Economy of Pakistan

Revamping public enterprises through fundamental reforms

2011-05-23T10:03:00.000-07:00

The News 23th May 2011

By Jamil Nasir

State ownership per se is not the only reason for the lacklustre performance of the public sector entities (PSEs). In this context, privatisation might not be the most pragmatic solution to salvage the futile PSEs, particularly if the government lacks adequate regulatory capabilities or is generally perceived as a corrupt state institution. On the other hand, if the ruling leadership has a strong political will to introduce organisational reforms in the PSEs, the economy’s condition can be improved without resorting to privatisation. Moreover, privatisation of loss-incurring enterprises is not an easy affair. It requires introducing fundamental reforms for improving the overall governance in these organisations to make their functioning and administrative affairs better. It implies that ‘third options’ should be explored that can either act as a substitute for privatisation or pave way for successful privatisation process to occur.

Introduction of fundamental organisational reforms is the first set of policy prescriptions that can be explored as one of the options. The goals and objectives of the PSEs need to be examined critically. Different weights can be assigned to the goals in order of priority. As a result of this critical analysis, the goals of PSEs should be reduced to the minimum possible number. The redundant or overlapping functions should be done away with. In this way, the charters of the PSEs can be redefined to avoid the overlapping of goals among various PSEs.

Another important ingredient of the organisational reforms is to ensure transparency in its operations and money matters. The PSEs should be required to maintain high standards of transparency and disclosure. The maximum possible information should be made available to the public at large related to their functions, policies, contracts/deals, HR aspects etc. Recruitment, placement and transfer should not be based on patronage and political considerations. A code of corporate governance after analysing the best global practices may be a good step forward to improve the governance of the PSEs. The code of governance should, inter-alia, provide answers to the significant questions, such as how the employees are selected, what they are paid, etc.

The appointment of CEOs and other top officials who are primarily responsible to set the direction of the organisations should be through an open, transparent and merit-based process. Recruitment of CEOs may be advertised in the newspapers. The aspirants may be asked to submit their strategy papers for making these enterprises profitable and efficient organisations. Only the candidates of known integrity and possessing proven leadership qualities should be selected through an independent commission that enjoys trust of both the government and the opposition.

In order to reduce interference from the government, the CEOs of such organisations must be accountable to a parliamentary committee composed of representatives of both the government and the opposition, having good understanding of managerial and economic issues. Once a CEO is selected through a competitive and merit-based process, the government should support the actions he/she takes to improve the performance and efficient running of the organisation. The government should not interfere in day- to- day operational matters of the organisations. They should be allowed full operational autonomy to achieve their objectives.

Linking the incentive system with performance, efficiency, productivity, and consumer satisfaction may be another important initiative in the domain of HR. The incentive system need not be construed as meaning materialistic rewards only and must include non-materialistic elements as well. Managerial autonomy, improved performance evaluation system, and a better incentive system can go a long way in improving the performance of the PSEs.

Further, high quality auditing and accounting standards ought to be prescribed for the PSEs. Information relating to accounts like balance sheets and income statements etc. should be available on their websites. Efficient internal audit function should be put in place. In our case, the office of the Auditor General of Pakistan may be tasked with the ‘performance audit’ of such organisations. The performance audit reports could become the starting point for a restructuring strategy of the PSEs.

Another set of policy prescription to salvage the PSEs can be increasing competition. Agreed that in cases where PSEs enjoy natural monopoly, increasing competition is either impossible or socially unproductive. Also agreed that coordination costs of escalating competition can be sometimes high but it does not mean that we do not have room for improving the productivity of a PSE by stimulating competition. For example, a PSE can be divided into regional units. Reward/punishment of such regional units should be according to their relative performance. Such a strategy can pave way for privatisation of some of the regional units at some later stage as was experimented by the British Railway system.

But above all it is the political will of the government that matters. The administrative and structural reforms require a high level of commitment. The culture of political patronage that has permeated into the public sector organisations is the biggest stumbling block to organisational restructuring and reforms. But the fact of the matter is that PSEs are here to stay. There are limits to the down-sizing and right-sizing of the public sector. So the need of the hour is that these organisations and enterprises are subjected to wide-ranging reforms of fundamental nature.

Higher revenue generation: an uphill task

2011-05-23T10:02:00.001-07:00

THE NEWS 23th May 2011

By Sardar Irshad Shaheen

Collection of taxes has been the most vital source to generate revenue in almost every society of human history, and a taxation system is the lifeblood for socio-economic development of a modern state. A developed tax system helps establish a fair society through equitable distribution of economic benefits. Such a system must be business friendly to attract and encourage investment at all levels of business activities. But if a tax system remains regressive and inelastic, it discourages properly documented investment with its social implications compelling the country to rely heavily on other revenue generation sources, including foreign assistance with wholly unfamiliar and irrelevant recipes.

High tax rates and an overall complicated tax system in Pakistan are the main causes of black economy and tax evasion, non documentation and corruption. The informal sector is thriving due to unchecked illegal activities such as smuggling, black marketing, and drug trafficking that are taking place in major parts of the country to the advantage of pressure groups who are helped by powerful mafias and vested interests. They are further promoted and protected by politico- bureaucratic amalgam through erosion of institutional stability and hollow cosmetic measures.

Unfortunately, this state of affairs is not only allowed to continue but it is being strengthened by defeating professionalism to accommodate manipulating groups and incompetent individuals.

It is a proven fact that all taxes in any shape are unwelcome, but income tax is the most unpleasant of all taxes, and it remains so in whatever from it is introduced anywhere in the world. A chief reason for its unacceptability is that it does not provide any direct return or benefit to the taxpayer. That explains why Zakat even at a very low flat rate of 2.5 per cent was refused at a very early stage of Islamic history (during the period of first Caliph).

A country’s tax system can be successful only if it has:

(1) Clarity of law and communicable simplicity of procedure.

(2) Stability in institution building and continuity of policies for promoting tax culture, in accordance with the stage of development of a society.

(3) Specialised and professional top management equipped with practical experience in tax field.

(4) Enforcement of law in letter and spirit.

(5) Provision of incentives to the taxpayers with some direct social and material advantages.

Simplicity of tax law and procedure will not succeed unless the number and rate of taxes are reduced to a reasonable level. A few years back more than hundred different taxes were in operation in our country out of which the most frequently charged 77 taxes included; 20 federal taxes, 19 provisional taxes, 14 local taxes and 24 other levies and surcharges. The businessmen were entirely at the mercy of various government departments. The tax rates were also unreasonably high since it was an easy way to increase revenues by increasing the number or rate of taxes.

Simplifying tax laws through experimentation:

Legal provisions under the Income Tax Act 1922 were considered quite complex particularly due to new requirements faced by taxpayers in the emerging business environment. This act was replaced by Income Tax Ordinance, 1979, in which legal provisions and procedures were re-arranged in a much simplified manner. It was welcomed by all the stakeholders. There was no strong demand to replace this law by a new one. The only demand of the taxpayers then was that Universal Self Assessment Scheme be given legal cover instead of changing it every year through circulars.

Nevertheless to the amazement of every stakeholder, a new law was drafted not by local experts, but by a foreign expert- completely oblivious to the local conditions ñ purely on the pattern of a developed economy. This law became operative as the Income Tax Ordinance, 2001. Even senior field officers were not taken into confidence and the entire exercise was done under the compulsion of IMF and World Bank. In the name of reforms every detail was prepared by IMF through a ìconfidentialî paper in which the designation, nomenclature, the design of offices and number of officers and employees were proposed by foreigners. The dominant role allowed to the World Bank and IMF made many field officers believe for quite some time that funds for reforms supplied by these institutions were grants and not loans. Not only was the road map prepared by IMF followed literally, but the loan money had been squandered recklessly. After the promulgation of Income Tax Ordinance 2001, more than four hundred amendments had to be made in it during the first month alone. Over two thousand amendments have so far been made in Income Tax Ordinance, 2001 as it was not in tune with the domestic requirements. It was an unnecessary exercise of mere experimentation which greatly eroded the institutional fabric of the tax organisation and added a great deal of confusion.

After the operation of Income Tax Ordinance 2001, repeated concessions were allowed to taxpayers some of which were not even demanded by them. Our system of income tax today is one of the most concession-orientated systems in the world. But compliance of tax laws has shown no improvement.

In comparison, India redrafted the Income Tax Act 1922 in 1961 and income tax laws have been enacted under Income Tax Act 1961 with effect from 13-09-1961. In this act amendments have been made through 109 finance acts so far. These amendments have been smoothly made by adding additional sections and sub sections without drafting new laws again and again. For instance in Chapter-VI A dealing with some deductions, section 80A has 67 additional sections (besides sub sections) from section 80A to 80 VVA, and section 115 has 75 additional sections from 115A to 115WL. Indian income tax rules revised in 1962 are still operative. We replaced the Income Tax Act 1922 with Income Tax Ordinance 1979, which was repealed and replaced by Income Tax Ordinance 2001 drafted by a foreign expert based on the model of an advanced country.

The Indian tax system had the closest affinity with our business and social environment since both countries inherited the Income Tax Act, 1922. But instead of sharing common experience with Indian tax laws, we preferred aping a model of a distant advanced country having little relevance to our ground realities.

Erosion of FBR as an institution:

An imported finance minister (later prime minister) had managed to thrust upon the FBR five members from the private sector who had little working expertise in a taxation department. Huge amounts were spent on them as perks with hardly any positive achievements. All this was done in the name of reforms and introduction of fresh (but alien) experience in this specialised organisation. These members could hardly match the career tax officers having over 30 years of practical field experience. The officers and workforce remained disillusioned and no positive long lasting result could be achieved. Major attention was focused on withholding tax which has been imposed on nearly every consumable item or receipt, and income tax got converted into an indirect tax which is suicidal for the very spirit of direct tax system. Even the formulation of the budget has been artificial as major chunk of revenue came from sales tax, customs duties and withholding tax on constantly increasing imports. So when these sources fell, the budget target also fell significantly. As if this was not enough, the federal government appointed a generalist as chairman FBR last year (who was junior to 38 officers of FBR). This was done at the most crucial time, when collection of revenue was most needed during the end of last financial year and the government could ill afford such an adventure. When the career members protested at this appointment, they were sidelined. This year too, just four months before the end of the financial year, the previous head of FBR has been replaced by a new generalist officer. The appointment of a generalist as head of a technical and professional organisation reflects total disregard of national interests, particularly at this critical time.

Such an attitude appears to be a deliberate attempt to erode national institutions which is a classic example of bad governance. The undeniable fact is that FBR has been failing in raising its tax-to-GDP ratio due to: (a) excessive experimentation and resultant erosion of intuitions; and (b) little importance given to career offices and tax experts in policy making and top postings.

Current state of affairs:

(1) The budget target of the FBR was fixed at Rs1,630 billion which was revised and re-fixed at Rs1,588 billion. With two months left, FBRís total collection up to April 2011 was Rs1,147 billion, leaving Rs441 billion balance to be collected. Collection of such a huge amount does not appear to be possible. The policy makers not only banked heavily on foreign borrowings but had no definite plan for the economy despite energy crisis, slash in PSDP (twice) and substantial interest payments on foreign debt amounting to Rs1,300 billion, which consumed a large proportion of the national resources together with expenditure on war on terror.

The quality of economic analysis and research of our financial experts can be found in Economic Survey 2009-10. The information and figures spread over various pages lack any descriptive scrutiny leading to no direction. As a whole the survey appears to have been prepared with no thought or effort. If such is the government's priority then one should not be surprised if the revenue system today is in such a mess.

(2) As pointed out earlier, our income tax system today is heavily concession oriented, but despite that the tax base has not expanded adequately and the tax-to-GDP ratio is still plummeting.

Taxpayers must be provided a guarantee of stability in tax rates and procedure of the system. Legal guarantee of Universal Self Assessment has been provided through statutory provisions in the Income Tax Ordinance 2001. Every return of income filed by a taxpayer is to be accepted irrespective of declared figure of income or loss. The rates of income tax were also to be reduced with some variation and the minimum rate should be half per cent and maximum twenty per cent for every taxpayer including the corporate sector. This would have reduced evasion, malpractices and corruption, resulting in expansion of the tax base. But the government fixed the rate at 35 per cent on corporate sector whereas on salary income, the maximum rate was reduced to 20 per cent. The FBR has again failed to appreciate the role of continuity and credibility of tax laws. Having failed to broaden the tax base, tax rates have been increased on all classes of income with complicated methods.

(3) The government on the advice of non-technical consultants and advisors has constantly been introducing whitening schemes, despite the fact that foreign remittances through banking channels were a constant source of whitening the untaxed money. The latest adventure by the government was that only two per cent tax was to be paid through a whitening scheme for whitening any amount of assets or black money, but the response was a paltry payment of Rs3.2 billion income tax for whitening assets, just 1.23 per cent of the total size of economy. This sorry state of affairs in the presence of every concession allowed by the government is most unfortunate and speaks loudly of the apathy of the policy makers. This also shows that the government would not want FBR to be an independent stable institution run by experts and experienced tax officers. Obviously the first priority of the government must be that highly experienced career officers of tax service be posted to top management levels of FBR and there should be no room for any mediocrity.

(4) Back in 1998 the number of taxpayers stood at 961,090. These taxpayers included salaried persons (411,000) and business class (534,000). After eleven years the position as on 30-06-2009 and 30-06-2010 was as shown in Table-1.

The figures in table 1 clearly reflect the dismal performance of the policy makers. The documented sector (or corporate sector) is very small which mainly bears the brunt of tax collection. Top one hundred taxpayers paid Rs174 billion in 2010 besides deduction at source and advance tax (mostly paid by petroleum, banking and manufacturing sectors). Other than the active registered companies and salaried class, the number of business taxpayers is quite low. Their share in the income tax collection is less than 10 per cent of the gross collection whereas the share of a salaried person is 7 per cent. After deducting the collection of tax paid by corporate sector at Rs176 billion plus gross withholding tax (with CVT collection), the balance amount left is Rs15 billion only which is around 3 per cent of total tax collection. It is argued that the business community pays withholding tax on almost each item, but the same is true of the whole population including the large majority of poor people. The common man pays withholding tax on mobile phones and other items (including CVT), which was almost 54 per cent of the gross income tax collection in 2009. It may also be added that corporate sector, government corporations, banks and some multinational companies including oil companies, have been paying bulk of the tax revenue. Almost the same number of companies (one hundred) paid over 80 per cent of indirect taxes. Obviously the number of regular business taxpayers who filed returns of income could not increase.

(5) Overall collection of FBR as on 30-06-09 and 30-06-10 shows an unpromising situatio. (see Table-2)

The figures in table 2 indicate that the amount of withholding income tax, sales tax on imports and federal excise on imports and customs duties works out to be 51 per cent and 63 per cent in both years, respectively. Major source of even domestic sales tax and federal excise duty comprises of:-

(a) Consumption of sugar and products of edible and medicine, etc.

(b) Utility bills and excise duty on bank transaction.

(c) Purchases by government and semi-government organisations, corporations and various contracts. Add to it the withholding tax on almost every item and it would be clear that the burden of 70 per cent of all taxes is being borne by the common man through indirect imposition of taxes.

It is a matter of grave concern that the situation is deteriorating. The tax-to-GDP rate has plunged to 8.8 per cent. The number of income tax business returns received during the last two years was quite unsatisfactory.

As regards to sales tax, the situation is worse. The number of enrolled sales taxpayers is merely 102,167 and only 90,204 returns are now regularly being filed. During the financial year ending on 30.06.2010, only one hundred corporate taxpayers paid 81 per cent sales tax (Rs240 billion) out of a total collection of Rs295 billion domestic sales tax. A major amount of domestic federal excise duty was also paid by only twenty four corporate taxpayers (mostly petroleum companies).

Solution:

The past experience of over three decades leads us to the conclusion that frequent experimentation and outside interference has caused erosion of the FBR as a stable tax collecting institution, with severe repercussions for the taxpayers and officials alike. The Central Board of Revenue was re-designated as Federal Board of Revenue through an act of parliament with effect from November 1, 2007 as a semi autonomous body after years of deliberations and efforts. The newly established organisationís performance was affected by mindless experimentation and appointment of non professional individuals at the helm of affairs. The FBR appears to lack direction and functions without proper coordination among various tiers of its departments. There is great deal of confusion and dissatisfaction all around.

If the government is really serious in tackling the issue of tax revenue collection, it must consider the FBR as an essential state institution. The right people for the right job must be a permanent feature with well defined career- oriented expertise in the organisational hierarchy. In areas like reforms and restructuring, the task must be left to experienced and senior officers of FBR only, who can reexamine every aspect of structural anomaly according to the actual requirements and ground realities. It must be emphasised that the FBR needs to be strengthened as an organisation based on professional competence.

