Jan 2008
Most investors who follow the U.S. Dow Jones index, Japan's Nikkei or London's FTSE ("Footsie), likely pay little heed to the KSE 100. But those select issues on the Karachi Stock Exchange have been consistently outperforming those of the better-known bourses.
There are 200 member seats on the floor of the Karachi exchange, Pakistan's oldest and biggest stock market. Traders execute orders on computers terminals below a huge electronic board that would not be out of place on Wall Street.
The Karachi market has 650 listed companies with market capitalization totaling $70 billion. From an index below the 2,000 mark seven years ago, Karachi now hovers above the 15,000 level. After a plunge in reaction to former Pakistani Prime Minister Benazir Bhuto's assassination at the end of last year, the key index has since gained nine percent.
While political confusion, suicide bombers and economic woes dominate the front pages, the business sections of newspapers continue to report about the benchmark KSE 100 setting new record highs.
Nayab Fakhir Qazi, BMA Capital Equity Sales Vice President
BMA Capital equity sales vice president Nayab Fakhir Qazi explains that is because the price-to-earnings ratios of stocks on the Karachi exchange are a bargain.
"It's trading at very low multiples compared to India or China or other Asian countries. It's significantly attractive. We're seeing a multiple of 11.8 times for '08 earnings and less than 10 times on '09 earnings," said Qazi. "If you compare it to the regional PE's that's a discount of more than 25 percent."
For some, Pakistan may still be too risky when looking at the country's economic data. After all, inflation is rising and the current account deficit is burgeoning. Exports have stagnated.
Senior research analyst Khurran Schehzad at Invest Capital and Securities says many investors, however, prefer to look at the bright side.
"Profit, opportunities are immense here in Pakistan," said Schehzad. "So they are capitalizing on that, but gradually, as politics and society get settled."
And things are far from settled. A new, democratically-elected national assembly sitting for the first time (this week) could find itself fighting for control of the country with the unpopular President and former Army General Pervez Musharraf. Pakistan, after all, has a checkered history of civilian governments being pushed aside by military coupes.
The potential volatility makes betting on the Karachi exchange attractive to the most daring of international investors - those who run hedge funds.
Such funds seek significant short-term gains in the double digits but will typically make a quick exit if shares drop by ten percent or more.
BMA Capital's Qazi says speculators are not the only foreigners trading on Karachi's stock exchange.
"Well it's not only the hedge funds which are investing," she said. "We've seen a lot of foreign investment coming in to the banking sector, telecom sector, energy sector."
This is taking place at a time when overall net foreign investment in Pakistan is falling sharply - off one-third in the first half of this fiscal year.
On the floor of the Karachi stock exchange, one of its trading members, Muhammad Siddique Suleman, believes additional foreign investors will be hard to find because of the somber headlines.
"They are very afraid because they treat Pakistan as an extremist country, a terrorist country," he said. "There are also the suicide bombings going on. Therefore, in my opinion, they will be afraid to come."
But in another example of turning a handicap into an advantage, Qazi at BMA Capital says Pakistan's sluggish export picture means it has less to lose from a downturn in the U.S. economy, compared to other Asian markets, such as China and Japan.
"Only 12.5 percent of our exports go to the U.S. That is going to be positive for Pakistan from the perspective that we are more indigenous," she said. "Our consumption is locally driven."
Khurran Schehzad, Senior rRsearch Analyst at Invest Capital and Securities
And Schehzad of Invest Capital points out existing exports are primarily in the agricultural and textiles sector, which are hardly represented in the stock market.
"Oil, banking, cement and fertilizer - these are three or four sectors which constitute most of the volumes, most of the price increase in the market," he said. "From the agriculture sector, very few companies are there.
And that has helped cushion Pakistan's stock markets from the negative impact of record high oil prices.
Some who are critical of the hype surrounding the Karachi exchange contend the market is not all that liquid. Stock exchange member Suleman says the skeptics have a point.
"[It's] quite tightly held. Ninety percent of shares are held by the syndicate sponsors and the institutions. And 10 percent is with the public," he said. "In this 10 percent, four percent are owned by the big players of the stock exchange. Therefore, six percent liquidity is there."
A famous Pakistani economist (Mahbub ul-Haq) noted four decades ago that two-thirds of the country's wealth was in the hands of 20 or so players. But Invest Capital's Schehzad says the playing field has become more level since then.
"Since 2001 onwards the market float has increased, volumes have increased. This reflects that it is not being held by a few people, right? If your float is increasing, the market manipulation reduces," said Schehzad. "This has increased transparency. This has increased the number of hands holding the market. So this can be ruled out."
Now that the key Karachi index has surpassed the 15,000 level, the big question on the trading floor is how high can it go? Many respected analysts contend the robust market has yet to achieve its potential for the year and still could rise another 1,000 or 2,000 points. Such gains would certainly help Karachi keep intact its reputation as home to one of the world's best performing stock markets.
Tuesday, March 18, 2008
Karachi's Stock Exchange Defies Pessimists
By Steve Herman
Karachi
17 March 2008
http://voanews.com/english/2008-03-17-voa8.cfm?renderforprint=1
Volatile Pakistan does not, at first glance, seem to be attractive for those looking to invest money in a stock market. But the Karachi exchange has gained a reputation as one of the world's top performers. In recent weeks it has again been setting new highs for share prices. VOA Correspondent Steve Herman in Karachi visited the exchange which has been defying the global trend and the direction of Pakistan's economy.
Pakistani traders read newspapers as they sit beside the Karachi Stock Exchange's board, 02 Jan 2008
Most investors who follow the U.S. Dow Jones index, Japan's Nikkei or London's FTSE ("Footsie), likely pay little heed to the KSE 100. But those select issues on the Karachi Stock Exchange have been consistently outperforming those of the better-known bourses.
