Tuesday, January 12, 2010

Energy sector's some profound woes


EDITORIAL (January 13 2010): Energy sector's woes appear to be multiplying. According to sources in the Ministry of Finance, inter-corporate energy sector's gross receivables have now crossed Rs 419 billion against their payables of Rs 279 billion, leaving a huge gap of Rs 140 billion.

Total receivables of Pepco stood at about Rs 175 billion on January 4, 2010 as against its payables of about Rs 141 billion, leaving a gap of about Rs 35 billion, while PSO's receivables stood at Rs 75 billion against its payables of about Rs 60 billion. Likewise, receivables of OGDC against power and gas companies stood at about Rs 53 billion, while Pak Arab Refinery Limited owed about Rs 23 billion to oil and power companies. KESC's total payables stood at about Rs 45 billion on 4th January as against its receivables of about Rs 13 billion.

In an attempt to reduce inter-corporate circular debt (ICCD), Finance Ministry released Rs 15 billion on 6th January and a part of this amount would be paid to refineries and gas companies on behalf of the PSO to improve their cash flows. A Rs 24 billion capital injection by the Federal Government in June, 2009 had reduced the size of the ICCD by Rs 106 billion through a cycle of book adjustments.

It was also confirmed that Pepco would not be given more than Rs 55 billion as subsidies during the current year, in accordance with commitments made to international lending agencies and its revenue shortfall would be bridged through recoveries, efficiency and tariff increases.

While the above situation would look like a nightmare, the case of PSO, which plays a central role in supplying the needed fuel to the energy sector, is of special significance due to its extremely negative ramifications on the economy of Pakistan and its people. There are reports that refineries have refused to honour the order of PSO because of non-payment of their dues, which have soared to over Rs 60 billion.

PSO is also unable to import furnace oil due to acute financial constraints. In the latest development, the arrival of two ships carrying furnace oil has been delayed due to non-availability of the required liquidity. Fuel reserves are reported to have declined by 50 percent from 24 days' stocks, putting the internal power generation in the country in the danger zone.

This decline has occurred at a time when the country is in the grip of massive loadshedding and in dire need of efficient supply of fuel. As of January 4, oil stocks for Kot Addu Power Generation Company were reported for one day only, while Hubco and AES Pak Gen+Lalpir had stocks for three days and two days, respectively.

Thermal power-generation came down to only 2,261 MW as against the installed capacity of 4,828 MW. Obviously, this appalling situation would further aggravate if the slow supply of fuel to thermal houses continues and PSO fails to import more furnace oil.

Clearly, this nightmarish situation has not developed in a day or two but is a self-inflicted disaster, which owes its origin to criminal mismanagement in the past. In too many ways the frightful situation has the true potential to inflict harm on the economy beyond all hope of repair.

In fact, even a modern, vibrant and industrialised economy is unimaginable without an adequate and smooth supply of energy throughout the year. A combination of factors has added to the woes of the energy sector in Pakistan. Authorities of the country have not been able to exploit the full potential of hydropower generation mainly due to political reasons.

Adding insult to injury is the fact that the water level has significantly decreased in both the Tarbela and Mangla dams. Their capacity to produce electricity has been constrained due to silting and more recently, canals have been closed for cleaning and are likely to remain so for another month.

Thermal power is decreasing fast due to a serious lack of liquidity at PSO, a huge amount of circular debt and a lack of proper planning and management. We talk too much about alternative sources of energy, including from coal, but there is almost nothing practical on the ground. The import of gas from Iran or other sources, which could have solved the problem to some extent, still looks like a distant possibility.

There are nuances of irony in the present situation. All and sundry, including the government, talk too much about impending energy shortages, but there is nothing on the ground to indicate a measured response to such challenges.

Even the issue of circular debt is not likely to be resolved soon despite a clear understanding with the IMF. As a last resort or in a desperate bid, government gives some money to PSO or other concerned entities or asks the banks to come to its rescue, but budgetary constraints would not let the government use this option freely in future.

All of this suggests that the stage is set for a collision between problems that have the capacity to literally bring the people on the streets and the country on its knees. We would implore the government to urgently attend to the issue before it becomes truly catastrophic. So far as tackling the problem through improved recoveries and efficiency is concerned, nobody could be sure about the success of such a strategy because of past experience.