The following measures, therefore, need to be adopted for immediate and long-term stability and efficiency of the taxation system, which would also help to expand the tax base and increase revenue:

A - (1) FBR is traditionally plagued with political pressure and bureaucratic (vested interest) influence. The first step should be to select chairman of FBR on merit. For this purpose, the post of chairman should be advertised for selection through Public Service Commission for a fixed tenure of four years based on academic qualification and professional experience. Such a step would go a long way in stability and efficiency of the FBR with no apprehension of political interference.

(2) Job classification with career planning must be clearly defined with strict application at all levels for postings and transfers. Job performance of various sections of FBR needs to be revamped for better coordination and only those officers should be posted in FBR who have sufficient field experience turn by turn for a fixed period.

(3) A full fledged research and development wing needs to be established to guide the FBR in the tax policy matters and suggest practical ways for effective coordination between FBR and field formations in the light of ever emerging new situations.

(4) Systems of appraisement of customs duty and Pakistan Customs Computerised Systems (PACCs) and system of sales tax processing and Sales Tax Automated Refund Repository System (STARR) should not be closed, but upgraded for application in all the dry ports and sea ports to make them transparent and less time consuming. Only fully trained and honest officers should be empowered to appraise and assess tax liabilities in accordance with best practices principle.

(5) Smuggling is perhaps the most lucrative and organised business in Pakistan and smuggled goods are sold openly everywhere particularly due to misuse of Afghan Transit Trade (ATT). Many departments including Federal Investigation Agency, commerce ministry, and foreign office deal in anti-smuggling cases. Other agencies like Coast Guards, Frontier Constabulary, Levies and even the police department have been given anti-smuggling powers. It not only creates overlapping and delay in taking proper action, but it also becomes a source of organised corruption which explains why smuggled goods are available not only in big cities but also in small towns. These agencies mostly run after tracing smuggled goods for corrupt practices and they do not focus on their own duties. A single agency fully trained and equipped must be empowered in dealing with anti-smuggling in an effective and transparent manner.

(6) All exemptions from sales and income tax should be withdrawn. The chief commissioner should be empowered to allow exemption in genuine cases for a specified period.

(7) At present only one hundred taxpayers of the corporate sector pay 90 per cent of sales tax on imported and domestic items. To make it acceptable within the business community, sales tax or RGST should be considerably reduced to 5 per cent starting from a fixed rate of 1 per cent or Rs100 on specified monthly sales (gradually increasing up to 5 per cent which should be adjustable). Sales tax at the rate of 1 per cent should also be imposed on defence purchases as well as on all medicines which should be non-adjustable. International tenders should also be taxed 1 per cent non-adjustable sales tax.

(8) Federal excise duty should be merged with sales tax to reduce the number of taxes and hassle for the taxpayers. The sales tax system must not only be fully automated to minimise delays and corruption, however a strict system of audit should also be put in place to eliminate the misuse of the system.

(9) Claim of refund on account of input cost has been a major source of corruption and malpractice. This can be curbed by reducing sales tax rates and abolishing exemptions. Instead alternate incentives can be offered to exporters including exemption of income tax and other taxes/levies on exported goods.

B - (1) Tax revenue enhancing measures:

For expanding the tax base, some provisions of law need to be amended / added to ensure that:

(a) All property transactions involving plots of 2 kanals and above in the urban areas of big cities should be registered only after verification of national tax number (NTN) of seller and purchaser;

(b) Similar method should be adopted for sale and purchase of commercial property of any size in big cities;

(c) All types of vehicles with market value of one million rupees or above should be registered/transferred after verification of NTN from the tax officer;

(d) Every person traveling abroad, except students and foreign nationals should be required to obtain NTN from the income tax department. This should also include travel for Umrah, Hajj or Ziarat, medical treatment and personal visits;

(e) Expenditure on lavish functions, including marriage and social/political gatherings and conferences should be taxed either at a fixed rate or booked for assessment of income after verification of NTN of the person concerned;

(f) Services sector is highly under taxed, particularly the income of surgeons, physicians, advocates and professionals rendering consultancy services. Surgeons earn an average of Rs0.5 million to Rs20 million per month. A specialistís income ranges from Rs0.2 million to Rs1.5 million per month, whereas their annual declared income is generally even less than their monthly income. Fees of private professional colleges and schools are also very high. Their share in revenue is nominal but no meaningful audit has ever been conducted. A mechanism needs to be adopted to properly tap this very important under taxed source of revenue;

(g) For better compliance, tax returns should be prepared in Urdu together with pamphlets for proper guidance of taxpayers.

(2) Making the tax laws equitable:

(a) The most frequently raised objection by the business community in particular and public in general is that politicians are selected by the people to safeguard their rights and are supposed to make laws in the best interests of the populace. Nonetheless, our politicians violate the law themselves when it comes to paying tax. Statistics show that very few legislatures of the national, senate and provincial assemblies are on tax rolls; and those who have a NTN pay an insignificant amount compared to their lavish expenses. It should be made mandatory under the law for every person contesting in the election (at any level) to get a NTN and file their return of income and wealth statement. Any person found guilty of tax evasion must immediately be disqualified. Such a step will give substantial boost to payment of taxes as leaders of the people will become a role model for them, dispelling the public perception that they consider themselves above the law.

(b) Due to a powerful lobby of authoritative landowners, agricultural income is exempt from income tax as it is a provincial subject under the constitution. Tax exemption to such a large section of economy reflects a huge distortion and the tax laws appear as inequitable. Taxing the agriculture income will make the taxation system not only equitable but it will greatly help boost the low tax-to-GDP ratio. Three steps should be taken in this direction:

(i) Agriculture land up to 15 acres should be exempted from income tax.

(ii) Income tax rates should be reduced (even for other taxpayers) to make the tax acceptable and to reduce the tendency of evasion.

(iii) Agriculturists can be compensated by provision of cheap fertilisers, electricity and irrigation water

(c) At present the FBR has not devised a worthwhile effective procedure of audit both for income and sales tax. There is no practical deterrence against evasion of tax after introduction of Universal Self Assessment Scheme. There needs to be a transparent provision in law that each case shall be audited on its turn after every third or fourth year (unless caught earlier on account of some definite evasion).

(d) Typically traditional bureaucratic method for raising revenues is to increase the rate of tax and number of taxes, which is counter-productive as such a method encourages tax theft and makes the tax base shrink. Not only the minimum rate should start from the lowest slab, but the maximum rate of income tax should not be more than 20 per cent, as no one would willingly pay tax more than that. Instead of promoting short-term interests, the FBR must bring the tax rates to a reasonably acceptable level so that measures adopted for increasing the number of taxpayers and revenue become fruitful. Lower tax rates can be a better tool of persuasion for taxing agriculture income. Moreover, another very important advantage of lower tax rates would be that it can help in introducing sales tax even at the retail level. The traders dislike documentation due to fear of paying income tax. If they can declare maximum receipts and incomes because of lower tax rates, the resistance to the imposition of sales tax would be minimised.

(3) Wealth tax:

(a) Wealth tax was abolished in 2000 under the pressure of powerful lobbyists, comprising mostly of civil and military bureaucracy, who did not want to pay wealth tax on their properties and plots. Tax on wealth is an important instrument of a fiscal policy which endeavours to establish an equitable economic system. Due to rising trend of investment in non-productive sector like properties, it would be advisable to impose wealth tax on all immovable properties at a fixed rate to be paid at the time of purchase/transfer. Wealth tax on each property measuring 2 kanals and above should also be charged annually. Other assets including costly vehicles can also be taxed accordingly.

(b) All the measures require the will of the government to enforce the law in letter and spirit. Successive governments have been bullied by apprehension of tradersí strikes, and they have wrongly considered them their decisive political constituency. A few hundred thousand traders can never change the fate of a government or political party if it remains more sensitive to the well being of the large population of 180 million people. Moreover, the ruling elite itself sometimes proves to be biggest hurdle in the enforcement of law. A tax collector sent his officials to monitor sales of one restaurant in Lahore, which incidentally belonged to the minister of state for finance. The collector was immediately made officer on special duty (OSD) and the whole campaign resulted in a fiasco. The political leaders in general and the party in power in particular consider themselves above the law. Such a mindset would never enable us to stand on our own feet.

C - Special incentives for taxpayers:

Our present system has not envisaged any provision of incentives to the taxpayers. To promote tax culture, the government must provide some special incentives to them. For instance, a certain limit of payment of tax (say Rs200,000) can be fixed for an individual taxpayer for one year, and if a taxpayer pays tax (of that amount or above), then he should be allowed some privileges for that year. For instance:

(i) Power to attest certain documents that year; (ii) Recommendation to issue specified number of armed licenses in that year; (iii) Recommendation to issue national identity cards and domicile certificates etc; (iv) Status of honourary magistrate and power to check and challan the traffic violators for one year by fixing a threshold of tax payment for this purpose. This will ensure additional advantage of effective control to regulate the otherwise quite unwieldy traffic throughout the country; (v) Priority in obtaining telephone, electricity, sui-gas connections; (vi) VIP treatment in hospitals and in courts of law; (vii) Some social security system should be introduced for regular taxpayers and incase of old age or disability, they should be paid some percentage of amount out of the tax already paid by them over the years; and (viii) Highest taxpayers should be offered honourary seats in legislation and government corporations. They should be guest of honour in certain local, provincial or national ceremonies/functions.

TABLE - 1

S. No. Total Number of Tax Payers Year ending Year ending

30-06-09 30-06-10

1 Number of companies 18973 19755

2 AOP Cases 28779 31135

3 Salaried Cases 145019 196101

4 Non corporate business 549252 638633

5 Number of return filers 765461 1444389

6 No. of persons shown in statements,

certificates of salaries, imports and exports, etc. 1766998 2313606

TABLE - 2

Taxes Year ending 30-06-09 Year ending 30-06-10

Sales Tax (total) 478284m 516348m

(1) Sale Tax on imports 203323m 247246m

(2) Sale Tax on domestic 274961m 269102m

Federal Excise (total) 113715m 124784m

(1) FED on imports 14617m 13557m

(2) FED on domestic 99098m 111227m

Customs (Net) 155905m 160273m

Income Tax (Net) 480487m 525977m

(Including withholding tax + CVT)

How Leaders start a Movement

2010-08-20T21:26:00.000-07:00

Global Economic Crisis and Poverty in Pakistan

2010-06-16T01:05:00.000-07:00

The Global Financial Crisis has impacted Pakistan through channels of Aid and FDI. To read more see paper by Vaqar Ahmed and Cathal O' Donoghue (published in the International Journal of Microsimulation).

Web: http://www.microsimulation.org/IJM/Articles/IJM_36.pdf

Fiscal incentives for setting up business be provided to returning expatriates: study

2010-03-15T04:09:00.000-07:00

KHALID ABBAS SAIF
FAISALABAD (March 11 2010): Economists have suggested that fiscal incentives should be provided to the returning Pakistani migrants who wish to set up small and/or medium-scale businesses.

In a study titled 'Remittances and Household Welfare', prepared by Vaqar Ahmed, Deputy Chief of Macroeconomics Section of Planning Commission of Pakistan; Guntur Sugiyarto, Economist, Development Indicators and Policy Research Division, Economics and Research Department, Asian Development Bank, and Shikha Jha, Senior Economist, Macroeconomics and Finance Research Division, Economics and Research Department, ADB, observed that these incentives may take the form of tax breaks, or other related initial concessions.

Second, to ensure future remittances cash flows, a special exchange rate may be offered on remittances arriving in special savings accounts in domestic financial institutions.

Third, the banking sector should be more proactive to increase the speed and certainty of remittance transactions to encourage more migrants to send their money through official banking channels, they added.

The economists said that this step would help in the development of the financial sector in the economy and contribute to the stability of macroeconomic fundamentals, in particular the balance of payments. It is also a challenge for the government to make remittances more redistributive by making the tax system more progressive to help low income households. It is important to note, however, that the tax structure, related to remittances, should provide incentives for migrants to send more through the formal channels. This may require amendments to the current Income Tax Ordinance, they added.

They pointed out that the challenge for Pakistan is to channel the remittance flows toward long-term investments that can contribute toward sustained growth in the real sector, while at the same time leveraging the economy away from consumption-led growth. In this regard, several key measures that have been seen across the developing world have also been considered for Pakistan. It is also a challenge for the government to make remittances more redistributive by making the tax system more progressive to help low-income households. It is important to note however that the tax structure related to remittances should provide incentives for migrants to send more through the formal channels. This may require amendments to the current Income Tax Ordinance.

In "Key Findings and Policy Implications", Economists revealed that with around two million Pakistani migrants in the Gulf region and almost the same number spread in North America, UK, and other countries, remittances from abroad have contributed significantly to the economy. The current contribution of foreign remittances is more than 4percent of GDP, and in some periods, they have become the major source of foreign exchange reserves. This paper examines the impact of remittances on the macro economy and household welfare in Pakistan using a CGE model and micro-econometric analysis. They said that the first approach is to highlight the macroeconomic and distributional effects of a reduction in remittances, while the second method is to show how remittances decrease the probability of being poor and affect the household consumption expenditure and hence poverty.

They pointed out the key findings are as follows:

(i) Descriptive analysis from survey data indicates that the mean income of a migrant household is 17.3 higher than a non-migrant household. The share of remittances in the total income increases as the household moves to a higher income group. Remittances also contribute more to rural household incomes than to urban household incomes. The share of remittances in rural households increased from 3 percent to 5 percent during 2002-06, while in urban areas it remained stable at around 4 percent. Regional characteristics also affect significantly the pattern of migration and therefore the flows of remittances in Pakistan.

(ii) The CGE simulation analysis shos that a 50 percent reduction in remittances adversely impacts real GDP growth by -0.74, real investment by -7.7percent, and total household consumption by -2.8 percent. As a result, poverty headc ount increases by 6.35 percent.

The reductions in consumption levels of rural non-farm and landless agricultural households shows the largest cut because of the remittance drop.

The poverty impact is much stronger in rural than urban areas, showing the stronger link between migration/remittance and poverty in rural compared to urban areas. This further highlights that many migrants from Pakistan are still low-skilled workers coming from agricultural backgrounds.

(iii) Results show that the probability of becoming poor declines by 12.7 percent if the household receives remittances from abroad. An increase in the household size and number of persons with secondary education lead to an increase in the probability of household member migrating. On the other hand, increasing the number of males over 15 years of age, living in urban areas, and having more household members with university education lead to a decrease in the probability of the household member going abroad.

(iv) The shares of household expenditures on food, education, clothing, and recreation increase with the availability of remittances. The predicted mean expenditure of migrant households is 41 percent higher than nonmigrant households. The highest increase is in the expenditure share on durables, ie, 74 percent. The budget share for education increases only by 2.9 percent for migrant households.

(v) The poverty headcount ratio and Gini coefficient decline by 7.8 percent and 4.8 percent, respectively, for households receiving remittances. Due to the global financial crisis, developing countries such as Pakistan, have witnessed a brief reverse migration following the laying off of workers abroad due to business closures and a general lack of demand. Pakistani overseas workers have returned home with their accumulated savings that increased remittance flows.

Furthermore, according to the Study, statistics shows the poverty estimates for both migrant and non-migrant households. The results suggest that poverty declines by 7.8 percent if the households receive remittances from abroad. This substantial reduction in poverty level signifies the importance of remittances received by households in Pakistan.

Similarly, the poverty gap and poverty severity also decline even by higher rates, ie, 11.5 percent and 14.9 percent, respectively. This implies that some of the remittance recipients are actually the poor households so that remittances reduce the poverty gap and poverty severity. Moreover, the income distribution of migrant households is actually better than non-migrant households. The Gini coefficient of migrant household is 4.8 percent lower than non-migrant households, study report said.

Copyright Business Recorder, 2010

Collection of taxes: Parliamentarians, experts support provincial autonomy

2010-02-22T06:16:00.001-08:00

RECORDER REPORT

ISLAMABAD (February 19 2010): Parliamentarians and tax experts strongly supported provincial autonomy for collection of taxes to broaden the tax-base and raising tax-to-GDP ratio in the country. During a seminar on pre-budget public consultation by NA committee on Finance and Revenue on Change in Collective National Behaviour.

"How to expand the Tax base in Pakistan: Ideas for the budget 2010-2011", most of the parliamentarians agreed that tax culture is necessary for expanding the tax-base. Experts pointed out that rich people in rural area are paying 14 percent less income tax as compared to those in urban areas. To remove this distortion, there is a need to impose tax on agricultural income to make income tax enforcement equitable in the country.

Most of the participants including the members of the Parliament suggested to bring agriculture, real estate and stock exchanges into the tax net. Other recommendations of the seminar included setting up of tax intelligence unit in FBR, data warehouse and the introduction of the subject on tax in the school classes for developing awareness about paying taxes among the masses.

While strongly supporting agriculture income tax, Senator Haji Adeel said that the depressed salaried class in urban areas is paying tax, than why the income from agriculture is not being taxed by the government. Senator Ilyas Bilour opined that agriculture tax would be considered as a potential area for increase in tax base. The provincial autonomy would have a good impact on tax to GDP ratio and broadening the tax base.