There are 200 member seats on the floor of the Karachi exchange, Pakistan's oldest and biggest stock market. Traders execute orders on computers terminals below a huge electronic board that would not be out of place on Wall Street.
The Karachi market has 650 listed companies with market capitalization totaling $70 billion. From an index below the 2,000 mark seven years ago, Karachi now hovers above the 15,000 level. After a plunge in reaction to former Pakistani Prime Minister Benazir Bhuto's assassination at the end of last year, the key index has since gained nine percent.
While political confusion, suicide bombers and economic woes dominate the front pages, the business sections of newspapers continue to report about the benchmark KSE 100 setting new record highs.
Nayab Fakhir Qazi, BMA Capital Equity Sales Vice President
BMA Capital equity sales vice president Nayab Fakhir Qazi explains that is because the price-to-earnings ratios of stocks on the Karachi exchange are a bargain.
"It's trading at very low multiples compared to India or China or other Asian countries. It's significantly attractive. We're seeing a multiple of 11.8 times for '08 earnings and less than 10 times on '09 earnings," said Qazi. "If you compare it to the regional PE's that's a discount of more than 25 percent."
For some, Pakistan may still be too risky when looking at the country's economic data. After all, inflation is rising and the current account deficit is burgeoning. Exports have stagnated.
Senior research analyst Khurran Schehzad at Invest Capital and Securities says many investors, however, prefer to look at the bright side.
"Profit, opportunities are immense here in Pakistan," said Schehzad. "So they are capitalizing on that, but gradually, as politics and society get settled."
And things are far from settled. A new, democratically-elected national assembly sitting for the first time (this week) could find itself fighting for control of the country with the unpopular President and former Army General Pervez Musharraf. Pakistan, after all, has a checkered history of civilian governments being pushed aside by military coupes.
The potential volatility makes betting on the Karachi exchange attractive to the most daring of international investors - those who run hedge funds.
Such funds seek significant short-term gains in the double digits but will typically make a quick exit if shares drop by ten percent or more.
BMA Capital's Qazi says speculators are not the only foreigners trading on Karachi's stock exchange.
"Well it's not only the hedge funds which are investing," she said. "We've seen a lot of foreign investment coming in to the banking sector, telecom sector, energy sector."
This is taking place at a time when overall net foreign investment in Pakistan is falling sharply - off one-third in the first half of this fiscal year.
On the floor of the Karachi stock exchange, one of its trading members, Muhammad Siddique Suleman, believes additional foreign investors will be hard to find because of the somber headlines.
"They are very afraid because they treat Pakistan as an extremist country, a terrorist country," he said. "There are also the suicide bombings going on. Therefore, in my opinion, they will be afraid to come."
But in another example of turning a handicap into an advantage, Qazi at BMA Capital says Pakistan's sluggish export picture means it has less to lose from a downturn in the U.S. economy, compared to other Asian markets, such as China and Japan.
"Only 12.5 percent of our exports go to the U.S. That is going to be positive for Pakistan from the perspective that we are more indigenous," she said. "Our consumption is locally driven."
Khurran Schehzad, Senior rRsearch Analyst at Invest Capital and Securities
And Schehzad of Invest Capital points out existing exports are primarily in the agricultural and textiles sector, which are hardly represented in the stock market.
"Oil, banking, cement and fertilizer - these are three or four sectors which constitute most of the volumes, most of the price increase in the market," he said. "From the agriculture sector, very few companies are there.
And that has helped cushion Pakistan's stock markets from the negative impact of record high oil prices.
Some who are critical of the hype surrounding the Karachi exchange contend the market is not all that liquid. Stock exchange member Suleman says the skeptics have a point.
"[It's] quite tightly held. Ninety percent of shares are held by the syndicate sponsors and the institutions. And 10 percent is with the public," he said. "In this 10 percent, four percent are owned by the big players of the stock exchange. Therefore, six percent liquidity is there."
A famous Pakistani economist (Mahbub ul-Haq) noted four decades ago that two-thirds of the country's wealth was in the hands of 20 or so players. But Invest Capital's Schehzad says the playing field has become more level since then.
"Since 2001 onwards the market float has increased, volumes have increased. This reflects that it is not being held by a few people, right? If your float is increasing, the market manipulation reduces," said Schehzad. "This has increased transparency. This has increased the number of hands holding the market. So this can be ruled out."
Now that the key Karachi index has surpassed the 15,000 level, the big question on the trading floor is how high can it go? Many respected analysts contend the robust market has yet to achieve its potential for the year and still could rise another 1,000 or 2,000 points. Such gains would certainly help Karachi keep intact its reputation as home to one of the world's best performing stock markets.
Karachi
17 March 2008
http://voanews.com/english/2008-03-17-voa8.cfm?renderforprint=1
Volatile Pakistan does not, at first glance, seem to be attractive for those looking to invest money in a stock market. But the Karachi exchange has gained a reputation as one of the world's top performers. In recent weeks it has again been setting new highs for share prices. VOA Correspondent Steve Herman in Karachi visited the exchange which has been defying the global trend and the direction of Pakistan's economy.
Pakistani traders read newspapers as they sit beside the Karachi Stock Exchange's board, 02 Jan 2008
Most investors who follow the U.S. Dow Jones index, Japan's Nikkei or London's FTSE ("Footsie), likely pay little heed to the KSE 100. But those select issues on the Karachi Stock Exchange have been consistently outperforming those of the better-known bourses.
There are 200 member seats on the floor of the Karachi exchange, Pakistan's oldest and biggest stock market. Traders execute orders on computers terminals below a huge electronic board that would not be out of place on Wall Street.
The Karachi market has 650 listed companies with market capitalization totaling $70 billion. From an index below the 2,000 mark seven years ago, Karachi now hovers above the 15,000 level. After a plunge in reaction to former Pakistani Prime Minister Benazir Bhuto's assassination at the end of last year, the key index has since gained nine percent.