10 more economic sectors: CCP to conduct study, says Mirza

KARACHI (January 13 2010): The Competition Commission of Pakistan (CCP) will continue to play its role in promoting competition in all commercial and economic activities in order to enhance economic proficiency and protect consumers from anti-competitive behaviour.

Competition Commission Chairman Khalid Mirza said this while speaking at the concluding session of the two-day National Conference on "Competition Regime in Pakistan," here on Tuesday. He said the commission has completed studies on four important sectors of the economy ie sugar, energy, banking and automobile industry. On the banking sector, the commission's study report has been published while the other three would be published soon, he added.

He said the commission would conduct study on over 10 other sectors. Khalid Mirza said competition related issues were discussed in the conference in addition to debating the multinational scope of competition laws. The law further requires positive steps to create awareness of competition issues and a culture of competition through advocacy and persuasion. Talking to media at the closing session, the CCP chairman said the fixation and control of the prices is not the responsibility of the commission. "We take action on any irregularity in any sector on any complain," he said.

It is the commission's policy to adopt enlightened and progressive approach and we are supporter of trade. "We facilitate and assist the trade and resolve their problems," he added. The commission aimed to provide level playing field to all market participants in all sectors of the economy and to curb cartels and anti competitive practices.

He said the conference was inaugurated by renowned social personality Abdul Sattar Edhi. The integrity and services were the two important qualities for which his name was suggested to inaugurate this first two-day national conference, he added. Speaking on the occasion, Karachi Chamber of Commerce and Industry President Abdul Majeed Haji Muhammad appreciated the CCP services to curb cartels and anti-competitive practices in the country.

Sustainable environmental strategy: water, food, energy security vital to poverty alleviation


ISLAMABAD (January 13 2010): Security of water, food and energy must be the cornerstones of new world sustainable environmental strategy to achieve the goals of poverty alleviation, population control and trend of urbanisation in a meaningful manner.

The strategy aimed at making sustainable commitments, outlining how the World Bank would work with client countries to meet the environmental challenges. This was the consensus of speakers on the first day of a two-day workshop on "World Bank (WB) Group Environment Strategy and Institutional Analysis of Air Quality Management in urban Pakistan," organised by the World Bank here on Tuesday.

Speaking on the occasion, Senator Humayon Khan Mandokhel, Chairman of the Senate Committee on Environment, said that being an agricultural economy, "we mainly depend on natural resources and their judicious use is need of the hour." He stressed the need for strict compliance with the environment laws taking into account the economic benefit of the policies. The assistance of the World Bank, he added, had prompted the local authorities to make environment development projects sustainable.

Speaking next, Javaid Afzal, senior environment specialist of the World Bank, said that the Environment Ministry, in collaboration with the WB, was preparing technical assistance loan for implementation of National Environment Policy (NEP). This workshop is a part of the ongoing global consultations, which the WB is undertaking to prepare its new environment strategy.

He said that through this assistance, the ministry and the bank would work on institutional strengthening, setting up pilots to reduce pollution load and draw out national strategy on climate change. The WB is helping the Ministry of Industries and Production in mainstreaming environmental management with industrial processes through non-lending technical assistance.

"The Bank's Environment Strategy, formulated in 2001, was successful in mainstreaming environment into development. Our new environment strategy seeks to address persistent challenges such as environmental health and pollution management, social equity, and sustainable natural resource management, as well as the growing challenges of climate change and urbanisation," he added

Naveed Naqvi, acting WB head in Pakistan, said that sustainable development was economically, socially and environmentally sustainable and key to all strategies and policies leading to the ultimate goal of poverty alleviation. He further said that the new strategy would build on the bank's first environmental strategy, titled "Making sustainable commitments: an environment strategy for the World Bank", formulated in 2001.

That strategy outlined how the World Bank would work with the client countries to address their environmental challenges and to ensure that the projects and programmes integrated the principles of environmental sustainability. The Sindh government has also requested the World Bank to help in identifying environmental priorities and propose investment operations for their management. The urgency of addressing Pakistan's environmental problems had probably never been greater, he said.