Former FBR Member Dr Ather Masood Ahmed shared vital data about taxes that only five major commodities contribute 50 percent of the taxes. If taxes are abolished on the POL, major chunk of revenue would not be collected. The compliance level needs to be improved before expanding the tax base.

Former FBR Chairman Abdulla Yusuf presented viable proposals for raising Tax-to-GDP ratio to implement the Turkish taxation system in Pakistan. The Turkey has managed to double the Tax-to-GDP ratio in a short span of time. Under the Turkish Tax Model, the tax department draft return on the behalf of the taxpayers and the same was sent to the registered units to amend the returns, if require.

Turkish tax department has all necessary data of the taxpayers and they have the capability to draft the return. However, taxpayer has given the opportunity to revise the return on the basis of data maintained by the unit. He said that tax gap of around 700 billion exists, which needs to be tapped. He referred to the example of Chilli where tax-to-GDP ratio jumped from 15-30 percent to 100 percent due to automation and tax administration reforms.

He opined that the State Bank of Pakistan (SBP) profits is not subjected to tax, which is a distortion in the tax system. The government should amend the Banking Companies Ordinance, 1962 and Protection of Economic Reforms Act, 1992 to access accountholder's information by the tax department. It is necessary to end such kind of secrecy under the banking laws to check the business transactions for brining potential taxpayers into the tax net.

There is a need to abolish the clause of bank secrecy law that is prohibiting access of tax authorities from bank accounts of taxpayers. Country like Switzerland has authorised its authorities access to the information of bank accounts of taxpayers and why not in Pakistan.

Responding to a query, he said that the President, Prime Minister and other policy makers have never intervened into the working of the FBR. He strongly dispelled impression that influence has been used in the transfers and postings of the tax officials. He suggested that the Data Warehouse is the most important tool for broadening the tax-base. The third party data from all potential sources has been matched with the information declared by the registered unit under the Data Warehouse concept.

Abdullah Yusuf further said that the tax department should be in a position to offer the taxpayers a tax return prepared by its officers based on income and expenditures of taxpayers on the basis of third party information.

Muhammad Sabir, Principle Economist, Social Policy and Development (SPDC) Karachi proposed increase in capital value tax on investment in long term assets like property and real estate. This investment should go in job creating areas like industrialisation and other productive sectors.

He suggested that FBR should setup a Tax Intelligence Unit to check the income and expenditures of the elite class for recovery of due tax from buyers and sellers of property, owners of luxurious cars and those involved in transaction different businesses from different bank accounts.

People are regularly arranging lavished parties and expenditures should be proposed in such cases. Riaz Fatiayana MNA proposed tax on spiritual practitioners (Peers and Faqeers), who are making money in major cities and their income should be taxed.

Shahid Khakan Abbasi, MNA proposed to abolish income tax as this levy is only targeting salaried class and few industrialists and majority of the rich are not under its ambit. Mian Abdul Sattar, PPP MNA suggested the FBR to auction the tax collection targets at the level of Union Council to bring in the tax net those people who are not paying the tax.

Chairperson Fauzia Wahab said that out of 170 million population only 1.7 million are taxpayers. She said that the Federal Cabinet's decision of February 10 to present Budget proposals to Parliamentary Committees by May 2010 to allow in-depth budget review and input by Parliamentary Committees was a triumph of efforts of all Parliamentarians over the years to reform the Parliamentary Budget Process.

Some of the members of National Assembly Standing Committee on Finance opposed tax exemptions given to army personnel. They claimed that land within the jurisdiction of the cantonment areas belongs to the federal government.

It was granted to the armed forces for construction of defence related buildings and establishments like barracks, but cantonment boards have been converted into commercial property. Tax should be applicable on the residential and commercial properties in the cantonment boards. Senator Haji Mohammad Adeel pointed out that land of the cantonment areas belong to the federal government and the army personnel should pay taxes on the same.

The armed forces should play their role in increasing the Tax-to-GDP ratio. In this regard, the Land Procurement Board Act in the cantonment areas needs to be revised. MNA Kashmala Tariq of PML-Q was of the view army personnel having more than one house should be liable to taxation. In this way, armed forces could help in increasing Tax-to-GDP ratio.

Copyright Business Recorder, 2010

Planning and Planning Process in Pakistan

2010-02-21T06:30:00.000-08:00

Planning Proces Feb 15 Slideshare

View more presentations from vahmed.

A laudable initiative by Yusuf H Shirazi

2010-02-20T21:48:00.000-08:00

The News
Thursday, February 11, 2010
Yusuf H Shirazi

The “Aman ki Asha” initiative of the Jang Group and the Times of India group is indeed laudable. It is a step in the right direction. The people of India and Pakistan have long aspired for peace. However, the realisation of this ‘Asha’ is not possible without the two governments sharing. Peace, and thus the welfare for the people of the subcontinent, lies in political, economic and social harmony between the two countries.

Whichever way one may wish to interpret the history of the two countries’ independence, in the present situation it is only political, economic and social harmony which can bring peace between the two countries.

While India has been a democracy since gaining its independence from the British, Pakistan has witnessed dictatorship for half its existence. Pakistan has thus been vacillating between dictatorships and political governments. The founding fathers, first Jinnah and then Liaquat Ali Khan, died soon after the creation of Pakistan. Hence, tragically, they could not oversee the promulgation of a constitution nor develop the three pillars of government – executive, legislative and judiciary. The result was that the political, social and economic development of Pakistan has been topsy-turvy.

On the other hand, India has developed into the largest democracy of the world. While the Indian constitution remained intact, Pakistan’s constitutions were abrogated time and again. Unfortunately, the judiciary too endorsed their abrogation, under the infamous “law of necessity.” By abrogating the constitution in the Maulvi Tamizuddin case, Chief Justice Munir set a dangerous precedent. This allowed his successors to also justify martial law under the nonsensical “law of necessity.” The course of this country may well have been different but for Justice Munir succumbing to political pressures. India went on developing politically, economically and socially. Pakistan meanwhile struggled through a variety of civilian and army rules.

India started with a better economic framework in terms of industry, agriculture and services. Pakistan, however, inherited just one textile mill – Delhi Textile Mill Lyallpur (now Faisalabad) – and continued to be basically an agrarian economy. India had an engineering industry, among others, and was exporting steel even in those days. India continued with Nehru’s philosophy of localising of investment, production and export as a means of GDP growth and employment. Pakistan, on the other hand, had a weaker political and socio-economic structure. While Pakistan followed the developed world’s dictum of liberalisation, privatisation and deregulation, India continued to protect its economy through trade barriers. Pakistan thus became the victim of globalisation, which was the developed world’s mechanism for development.

The economies of India and Pakistan can benefit from each another. Trade with India may be in the interest of Pakistan, because India is a market of more than one billion people as against Pakistan’s 170 million. So Pakistan will have to harmonise its economy with India’s, and vice versa: otherwise, Pakistan will be the loser.

India’s rupee-dollar parity, for example, is Rs45 against Pakistan’s Rs85. In India, sales tax is five to seven percent, and only in a few states is it as high as 12 percent. The sales tax in Pakistan is 15 to 18 percent. Corporate tax in India is less than 20 percent, as against 35 percent in Pakistan. This is not to mention the presumptive tax at about six percent, whether the income is liable to tax or not. In India, there is no such tax at all. The socio-physical infrastructure cost in India is two-thirds that in Pakistan.

India does not rely on foreign loans and credits – it does not borrow from the IMF, whereas Pakistan is subject to the IMF’s strict and severe conditionalities, sometimes at the cost of fulfilment of socio-economic objectives. India also relies on large-scale industries as against Pakistan’s focus on small- and medium-sized enterprises. India’s exports per month are equal to Pakistan’s annual exports. Indian foreign exchange reserves are close to $300 billion, as against Pakistan’s $15 billion, which have been recently inflated due to Pakistan’s IMF loan arrangement.

As for the dismantling of all imports and export barriers between the two countries, India does not permit import of products that are locally available. Industrial policies need to be dovetailed with local priorities, so that employment, technology transfers are generated and foreign exchange is saved. India follows this religiously. The reverse is the case in Pakistan. As in India, the Malaysian experience shows that as long as a country has sufficient reserves, an industrial policy can be formulated that simultaneously promotes export-based industries, nurtures import substitution industry and protects strategic industries. Industry and especially hi-tech manufacturing industry can be nurtured and promoted to become globally competitive.

There is revenue shortfall and unemployment in Pakistan. Further, actual inflation is above 15 per cent, much higher than in India. The remedy lies in industry, manufacturing, in particular. In India, the basic industry is now one of the top tax generators for the government. The Indians did it by focusing on manufacturing and value-addition, and not packaging or assembly as in Pakistan.

Inconsistent economic policies in Pakistan have discouraged investment, production, export and employment. The Pakistan policies need to be catered to harmonise local aspirations. The remedy, as evident in India’s success, lies in industry. A balance must be struck irrespective of external pressures. Reliance on these policies would be in the larger national interest and the socio-politico-economic sovereignty of Pakistan.

All this is a prerequisite to “Aman ki Asha.” Without this any such endeavour would be a pipedream, a desire unfulfilled. If Pakistan becomes the architect of its own policies rather than have them imposed on it by the developed world, the peace initiative will indeed lead to not only political harmony but also socio-economic harmony between Pakistan and India. For we surely have inherited the same or similar culture.

Soon after the creation of Pakistan, Jinnah was asked, if Hindustan is attacked, what would Pakistan do? Jinnah was quiet for a moment, and then said, Pakistan will support Hindustan. Why, he was asked. Jinnah said, “Blood is thicker than water.”

The writer is the founder/chairman of the Atlas Group of companies. Email: yhs@ atlas.com.pk

A story of incompetence (Taxation)

2010-02-16T10:55:00.001-08:00

Huzaima Bukhari and Dr. Ikramul Haq
The NEWS

The Federal Board of Revenue (FBR) is in for criticism for inefficiency and indiscipline. It has failed on all fronts: collection targets, widening of tax base, countering tax evasion and avoidance, recovery of arrears, voluntary compliance, reform process and what not.

At the end of the five-year Tax Administration Reform Project (TARP), the tax-to-GDP ratio dipped to 8.2 percent from 10.6 percent. The borrowed funds of millions of dollars were ruthlessly wasted. The standing committee of parliament on finance must conduct a thorough probe in the matter and seek the assistance of tax experts to determine the amount of loss caused to national exchequer by the FBR stalwarts during the last two decades.

Despite an expensive media campaign, FBR could not make 25 million potential taxpayers to file tax declarations by the extended date — 25 January 2010. The majority of non-filers are rich and mighty bureaucrats, corrupt politicians, and unscrupulous businessmen. FBR has not only failed to tap the actual tax potential — not less than Rs4 trillion — but is also guilty of shifting tax burden from the rich to the poorer segments of society. According to FBR, on admission, 1,916,300 income tax returns and statements were received from July-January of the current fiscal year (2009-10) as compared with 1,797,000 returns and statements in the same period of last fiscal year (2008-09). Total number of income tax returns received up to 25 January 2010 is only 755,671, the rest are statements under section 115(4) — last year 642,777 returns were received — indicating an increase of 112,849 returns. According to the FBR Press release as of January 25, 2010, FBR has received 16,281 corporate sector income tax returns as against 14,903 returns in the same period of last fiscal year, projecting an increase of 1,378 returns.

Firms — registered and unregistered — filed just 41,863 returns. Salaried persons filed 114,495 returns for tax year 2009 as against 119,759 last year showing a decline of 5,264. Non-salaried individuals filed 583,032 returns compared to 481,961 filed last year. Salary certificates received are 18,828 as against 20,745 filed last year. Number of employees covered in statements under section 115(4) are 1,053,708 this year as compared with 1,055,954 last year. Number of importers who filed their statements is 12,262 whereas some 11,510 importers filed their statements last fiscal year. By January 25, 2010 some 8,473 exporters filed their statements as against 8,050 exporters in the same period of last fiscal year. Some 13,332 retailers having up to Rs5 million annual turnover filed their statements during July-January 2010 period of this fiscal year as compared with 18,272 retailers in the same period of last fiscal year. 581 retailers having over Rs5 million annual turnover filed their statements this year as against 830 such retailers in the last fiscal year. 24,378 contractors and suppliers filed statements during this year as against 24,030 during the last year.

It is admitted by FBR that even after "great efforts" less than 2 million Pakistanis have filed income tax declarations for tax year 2009. FBR has failed to implement law even in Islamabad as out of 43000 commercial and residential rental properties in Islamabad, only 7000 owners are filing returns. In Pakistan, the number of mobile users alone, who pay more than Rs100,000 as annual bill, is about 25 million. Why have they not been compelled to file returns? FBR is taking credit of extra 119,300 declarations filed this year. However, it is completely silent about its failure to expand the tax net — we have at least 25 million persons earning taxable income, but who are not filing tax declarations.

For a long time now, FBR has been apologetic (specifically before the IMF and the World Bank) that total income tax payers (referring to registered only) in Pakistan are just 2 million in a population of 170 million. This is a myth. The reality is that since July 1, 1992 all commercial electricity consumers (including about 3.2. million retail outlets in urban areas), irrespective of whether their income is chargeable to tax or not, are paying minimum income tax of Rs60 per month.

The total number of persons earning interest on bank deposits is not less than 30 million. They pay 10 percent mandatory withholding tax irrespective of their quantum of income. Total number of mobile and land-line telephone users, subjected to withholding tax, in the country, is in excess of 60 million — yet FBR claims that our tax base is narrow. The reality is that FBR is incompetent as a result of which it has failed to book/register a majority of these taxpayers. Had it been done, we could today have boasted of nearly 25 million registered taxpayers. Even a petty village shopkeeper (whose total income is much below the minimum taxable limit of Rs100,000) is paying tax as high as Rs720 per annum. On the contrary, big absentee landlords, earning millions by merely leasing out orchards/lands, are not paying even a single penny as personal income tax.

Out of total population of Pakistan, 43.1 percent are below the age of 15 years. The overwhelming majority of them will not have taxable income. Rural labour of 40 million earns meagre income. Thus, the total income tax paying population having taxable income of Rs100,001 can safely be around 25 million. The FBR is not only taxing all of them but even many of those whose incomes fall below taxable limits. The poor are paying not only indirect taxes but also income tax at source under various provisions of the Income Tax Ordinance, 2001 — section 148 to 156A, sections 234 to 236. Thus in reality the people — except the ruling trio — are over-taxed. In return they get nothing.

It was the duty of FBR to allot National Tax Numbers (NTNs) to all those who paid tax under sections 148,149,150,151,152,153,154,155,156, and 233, 234 and 235 of the Income Ordinance, 2001. Had the FBR just issued notices for filing of return to all commercial electricity consumers, mobile and land-line users (paying bill of Rs100,000 or more) and vehicle owners, today we would have over 25 million registered taxpayers. The FBR did not bother to prepare a database of such persons though millions of rupees were spent (rather wasted) on so-called automation.

FBR is guilty of criminal negligence in not taxing persons having taxable income, but extorting money from many who earn below taxable income. It has been misreporting the figures regarding income taxpayers in Pakistan. Its performance is abysmal in achieving a satisfactory tax-to-GDP ratio. It is just thriving on withholding taxes and voluntary payments — constituting 92 percent of total collection. The contribution of field officers [collection on demand through investigation or audit] is just 8 percent of total collection proving beyond any doubt how unproductive this organisation is.

The small business houses and salaried persons, already heavily taxed through withholding tax mechanism, are victims of highhandedness. It is high time that the FBR should put its own house in order and tax the rich and mighty tax evaders.

The writers, tax lawyers, are members of Adjunct Faculty of Lahore University of Management Sciences (LUMS).

FBR version:

According to FBR, it has finally decided to bring all the persons earning taxable income in the tax net through its tax intelligence system. The Chairman of FBR referred to various proposals such as:

Tax legislation will be introduced for installation of electronic cash registers at the retail outlets. Prime Minister has agreed to provide free of cost electronic cash registers to retailers to document their sales.

Political support/will is requested for taxing black economy and brining informal sector into the tax net. Most of the housing schemes are involved in selling of files of plots. There is proposal to tax transfer of plots through sale of files that would be instrumental in generating additional revenues.

Under new Value Added Tax (VAT) regime retailers having annual turnover of Rs7.5 million would be registered—only essential food items and life saving drugs would remain exempt and 15 percent VAT would be imposed on all other goods from July 1, 2010.

The professional service providers e.g. doctors, lawyers, engineers and architects would also be brought under VAT from July 1, 2010. The implementation of the broad-based VAT would generate around Rs150-200 billion in next fiscal year. The revenue generation from VAT implementation would reach to around Rs600 billion in coming years.

The importers, wholesalers and big retailers are paying Rs125 billion, which is below the actual potential. In most of the cases they deposit withholding tax collected from the consumers and do not declare their actual income, thus presumptive tax regime will be abolished.