While political confusion, suicide bombers and economic woes dominate the front pages, the business sections of newspapers continue to report about the benchmark KSE 100 setting new record highs.
Nayab Fakhir Qazi, BMA Capital Equity Sales Vice President
BMA Capital equity sales vice president Nayab Fakhir Qazi explains that is because the price-to-earnings ratios of stocks on the Karachi exchange are a bargain.
"It's trading at very low multiples compared to India or China or other Asian countries. It's significantly attractive. We're seeing a multiple of 11.8 times for '08 earnings and less than 10 times on '09 earnings," said Qazi. "If you compare it to the regional PE's that's a discount of more than 25 percent."
For some, Pakistan may still be too risky when looking at the country's economic data. After all, inflation is rising and the current account deficit is burgeoning. Exports have stagnated.
Senior research analyst Khurran Schehzad at Invest Capital and Securities says many investors, however, prefer to look at the bright side.
"Profit, opportunities are immense here in Pakistan," said Schehzad. "So they are capitalizing on that, but gradually, as politics and society get settled."
And things are far from settled. A new, democratically-elected national assembly sitting for the first time (this week) could find itself fighting for control of the country with the unpopular President and former Army General Pervez Musharraf. Pakistan, after all, has a checkered history of civilian governments being pushed aside by military coupes.
The potential volatility makes betting on the Karachi exchange attractive to the most daring of international investors - those who run hedge funds.
Such funds seek significant short-term gains in the double digits but will typically make a quick exit if shares drop by ten percent or more.
BMA Capital's Qazi says speculators are not the only foreigners trading on Karachi's stock exchange.
"Well it's not only the hedge funds which are investing," she said. "We've seen a lot of foreign investment coming in to the banking sector, telecom sector, energy sector."
This is taking place at a time when overall net foreign investment in Pakistan is falling sharply - off one-third in the first half of this fiscal year.
On the floor of the Karachi stock exchange, one of its trading members, Muhammad Siddique Suleman, believes additional foreign investors will be hard to find because of the somber headlines.
"They are very afraid because they treat Pakistan as an extremist country, a terrorist country," he said. "There are also the suicide bombings going on. Therefore, in my opinion, they will be afraid to come."
But in another example of turning a handicap into an advantage, Qazi at BMA Capital says Pakistan's sluggish export picture means it has less to lose from a downturn in the U.S. economy, compared to other Asian markets, such as China and Japan.
"Only 12.5 percent of our exports go to the U.S. That is going to be positive for Pakistan from the perspective that we are more indigenous," she said. "Our consumption is locally driven."
Khurran Schehzad, Senior rRsearch Analyst at Invest Capital and Securities
And Schehzad of Invest Capital points out existing exports are primarily in the agricultural and textiles sector, which are hardly represented in the stock market.
"Oil, banking, cement and fertilizer - these are three or four sectors which constitute most of the volumes, most of the price increase in the market," he said. "From the agriculture sector, very few companies are there.
And that has helped cushion Pakistan's stock markets from the negative impact of record high oil prices.
Some who are critical of the hype surrounding the Karachi exchange contend the market is not all that liquid. Stock exchange member Suleman says the skeptics have a point.
"[It's] quite tightly held. Ninety percent of shares are held by the syndicate sponsors and the institutions. And 10 percent is with the public," he said. "In this 10 percent, four percent are owned by the big players of the stock exchange. Therefore, six percent liquidity is there."
A famous Pakistani economist (Mahbub ul-Haq) noted four decades ago that two-thirds of the country's wealth was in the hands of 20 or so players. But Invest Capital's Schehzad says the playing field has become more level since then.
"Since 2001 onwards the market float has increased, volumes have increased. This reflects that it is not being held by a few people, right? If your float is increasing, the market manipulation reduces," said Schehzad. "This has increased transparency. This has increased the number of hands holding the market. So this can be ruled out."
Now that the key Karachi index has surpassed the 15,000 level, the big question on the trading floor is how high can it go? Many respected analysts contend the robust market has yet to achieve its potential for the year and still could rise another 1,000 or 2,000 points. Such gains would certainly help Karachi keep intact its reputation as home to one of the world's best performing stock markets.
Sunday, March 16, 2008
Trading with the 'enemy'
www.jang.com.pk
The international trading system is characterised by growing intra-region trade, but South Asia lags far behind on this count
By Hussain H Zaidi
Trade within regional blocs constitutes more than half of the global trade. When it comes to South Asia, however, the picture is dismal. Trade among the countries of the region is less than five per cent of their global trade. The major reason for this is the low volume of trade between Pakistan and India, the largest economies and trading nations in the region.
Though formal Pak-India trade (the two countries have informal trade of more than $ 3 billion a year) has increased from $ 236 million in 2001-2002 to $ 1.57 billion in 2006-07, it still constitutes less than one per cent of the global trade of the two countries. This means a lot needs to be done for an appreciable increase in trade between the two largest economies of the South Asian region. Another notable feature of Pak-India trade is that trade balance has remained heavily in favour of India. Pakistan's trade deficit with India has gone up from $137 million in 2001-2002 to $893 million in 2006-07.
The increasing trade deficit of Pakistan is one of the two major reasons for Pakistan not granting the most favoured nation (MFN) status to India, while New Delhi has already granted the same to Islamabad. The MFN status, it may be mentioned, is not a ;special' or 'preferential' treatment -- but normal treatment.
The MFN principle requires that any trade concession -- for instance, application of tariffs -- granted to one member of the World Trade Organisation (WTO) must be extended to all other members unconditionally. Thus, MFN status means -- more than anything else -- non-discrimination among trading partners. Pakistan trades with India on the basis of a 'positive' list of products that can be imported and with the rest of the world on the basis of a 'negative' list (import of all products is allowed, except those contained in the list for such reasons as religion, morality, national security, health, environment, etc).