Conservative estimates presented in the WB report suggests that environmental degradation costs the country at least six percent of the GDP or about Rs 365 billion per year, as these costs fall disproportionately upon the poor. Experts said that the most significant causes of environmental damage identified and estimated include illness and premature mortality caused by air pollution, diahorrea and typhoid due to inadequate water supply, sanitation and hygiene and reduced agricultural productivity due to soil degradation etc.

'Inflationary pressure growing again'

KARACHI (January 13 2010): Inflationary pressure is again growing in the economy, and continued fiscal stimulus could complement an expected rise in imported inflation, raising the risk of resurgence in domestic prices, says State Bank''s First Quarterly Report. According to the Report, released on Tuesday, Consumer Price Index inflation is likely to remain higher than the annual target of 9.0 percent for the year.

The report has projected a CPI inflation of 10-12 percent for the current fiscal year. "The adjustment in administered prices of key fuels amid rising international oil prices and cut in electricity subsidies are important factors behind the expected strengthening of inflationary pressures", the report said.

The report said that headline CPI inflation dropped to 8.9 percent YoY in October 2009 (the lowest level in the preceding 26 months), it bounced back to 10.5 percent in November 2009. Similarly, WPI inflation saw a sharp jump in November 2009 to 12.5 percent from only 3.8 percent YoY during the previous month, the report said, and added that an uptick in November was largely attributable to higher food prices on account of Eid-ul-Azha.

As a leading indicator, WPI shows growing inflationary pressures in the economy. This view is also reinforced by an uptick in inflation measured by SPI in recent months, continued high levels of core inflation and as well as strong CPI inflation numbers on a month-over-month basis for an extended period, the report said. The risk of resurgence in inflationary pressures is also evident from strong core inflation. Both indicators, the non-food non-energy (NFNE) and 20 percent trimmed mean, though declining since H2-FY09, remained high, it added.

One of the main reasons for the persistence in both measures of core inflation is the double-digit increase in house rent index (HRI) despite an easing since June 2009. Moreover, the rising trend in international commodity prices, particularly crude oil, metals and some food items, is likely to fuel inflationary pressures in the economy. The risk of higher inflation in food commodities also stems from weak monsoons in India, which would likely have negative spillovers on domestic prices.

Sunday, January 10, 2010

Home remittances

Editorial of Business Recorder 8-01-2010

Encouraged by a steep increase in home remittances in the recent past, authorities of the country have been taking several measures to increase such flows to narrow the gap in the external sector. In order to further facilitate banks and beneficiaries of home remittances under the recently launched Pakistan Remittance Initiative (PRI), the State Bank on 4th January, 2010 reduced the timeliness for payment and settlement of home remittances, in view of the problems faced by banks in crediting beneficiary accounts on the same day due to time and resource constraints. According to the SBP circular, new timeliness for the first batch would be remittances received upto 0900 hours that potentially cover remittances from countries within the time zone of the US, partially Europe and the Middle East, whereas the second batch would be referred to remittance transactions that potentially cover remittances from the countries within the time zone of the Middle East and Europe. After the successful implementation of the new payment system's architecture, home remittances will be credited in one-hour time to the beneficiary's accounts and the timeliness for the two batches will be reduced to 1100 hours and 1500 hours, from 1200 hours and 1600 hours respectively.
It is good to see that the SBP and commercial banks are adopting innovative ways to increase the inflow of remittances. Although, it is very difficult to quantify the overall impact of the latest measure on the level of remittances, yet, any increase, even if it is marginal, due to the new initiative would be welcome because of the current problems in the country's external sector. In fact, without substantial improvement in home remittances in the recent past, Pakistan's current account deficit would have been much larger and its foreign exchange reserves at a much lower level. In this context, it would be in order to also give due credit to the helpful role played by the banking community. It was definitely not easy for them to change their bureaucratic attitude and compete successfully with a highly organized informal sector, which had perfected its tools over time to operate on very thin margins and in a very efficient and speedy manner to attract clients in the overseas market. Their success rate could be gauged from the fact that Allied Bank, Habib Bank, KASB Bank, MCB Bank, National Bank of Pakistan and United Bank that are currently part of the PRI mechanism, have settled around 100,000 inter-bank transactions worth Rs. 6.2 billion during the last two months. Hopefully, the latest circular of the SBP would further facilitate the banks as well as the recipients of home remittances. Also, Bank Alfalah and JS Bank are expected to join the PRI mechanism soon. The shift to modernity and the provision of quicker service, in our view, was definitely a step in the right direction.
However, it needs to be highlighted that the latest measure taken by the State Bank, in fact the whole idea of Pakistan Remittance Initiative, centres around the provision of a high level of convenience and comfort to the households receiving home remittances from abroad. In our view, there are other more potent factors determining the level of remittances through the banking channels, which include the difference in the exchange rates offered in the official and informal markets, employment of Pakistanis in foreign countries and their income levels, and investment opportunities and political conditions back home. We expect that the government will also continue to keep a close watch on all these factors and try to immediately remove any impediments which could retard the present buoyant trend in home remittances.