FBS restructuring bill may be approved soon

2010-02-16T10:45:00.000-08:00

Tuesday, February 16, 2010
By Israr Khan
The NEWS

ISLAMABAD: Parliament will soon approve a draft bill for restructuring and reorganisation of data collection organisations, which is aimed at making them more responsive to national requirements with increased autonomy and credibility, sources say.

The bill will establish Pakistan Bureau of Statistics (PBS) by merging Federal Bureau of Statistics (FBS) with Agriculture Census Organisation (ACO) and Population Census Organisation (PCO). The new body will have seven members — three from the government while four from the private sector.

Official sources told The News the restructuring bill had already got federal approval and would now go to parliament for final approval.

The restructuring of the statistics body had been due for the last several years, but pressure from the International Monetary Fund forced the government to step up efforts in that regard, a source said. It is expected that the World Bank will assist the government in the restructuring process.

The Statistics Division arranged a briefing for senior officials of the attached departments including FBS and PCO about the restructuring and reorganisation of the federal statistics system.

Speaking to the officers, Muhammad Uris Jumani, Deputy Director General of Statistics Division, said parliament was in the process of approving the draft bill.

“The government has approved restructuring of the federal statistics system to make it more responsive to national requirements with increased autonomy and credibility through merger of Federal Bureau of Statistics, Population Census Organisation, Agriculture Census Organisation and technical wing of the Statistics Division into a new autonomous body called the Pakistan Bureau of Statistics,” he said.

Jumani said the Statistics Division planned to hold such briefings in the provincial headquarters in order to introduce the new body.

He said main objectives of restructuring were to make the data collection system more relevant to national needs and to ensure capacity building, career planning of professional staff, upgrading of skills, fair use of resources through pooling of human and material resources and better coordination between different data collecting agencies.

Pakistan Bureau of Statistics will have an apex body namely the Governing Council with three government and four non-government representatives.

A National Users Council comprising data users will be formed to give advice on priorities for collection of statistical data in order to achieve efficiency and prompt results.

Provision has been made for release and dissemination of data by the statistics authority while protecting secrecy of individuals, firms and institutions.

The draft law also provides for establishment of a statistics fund to ensure financial autonomy to the bureau. Protection has been provided in the draft law to existing employees of the bureau in terms of service and they will be governed by the Civil Servants Act 1973 and its rules and will continue service on same terms and conditions.

Every person or employee will have the right to opt for work in the bureau as a civil servant or under new rules and regulations to be prepared by the management of PBS.

Statistics reveal stunning increase in poverty

2010-02-16T10:41:00.001-08:00

World Bank’s Task Force on Food Security says 40pc Pakistanis living below poverty line

Tuesday, February 16, 2010
By Ikram Hoti
The NEWS

ISLAMABAD: Statistics reveal stunning increase in poverty in Pakistan impacted by the prices of energy and food in the past three years.

These happen to be the worst years as far as the poverty situation in the country is concerned, data reveals.

The Federal Bureau of Statistics data updated for the Centre for Poverty Reduction and Social Policy Development (CPRSPD), Planning and Development Division, shared with The News indicates an upswing in the headcount poverty ratio for 2008-09.

The steep increase in the prices of petroleum products, electricity and natural gas as well as food items (especially flour, sugar and meat) began in 2007, while the situation worsened in 2008 with global increase in POL and commodity prices.

The financial meltdown followed as industry could not cope with the rising energy prices triggered sharp slowdown in growth and high inflation.

This situation impacted Pakistan’s economy generally and the poor households particularly, as the report indicates.

The government is yet to make this report public after its preparation is formalized and the relevant officials in high places approve its launch.

The News obtained salient figures from this report revealing that the increase in food and energy prices since late 2007 compelled the government to launch a household income and expenditure survey for assessment of poverty increase and vulnerability of the countryside and city-slum majority.

Survey to make such assessment got delayed for inexplicable reasons but the reports based on a 5-year old assessment got regularly updated for the federal cabinet’s appraisal.

The updated Planning Commission’s Interim Report based on 2004-05 poverty head count number of 23.9 percent put the increase in poverty at around 6 percent for the year 2008-09. The newly updated figures say this ratio must go as high as 29.9 percent.

The World Bank’s Task Force on Food Security had put the ratio at 29.2 percent in 2004-05, 33.8 percent in 2007-08 and 36.1 percent in 2008-09. Such estimates placed 62 million people of the country Below the Poverty Line (BPL) in 2008-09.

The new assessments say at least 20 million people might have joined the previous headcount on BPL population.

The poverty increase situation thus stood as follows: 22.3 percent of the population in 2005-06 to between 30-35 percent in 2008-09; now this population is beyond 40 percent.

The data is explained in a manner that the increase in BPL population in the rural areas is more tragic as people lost their small holdings to inflation and overall expenditure per family unit increased by more than 20 percent in the past 3 years.

Though the increase of inflation-hit population in the urban areas remained more pronounced, the net impact was far lower than in the rural areas.

More than 50 percent of the urban workforce underwent decrease in actual wages viz a viz inflation.

The high food prices undermined the government efforts for poverty reduction as food price hike severely eroded poor households’ purchasing power.

This situation indicates a serious risk of massive school dropouts at primary levels while fresh enrolments would also be on the decline.

The poorest households are compelled to spend more than 78 percent of incomes on food and other most essential expenditure, while health and education are tragically compromised areas.

Industrial competitiveness through quality

2010-02-16T10:36:00.000-08:00

By Shaukat Hussain
The NEWS

The World Trade Organisation (WTO) is an international organisation established to supervise and liberalise international trade. WTO’s function is to ensure that trade between different countries flows as freely as possible, without any barriers.

The three technical partners, ISO (International Organisation for Standardisation), IEC (International Electrotechnical Commission) and ITU (International Telecommunication Union) have formed a strategic relationship with the WTO, to promote a free and fair global trading system. The political agreements reached within the structure of the WTO require reinforcement by technical agreements. ISO, IEC and ITU, as the three principal organisations in international standardisation have the complementary scope, the framework, the expertise and the experience to provide this technical support which is called ‘quality infrastructure or technical infrastructure,’ which leads towards global market growth.

The WTO since its existence in January 1995 imposes technical barriers to trade (TBT), to ensure that technical negotiations and standards, as well as testing and certification procedures, do not create unnecessary obstacles to trade. However, the agreement also recognises countries’ rights to adopt the standards they consider appropriate, for example, for human, animal or plant life, for the protection of the environment or to meet other consumer interests. In order to ensure safe production of food and animal products, a separate agreement on food safety and animal and plant health standards, the Sanitary and Phytosanitary Measures Agreement (SPS) sets out some basic rules. It allows countries to set their own standards, but it also says that regulations must be based on science. They should be applied only to the extent necessary to protect human, animal or plant life/health. Both these agreements of TBT and SPS rely upon efficient functioning of the technical infrastructure, to support the exchange of products worldwide. Therefore, metrology, standards, testing and quality through recognised accreditation system are essential elements of technical infrastructure. Quality infrastructure refers to all aspects of metrology, standardisation, testing, and quality management (MSTQ) or standardisation, quality assurance, accreditation and metrology (SQAM).

In the quality infrastructure system, accreditation plays a very vital role. It is a formal confirmation that a body is competent enough to perform certain tasks. It builds confidence in the work of testing laboratories, certification and inspection bodies, and facilitates mutual recognition of certificates, in addition to promotion of trade. The Asia Pacific Laboratory Accreditation Cooperation (APLAC) was initiated in 1992 as a forum for laboratory accreditation bodies in the Asia Pacific region. Its primary aim was to establish, develop and expand a mutual recognition arrangement (MRA) among accreditation bodies in the region. The International Laboratory Accreditation Cooperation (ILAC) is an international cooperation of laboratory and inspection accreditation bodies formed to help remove technical barriers to trade. The ultimate aim of the ILAC arrangement is the increased use and acceptance by industry, as well as regulators of the results from accredited laboratories and inspection bodies, including results from laboratories in other countries. In this way, the free-trade goal of 'product tested once and accepted everywhere' can be realised. The International Accreditation Forum, Inc. (IAF) is the world association of conformity assessment accreditation bodies and other bodies interested in conformity assessment in the fields of management systems, products, services, personnel and other similar programmes of conformity assessment. Its primary function is to develop a worldwide program of conformity assessment, which reduces risks for businesses and its customers by assuring them that accredited certificates may be relied upon. The achievement of this MRA is not an easy task. There are only two accreditation bodies in the South Asian Association for Regional Cooperation (SAARC) region, four in the Organisation of the Islamic Conference (OIC) countries, and only fifty one countries have this status in the world. Pakistan National Accreditation Council (PNAC) achieved this status on 21st May 2009. In addition to this, the Ministry of Science and Technology (MoST) has the entire essential quality infrastructure, which is necessary for competitiveness of industrial products. The infrastructure includes institutions like the National Physical and Standards Laboratories (NPSL) to provide accredited metrology services to industry and testing laboratories, Pakistan Standards and Quality Control Authority (PSQCA) to formulate and disseminate standards for the local industry and other stakeholders, and Pakistan Council of Scientific and Industrial Research (PCSIR) to provide internationally recognised testing services to the industry, regulators and consumers.

Though the impact of quality infrastructure seems invisible, it is however imperative because without it the world economy cannot possibly move forward. Quality infrastructure is necessary for eliminating technical barriers to trade. It thus plays a key role in integrating the trading partner countries into the international trade system.

The appropriate operation of quality infrastructure ensures benefits to various stakeholders as given below:

Producers

(a) Helps to demonstrate conformity of their products according to the requirements of the relevant standards.

(b) Provides a marketing tool to the business industry.

(c) Assist in overcoming technical barriers to trade by fulfilling the regulatory requirements of the importing country.

(d)Reduces product liability, if applicable in the intended country.

(e) Increases the confidence of industrialists through an assurance to produce high quality products.

Regulators

(a) Provides an assurance to regulators and government departments that they are using reliable testing, certification and inspection services.

(b) The products in the market are assumed to be tested by competent institutions of quality infrastructure. Therefore regulators have to select very few samples and it reduces the cost of market surveillance.

(c) Public, private and multinational companies can establish testing and inspection organisations duly verified by the national quality infrastructure. It reduces the burden on the government sector to establish laboratories and inspection bodies, and it serves as a de-regulation tool as well.

Consumers

(a) If the product has been tested by a competent institution of quality infrastructure, then it reduces the risk of it being of poor quality, hence quality Infrastructure is the source of a reliable service.

(b) The product purchased by consumers is worth the money and it is assured to be of top notch quality.

In order to provide awareness and training on technical quality matters, there is no such recognised institution in Pakistan. For this, certain steps should be taken, such as to start training courses in universities on quality infrastructure related activities in consultation with the Ministry of Science and Technology (MoST). A training program for the interpretation and implementation of specific international agreements, like SPS, TBT and its linkage with quality infrastructure may be introduced at the university level in consultation with the Higher Education Commission (HEC) and Ministry of Science and Technology. Public sector universities should be encouraged to launch laboratory proficiency testing programs in Pakistan. At this particular time period, even a single accredited laboratory scheme would be very helpful. A pool of trainers and consultants should be prepared. Last but not the least, there is a dire need to develop a strong linkage between the industries and quality infrastructure institutions so that our industries may benefit from the worldwide recognised quality infrastructure, which would definitely provide them a competitive edge in the global market.

Gas price hike and the common man

2010-02-16T10:35:00.000-08:00

By Syeda Majeeda Aqeel
The NEWS

Recently the Oil and Gas Regulatory Authority (OGRA) increased the price of gas sold by gas utilities to different consumers with effect from January 1st, 2010. OGRA issued two notifications; first on 31st December 2009, which was somewhat dubious to consumers, so the authority came up with another notification on January 8th, 2010 in suppression to the previous one. In its first notification, the authority did not include minimum charges (the charges for being connected to the gas supply) to the consumers (i.e. domestic, commercial, industrial, CNG stations, cement, WAPDA and KESC power stations etc.), so minimum charges to be paid by consumers were added in the second notification. The said price hike was to increase the revenue of Sui Northern Gas Pipeline Ltd (SNGPL) and Sui Southern Gas Company Ltd (SSGC) as the global lenders demand from the government to keep the revenue of the two gigantic gas distributors at a certain level.

According to the notification, minimum charges for domestic consumers are Rs.128.15, while the commercial units are bound to pay Rs2189.28 per month. The commercial units include clinics, cinemas, laundries, barber shops, tea stalls, milk shops, bakeries, cafes etc. Similarly, the industrial sector is made to pay Rs12893.23 as minimum charges per month. While the CNG stations, cement, independent power producers (IPP) and captive power plants would pay Rs16,982.44, Rs18,087.77, Rs11,206.98 and Rs12,893.29 respectively. There was a total increase of Rs3000 in the minimum charges paid by consumers as compared to the June 30th, 2009 notification. (As shown in the table)

OGRA also fixed the price of natural gas sold by Pakistan Petroleum Limited to WAPDA’s gas tribune power station, located at Guddu, at Rs380.41 and Rs369.97 per mmbtu, respectively.

This increase of 18 per cent has come as a shock to the end users who happen to be the masses in all cases. Commercial, industrial and transport sectors quickly pass on the price hike to the common man. Domestic, industrial and transport sectors mainly consume more than 90 per cent of gas supply.

Transport sector consumes gas in the form of CNG, as a fuel. Pakistan has the world’s highest number of CNG vehicles i.e. over 2 million, and has the maximum number of CNG refueling stations i.e. 2,941 as of July 29th, 2009. The main reason is because gasoline (petrol) prices in Pakistan are the highest in the region. So during the recent years, our transport system has switched over to CNG, putting great pressure on this meager gas resource. Discouraging use of this source of energy through price hike is a foolish idea, especially when oil prices have started escalating again. The current CNG crisis in Punjab and in NWFP is handled through restricted supply which is not a long term solution.

Due to lack of effective planning and timely rectification, the gas sector is on the verge of collapse and if the ongoing decision to suspend gas supply for two days a week is not withdrawn, then the import bill of oil will swell, as CNG is presently replacing at least 3.7 billion liters of petrol per annum which is again a burden on the already huge budget deficit.

The industrial sector is the second largest sector of Pakistan’s economy in terms of output and employment. However, due to many factors both domestic and external, presently the sector is passing through a terrible period, and this decision is worsening the already fragile sector. The sector has already been destabilised by the weakness in domestic demand, excessive power shortage, structural problems, deterioration in law and order situation and decline in external demand emanating from the global recession. In this situation the suspension of gas supply to industries for two days a week is beyond one’s imagination. Non availability of electricity and gas has destroyed the industrial base and the government is not dealing with this particular crisis efficiently, rather it is playing the role of a silent spectator. The industrial area, which is the hub of production, is facing huge losses as a large number of industrial units have stopped production.

In order to tackle with the problem of gas shortage, the government is on its way to implement a risky project of Iran-Pakistan-India (IPI) gas pipeline. IPI, being a doubtful starter entails huge economic and political costs to the country. This project will benefit the seller Iran and the buyer India chiefly. Although Pakistan will be able to purchase 750 million to one billion cubic feet of gas per day, the project can be dicey due to the fact that Pakistan has a fragile relationship with India. The Iranian request clearly made on India’s demand for a guarantee by Pakistan to ensure uninterrupted gas supply to India is unreasonable. This should not happen in order to safeguard our interests.

Within a short time period, the change of autocratic government to the democratic one has caused havoc to the general population. Be it natural gas or CNG, the higher authorities have vested interests to extract maximum financial gains with little or no concern for the average man, who is suffering the most.

Our country is blessed with precious natural gas, but unfortunately due to mismanagement it is being wasted in the form of gas hoarding or theft. During the last financial year, SNGPL and SSGCL recorded a revenue loss of more than three billion rupees, as per OGRA’s annual report.

If squandering of gas is not checked immediately then the entire reserve will deplete within the next few decades, leaving nothing for the coming generation. Special emphasis needs to be laid on the exploration and development of the resource and this can only be achieved by attracting local and foreign investment in this sector, which has a huge potential.

Minimum charges paid by each sector

(In Rupees)

Sector 1st Jan 2010 1st July 2009

Domestic 128.15 108.78

Commercial 2,189.28 1,856.80

Industrial 12,893.23 10,935.13

CNG stations 16,982.44 14,403.25

Cement 18,087.77 15,340.65

IPP 11,206.98 9,504.74

Captive power plants 12,893.29 10,935.13

Notification issued by OGRA

Food security in great peril

2010-02-16T10:34:00.000-08:00

By M. Zafar Haider Jappa
The NEWS

The recent emergence of food insecurity hit hard the whole developing world in general and the South Asian states in particular. Food security is a human right of every citizen. The UNís Food and Agriculture Organisation (FAO) defines it as, ìaccess by all people at all times to the food needed for an active and healthy life.î The most recent crucial event on food security was held in Rome one month before the climate summit. Like the Copenhagen Climate Accord of December 2009, the World Food Summit held in November 2009 faced a serious blow when the Food and Agriculture Organisation (FAO) failed to win a clear pledge from the industrialised nations to commit $44 billion a year to help poor nations overcome food shortage.