The other major reason is the political tension between the two countries because of the Kashmir issue. Thus, reasons for restricted trade with India are two-fold: economic and political. We take the economic ones first:
The basic economic argument for restricted Pak-India trade is that, despite enjoying the MFN status, Pakistan's exports to India lag far behind those of India to Pakistan. Hence, if the bilateral trade is opened, cheaper Indian goods would flood the Pakistani market. This would not only cause serious problems for the import-competing domestic industry besides large-scale unemployment, but would also increase Pakistan's trade deficit with India and, thus, aggravate the country's already difficult current account position.
A related argument is that the grant of MFN status to Islamabad by New Delhi has not helped significantly increase Pakistan's exports to India, mainly because the latter maintains high tariffs, as well as non-tariff barriers, on products of export interest to Pakistan. This high, solid wall of protectionism, the argument goes, makes it difficult for exports from Pakistan to have an effective access in the Indian market; and, thus, offsets any advantage conferred by the grant of MFN status.
There is an element of truth in these arguments. In case Pak-India trade is liberalised, imports from India would probably price out Pakistani products and, thus, further widen the trade imbalance. It is also true that products of export interest to Pakistan face tough market access barriers in India; and that, despite the grant of MFN status, Pakistan's exports to India have remained at a very low level.
For instance, whereas average Indian applied tariffs on industrial products are 16.4 per cent, those on textile and clothing products -- which account for almost two-thirds of Pakistan's global exports -- are 20.2 and 22.4 per cent, respectively. The maximum tariffs applied by India on textile and clothing products are 268 and 103 per cent, respectively. Moreover, Indian tariffs on textile and clothing products include both 'ad valorem' -- based on the value of imports -- and 'specific' -- based on weight or volume of imports -- duties. For a country like Pakistan, which is an exporter of low-end textile and clothing products, 'specific' duties are very restrictive -- the greater the weight of import consignment, not necessarily its value, the higher the duties.
Having said this, a few things, however, need to be noted: One, the grant of MFN status or even preferential treatment in itself is no guarantee that exports will register a considerable increase. The foremost condition for considerable increase in exports is their competitiveness, which is a function of both quality and price. A country's competitive advantage rests on either high quality products or their low price. Both these components of competitiveness entail essentially overcoming supply-side constraints. A country's export performance is as good or bad as its industrial performance. Hence, for increasing Pakistan's exports to India, or for that matter to any other country, supply-side constraints have to be overcome. This, however, does not mean that once the supply-side position is improved, a restrictive Indian import regime will cease to be a serious issue.
Two, regarding high Indian tariffs, as well as non-tariff barriers, on products of export interest to Pakistan, the international trading system (WTO) does not specify how much tariffs or non-tariff barriers are to be reduced -- such matters are to be settled largely at bilateral level through negotiations. However, international negotiations are based on a quid pro quo. If Pakistan asks India to cut its tariffs and non-tariff barriers, the former will also have to offer the latter increased market access in the shape of MFN status. Besides, grating the MFN status to other member countries is a basic requirement under WTO rules and no country can get away with that indefinitely.
Three, Pakistan has unhindered trade with China whose products are as cheap, if not cheaper, as India's. Pakistan has signed a free trade agreement (FTA) with China, under which the two countries are required to give each other duty free or preferential market access. As a result, Pakistan's trade deficit with China ($ 2.94 billion) is much higher than that with India ($ 894 million).
Four, certain safeguards are available under the WTO to protect the domestic industry -- for instance, under the Agreement on Safeguards, a country can restrict imports of a product if they increase to such a high level as to cause, or threaten to cause, serious injury to competing domestic products. Imports can be restricted either by increasing the bound rate of tariffs or by clamping quantitative trade restrictions (or quotas) on them. Normally, the safeguard measure has to be adopted in a non-discriminatory manner -- against imports from all countries affecting the domestic industry. In special circumstances, however, quantitative restrictions may be applied to only one country -- in case imports from that country "have increased in disproportionate percentage in relation to the total increase of imports of the product concerned in the representative period." The safeguard measure, however, is a stopgap arrangement available only for a maximum of 10 years, during which the competitiveness of the local industry has to be increased.
Five, under the General Agreement on Tariffs and Trade (GATT), a part of the WTO, a country can restrict imports to overcome balance of payment (BoP) problems. Hence, if Pakistan faces BoP problem due to a possible onslaught of Indian imports, the said article can be invoked. However, again, this will only be a temporary arrangement.
Six, trade with India will yield certain advantages. For instance, it will benefit Pakistani consumers, who will be having access to cheaper goods, particularly autos and medicines; as well as industrial buyers, who will have access to cheaper capital goods and raw materials. Since India is Pakistan's next-door neighbour, lower transport costs will also reduce the cost of doing business and, thus, help increase competitiveness of the country's exports. The legalising of trade through smuggling will also enable the government to earn revenue in the form of import duties.
As for the political reasons, Pakistan has in the past linked normalisation of economic relations with India with peace, especially resolution of the 60-year-old Kashmir dispute. India's standpoint, however, is that political relations between the two countries should not affect their economic relations. The Indian argument, in principle, is sound.
There are quite a number of examples of countries -- China and Taiwan, the United States and the former United States of Soviet Russia, China and India to name a few -- having normal trading relations notwithstanding political tensions between them. Besides, improved economic relations between Pakistan and India will lead to creation of common stakes, which will contribute substantially to defusing political tensions.
In short, normal trading relations with India will have several advantages, though one must also be alive to their possible negative effects on the domestic industry, employment and BoP position. The important thing, however, is that whether Pakistan has restricted or open trade with India, the decision needs to be made primarily on economic -- and not political -- considerations.