The great divide (on Inequality)

From Business Recorder 8-01-2010

Huzaima Bukhari and Dr Ikramul Haq

A number of informative - though highly disturbing studies - conducted by the Centre for Research on Poverty and Income Distribution (CRPID, www.crpid.org), confirm that rich-poor divide in Pakistan is increasing alarmingly. According to conservative estimates, 63% of the poor in Pakistan are in the category of 'transitory poor'. The rest of the 32% and 5% of the population - subsisting below the poverty line - are 'chronic' and 'extremely poor', respectively. Chronic and extremely poor are those households that are always below the poverty line, all the time during a defined period. Similarly, on the other side, 13% and 21% of the total non-poor (above the poverty-line) have been classified as 'transitory vulnerable' and 'transitory non-poor', respectively.

This portrays an alarming situation as more and more people are moving from the transitory category to the chronic category, courtesy regressive taxation leading to inequitable distribution of income and wealth, monopoly over assets by a few, and wasteful expending by the government. Rulers in Pakistan since 1948 have shown extreme apathy towards the poor. They are not at all interested to make Pakistan an egalitarian society - providing economic justice to all. One wonders if the present government, badly trapped by the forces that matter in the land in various non-issues, is cognizant of this state of affairs and devising some practical means to overcome it.
Political economy is the theory of wealth and of how wealth is created and shared within the society. Its key concepts are production, distribution, exchange, and consumption. Historically, the political economy is a response to the rise of capitalism and capitalist society. Its concepts are refined, redefined and added to as capitalism progresses from the mercantile or merchant capitalism of the sixteenth and seventeenth centuries, to the agricultural and manufacturing capitalism of the eighteenth century, to the industrial capitalism of the nineteenth century, from the rise of a unipolar world power, to quest for monopolies in the 21st century.