According to the Food Security Risk Index, USA, France, Canada and Germany are top most secure in food production and distribution. On the contrary, Angola, Haiti, Mozambique, Congo and Zimbabwe happen to be the most insecure in food production. In recent past food situation started deteriorating in 2003 when the world commodity market registered a shortfall in grain up to 105 million tons. In 2007-08 wheat nosedived to a shortfall of 16 million metric tons alone, owing to a shift in the priorities of the worldís leading producers of wheat like USA, Australia and Canada in favour of maize to meet bio-fuel needs.

A sharp spike in food prices sparked riots in some 60 countries with varying intensity and widespread hoarding. The food scarcity also prompted rich food importing countries, like Saudi Arabia to snap up farmland in developing countries to meet future food needs.

Although article 38 of the Constitution of Pakistan explicitly guarantees the right of food to the people, however it has attracted little attention of the policy makers since its promulgation. The abrupt spike in the prices of food items in the wake of 2008 clearly exposed one fact that Pakistan will never meet the targets of the Millennium Development Goals (MDGs) within the time limit. The situation in the other South Asian economies is also not so different. Poverty is rather compounding and the plight of the vulnerable segments of the society is painting things worse. WFP has revealed that during the year which ended in March 2009, the number of persons deemed insecure had risen to 77 million from 60 million in the previous year. Prior to the recent food shortage, only Pakistan was the net food importing developing country (NFIDC) in the whole South Asia as per the data of World Trade Organisation (WTO). Now except Bhutan all other economies of the region fall in the category of NFIDCs. Sri Lanka has been listed as one of the ìhungerís global hotspotsî by the WFP although it has a high literacy rate, low unemployment level and modernisation of farming sector. Other hotspots include Afghanistan, Bangladesh, Chad, North Korea, Somalia, Sudan and Zimbabwe.

In Pakistan wheat and rice are the two main food crops. Since we have no exact figure of the total population of the country, hence actual requirement of the country against both these items cannot be ascertained. This is the reason we are just following guess work to quantify and identity national targets for food production. Except 2000-04, Pakistan has been importing wheat. Wheat is lost while harvesting, threshing, cleaning, drying, milling, storage, processing, cooking and consumption. Although owing to some inbred problems in decision making and implementation, achieving food self-suffice is next to impossible in Pakistan in future, but it can be materialised by taking some innovative steps. We will have to determine the bare minimum area for food cultivation before the construction mafia swallows the whole fertile grassland of the country. Poverty is widely distributed in the many mountainous parts of the country where communities are small and scattered. The rugged terrain, fragile ecosystems, and a recent scourge of climate change make cultivation difficult. Lack of access to services, markets and innovative means have contributed to chronic poverty in these areas. Owing to the spillover effect it has affected the rural way of life and compelled urban migration.

According to the International Fund for Agriculture Development (IFAD), a majority of rural people in Pakistan are poor because of unequal land distribution. A few large landholders own a disproportionate amount of land. More than 4 million family farms have plots of less than 5 hectares, and 25 per cent of all farms consist of less than 1 hectare. At present about 50 per cent of farmers own and operate their farms, while 26 per cent are tenants. Sharecroppers who work on lands belonging to large-scale farmers, are often in debt to their employers.

WFP undertook two exercises to measure the level of food security in Pakistan, once in 1998 and then in 2003. The worrying fact was that the rural population in food surplus provinces was found insecure owing to population pressure and resultant rise in food items. The situation was aggravated by the post harvest losses.

FAO (2009) suggests, for all the economies of South Asia, the share of agricultural sector in their GDPs has steadily declined since 1990. For the period of 1985-2005, the average annual rate of growth of yields of cereals in South Asia has been increased at decreasing rates except for Pakistan. It was ñ1.41 per cent in 1985 but soared to 3.98 per cent in 2005. For India it was 4.17 per cent in 1985 that reduced to .63 per cent in 2005. This enlightens the change in governmentsí priorities over the time period. One of the main reasons is the massive diversion of fertile lands into construction activities, which has slowed down cereal production in the region.

In South Asia, India realised the importance much earlier when it disbanded feudal system in 1949 and in 1955 passed Essential Commodities Act by gaining control over production, supply and distribution of essential food goods to ensure fair distribution of food grains at reasonable prices.

In Pakistan, the Pakistan Agricultural Services and Supplies Corporation (PASSCO) was established in 1973 under the federal government and tasked to procure wheat and other agricultural commodities, determining support prices, ensuring adequate supplies in provinces deficit of food and maintaining strategic reserves in the country. Till 2006 India and Sri Lanka have been net exporters of food but owing to the adverse effects to its cropping patterns because of climate change might compel them to import food for the myriad millions in next 10-15 years.

It is vital for countries to cooperate in the following areas to overcome the chronic issue of food : (i) innovations in the development of new varieties, hybrids and breeds especially in cereal (ii) management of water and natural resources (iii) new methods such as remote sensing and Geographic Information System (GIS), biotechnology, weather and flood forecasting, disaster management(iv) technology exchange - exchange of germplasm; exchange of variety and breed, crop and animal husbandry practices (v) capacity building through development of human resources and regional facilities (vi) regional programmes for plant and animal trans-boundary pests and diseases control (vii) harmonisation of policies and actions like relating to protection of plant variety, bio-safety protocols, biodiversity and indigenous knowledge. (Vii) Minimising post harvest losses (ix) Indus Basin Treaty between Pakistan and India needs to be revisited. But this is only possible if India and Pakistan dispel their mutual fears cropped up of centuries old animosities and broken trust. In Pakistan, $179 million have been spent inclusive of government of Pakistanís contribution in food security. Furthermore, the USAID programmes have invested $134.4 million during 2008-09. USAID has been the largest contributor to provide food to the IDPs of Malakand, Bajour and Waziristan. The Planning Commission of Pakistan has recently reported that if the yield potential of the medium and small size farm sector is achieved, food shortage can be overcome and be converted into surplus. Poverty generates food insecurity. Poverty is spread by lack of education, poor political will, poor access to health services, fragile infrastructure, low level of regional integration and vulnerability to environmental degradation, and deterioration of the natural resource base. The ongoing international financial meltdown and climatic change have caused addition of almost 10 million people among vulnerable to the bare minimum food need and nutritional requirement. The FAO Director General Mr. Jacques Diouf expressed his views that ìhungry people are a serious potential source of conflict and forced migration. This scourge is not just a moral outrage and economic absurdity, but also represents a threat for our peace and security.î

Food importing countries, including Pakistan and India must be pragmatically cautious of such a scenario. Commitment like that presented by FD Roosevelt after the world economic depression needs to be replicated in this region as well, and now is the time to do so. On food security we can no longer afford sluggishness and a consistent public policy is a guaranteed solution.

Coal power plant a viable solution to the energy crisis

2010-02-16T10:33:00.002-08:00

Pakistan’s economic development and prosperity depend on how successfully
the country ensures abundant supply of reliable and affordable energy. If the energy
problem is not tackled effectively, the population’s sufferings will increase

By M. Osman Ghani
The NEWS

Since ancient times use of energy has served as an integral part of human life and their prosperity. As population was increasing, the demand for energy was also expanding. It was the discovery of electricity and extensive use of fossil fuel that led to the industrial revolution and that steered advancement of science and technology, culminating in enhanced level of socio-economic prosperity, better living conditions, better health and human happiness. The role of energy still remains as a vital ingredient for rapid socio-economic development. The per capita consumption of energy indicates socio-economic prosperity of any country. It is also a criterion to distinguish between an advanced and a poor country. Any nation willing to pursue rapid socio-economic advancement must assign priority to the development of this vital factor.

Energy development, broadly meaning increased provision and use of energy services, is an essential part of enhanced economic development. Advanced industrialised societies use more energy per unit of economic output and far more energy per capita than poorer societies, especially those still in the pre industrial state. Energy use per unit of output does seem to decline over time in the more advanced stages of industrialisation, reflecting the adoption of increasingly more efficient technologies for energy production and utilisation, as well as changes in the composition of economic activity. And energy intensity in today’s developing countries probably peaks sooner and at a lower level along the development path than was the case during the industrialisation of the developed world. But even with trends toward greater energy efficiency and other dampening factors, total energy use and energy use per capita continue to grow in the advanced industrialised countries, and even more rapid growth can be expected in some developing countries as their incomes advance. The fact that expanded provision and use of energy services is strongly associated with economic development leaves open how important energy is a casual factor in economic development. Development involves a number of other steps besides those associated with energy, notably including the evolution of education and labour markets, financial institutions to support capital investment, modernisation of agriculture, and provision of infrastructure for water, sanitation, and communication. This is not just an academic question; energy development competes with other development opportunities in the distribution of scarce capital, and in the allocation of scarce opportunities for policy and institutional reform.

Energy use increases as more economic sectors develop and more channels for flows are opened. Economic diversity, as measured by the number of economic sectors using energy and the equitability of flows between them, generally increases. As diversity increases the efficiency of generating output with a given amount of energy also increases. Development capacity, the product of system energy throughput the diversity of flows, is a measure of the potential system output and is calculated for selected countries. Capacity changes overtime are shown to relate to changes in economic output in selected countries. Two distinct development strategies become evident, one which promotes energy use and the other which emphasises diversity and the sustainability of each.

Sustainable human development is people-centred development. It generates economic growth and equitably distributes the fruits of that growth. It empowers people, expands their choices and opportunities, and involves them in decisions that shape their lives. For the United Nation Development Programme (UNDP), sustainable human development means focusing resources on four key areas; eradicating poverty, increasing women’s role in development, providing people with income-earning opportunities, and protecting and regenerating the environment. Initiatives in the energy sector are an important means to achieve sustainable human development. After all, as countries develop, their energy needs evolve and expand. And, the production and consumption of energy has a tremendous impact on economies, environments and industrial development. Energy should, therefore, be taken into account in any development strategy.

Due to acute shortage of electricity and other forms of energy, and their rising prices, Pakistan has been experiencing a slowdown in its economic activities. Major negative impact is being experienced by its industrial sector and international trade. Energy availability in Pakistan in all its form has declined or at least remained stagnant during 2008-09, and due to the ever increasing demand, the energy situation may deteriorate in the current fiscal year. Like previous years, the major sectors affected will be the manufacturing sector and exports. It should be noted that Pakistan’s exports during July-December 2009 declined by 3.2 per cent, while India’s grew by 9.3 per cent in December 2009. Poor power supply, along with the circular debt burden has been singled out as one of the prime reasons for dismal performance of the manufacturing and agriculture sectors. The future economic development and human prosperity of Pakistan squarely depends on how successfully it ensures the abundant supply of reliable and affordable energy. If Pakistan fails to tackle its energy problem effectively, then its population’s sufferings will increase.

The impact of power shortage is quite visible not only in the form of slowdown in economic growth, but in the form of severe suffering of the people. Moreover, continuous increase in petroleum, oil and lubricant (POL) products and utility charges are only adding to their suffering. Increase in energy prices is immediately reflected on higher transportation costs and price hike of essential consumer items. On the other hand, to fill up the revenue gap and to meet the conditionality of major donors, the government is sometimes compelled to increase the utility charges.

The question that the people of Pakistan generally ask is, how long will they have to wait to see the nation prosper, especially when, in our corruption-prone society the gap between the have and have not is widening day by day, and when the number of people living below the poverty line is also dangerously increasing? Economic stagnation and the rising poverty level, however, can be effectively addressed by rapidly improving the dilapidated infrastructure system, energy availability and human indicators. We have repeatedly heard optimistic news such as the country having the largest coal reserves, and that it can meet its energy demand for more than a thousand years. It has hydro potential of 40,000 MW, mostly unutilised; it has huge potential of renewable energy, including at least 20,000 MW wind power etc. The time is just right to do something about this. Because of resource constraints and other problems, we cannot do everything that we need or want to do. But, we can start with a few projects that will take less time and would be easy to accomplish. One such project is to exploit the huge coal reserves of Thar, with the cooperation of some friendly countries like China. Pakistan and China enjoy exemplary friendly ties, which have not only sustained but, in fact, have expanded becoming deeper and deeper. Pakistan, being its closest friend may ask China to cooperate in the rapid and comprehensive development of Thar Coal for adequate power generation. Coal supplied the vast majority (70 per cent) of China’s total energy consumption requirement. Over the time, China has gained the required experience and expertise for hazard-free production of coal electricity, and Pakistan can benefit from its expertise and help. It may be noted that China was interested in various energy sector development projects in Pakistan including the following:

(1) Collaboration in exploiting the Thar coal and its use for power generation.

(2) Proposal for setting up an oil refinery in Gwadar, along with oil storage and patro-chemical complex.

(3) Proposal for setting up an oil pipeline from Gwadar to Kashgar.

(4) Examining the feasibility of installing additional nuclear power plants in Pakistan etc.

It is estimated that coal consumption of the entire world will increase by 49 per cent from 2006 to 2030, and coal’s share in world energy consumption will increase from 27 per cent in 2006 to 28 per cent in 2030. Of the coal produced worldwide in 2006, 62 per cent was shipped to electricity producers, 34 per cent to industrial consumers, and most of the remaining 4 per cent to coal consumers in the residential and commercial sectors. In the electric power sector its share may decline slightly, from 42 per cent in 2006 to 40 per cent in 2020, and then increase to 42 per cent in 2030. Pakistan, being an energy deficient country can no longer neglect this precious gift of God in the form of Thar coal.

Remittances and economic development

2010-02-16T10:33:00.001-08:00

Remittances are a source of economic wellbeing for a large number of families of expatriates living in home countries and also lead to economic growth through consumption and development, where the state and banking sector play a key role in channelizing the remittances for productive economic activity

By M. S. Qazi
The NEWS

It is a known fact that after 9/11, the state of Pakistan’s remittances changed drastically. These increased gradually from almost $1.0 billion to $7.81 billion by the end of last fiscal year. During H1 FY-10 their amount was $4.531 billion, displaying an increase of $891.07 million or 24.48 per cent over the same period of last fiscal year. According to an optimistic estimate remittances would increase to around $9.0 billion by the end of current fiscal year, nearly half of the amount of projected exports. Major contribution in remittances is from expatriates working in UAE, UK, Saudi Arabia and a few other countries.

How is one to estimate further growth of remittances, in the light of economic slowdown in nearly all the countries where expatriates are concentrated, and the government’s expectation for further increase in them during the next few years? The government of Pakistan (GoP) conscious of the positive effects of remittances on an economy and poverty alleviation, a few months earlier launched PRI (Pakistan Remittances Initiative) to streamline flow of remittances through commercial banks and official channels, against illegal transactions through hawala system, with a focus on doubling the remittances within five years.

Remittances are a global phenomenon and their impact is more pronounced in South America, the Middle East and South Asia. Some economists consider remittances as a ‘development resource’ at par with domestic savings and foreign investment. On the contrary, a few IMF economists after carefully analysing their effect on economic growth and development, particularly in the long term perspective did not find any significant impact. This is because many countries, including Pakistan have not developed the required expertise and financial institutions to directly channelize the remittances towards increasing economic growth and development. The IMF study further revealed that, “a negative relationship between remittances and growth was found.” This observation is quite pertinent with reference to the recent boom in remittances and economic growth in Pakistan.

Despite such diametrically opposite views, remittances are a source of economic wellbeing for a large number of families of the expatriates living in home countries and also lead to economic growth through consumption and development, where the state and banking sector play a key role in channelizing the remittances for productive economic activity. Remittances are not risk free; they create excess liquidity unless it is mopped up in the banking system and concerted efforts are also made by the government to tone down fiscal deficit. Otherwise, they are likely to lead to higher inflationary pressures and create other fiscal and monetary distortions.

It was estimated that in 2008 more than $325 billion remittances were transferred worldwide through official and banking channels. According to an analysis during the past ten years, inflow of remittances to developing countries on an average amounted to one-third of their export earnings. In recent years, they became at par with the foreign direct investment (FDI) in developing countries and during the period of global financial crisis have performed much better than FDI. In Pakistan, FDI during first five months of current fiscal year have declined by 52.0 per cent compared to corresponding period of last fiscal year, but remittances have increased by around 22.0 per cent during this time, as compared to the corresponding period of last fiscal year.