(Email: hussainhzaidi@yahoo.com)
The international trading system is characterised by growing intra-region trade, but South Asia lags far behind on this count
By Hussain H Zaidi
Trade within regional blocs constitutes more than half of the global trade. When it comes to South Asia, however, the picture is dismal. Trade among the countries of the region is less than five per cent of their global trade. The major reason for this is the low volume of trade between Pakistan and India, the largest economies and trading nations in the region.
Though formal Pak-India trade (the two countries have informal trade of more than $ 3 billion a year) has increased from $ 236 million in 2001-2002 to $ 1.57 billion in 2006-07, it still constitutes less than one per cent of the global trade of the two countries. This means a lot needs to be done for an appreciable increase in trade between the two largest economies of the South Asian region. Another notable feature of Pak-India trade is that trade balance has remained heavily in favour of India. Pakistan's trade deficit with India has gone up from $137 million in 2001-2002 to $893 million in 2006-07.
The increasing trade deficit of Pakistan is one of the two major reasons for Pakistan not granting the most favoured nation (MFN) status to India, while New Delhi has already granted the same to Islamabad. The MFN status, it may be mentioned, is not a ;special' or 'preferential' treatment -- but normal treatment.
The MFN principle requires that any trade concession -- for instance, application of tariffs -- granted to one member of the World Trade Organisation (WTO) must be extended to all other members unconditionally. Thus, MFN status means -- more than anything else -- non-discrimination among trading partners. Pakistan trades with India on the basis of a 'positive' list of products that can be imported and with the rest of the world on the basis of a 'negative' list (import of all products is allowed, except those contained in the list for such reasons as religion, morality, national security, health, environment, etc).
The other major reason is the political tension between the two countries because of the Kashmir issue. Thus, reasons for restricted trade with India are two-fold: economic and political. We take the economic ones first:
The basic economic argument for restricted Pak-India trade is that, despite enjoying the MFN status, Pakistan's exports to India lag far behind those of India to Pakistan. Hence, if the bilateral trade is opened, cheaper Indian goods would flood the Pakistani market. This would not only cause serious problems for the import-competing domestic industry besides large-scale unemployment, but would also increase Pakistan's trade deficit with India and, thus, aggravate the country's already difficult current account position.
A related argument is that the grant of MFN status to Islamabad by New Delhi has not helped significantly increase Pakistan's exports to India, mainly because the latter maintains high tariffs, as well as non-tariff barriers, on products of export interest to Pakistan. This high, solid wall of protectionism, the argument goes, makes it difficult for exports from Pakistan to have an effective access in the Indian market; and, thus, offsets any advantage conferred by the grant of MFN status.
There is an element of truth in these arguments. In case Pak-India trade is liberalised, imports from India would probably price out Pakistani products and, thus, further widen the trade imbalance. It is also true that products of export interest to Pakistan face tough market access barriers in India; and that, despite the grant of MFN status, Pakistan's exports to India have remained at a very low level.
For instance, whereas average Indian applied tariffs on industrial products are 16.4 per cent, those on textile and clothing products -- which account for almost two-thirds of Pakistan's global exports -- are 20.2 and 22.4 per cent, respectively. The maximum tariffs applied by India on textile and clothing products are 268 and 103 per cent, respectively. Moreover, Indian tariffs on textile and clothing products include both 'ad valorem' -- based on the value of imports -- and 'specific' -- based on weight or volume of imports -- duties. For a country like Pakistan, which is an exporter of low-end textile and clothing products, 'specific' duties are very restrictive -- the greater the weight of import consignment, not necessarily its value, the higher the duties.
Having said this, a few things, however, need to be noted: One, the grant of MFN status or even preferential treatment in itself is no guarantee that exports will register a considerable increase. The foremost condition for considerable increase in exports is their competitiveness, which is a function of both quality and price. A country's competitive advantage rests on either high quality products or their low price. Both these components of competitiveness entail essentially overcoming supply-side constraints. A country's export performance is as good or bad as its industrial performance. Hence, for increasing Pakistan's exports to India, or for that matter to any other country, supply-side constraints have to be overcome. This, however, does not mean that once the supply-side position is improved, a restrictive Indian import regime will cease to be a serious issue.
Two, regarding high Indian tariffs, as well as non-tariff barriers, on products of export interest to Pakistan, the international trading system (WTO) does not specify how much tariffs or non-tariff barriers are to be reduced -- such matters are to be settled largely at bilateral level through negotiations. However, international negotiations are based on a quid pro quo. If Pakistan asks India to cut its tariffs and non-tariff barriers, the former will also have to offer the latter increased market access in the shape of MFN status. Besides, grating the MFN status to other member countries is a basic requirement under WTO rules and no country can get away with that indefinitely.
Three, Pakistan has unhindered trade with China whose products are as cheap, if not cheaper, as India's. Pakistan has signed a free trade agreement (FTA) with China, under which the two countries are required to give each other duty free or preferential market access. As a result, Pakistan's trade deficit with China ($ 2.94 billion) is much higher than that with India ($ 894 million).
Four, certain safeguards are available under the WTO to protect the domestic industry -- for instance, under the Agreement on Safeguards, a country can restrict imports of a product if they increase to such a high level as to cause, or threaten to cause, serious injury to competing domestic products. Imports can be restricted either by increasing the bound rate of tariffs or by clamping quantitative trade restrictions (or quotas) on them. Normally, the safeguard measure has to be adopted in a non-discriminatory manner -- against imports from all countries affecting the domestic industry. In special circumstances, however, quantitative restrictions may be applied to only one country -- in case imports from that country "have increased in disproportionate percentage in relation to the total increase of imports of the product concerned in the representative period." The safeguard measure, however, is a stopgap arrangement available only for a maximum of 10 years, during which the competitiveness of the local industry has to be increased.
Five, under the General Agreement on Tariffs and Trade (GATT), a part of the WTO, a country can restrict imports to overcome balance of payment (BoP) problems. Hence, if Pakistan faces BoP problem due to a possible onslaught of Indian imports, the said article can be invoked. However, again, this will only be a temporary arrangement.