Unfortunately, nobody in Pakistan has conducted a comprehensive research to determine all the dimensions of the rich-poor divide. Different studies (notably that of late A. R. Kamal and Talat Anwar) provide estimates of various inequality indices in Pakistan, wherein the Lorenz Curve and Gini Coefficients, have been most commonly used. According to Mr. A.R. Kamal, studies on income inequality in Pakistan show different estimates arising due to the following five important factors. Firstly, different studies use different data sets, some based on Household Income and Expenditure Surveys, others that make use of income tax data, and some other studies splice the two sets of data. Second, while some studies consider inequalities in income, others consider inequalities in the consumption expenditures. Third, while some studies are done for Pakistan as a whole, others examine income inequalities in both the rural and urban areas. Fourth, some studies report income inequalities across households; others report inequalities across population or earners. Fifth, some researchers classify data by deciles prior to estimation of the Gini-coefficient; others employ the income intervals that are not uniform. All studies, however, confirm that income inequality in 2000-2007 had been the maximum compared to any time period in the history of Pakistan. The poorest 30% lost their share, while the richest 20% gained in both the urban and rural areas during the Musharraf-Shaukat era.
The Gini Coefficient is named after Corrado Gini, an Italian economist who published it in 1912. The Gini Coefficient is derived from a statistical formula and expresses the degree of evenness or unevenness of any set of numbers as a number between 0 and 1. A Gini Coefficient of 0 would indicate equal income for all earners. A Gini Coefficient of 1 would mean that one person had all the income and nobody else had any. Thus, lower Gini Coefficients indicate more equitable distribution of wealth in a society, while higher Gini Coefficients mean that wealth is concentrated in the hands of fewer people. Sometimes, the Gini Coefficient is multiplied by 100 and expressed as a percentage between 0 and 100. This is called the "Gini Index". Pakistan's latest position, vis-୶is some selected nations, is illustrated in the Table.
According to UN Official report, from 1987-99 the Gini Coefficient for Pakistan was in the range of 0.33 to 0.43, which deteriorated to 0.68 in 2006, yet Musharraf and his "technocrat team" (sic) keep on claiming a wonderful 'economic turnaround" during the PML(Q) regime. It is a national shame and disgrace; for their insensitivity, indifference and apathy towards the poor masses of Pakistan for which, history will never forgive them.
Inequalities in income in Pakistan, as elsewhere, largely reflect inequalities in the distribution of assets. Since the poor have virtually no assets and the lower middle class own very few assets, income distribution is skewed. Distribution of state land; development of plots and houses for the common man at affordable prices and installments; the sale of shares of public enterprises in smaller lots; human resource development; and credit to the micro, small and medium enterprises are some of the ways that might help the poor in acquiring assets. However, the role of official bodies set up by federal and provincial governments in this regards (much-publicized 'Benazir Income Support Programme' or 'Khushal Fund'!) is simply hopeless - due to various weaknesses, even the allocated funds have not been distributed or are mis-utilised.

The income inequalities in Pakistan have increased sharply during the last 8 years and the trend continues unabated, despite tall claims (sic) of poverty reduction. The main factors that govern personal income distribution include: distribution of assets; functional income distribution; transfers from other households, government and rest of the world; and tax and expenditure structure of the government. The single most devastating factor for increased income and wealth inequalities remains the regressive tax system. Incidents of tax on the poor during the last 10 years has increased substantively (35%) while the rich are paying no tax on their colossal income and wealth. A study of Pakistan from this political economy perspective is very crucial as our society is fast moving towards dehumanizing characteristics, unfettered and unchallenged. We are facing economic disparities, starvations, scarcity of eatables, and lack of essentials services. The Great Divide in today's Pakistan between the rich and the poor is assuming alarming proportions and may eventually lead to civil commotion, if curative measures are not taken immediately.

(The writers, tax lawyers, are visiting Professors at Lahore University of Management Sciences (LUMS)

Table: List of recent Gini Indexes for a select

group of nations


Japan 14.9 United Kingdom 23.0

Sweden 21.0 Iran 41.0

Germany 22.3 United States 46.6

France 32.7 Argentina 52.2

Pakistan 68.0 Mexico 54.6

Canada 23.1 South Africa 57.8

Switzerland 21.1 Namibia 70.7


Source: US State Department report (2008)

Pak-Jordan FTA: the sooner the better

From Business Recorder 8-01-2010

Proposals, agreements and negotiations are terms often used with respect to Pakistan's policy-making showing the absence of the most important factor i.e. the implementation. Pakistan's trade relations are no exception to this rule and are mostly confined to pre-implementation stages since long.
Pakistan enjoys the rather unwanted distinction of having as many as 10 proposed Free Trade Agreements (FTAs) on its plate, which is the highest number in the region. Yet, the slow progress on FTAs could be tracked by the fact that only 6 FTAs out of 26 are actually under implementation. There is, however, a ray of hope that the list of implemented FTAs would stretch to seven anytime soon.
This hope has emerged after Pakistan's commerce minister urged to speed up and formally ink the agreement when Pakistan's delegation next meets its Jordanian counterpart later this month. The two countries initiated FTA talks way back in 2005 and ever since have only progressed to reach the 'under consideration' stage - which is a slow process by regional standards where FTAs mostly become operational within 20 to 24 months of proposal.
FTAs generally have not been of great benefit to Pakistan's trade balance as they have only added fuel to the fire by swelling the import bill. But Jordan's case is exceptional as bilateral trade with the Middle East country has a volatile history with trade balances shifting in favour of one country to another every year. However, the trend has started shifting more in Pakistan's favour of late.
Pakistan's major imports from Jordan are mainly focussed on fertilizers which have more than 50 percent share in total imports. The good news is that Pakistan is most likely to stop importing urea fertilizer from 2012, which bodes well for Pakistan's trade balance with Jordan as it would reduce the import bill from Jordan to half of what it is now.
A more immediate benefit which Pakistan could reap from the FTA is easing the government's burden on imported fertilizer in the form of subsidy. Pakistani government allows duty free urea import and takes the burden of price differential on its books. The FTA, when implemented would certainly reduce the subsidy bill on imported fertilizer.
The Pak-Jordan FTA will also open doors for Pakistani exporters to capture the Jordan market with much more penetration once the duties are abolished. Jordan has big appetite for Pakistani cotton which constitutes around 45 percent of the country's total exports to Jordan. The exports become even more attractive considering the 12-15 percent premium pricing of Pakistani cotton in Jordanian market. Pakistan's bumper cotton crop this season could not have been timed any better either.