The global financial crisis, which triggered in late 2008, certainly did negatively affect the flow of remittances. Recently added element was the fallout of the Dubai World. With particular reference to Pakistan and other South Asian countries, according to a World Bank (WB) report titled, Global economic prospects 2010; crisis, finance and growth in developing countries, “remittances inflows- a cushion for the region could fail to recover in the event of a prolonged global recession or a jobless economic recovery potentially coupled with tighter immigration controls.” Contrary to fears expressed in the report, inflow of remittances to Pakistan has been on the increase during past two years. The remittances increased to a record high level of $7.811 billion during FY09, compared to their inflow of $6.451 billion a year earlier. According to the SBP, “the monthly average remittances for the July-December 2009 period came out to be $755.17 million as compared to $606.67 million during the corresponding period of last financial year registering an increase of 24.48 per cent.” This is being attributed to a number of factors that include return of some of the expatriates, diversion of remittances partially from informal to formal channels, increased outreach of the banking sector because of the Pakistan Remittance Initiative (PRI) under which transfer of remittances is facilitated within 24 hours, and posting savings in the homeland country considered to be more secure than elsewhere.

According to the report, “South Asian countries are projected to benefit from stronger inflows of remittances which should boost private consumption and support growth particularly in Bangladesh, Nepal, Pakistan and Sri Lanka. Conflict ridden countries like Pakistan, Afghanistan and to a lesser extent Nepal, are expected to face more moderate growth as political uncertainty and fighting continues to disrupt economic activity.” South Asia’s growth is projected to firm up from 6.0 per cent in 2009 to 7.0 per cent in 2010 and further to 7.4 per cent in 2011. The region’s fiscal deficit is projected to continue to exceed its pre-crisis deficit of 5.7 per cent recorded in 2007. Pakistan has problems on account of containing fiscal deficit, inflation and boosting growth that need to be addressed.

The boom in the level of remittances is not occurring for the first time, though the amount remitted during last fiscal year and expected remittances during current fiscal year will be the highest ever. During the past two years economic growth slowed down. It touched a low level of 2.0 per cent during last fiscal year (FY09) but remittances were at a record high level of $7.811 billion. In the current fiscal year, an inverse relationship between high remittances and low economic growth will be reflected. The economy is projected to grow at 3.0 per cent, whereas remittances are expected to grow to around $9.0 billion. During the past five and a half years (including H1 of current fiscal year), remittances worth more than $32.0 billion became a part of the money supply in the financial market. However, they landed mostly in stocks, real estate and domestic consumption. In addition to this, national savings scheme (NSS) and commercial banks had their share. The financial market witnessed excessive liquidity that was diverted towards boosting consumption through consumer financing. There was hardly any concerted effort to divert a major chunk of remittances towards manufacturing, agriculture or agro-based industries either by the government or by commercial banks.

Lack of any concrete strategy to divert part of the remittances towards productive economic activity and a greater stress on consumption had a threatening effect on weak supply side of the economy. It resulted in developing inflationary pressures that was further aggravated because of expansionary fiscal policy of the government, soon after coming out of the IMF bailout package by end of 2004. In 2008, prices of essential commodities and food items hit new peaks. The cumulative effect of all these factors pushed the inflation to a record high of 25.4 per cent in August 2008. With respect to utilisation of remittances there is hardly any change. An amount of $9.0 billion received as remittances, if converted into domestic currency would mean Rs765 billion. Where would such an enormous amount of money end up? This is an important question that needs to be addressed by managers of the national economy. Huge remittances are a big national asset for a country, as they help in alleviating poverty, shoring up foreign exchange reserves and improving the current account. However they contribute little towards development because of shortage of significant expertise in channelising them towards productive economic activity. It is up to the managers of the economy to make the best use of remittances as a development resource. PRI is meant only to double the remittances in five years. The need to move beyond this limited objective is too obvious to be highlighted.

The water crisis and its implications

2010-02-16T10:31:00.000-08:00

The factors responsible for the reduction in water supply include increase in population, climate change, lack of construction of water reservoirs, and misplaced use
of the Jhelum and Chenab rivers by India under the Indus Water Treaty (IWT) of 1960

By M. Sharif
The NEWS

According to the World Bank (WB) and Asian Development Bank (ADB), Pakistan is one of the most “water stressed” countries in the world; it is likely to face an acute water shortage over the next five years due to lack of water availability for irrigation, industry and human consumption. A WB report states that water supply in Pakistan has fallen from 5,000 cubic meters per capita to 1,000 cubic meters in 2010, and is likely to further reduce to 800 cubic meters per capita by 2020. Contributory factors consist of increase in population, climate change, lack of a solid vision to construct water reservoirs, and misplaced use of Jhelum and Chenab rivers by India under the Indus Water Treaty (IWT) of 1960 that has resulted in reduced flow of water to Pakistan. The water crisis has two dimensions. First is the distribution of water among the four provinces, particularly between Punjab and Sindh. The second is between Pakistan and India arising because of utilizing water from Chenab and Jhelum rivers. The first problem basically arises from the second one.

India got the right to fully utilize water from the three eastern rivers; Ravi, Bias and Sutlej, while Pakistan was to utilize water from the three western rivers; Indus, Chenab and Jhelum under the Indus Water Treaty (IWT). India was also permitted limited irrigation of 1.343 million acres (2.85 MAF) from western rivers. Water for Pakistan was not quantified. However, it is implied in the treaty that India is not to exceed the specified limit for water utilization. If India continues with its current strategy of building dams on Chenab and Jhelum rivers, then there would be serious implications for Pakistan’s agriculture and national security. It would aggravate the already strained relationship between the two countries, which is due to the unresolved Kashmir issue. A very strong perception exists in Pakistan that India in its quest to utilize water from Chenab and Jhelum rivers and is not fulfilling its obligations under the IWT. It wants to constrict the flow of water to Pakistan. This strategy has a hidden political agenda to create scarcity of irrigation water that would hurt Pakistan’s economy and agriculture sector in between 10-15 years. The national interests of both the countries would be best served if India honoured its commitments under the IWT. But, is India ready to address Pakistan’s concerns or wants to safeguard its own interests by violating the IWT that could lead to worsening of relations between the two countries?

The water crisis at the national level exists due to the following reasons:

(a) In the past, the public leadership did not succeed to develop a consensus on construction of huge water reservoirs, particularly the Kalabagh dam that could have addressed many of the power and water problems which are being faced today.

(b) Provinces are in dispute over their respective share of water under the IWT, with particular reference to utilizing water for Kharif and Rabi seasons through link canals managed by the Indus River System Authority (Irsa). Irsa has stopped satisfying Punjab, Sindh and Balochistan provinces over distribution of irrigation water for current Rabi season because of 34.0 per cent shortage of water, primarily due to construction of Baglihar dam on Chenab. Water supply would be further constricted because of planned construction of Basrur multi-power project, Siwalkot dam, and Pakot Dul dam on Chenab river by India. Unless resolved it would continue to be a recurring problem.

(c) The Sindh Assembly has demanded scrapping of hydropower project on Chashma Jhelum link canal, a key project for the Punjab government. There is a strong perception in Sindh that the project would constrict flow of water to the province and hurt its agriculture as well.

(d) Punjab is accused of stealing 16,000 cusecs of water between Taunsa and Guddu, from 2nd to 4th Feb, 2010. The Punjab government claims that system losses are to blame for the water that has disappeared.

Pakistan is facing numerous challenges including poverty alleviation, high food inflation and food security for a population of more than 180 million that is likely to swell to 250 million by 2050. These challenges could only be addressed adequately if the agriculture sector that presently contributes 21.5 per cent to GDP growth, and employs 40 per cent of the country’s workforce performed well. The fears of the Sindh province have to be dispelled by the federal government and the Punjab government with respect to honouring its right to water. Each province is to be provided sufficient amount of water, without any reservations from any quarter.

Coming to the water crisis between Pakistan and India, it prevails due to the following reasons:

1.India has embarked upon the construction of a huge network of water storage facility, the national river linking project at an estimated cost of $120 bn likely to be completed by 2016. It includes construction of Basrur multi-power project, Siwalkot dam and Pakot Dul dam on Chenab, in addition to the already constructed Baglihar dam.

2.The Baglihar dam’s construction enticed India to reduce water supply by 0.2 MAF, which is having a negative impact on the production of wheat crop. It is estimated that because of water shortage, it would be difficult to meet the target of producing 25 million tons of wheat. There is likely to be a shortfall of around 2-3 million tons.

3.India is building the Uri power project (240MW) and Kishan Ganga power project (330MW) on river Jhelum. A 22 kilometer long tunnel is to divert Neelam-Jhelum water for Kishan Ganga power project, which threatens Pakistan’s 930 MW Neelam Jhelum project.

The short term implications of the water crisis are already visible. The level of distrust between Sindh and Punjab is increasing. IRSA is facing difficulty to resolve water disputes between them. The meeting held on 4th Feb to resolve compensation of 0.4 MAF of water previously allowed by Sindh and Balochistan to Punjab, open Chashma-Jehlum canal to meet Punjab’s requirement for additional water and the 16,000 cusecs of water theft between Taunsa and Duddu ended up without any positive results. The water dispute can only be resolved if the provinces show maturity, as they have shown in resolving the National Finance Commision (NFC) award. The resolution of technical matters related to the downstream flow of water needs to be tackled through a centralized telemetry system that can measure water flow at around two dozen points, where its discharge takes place. Such a system was established in early 2000s at an enormous cost, but it hardly functioned. It should not be difficult to restart the system, but care should be taken that vested interests do not subvert functioning of the system.

Water dispute between India and Pakistan is of a larger dimension and can be resolved only if it is de-linked from politics between the two nations. The most important point in this respect is that India, being an upper riparian state has a greater responsibility towards resolving the quarrels within the framework of the IWT. This is for one simple reason that the root cause of the problem lies in lack of implementation of the IWT in letter and spirit by India. It has not been sharing technical information and data related to flow of water downstream with Pakistan, and is not agreeing for inspection visits to India by Pakistani teams, whenever required. Using water from the western rivers beyond a permissible limit of 2.85 MAF is a clear violation of the IWT. This can be resolved if India promptly shares water flow data and agreed to inspections taking place, as laid down in the treaty.

Recently, a three-member Indian delegation headed by the Indus Commissioner visited Pakistan. The commission agreed to resolve the water dispute within an agreed timeframe. The matter was earlier raised at the highest level between the Indian Prime Minister, Manmohan Singh and Pakistani President, Asif Ali Zardari during their meeting in New York on the side lines of the UN General Assembly session last year. Manmohan Singh had assured the president that, “his country is seriously committed to our (Indus) water sharing treaty.” India needs to stand by its commitment. It should not disrupt or reduce the flow of western rivers, share technical information with Pakistan on water projects that it plans to construct on the western rivers’ side and respect the rights of Pakistan as a lower riparian state. The two states need to implement the water dispute resolution mechanism of the IWT in the larger interests of regional stability and well being of the people.

Water availability falls sharply

2010-02-06T23:06:00.000-08:00

THE NEWS

Sunday, February 07, 2010
By our correspondent

LAHORE: Pakistan is fast becoming a desert because of a drastic fall in water availability from 5,000 cubic metres per capita in the 1950s to 1,000 cubic metres in 2010.

Lahore Chamber of Commerce and Industry’s former vice president Shahzad Ali Malik said this in a presentation to US Consulate’s Economic and Political Adviser Richard C Jao.

LCCI Vice President Faisal Iqbal Sheikh, Executive Committee members and former Lahore Chamber of Commerce presidents also attended the presentation.

Malik said without water 20 million acres of fertile land would dry up in a week and tens of millions of people would face starvation. No army, with bombs and shellfire, could devastate the country as India by cutting off river flows, he stressed.

He urged the US to ensure implementation of the Indus Water Treaty in letter and spirit, sharing of complete information about water flows as per Article VI of the treaty and installation of telemetry system on rivers by international agencies.

Besides, he added, the country should be compensated for loss of 0.2 million acre feet of water to Baglihar and protection of watershed in upper reaches (J&K) of western rivers.

According to the presentation, Indian manipulation of river water goes back to 1948 as all the rivers on which Pakistan depends originate from India and Kashmir.

The presentation further said between 1951 and 1960 the US took keen interest in water issues leading to the Indus Water Treaty in 1960. The World Bank was the facilitator in appointment of neutral experts and arbitration. Three eastern rivers (Ravi, Beas and Sutlej) were given to India and three western rivers (Indus, Jhelum and Chenab) to Pakistan.

However, last-minute changes in the treaty permitted India irrigation of 1.343 million acres (2.85 MAF) from western rivers. Water for Pakistan was not quantified.

All water heads originated in Kashmir, the jugular vein of Pakistan, he said, adding through annexation of Kashmir India managed to take control of Pakistan’s ‘lifeblood’.

India first used the water weapon in 1948, prompting an intervention by US President Truman. Under the Indus Water Treaty, India cannot stop or interfere with western rivers, whereas in case of Baglihar Dam India did not meet the treaty’s provisions of sharing information. India withheld 0.2 MAF of water in case of Baglihar.

He said India was building a huge storage facility (national river linking project) at a cost of $120 billion to be completed in 2016 which might result in conflicts with neighbouring countries including China, Bangladesh, Bhutan and others.

India was also blatantly violating commitment to ensuring 50,000-plus cusecs in Chenab at Marala. The presentation said that under-construction Kishanganga Dam was a severe threat to Neelum-Jhelum Hydel Project of Pakistan.

Govt trying to get GSP-plus status from EU

2010-02-06T23:03:00.000-08:00

THE NEWS
Sunday, February 07, 2010
By our correspondent

KARACHI: The government is trying to negotiate with the European Union to get Generalised System of Preferences-plus status for Pakistan which will help exporters to compete in European markets.

In this regard, a booklet and a documentary have been prepared so Pakistan’s case can be well presented in the European Union. It shows how the cost of the war on terror is badly affecting the cost of doing business.

This was stated by Zafar Mahmood, Federal Secretary for Commerce, at the Karachi Chamber of Commerce and Industry (KCCI) on Saturday.

He said the war on terror was affecting industrial sectors of the country and was one of the major factors which was adding up to the cost of manufacturing and doing business. Eighteen factors had been identified including tangible and intangible factors which were adversely affecting the trade, he said.

Owing to the high cost of the war on terror, he said, investment from various sectors was being shifted to the war, which was badly affecting development in different sectors including energy.

He said European and American buyers were pressurising Pakistani suppliers to shift their manufacturing units to other places in order to ensure continuous and timely supply. He said exporters should share such type of information so the government could take up the issue because closure of any industrial unit would lead to unemployment and that in turn would create terrorists. “Unemployment is also one of the reasons for growing terrorism.”

He said a committee had been set up to look into the pros and cons of trade agreements with different countries, adding free trade agreement with China was not benefiting Pakistan though its aim was to provide benefit for both countries. However, “China is benefiting from it.”

He added Pakistani goods’ containers were rejected on technical grounds and no one was providing the details and the issue would be taken up.

He said eight per cent tax to GDP ratio was very low and governments could not sustain on that rate and tax collection had to be increased but systematically.

Regarding the Afghan Transit Trade, he said, a committee had been set up which was negotiating on various issues with Afghan officials.

The secretary said commercial counselors or commercial attaches would be appointed on merit and for this written test had been made mandatory and they would be on contract for two years. They would be given targets to achieve and their contract would be revised subject to their performance in the respective countries, he added.

He said drop in imports was not a good sign which showed that the purchasing power had decreased and production had dropped.

The secretary commerce said the KCCI should put on record the fake trade bodies’ issue and send its suggestions to the National Assembly Standing Committee on Trade and Commerce.

KCCI Acting President Rasheeduddin Rashid, Businessmen Group (BMG) Chairman Siraj Kassam Teli and Adviser to Sindh CM on Investment Zubair Motiwala were also present.

Some major issues were discussed including power and gas crisis, high utility tariffs, textile sector problems, Trade Ordinance 2007 and Afghan Transit Trade Agreement.

Businessmen said textile exports fell sharply as high operational cost and hike in power and gas tariffs affected export activities. Due to the high operation cost, exporters were unable to compete in the global market, they said, adding some concessons must be given to the textile sector in the form of exemptions and relief in taxes.

They said the Afghan Transit Trade Agreement had been massively abused by unscrupulous elements who imported products way above their actual demand in Afghanistan and brought the products into Pakistan.

Ishrat sees high trade potential for Pakistan, India

2010-02-06T22:47:00.000-08:00

THE NEWS

Sunday, February 07, 2010
By Samia Saleem and Farhan Zaheer

KARACHI: Dr Ishrat Husain, former State Bank of Pakistan governor and Dean of the Institute of Business Administration, sees Indo-Pak relations in a new perspective as the two media giants of India and Pakistan provide people an opportunity to present their views, end mistrust and improve economic ties.

Dr Ishrat, having a keen eye on economic affairs, has given key analysis on prospects of growth between the two countries.

“Through their peace initiative ‘Aman ki Asha’, the Jang Group and The Times of India have taken a responsible step towards the cause of peace but have a long way to go,” he feels.

He is of the view that with changing times the burgeoning economy of India will realise the importance of improved ties with Pakistan as recognising the potential of each other is in favour of both the nations.

He says India today is a fast growing economy and a very important economic power-in-making and “we must recognise that”. “At current 80 per cent of the Gross Regional Product (GRP) income of South Asia comes from India and India today has one of the largest markets in the world and the economy of Pakistan can benefit multifold if we have trade with the country.”