Six, trade with India will yield certain advantages. For instance, it will benefit Pakistani consumers, who will be having access to cheaper goods, particularly autos and medicines; as well as industrial buyers, who will have access to cheaper capital goods and raw materials. Since India is Pakistan's next-door neighbour, lower transport costs will also reduce the cost of doing business and, thus, help increase competitiveness of the country's exports. The legalising of trade through smuggling will also enable the government to earn revenue in the form of import duties.
As for the political reasons, Pakistan has in the past linked normalisation of economic relations with India with peace, especially resolution of the 60-year-old Kashmir dispute. India's standpoint, however, is that political relations between the two countries should not affect their economic relations. The Indian argument, in principle, is sound.
There are quite a number of examples of countries -- China and Taiwan, the United States and the former United States of Soviet Russia, China and India to name a few -- having normal trading relations notwithstanding political tensions between them. Besides, improved economic relations between Pakistan and India will lead to creation of common stakes, which will contribute substantially to defusing political tensions.
In short, normal trading relations with India will have several advantages, though one must also be alive to their possible negative effects on the domestic industry, employment and BoP position. The important thing, however, is that whether Pakistan has restricted or open trade with India, the decision needs to be made primarily on economic -- and not political -- considerations.
(Email: hussainhzaidi@yahoo.com)
Anti-dumping laws: Good or bad for LDCs?
THE FINANCIAL EXPRESS [BANGLADESH]
Dhaka, Saturday March 15 2008
M. Zakir Hossain
IN this globalized world, trade is considered to be the key for development and growth of a country's economy no matter whether it is a developing or least developed country (LDC). While countries trade in the global market, often some private firms and entities apply unfair trade practices. Such practices cause serious injury for domestic industries in a particular importing country.
Dumping of products by one country in another importing country is one of the common unfair trade practices. For example, China has been dumping television sets and furniture in the US market. The countries prominently figuring in anti-dumping investigations are China, the European Union (EU), Korea, Taiwan, Japan, USA, Singapore, Russia etc. Bangladesh probably is the only LDC that brought up more than one anti-dumping cases to the World Trade Organisation (WTO). Countries who are the members of the WTO, being regulated by their national trade-remedy policies and laws in consistent with WTO anti-dumping agreement.
The anti-dumping instrument is one of the three trade defence instruments widely used by the many developed and developing countries since 1970 against unfair trade practices. Under the anti-dumping laws, antidumping duty is imposed on the exporters or exporting countries to compensate the domestic industries for material injury.
The countries which are members of the WTO have to comply with the WTO agreement on anti-dumping. The LDCs need to have trade-remedies' laws including anti-dumping to protect their domestic industries and to gain from competition. Reasons for which the LDCs need to adopt anti-dumping laws are as explained below:
-- To protect their domestic industries from unfair trade practices through creating an institutional framework along with regulatory policies and a well-defined mechanism.
In LDCs, the governments need to establish institutions to deal with trade remedies and to control unfair competition in order to protect the local industries through ensuring a 'level playing field' for local industries. In order to control any predatory and pernicious price-cutting behaviour of importers making the local industries uncompetitive, an institution along with a set of defined polices and required human capacity must be ensured so that they can observe country's trading system and market movements closely and regularly and undertake the required investigation to identify materials injury.
-- To protect the rights of the consumers through controlling unhealthy competition, using study and research findings on the industrial sectors as good basis and wide dissemination.
Predatory pricing is harmful not only to the local competitors but to the consumers as well. The anti-trust laws prohibits this type of pricing technique as it abuses to monopolizing an industry. This practice of charging less than the marginal cost of production is done to drive competitors out of business so that the price-cutter can thereafter raise its price level and recoup its losses, which goes against the interest of the consumers.
However, anti-dumping laws can sometimes be misused by countries to protect their industries through applying the marginal cost of production concept. This could be done through local industry-biased calculation of injury. However, more and more countries including LDCs are embracing anti-dumping laws.
The LDCs, being the signatories to WTO, it is mandatory for them to adopt national trade defence policies in consistent with the WTO anti-dumping agreement. However, if a least developed country is not a member of the WTO, it may not require adopting anti-dumping laws at a certain stage. When a country is not having a certain level of industrial base, it may avoid incorporating anti-dumping laws within its jurisdiction. Because, enterprises in the LDCs with limited scale of production and inefficient operation are unable to offer quality products at a competitive price. Since the per unit production cost is higher, they may not able to compete with the cheaper imported products. On the contrary, there is welfare gain for the consumers who get quality imported products at a lower price. Such facilities may not be achieved if the anti-dumping laws are adopted in the LDCs. However, countries may need introducing the anti-dumping laws at a later stage when the local industries are competitive. Finally, there are reasons to eliminate the anti-dumping laws in LDCs and these are as follows:
-- Increased competition in the local markets bringing prices lower for the consumers
From the social welfare point of view, dumped products from foreign firms are beneficial for the dumping-recipient LDCs. These benefits arise from cheaper imports.
-- Higher national income resulting from increased efficiency in production activities
When the LDCs are having cheaper imported products, it can also increase more competition in the domestic market and the domestic producers of similar goods or services may strive hard to improve their operation scale and productivity. This results in ultimate efficiency gain in the local industries and this way, additional outputs can be achieved that contributes to higher gross domestic product (GDP) for the economy. Finally, welfare analysis suggests that anti-dumping tariffs are the least convenient trade policy for the dumping recipient country.
................................................................
The writer is Chief Executive, Young Consultants, a Dhaka-based economic research body
Dhaka, Saturday March 15 2008
M. Zakir Hossain
IN this globalized world, trade is considered to be the key for development and growth of a country's economy no matter whether it is a developing or least developed country (LDC). While countries trade in the global market, often some private firms and entities apply unfair trade practices. Such practices cause serious injury for domestic industries in a particular importing country.