The fact that Jordan already has an operational FTA with USA would also act as a confidence booster for Pakistani exporters - as they duty free access to the US markets would be reason enough for the exporters to increase the bilateral trade, hence the trade surplus. Pakistan vows to quadruple its exports to Jordan in the post FTA regime. This is easier said than done, no doubt, but if the policies are implemented in true spirit - it could well become a reality.

Regional FTAs status


Proposed Framework Under Signed In effect Total

Agreement negotiation


Australia 5 1 5 1 7 19

China 7 2 4 1 9 23

India 11 5 7 1 8 32

Indonesia 6 2 1 2 5 16

Pakistan 10 5 3 2 6 26

Singapore 4 1 9 4 15 33

Thailand 6 5 3 1 9 24


Source: ADB

Pakistan: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding


December 11, 2009

Pakistan: Third Review Under the Stand-By Arrangement

IMF Country Report No. 10/6

January 2010



Phajja is the proprietor of a Siri-Paya and Nehari Shop in Lahore. Sales are low and, in order to increase them, he comes up with a plan to allow his customers to eat now and pay later. He keeps track of the meals consumed on a ledger. Word gets around and as a result increasing numbers of customers flock to Phajja’s shop. Phajja’s suppliers are delighted and are very willing to sell more and more raw materials for the meals he prepares. Phajja shows them his ledger of receivables and they extend him credit.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and gives Phajja a credit line and then increases Phajja’s borrowing limit.

Taking advantage of his customers' freedom from immediate payment constraints, Phajja jacks up the prices of his Nehari and Siri-Paye. Customers don’t mind as they are not required to pay on the spot. Sales volume increases massively; Banks and suppliers lend more; Phajja opens more outlets. He sees no reason for undue concern since he has the debts of the customers as collateral.

At the bank's corporate headquarters, expert bankers recognize Phajja's customer loans as assets and transform these customer assets into BONDS. These negotiable instruments are given exotic names such as SIRIBOND, PAYABOND, MAGHAZBOND AND BONGBOND. These securities are then listed on the Stock Exchange and traded on markets worldwide. No one really understands what the names mean and how the securities are guaranteed but, nevertheless, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a credit risk manager of the bank decides that the time has come to demand payment of one of the debts incurred by Phajja. Phajja in turn asks his clients to pay up. One by one they refuse; the clients cannot pay back the debts. Phajja refuses to serve them any more. The clients stop coming.

Phajja is really screwed now. He cannot fulfill his loan obligations and therefore claims bankruptcy. All Bonds drop in price by between 80 to 95%.

The suppliers of Phajja, having granted generous payment due dates and having invested in the securities are faced with similar problems. The meat supplier defaults on payment to the sheep and cattle supplier and claims bankruptcy. The atta supplier is taken over by a competitor; Phajja lays off the cook and staff.. Bankruptcies soar, unemployment mushrooms.

The bank that lent the money in the first place is set to collapse. It is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties with Phajja commuting back and forth in his Executive jet and Mercedes 500SEL, brokering the deal.

The funds required to save the economic collapse are obtained by a tax levied on the citizens, most of whom do not eat Nehari or Siri-paye.