He expects the economy of Pakistan can be doubled if Pakistan is able to capture even 10 per cent of the 300 million-middle class market of Pakistan and India.

Dr Ishrat, who has a proficient background as an economist, sees Indo-Pakistan friendship as a step towards prosperity for both.

Quoting a 2004 State Bank study, he says, trade between India and Pakistan can be increased from $1 billion to $5 billion if the entire trade between the two sides through illegal means is brought in the legal net.

He says Pakistan can tap this potential in the sectors where India has already excelled like steel, pharmaceuticals, IT, consumer products and various raw materials.

Quoting an example, he says, “we import coal and iron ore for our steel mill from Australia and Brazil, but can import it from India which has a growing expertise in the industry and will reduce our cost to one-fifth.

“This will cut our cost of production of steel and will have a positive effect on other industries like automobile and construction,” he says.

“We need to increase our growth rate because low growth rate hampers employment opportunities and increases poverty. The problems of today’s Pakistan are non-economic like law and order, terrorism and improper use of natural resources.”

On the failure of dialogue due to disputes between the two countries, he feels that it is not actually the fault of any country but is rather an action-reaction diplomatic retort that mars relations. He feels that economic or any other ties with India cannot be sustained unless the political mistrust and discord is removed.

However, the mistrust cannot be removed unless and until “we recognise each other’s potential, sensitivities and value. But for this, India too has to behave as a bigger regional country instead of being aggressive and arrogant.”

He says ‘Aman ki Asha’ has provided an open platform to the people of the civil society to express their views and concerns about relations of the two neighbouring countries. Unlike the old times when the issue of relations between the two countries was limited to government to government correspondence and stances, this step has provided common people with an opportunity to talk for them openly on their issues, he says.

“Now businessmen and the organisations can put on the table whatever is on their minds and the people can articulate their views openly with the most powerful media groups in both the countries.”

After a bright career as an economist, Ishrat entered the field of education to take Pakistan’s name among top teaching institutes in the world. “This is not a job, rather a passion for me as I want to take the IBA to the next level where it is not only considered the best in the country but also in the world,” he says.

Having a keen eye on the economy relative to the world, he feels that the biggest problem of the country is illiteracy and lack of work on human resource. “This if tackled properly can also become our greatest strength as the population in western countries is fast growing old and the future says that our youth will be in demand provided we train them properly.”

He is of the view that the upcoming business conference under the banner of ‘Aman ki Asha’ this month, where top-notch Indian leaders belonging to the civil and business society will come, is the right step towards bridging the big gap in relations.

Supporting the initiative, he says “given history of relations, Aman ki Asha will see both successes and failures but the key is persistence. And that both media groups should have to go a long way that is to go beyond just seminars and conferences.”

Only 66% committed education aid disbursed

2010-02-05T03:19:00.001-08:00

The News
Tuesday, January 26, 2010
Myra Imran

Islamabad

The commitment and disbursement gap in the Official Development Assistance (ODA) in Pakistan’s education sector is becoming all the more evident in view of the fact that only 66 per cent of the ODA committed is disbursed.

These views were expressed at the launch of a study titled ‘A Policy Scan of Official Development Assistance (ODA)’ published by the Pakistan Coalition for Education (PCE). Civil society activists, government officials, media representatives and education experts participated in the event and expressed their views on the issue.

The study shows that the ODA in education sector faces innumerable issues and challenges such as meagre allocation of resources, little focus of multinationals on education, gaps in commitments and actual disbursements, strict aid conditionalities, and lack of implementation and transparency mechanisms.

Highlighting the importance of ODA, Chairman National Standing Committee on Education Abid Sher Ali said it is vital in addressing the missing links in education. “Our enhanced focus, however, should be on generating and mobilising local resources,” he added.

Talking about the inadequate focus of multinationals on education, researcher of the study and Executive Director Centre for Peace & Development Initiatives (CPDI) Mukhtar Ahmed Ali said the trend is evident from the fact that the World Bank and the Asian Development Bank apportion most of the project aid to infrastructure development. He further mentioned that grants constitute only 19 per cent of ODA and the remaining comes in the form of loans.

Assessing the role of ODA in Pakistan, Advisor to Chief Minister Sindh Dr Kaiser Bengali emphasised that as a rule, loans should only be taken for asset creation and should never be taken for budgetary support. However, he cited education as an exception to this rule, as it is not aimed at asset creation but the overall well-being.

He reiterated the importance of foreign assistance but specified four areas of concerns regarding shortage that of teachers, laboratory equipments/instruments, libraries, and research resources like journals/books and scholarships. He also called for comprehensive planning to control the brain drain.

Mohammad Muntasim Tanvir, Campaign Coordinator Asia South Pacific Association for Basic & Adult Education (ASPBAE) - a network of 200 organisations working in 36 countries - spoke on the ODA trends in Asia. He highlighted the inadequacy of aid and low priority accorded to education in the whole region.

He also underlined the key policy demands from the Asian civil society regarding aid, adding that aid should be transparent, unconditional, consistent and better quality grants (instead of loans). “The aid should be monitored through strong accountability measures and should be used in a harmonised process for long term and sustainable projects with full participation from civil society in its design, implementation and monitoring.”

Pakistan Coalition for Education (PCE) is a network, which by design is a forum for initiating, sharing and exchanging dialogues on different education related issues like policy, governance and financing. It encourages dialogues on issues in education with a view to promote awareness among people and create a critical mass for facilitating a positive change and improving upon the overall education scenario.

Businesses advised not to depend on govt assistance

2010-01-30T21:56:00.001-08:00

The News
Saturday, January 30, 2010
By By Mansoor Ahmad
LAHORE: Successful entrepreneurs from knitwear, packaging and auto sector talking to The News have advised their counterparts in trade to promote best management practices and go for innovation instead of looking towards government for dole outs and facilitations.

They said that facilitations and concessions if offered by the government at any time would be more useful for those entrepreneurs that improved their efficiencies and management skills during the hard times. Those that expect to survive on dole-outs would come under pressure again when concessions are withdrawn.

They said that in a badly governed country like Pakistan it was a folly to pin hopes on government. They said the entrepreneurs would have to innovate and upgrade technology to produce value added products with maximum efficiency.

Pakistan Hosiery Manufacturers Association Vice Chairman Adil Butt said that the deteriorating economic conditions in the country were taken as a challenge by his organisation. He said his company used the research and development grant provided by the government after 2005 for the same purpose that prepared the company for competition. He said entrepreneurs that used the R&D grant to capture export orders at lower rates faced the music when this facility was withdrawn.

He said instead of brooding over high cost of doing business his company opted to increase production to achieve economies of scale and at the same time controlled wastages as the sponsor directors remained on the manufacturing floors to ensure that all guidelines of the good management practices are fully adhered.

Adil Butt said even after offering the clothing at extremely sharp margins the company earned more profit than it did during the boom of knitwear exports in the late 90’s. He said his firm gave nine bonuses to its entire workforce this year on the basis of high profits earned.

He said the steep depreciation in the rupee value did help the company a lot. However the basic point was that the firm has established its reputation as the quality knitwear supplier.

He said the earning would have been exorbitant had the government policies been supportive. The efficiencies now achieved he added would serve his company when economy resumes normal growth path supported by prudent government policies.

Nabeel Hashmi who is in auto-parts manufacturing and LPG distribution business said that the slump in car industry provided him an opportunity to diversify and start making parts for other industries.

He said auto-parts makers supply to the original equipment manufacturers according to the standards dictated by their principles in Japan and Korea.

This he added has equipped the auto-parts manufacturers to make precision components according to best global standards. Hashmi said now he is applying the same skill to make precision parts for other industries that were importing spare parts at exorbitant rates.

Hashmi said earlier his exports were limited to auto-parts only now he exports number of components for the engineering industries. He said he has further diversified in to making gardening gadgets for domestic market. Now he added he is forced to expand his manufacturing facility and construction is on at five times larger area in Sundar Estate.

Chief Executive Officer of SPEL Almas Hyder said that his company registered a growth of 50 per cent this year when most of the companies struggled to survive. He said the success was possible due to stress on diversity of business, stress on quality and prudent marketing. He said his concern diversified much before the economic slump started from auto-parts to die moulding and packaging. “We knew from our past experience that Pakistan’s economy is managed non-transparently through inconsistent policies that have subjected it to periodic ups and downs.”

Almas said the main emphasis of the management had been on quality and efficiency through upgradation of technology. He said during past three years his company has maintained robust growth. He said his exports are increasing along with the local sales. He said he has strengthened the human resource of the company by engaging the best brains in the industry that were retrenched by failing companies due to economic crunch.

Energy sector's some profound woes

2010-01-12T23:08:00.000-08:00

BUSINESS RECORDER

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

2010-01-12T23:07:00.000-08:00

RECORDER REPORT
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

2010-01-12T23:04:00.000-08:00

BUSINESS RECORDER

RAJA AQEEL & SEHRISH WASIF
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'

2010-01-12T23:02:00.000-08:00

BUSINESS RECORDER REPORT
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.

Home remittances

2010-01-10T23:14:00.000-08:00

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)

2010-01-10T23:10:00.000-08:00

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

2010-01-10T23:07:00.000-08:00

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

2010-01-10T23:03:00.000-08:00

http://www.imf.org/External/NP/LOI/2009/pak/121109.pdf

December 11, 2009

Pakistan: Third Review Under the Stand-By Arrangement

2010-01-10T22:54:00.000-08:00

IMF Country Report No. 10/6

January 2010

http://www.imf.org/external/pubs/ft/scr/2010/cr1006.pdf

THE CURRENT GLOBAL ECONOMIC CRISIS EXPLAINED

2010-01-10T10:45:00.000-08:00

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.

A De-Globalized World?

2010-01-09T10:05:00.000-08:00

By Dani Rodrik

"....developing countries can continue to grow rapidly even if world trade slows...."

Read more at:

http://www.project-syndicate.org/commentary/rodrik31

www.project-syndicate.org

Emily Oster flips our thinking on AIDS in Africa

2009-12-29T11:12:00.001-08:00

Paul Romer On the Importances of Choices

2009-12-29T10:43:00.000-08:00

Jacqueline Novogratz on patient capitalism

2009-12-28T03:20:00.001-08:00

Paul Collier on the "bottom billion"

2009-12-28T02:41:00.001-08:00

Replace ‘income support’ programme with ‘employment generation’ plan

2009-12-28T00:47:00.000-08:00

The News

23-11-2009

By Dr. Sabur Ghayur

The “welfare” and “workfare” programmes are two important instruments of policy makers outreaching the poor and marginalised segments of the population in times of distress.

Termed as important components of social safety nets, it is quite common for governments of poverty stricken regions to recourse to such programmes at the time of need, for economic development and improving the lives of the societies’ underprivileged.

A variety of governmental programs designed to protect citizens from economic risks and insecurities of life have been experimented in a number of developing countries. Such programs mostly provide financial assistance to beneficiaries; however, they also contain certain positive and life changing conditions. Such as, the beneficiaries of these programmes have to enrol their children in schools etc.

Bangladesh launched a targeted food rationing programme in 1993. It was later replaced with food for education programme, which provides a free monthly ration of rice or wheat to poor families if their children attend primary school. Poor households are provided monthly 15 kg of rice per child with a maximum of 20kg, if all the children of a family are enrolled in primary schools. The goals of this program are to increase primary school enrollment, promote attendance, reduce dropout rates, and enhance the quality of education.

Progresa – a social assistance program in which cash is transferred to poor households was introduced in Mexico. Federally designed and implemented cash transfers were conditioned with: (i) enrolment of children aged 6-17 years in schools, and ii) regular visits to health centres with full attendance at information sessions.

The workfare programmes (WFPs) have come into existence in response to the crisis of unemployment and poverty having cropped up in recent times, due to macro-economic instability or climatic disasters owing to global warming. Such programmes were introduced in different regions under different circumstances. For example, South Korea in response to the Asian financial and economic crisis of 1997-98, north-east Brazil due to the prolonged drought that destroyed it in 1998, and in Argentina, where in 1997 unemployment had reached 18 per cent because of recession.

In our neighbouring country India, the Maharashtra state was first to guarantee statutorily to the principle of “right to work”; making employment an entitlement for everyone to empower the poor living in slums. The Maharashtra Employment Guarantee Act was enacted in 1979. In 2004, the then newly elected government launched the national rural guarantee scheme, initially in 150 districts and then later covering the entire country.

Successful workfare programmes have been found to be linked with citizens earning low wages in mostly poor countries of the world. However, it has been witnessed that when market wages fall, programme wages are also reduced. Like in the case of Argentina’s trabajar programme, where low wages were paid to the rural population on the basis that it was just a form of economic assistance only and not a hefty remuneration amount. In Korea, the programme wage was set slightly below the market wage for unskilled labour. The programme in Brazil also paid benefits below the minimum wage.

Pakistan also has various welfare or social security programmes aimed for the betterment of the unemployed or poor people. Many of these programmes announced have found later to be either abandoned or replaced with others. The “guzara” (sustenance) allowance and permanent rehabilitation programs under Zakat have been in place for decades; reaching over a millions of families. In addition to this, cash transfer, individual financial assistance, food support and vocational training programmes are reaching over a million needy and destitute through the Pakistan Baitul-ul-Mal (PBM). Further, there is the wheat subsidy and the mid-day meal for school students under Tawana Pakistan programme, however this has been dis-continued. Except the programmes under Zakat, the rest are funded through budgetary allocations, on many occasions based on foreign loans.

The People’s Party government launched a rather ambitious income support programme in August 2008, targeting 3.5 million households in its initial year of inception. With a huge financial allocation of Rs.35 billion, the funds for Benazir Income Support Programme (BISP) have been doubled for the current fiscal year. The international financial institutions are the major providers of funds, in the form of loans for this particular programme. While not denying the need for a well prepared social safety net programme, one is really astounded by the ease with which such an uneconomic, unsustainable and ineffective programme has been launched and that too on borrowed money.

A look at the current employment and labour market situation lands us into a rather discomforting situation. The signs emanating from the labour market are alarming. The economic side is exacerbating at a fast rate. Rapid depleting regular employment has become a norm. The unemployed workforce escalating at a swift pace is being confronted with absorption difficulties. Furthermore, those employed; a large proportion of them have to be satisfied with such working environments having longer hours of work, lesser remunerations with an overall poor working conditions. Females and the youth are the most disadvantaged segments of the society as poverty and unemployment are fast engulfing them, even though many of them are educated and skilled. Unemployment and poverty are fast returning and surging the economy.

Indeed the current situation, besides other interventions deserves a well designed and implemented workfare programme. A mechanism of WFP that can provide a guaranteed wage employment for 120 days can be worked out rather easily. The pubic sector development programmes (PSDPs) do contain huge allocations for a large number of smaller projects, many of them related to infrastructural development. These need to be linked with an employment generation programme (EGP) primarily for the rural areas and slums. The citizens’ community board is to be consulted, as well as local bodies involved with the national and provincial parliamentarians in the design and monitoring of the programme, along with other schemes. The activities that can be undertaken under the EGP may also include: (i) soil conversation and development, (ii) developing waste lands, (iii) water conservation, (iv) minor irrigation, (vi) flood protection, (vii) improving water courses, (viii) brick-lining of canals, (ix) supply of clean drinking water, (x) electricity, (xi) building of streets, (xiii) horticulture, (xiv) forestation, and (xv) roads building and maintenance.

Whereas, diversion of financial resources from the Benazir income support programme can be the immediate source of funding, whereas, levy of EGP tax on motor vehicles, all non-food and non-oil imports and a rise of GST by 0.5 per cent would be the other sources of funding. Furthermore, the international financial institutions can also provide financial assistance to meet their goal of poverty reduction.

As far as the much broadcasted BISP is concerned, it should not be discarded. In fact, it should be amalgamated with the Pakistan Bait-ul-Maal and Zakat but with significant reforms in the governance of these institutions.

The introduction of the employment generation programme, owing to the worsening labour market situation and large infrastructural gaps especially in rural areas is quite essential for us and long overdue. It will address the three most critical obstacles faced by Pakistan’s economy; unemployment, poverty and slow economic growth. Moreover, it will also be a face saving for the much trumpeted BISP, providing it a safe exit.

— (The writer heads Islamabad-based centre for labour advocacy and dialogue (CLAD).)

Employment generation through overseas migration

2009-12-28T00:12:00.001-08:00

The News
07-12-2009

Overseas migration plays an important role in the economic prosperity of individuals as well as of nations - both for countries of origin and destination. The economic contribution of migration, especially towards poverty reduction, employment generation and women’s empowerment is extensive

By Dr. Sabur Ghayur

Close to 200 million people that is 3 per cent of the world population is estimated to be the international migrants; half of them are females. Whereas, 1 in 35 is a migrant globally, in case of OECD countries it is 1 in 10. Some 4 million emigrated to the OECD during 2006 alone on “permanent” visa type – the USA receiving 1.3 million. In the Gulf countries, the emigrants largely outnumber the local population. The migrant workers alone are estimated to be about 95 million; more than half of them are females.