Dumping of products by one country in another importing country is one of the common unfair trade practices. For example, China has been dumping television sets and furniture in the US market. The countries prominently figuring in anti-dumping investigations are China, the European Union (EU), Korea, Taiwan, Japan, USA, Singapore, Russia etc. Bangladesh probably is the only LDC that brought up more than one anti-dumping cases to the World Trade Organisation (WTO). Countries who are the members of the WTO, being regulated by their national trade-remedy policies and laws in consistent with WTO anti-dumping agreement.
The anti-dumping instrument is one of the three trade defence instruments widely used by the many developed and developing countries since 1970 against unfair trade practices. Under the anti-dumping laws, antidumping duty is imposed on the exporters or exporting countries to compensate the domestic industries for material injury.
The countries which are members of the WTO have to comply with the WTO agreement on anti-dumping. The LDCs need to have trade-remedies' laws including anti-dumping to protect their domestic industries and to gain from competition. Reasons for which the LDCs need to adopt anti-dumping laws are as explained below:
-- To protect their domestic industries from unfair trade practices through creating an institutional framework along with regulatory policies and a well-defined mechanism.
In LDCs, the governments need to establish institutions to deal with trade remedies and to control unfair competition in order to protect the local industries through ensuring a 'level playing field' for local industries. In order to control any predatory and pernicious price-cutting behaviour of importers making the local industries uncompetitive, an institution along with a set of defined polices and required human capacity must be ensured so that they can observe country's trading system and market movements closely and regularly and undertake the required investigation to identify materials injury.
-- To protect the rights of the consumers through controlling unhealthy competition, using study and research findings on the industrial sectors as good basis and wide dissemination.
Predatory pricing is harmful not only to the local competitors but to the consumers as well. The anti-trust laws prohibits this type of pricing technique as it abuses to monopolizing an industry. This practice of charging less than the marginal cost of production is done to drive competitors out of business so that the price-cutter can thereafter raise its price level and recoup its losses, which goes against the interest of the consumers.
However, anti-dumping laws can sometimes be misused by countries to protect their industries through applying the marginal cost of production concept. This could be done through local industry-biased calculation of injury. However, more and more countries including LDCs are embracing anti-dumping laws.
The LDCs, being the signatories to WTO, it is mandatory for them to adopt national trade defence policies in consistent with the WTO anti-dumping agreement. However, if a least developed country is not a member of the WTO, it may not require adopting anti-dumping laws at a certain stage. When a country is not having a certain level of industrial base, it may avoid incorporating anti-dumping laws within its jurisdiction. Because, enterprises in the LDCs with limited scale of production and inefficient operation are unable to offer quality products at a competitive price. Since the per unit production cost is higher, they may not able to compete with the cheaper imported products. On the contrary, there is welfare gain for the consumers who get quality imported products at a lower price. Such facilities may not be achieved if the anti-dumping laws are adopted in the LDCs. However, countries may need introducing the anti-dumping laws at a later stage when the local industries are competitive. Finally, there are reasons to eliminate the anti-dumping laws in LDCs and these are as follows:
-- Increased competition in the local markets bringing prices lower for the consumers
From the social welfare point of view, dumped products from foreign firms are beneficial for the dumping-recipient LDCs. These benefits arise from cheaper imports.
-- Higher national income resulting from increased efficiency in production activities
When the LDCs are having cheaper imported products, it can also increase more competition in the domestic market and the domestic producers of similar goods or services may strive hard to improve their operation scale and productivity. This results in ultimate efficiency gain in the local industries and this way, additional outputs can be achieved that contributes to higher gross domestic product (GDP) for the economy. Finally, welfare analysis suggests that anti-dumping tariffs are the least convenient trade policy for the dumping recipient country.
................................................................
The writer is Chief Executive, Young Consultants, a Dhaka-based economic research body
Policy prescriptions by the IMF
Business Recorder
EDITORIAL (March 12 2008): Although countries not utilising IMF resources are not bound by its advice, it continues to analyse the economies of its members periodically with a view to offering policy prescriptions on various issues as a part of its mandate.
According to the latest report, the IMF wants the new government of Pakistan to bring agriculture and services sectors into the tax net and reduce exemptions in order to tide over financial difficulties of the country. Talking about the overall budgetary situation, it asserts that "fiscal effort should rely primarily on strengthening revenue mobilisation substantially to reduce deficit, while allowing for increased spending on infrastructure, human capital and poverty alleviation."
Going forward, fiscal adjustment, accompanied by higher levels of investment and vigorous implementation of structural reforms to increase the economy's productivity, constitute the main avenues to improve external competitiveness. In addition to strengthening tax revenues, priority should also be given to other structural reforms of critical importance to increase savings and investment. Besides, the reform of energy sector's regulatory and tariff framework should be pressed ahead vigorously for strengthening public sector financing profile and enhancing the prospects of privatisation of power sector companies.
In the foreign sector, a high degree of flexibility in economic policy making is required to respond quickly to external shocks. In particular, given the need to continue strengthening the foreign exchange reserves position, the authorities should adhere to their plan to rely primarily on active demand management policies in response to external financing shortfalls. However, even with the envisaged reduction in current account deficit over the medium-term, Pakistan would continue to depend heavily on large capital inflows.
We feel that the policy advice given by the IMF is very appropriate to the current situation and can only be dismissed at a great peril to the economy. As the latest trends indicate, weakness in the fiscal outcome has now emerged as the greatest challenge to the health of the economy.
Thanks to a wide-ranging reform process and substantial inflow of external resources, the overall fiscal deficit that averaged nearly 7.0 percent of GDP in the 1990s, was brought down to 3.4 percent in 2005-06 and 3.7 percent during the previous year. This excluded, however, earthquake spending which was an exceptional burden on the budget during these two years. The developments during the current year appear to have washed away these gains which were earned by great efforts and a firm resolve.
The fiscal deficit for 2007-08 was targeted at 4.0 percent of GDP, but it is not likely to be achieved as it has already touched the figure of 3.6 percent during the first half of the year due to lower-than-expected revenue growth (1.76 percent) and higher expenditures (25.28 percent). While revenues stagnated, higher debt servicing cost, increased outlay on subsidies for energy and food and rise in development spending led to a jump in expenditures. The country is obviously heading again towards a fiscal deficit of nearly 7.0 percent of GDP if the sharply deteriorating trend is not arrested in the remaining part of the year which does not seem to be likely at the moment.
Such an expansionary fiscal outcome would have grave consequences for the economy as a whole. While overall spending cannot be substantially reduced for a variety of reasons, the only alternative for the country is to mobilise a much higher level of revenues. It is against this background that the IMF has proposed to the new government to bring agriculture and services sectors into the tax net and reduce tax exemptions.
Everybody knows that agriculture tax is a provincial subject and the vested interests would oppose it tooth and nail but adequate collection of taxes from this source is necessary to improve the fiscal position of the country and for the sake of equity. Further delay in taxing the exempted sectors and punishing the tax evaders will only make matters worse. It also needs to be pointed out that proper fiscal management constitutes an important element of demand management about which the IMF has talked in its report.
Sticking to the target of overall deficit of 4.0 percent of GDP during 2007-08 and further progress in the desired direction in the subsequent years could reduce pressures on the worsening current account and soften inflationary impulses in the economy.
The State Bank has already taken several measures to curb demand by tightening the monetary stance but if fiscal policy of the country is at variance with the monetary policy, the intended objectives of price stability, avoidance of internal and external debt, sustainability in the external sector, higher growth trajectory etc cannot be achieved. We know that the new economic managers of the country would not like to be dictated by the IMF but there is no harm in listening to its advice, especially when it is given in good faith and without a quid-pro-quo.
Copyright Business Recorder, 2008
EDITORIAL (March 12 2008): Although countries not utilising IMF resources are not bound by its advice, it continues to analyse the economies of its members periodically with a view to offering policy prescriptions on various issues as a part of its mandate.
According to the latest report, the IMF wants the new government of Pakistan to bring agriculture and services sectors into the tax net and reduce exemptions in order to tide over financial difficulties of the country. Talking about the overall budgetary situation, it asserts that "fiscal effort should rely primarily on strengthening revenue mobilisation substantially to reduce deficit, while allowing for increased spending on infrastructure, human capital and poverty alleviation."
Going forward, fiscal adjustment, accompanied by higher levels of investment and vigorous implementation of structural reforms to increase the economy's productivity, constitute the main avenues to improve external competitiveness. In addition to strengthening tax revenues, priority should also be given to other structural reforms of critical importance to increase savings and investment. Besides, the reform of energy sector's regulatory and tariff framework should be pressed ahead vigorously for strengthening public sector financing profile and enhancing the prospects of privatisation of power sector companies.
In the foreign sector, a high degree of flexibility in economic policy making is required to respond quickly to external shocks. In particular, given the need to continue strengthening the foreign exchange reserves position, the authorities should adhere to their plan to rely primarily on active demand management policies in response to external financing shortfalls. However, even with the envisaged reduction in current account deficit over the medium-term, Pakistan would continue to depend heavily on large capital inflows.
We feel that the policy advice given by the IMF is very appropriate to the current situation and can only be dismissed at a great peril to the economy. As the latest trends indicate, weakness in the fiscal outcome has now emerged as the greatest challenge to the health of the economy.
Thanks to a wide-ranging reform process and substantial inflow of external resources, the overall fiscal deficit that averaged nearly 7.0 percent of GDP in the 1990s, was brought down to 3.4 percent in 2005-06 and 3.7 percent during the previous year. This excluded, however, earthquake spending which was an exceptional burden on the budget during these two years. The developments during the current year appear to have washed away these gains which were earned by great efforts and a firm resolve.
The fiscal deficit for 2007-08 was targeted at 4.0 percent of GDP, but it is not likely to be achieved as it has already touched the figure of 3.6 percent during the first half of the year due to lower-than-expected revenue growth (1.76 percent) and higher expenditures (25.28 percent). While revenues stagnated, higher debt servicing cost, increased outlay on subsidies for energy and food and rise in development spending led to a jump in expenditures. The country is obviously heading again towards a fiscal deficit of nearly 7.0 percent of GDP if the sharply deteriorating trend is not arrested in the remaining part of the year which does not seem to be likely at the moment.
Such an expansionary fiscal outcome would have grave consequences for the economy as a whole. While overall spending cannot be substantially reduced for a variety of reasons, the only alternative for the country is to mobilise a much higher level of revenues. It is against this background that the IMF has proposed to the new government to bring agriculture and services sectors into the tax net and reduce tax exemptions.
Everybody knows that agriculture tax is a provincial subject and the vested interests would oppose it tooth and nail but adequate collection of taxes from this source is necessary to improve the fiscal position of the country and for the sake of equity. Further delay in taxing the exempted sectors and punishing the tax evaders will only make matters worse. It also needs to be pointed out that proper fiscal management constitutes an important element of demand management about which the IMF has talked in its report.
Sticking to the target of overall deficit of 4.0 percent of GDP during 2007-08 and further progress in the desired direction in the subsequent years could reduce pressures on the worsening current account and soften inflationary impulses in the economy.
The State Bank has already taken several measures to curb demand by tightening the monetary stance but if fiscal policy of the country is at variance with the monetary policy, the intended objectives of price stability, avoidance of internal and external debt, sustainability in the external sector, higher growth trajectory etc cannot be achieved. We know that the new economic managers of the country would not like to be dictated by the IMF but there is no harm in listening to its advice, especially when it is given in good faith and without a quid-pro-quo.
Copyright Business Recorder, 2008
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