Overseas migration plays an important role in the economic progress and prosperity of individuals as well as nations - both for countries of origin and destination. The economic contribution of migration, especially towards poverty reduction, employment generation and women empowerment is extensive. It is also an effective mechanism of transferring new skills to labour when they migrate to other nations. Indeed, on return the migrants bring knowledge and skills as well as social capital to their countries. The remittances sent by migrants, not only provide livelihood to their families but the much needed funds for the development policies and programs.

The remittances help in building foreign exchange reserves and providing balance of payment support. Remittances sent by them form an important source of foreign exchange earnings. In case of the Philippines, some Central American states and Bangladesh, these were 12 per cent, 10 per cent and 8 per cent respectively of the GDP. Migrant workers from Pakistan have also been significant contributors in providing the much needed foreign exchange for development needs including import facilitation. They remitted about US $29 billion in six years up to 30th June 2008; $5.5 billion in 2006-07, $6.6 billion 07-08, $7.81 billion in 2008-09 and a monthly average of $772.45 million during July – October 2009.

There is also no denying the fact that the host countries receive substantial benefits, such as, meeting labour shortages, enrichment of human capital and augmentation of economic activities. It is, therefore, an important source of economic growth and development for individuals as well as nations.

Pakistan too is an important source country. Whereas, the size of the Pakistani diaspora is estimated to range between 6-7 million, the people leaving for work during 1971 - 2008 was recorded as 4.5 million. Till the end of 2008, the average number of workers emigrating annually had been over 140,000, the number exceeding 280,000 in 2007 and 430,000 in 2008. This year is expected to record highest number of workers emigrating – about half a million.

The destination of our workforce has been to over 50 countries. However, Gulf countries notably Saudi Arabia and UAE remain the most important countries for Pakistani migrant workers. No doubt, the contribution of Pakistani migrant workers and Diasporas to the national economy is significant. It is not only the much needed foreign exchange support that is being provided through these remittances, but equally important are the numerous economic activities undertaken or the consumption that is being supported by the remittances receiving households.

The overall number of emigrants and annual flows, no doubt, has been instrumental in addressing employment and poverty issues in the country. Moreover, the remittances sent to Pakistan helped in tackling development resource constraints. Many while working overseas acquired new skills and accumulated knowledge that contributed in human capital formation. The importance of migration is gaining new “heights” under the current socio-economic situation.

It is not only the existing underutilisation of workforce, both unemployment and underemployment – affecting about a-fifth of the workforce - that is a cause of concern. The situation is being aggravated further by a labour force growing by about 2 per cent annually in an environment of the current economic depression, along with the deteriorating law and order situation.

This situation is and will continue to exert pressure on the policy makers and planners to explore all avenues for gainful and decent employment including “safe” emigration. Thus, a renewed focus on tapping employment opportunities overseas would be an important factor in not only tackling unemployment and poverty in the country, but also in raising the levels of remittances.

In the migration process, we are currently confronted with a number of issues – rather challenges. The availability of information regarding the very process of migration, such as emigration policies of competitors, economic plans and sectoral priorities of the host countries, return migration, etc is conspicuous with absence; at best are inadequate. An increasing number of the workforce considers overseas migration as an escape route out of poverty and unemployment. However, not sufficient amount of technical vocational education and training (TVET) competence matching the demand overseas as well as necessary facilitation have been provided to migrants. Furthermore, focus on seeking increasing work opportunities overseas has not been coordinated with developing a mechanism for workers’ protection and welfare. Efforts are also wanted with regard to: (i) ensuring transparency in recruitment procedures, (ii) protecting borders, (iii) readily accessible support of the Pakistani missions abroad in the event of a need, (iv) welfare of the family members left behind, and (v) effective reintegration of returning migrants.

The foremost action that needs serious consideration is none other than maintaining our size and share in the traditional destinations in the Gulf countries and also responding to the changing patterns in demand taking place over there. It should then be supplemented by concerted efforts exploring new avenues in the selected non-traditional destinations in East and South East Asia, namely: Malaysia, Singapore, Hong Kong, Taiwan, Korea and Japan. To these should be added countries like Australia, New Zealand, United Kingdom, etc - that have introduced point system for “immigration.”

Disciplined, trained and motivated workforce is the key to keep the size of Pakistani workforce intact in the traditional destination countries and penetrating in the non-traditional destination countries. “Sufficiently trained” is emerging as a determining factor in the non-traditional destination countries. Timeliness in processing overseas demand with ensuring relevance and quality of the workforce is a critical factor in new destination countries.

Pakistan today, with a long history of migration notwithstanding, finds itself challenged in terms of: i) improving capacity to regulate the recruitment process; ii) eliminating unsafe; exploitative and abusive situations of migration; iii) improving protective and welfare mechanisms for emigrants; and iv) importantly, not only retaining and expanding share of our workforce in the traditional host countries but also emerging as an important source country for other labour receiving countries. No doubt, safe emigration requires a simultaneous focus on matters related to four main areas, namely: (i) pre-departure, (ii) the country of work, (iii) families left behind, and (iv) re-integration on return.

The first ever National Emigration Policy (NEMP) was prepared and finalised by the Policy Planning Cell of the M/O Labour and Manpower in early 2009. This policy has dealt with all aspects relating to emigration process rather extensively. Its recommendations are on the basis of a consultative process that took place in federal and provincial capitals as well as some other important cities. The recommendations do carry answers also for tackling unemployment and under employment through better managing migration under safer conditions.

This policy is awaiting presentation to the Cabinet since January 2009!

— (The writer heads Islamabad-based centre for labour advocacy and dialogue (CLAD). E-mail: sabur@clad.org.pk)

PAK-SRI LANKA FREE TRADE AGREEMENT

2009-12-28T00:10:00.001-08:00

The News

14-12-2009

A step forward in the right direction

By Alauddin Masood

Eager to reap maximum benefits from the Free Trade Agreement (FTA) between Pakistan and Sri Lanka, the Karachi Chamber of Commerce and Industry is holding a seminar to discuss ways and means to give a boost to the two-way trade between both the countries.

Scheduled to be held in early December of this year, the seminar would offer a good opportunity to the local businessmen to gain awareness and knowledge about the prospects for expansion of the two-way trade between Pakistan and Sri Lanka.

The bilateral trade between Pakistan and Sri Lanka has already doubled and touched $400 million during the last three years as a result of the bilateral free trade agreement which the two countries signed on August 1, 2002, but became operative in June 2005.

Under FTA, both Pakistan and Sri Lanka have granted duty free access to each other on several tariff lines, agreeing to eliminate custom tariff on almost 90 per cent of products by June 2010.

As per FTA’s provisions, Sri Lanka has granted duty free access to Pakistani products on 102 tariff lines; while Pakistan has granted Sri Lanka duty free access on 206 tariff lines. By June 2010, Sri Lanka will eliminate the customs duty on 4,527 tariff lines out of 5,224 products at six digit level. On the other hand, Pakistan has agreed to eliminate by June 2010 the customs tariff on 4,680 tariff lines at six digit levels, covering about 90 per cent of products. The elimination of customs duty will cover 69 per cent of the actually traded goods between the two countries.

The FTA enables Sri Lanka to export it natural rubber, coconut products, spices, natural graphite, paper and paper products, copper and aluminum products duty-free to Pakistani market. Similarly, Pakistan has duty-free benefits for its exports of oranges, basmati rice, chick-peas, cumin seeds, fennel seeds, motorcycles and accessories to the Sri Lankan market.

While keeping the negative lists to the minimum, the two countries have granted each other tariff rate quotas (TRQs) and higher margin of tariff preferences on a number of products on the negative list.

Pakistan has granted TRQs to Sri Lanka, on an annual basis, on 10,000 metric tonnes of tea at zero rate of duty and 1,200 metric tonnes of betel leaves at a preferential margin of 35 per cent against the pre-2005 import duty of Rs.150 per kilo. Before 2005, Sri Lanka exported about 3,000 metric tonnes of tea to Pakistan and the annual TRQ of 10,000 metric tonnes enabled Sri Lankan tea trade to make a fresh start. Likewise, TRQ on betel leaves has resulted in enhancing the income of betel growers in the rural areas of Sri Lanka.

Pakistan also granted Sri Lanka TRQs for three million pieces of apparel products, covering 20 categories where there was market potential without restrictions regarding the fabric’s country of origin. The apparel categories also qualify for 35 per cent preferential tariff margin. In addition, Sri Lankan ceramic tiles and tableware also enjoy 20 per cent of preferential tariff margin.

Sri Lanka has granted to Pakistan TRQs for duty free exports of Kino and 6,000 metric tonnes of long grade basmati rice, in addition to 1,000 metric tonnes of potatoes per annum.

Under FTA, both the countries have agreed to a 35 per cent domestic value addition and change of tariff heading at a six digit level, which provides flexibility for Sri Lankan and Pakistani investors to source their inputs from third countries and export manufactured products to each other.

Following FTA’s coming into operation on June 30, 2005, bilateral trade between both the countries has been strengthened through an increase in the number of products that they can now import from each other. Resultantly, Pakistan has now become the second largest trade partner for Sri Lanka in the South Asian region.

There is a great demand in Sri Lanka for Pakistani products. Pakistan can export cotton yarn and fabrics, potatoes (fresh/chilled), pharmaceutical products, knitted or crocheted fabrics, articles of iron and steel, galvanised pipes, rice, fish and many other kinds of sea food items, textile made-ups, apparel and clothing accessories and rods of refined copper.

Sri Lankan products in demand in Pakistan include: Coconut products, tea, rubber and rubber-based products, while Pakistani products in demand in Sri Lanka are rice, vegetables, pharmaceuticals, potatoes, textiles and apparel. Only the export of value-added textiles has reached more than $100 million.

NFC Award: some positive development

2009-12-28T00:09:00.001-08:00

The News
21-12-2009

The basis of horizontal distribution is made more complicated after the inclusion of vague concepts like poverty and backwardness. The population factor remained the most dominant basis for distribution of resources

By Zafar-ul-Hassan Almas

The government has finally resolved the thorny issue of NFC (National Finance Commission) in its Lahore meeting by accepting the provincial governments' demand for a greater share in the national resources.

The government has finally resolved the thorny issue of NFC (National Finance Commission) in its Lahore meeting by accepting the provincial governments' demand for a greater share in the national resources. The federation has sacrificed its chunk of share along with reduction in collection charges from five to one per cent. The horizontal and vertical issues are almost done as well. The basis of horizontal distribution is made more complicated after the inclusion of vague concepts like poverty and backwardness. The population factor remained the most dominant basis for distribution of resources with 82 per cent of them being distributed on this basis. The sympathy towards war torn province of NWFP is yet another positive development besides Punjab’s all out support for the NFC.

The fact that the federal government and the four provinces have come to an agreement in the current round of NFC negotiations is very encouraging and has been hailed as a victory for democracy. However, the worrying thing about the arrangement is that it has not taken into account the ground realities of the budgetary dynamics. The federation has surrendered portion of its 52.5 per cent stake to 44 per cent in this award and if we include four per cent point reduction in collection charges, the sacrifice is even greater. But without transferring expenditure assignments to provincial governments, the federation will face dire resource shortages. Federal government is already responsible for creating major portion of the fiscal deficit, when we are committed to abide by fiscal discipline through restricting ourselves to fiscal deficit target assigned in the SBA package. Now the federation has indulged itself into a situation where attaining fiscal deficit target has become a gigantic task.

With the current revenue short-fall and growing expenditure needs in the wake of security needs compounded by ever increasing debt servicing liabilities, the center needs more resources. In this situation, the provincial share has to be increased at the expense of the federal government. The poor resource mobilization effort on the part of the provinces is likely to remain a hallmark of this NFC. There is a huge untapped potential in the provincial revenue account. Even the local government could amass a huge chunk of revenue from the structure of the local resources. The own revenue concept has to be given more weight without enhancing multiplicity of the taxes.

The right of provincial governments on sales tax of services is also accepted. However, a million dollar question is whether GST on services will remain non-starter like the agriculture income tax. The ability of the provincial governments to collect this tax with efficiency is also doubtful and to devise a mechanism for tax collection will take time.

The last formal NFC award was promulgated in 1997 for a period of five years by a caretaker set up and it generated a lot of controversy. The award after its expiry in 2002 remained formally operative until 2009. The politics of the NFC got messier and no consensus was reached among the federating units for many years. All provinces had taken positions and nobody was ready to compromise even a slight fraction of their position in the larger interest of the country. The deadlock forced the last government to prevail upon the provincial chief ministers to authorize the then president to announce an award by using his powers under Article 160(6) of the Constitution. Subsequently, then president of Pakistan amended the “Distribution of Revenues and Grants in Aid Order, 1997” and announced the NFC award which took effect on July 1, 2006. Then president gave the formula which promised more resources to the provinces. The resources are being distributed on the basis of this formula since the last three years.

Since 1997, the share of the government in the divisible pool had been fixed at 62.5 per cent while the share of the provincial governments was fixed at 37.5 per cent. However, in the provisional award of 2005, the share was enhanced and beginning 2006-07 it was decided the share of the provincial governments in the divisible pool will rise annually to 41.5, 42.5, 43.75, 45.0 and 46.25 per cent thereafter in coming years. This arrangement is going to expire in the end of 2010-11.

The provincial share has already reached 45 per cent in the current year. In the negotiation process of the current NFC, provincial governments demanded 60 per cent share in the revenues. More importantly, they were not demanding expenditure assignments equal to this additional revenue. The dichotomy is that expenditure assignments have continued to perform by the federation with reduced resources.

This is the most trying time for Pakistan when expenditure needs are growing but the revenue base is shrinking with imports contracting, negative growth in industrial output and deteriorating governance. Pakistan has already earned a distinction of having low tax-to-GDP ratio, even in the South Asian region. In this environment we are replicating the performance of the 1990s when additional tax measures were taken more frequently but tax-to-GDP ratio persistently fell. If we are transferring more resources to provincial governments then we have to redefine expenditure assignments because going forward, there is a likelihood of a rising expenditure burden on the federal government.

There is always a question mark on the provinces’ ability to spend because whenever enormous growth in allocations to provinces is witnessed, the provincial governments were not able to consume despite the spendthrift and profligate attitude of the government. The NFC award has badly ignored the most pressing demand of value for money assessment of spending.

The lower tiers of the government are bestowed with new assignments under the decentralization program without any guaranteed resource inflows from provincial governments. We should learn from the experience of our next door neighbor India where distribution of resources is a normal function of the government without any controversy. Indian resource distribution also makes it obligatory on the part of the states to further specify the share of local governments in their resources. In Pakistan’s case, lower tiers of the government are ignored in the process and discretion of the provincial government is adding to their woes. Resource shortage is hampering their simple development needs in many cases while resource abundance is feeding fat cows in pro-government district governments.

Another lesson from India is professionalism because their resource distribution is professional in approach. The composition of the NFC is again political rather than professional. The NFC award should be manned by professionals from different federating units. The countries which have centralized government structures with diversity, the distribution and burden sharing among federating units is always cumbersome. It is natural that resource generating abilities and resource consumption requirements of different regions is different and some sort of burden sharing is a must for the federation to run efficiently. The amicable agreement between the stakeholders requires intricate, professionally designed and unbiased formula based on sacrifices and tolerance. This needs a permanent structure and professionally managed independent body.

Political backing and commitment is a must but if a political solution is tried in an emotional environment like Pakistan’s, the result would be disastrous. Pakistan has a long history of NFC awards’ failure.

Punjab has been generous with respect to smaller provinces and its attitude has remained accommodative with three provincial governments having acknowledged the contribution of Punjab. Every province should have been generous and take into account growing expenditure needs generated in the center. The NFC should also devise a mechanism for equitable distribution of resources to the lowest tiers of the government.

With Musharraf’s devolution system, significant responsibilities have been transferred to lower tiers of the government. The federal government is obliged to share its revenue with provincial governments, but the provincial governments are not bound to share any amount with local governments. The centralized revenue generation to the extent of almost 95 per cent and subsequent transfer of resources among different tiers of the government creates problems and frictions.

We need more professional debates on inter-governmental relationship and consensus building. The provinces should be given some sort of fiscal autonomy by allowing them to generate more revenues. The local taxes like property taxes should be made into important vehicles of revenue mobilization by local governments. True, is the fact that waste and corruption increases with the downward movement of tiers but this is because of weaker monitoring and accountability. Once rule of the law is established and an accountability process is at place, the effectiveness of public spending at the lowest tier of the government would be increased.

Failure can be a beginning

2009-12-28T00:06:00.000-08:00

The News
27-12-2009

We need a new approach to deal with climate change so that the world trundles along on a business-as-usual basis

By Pradeep S Mehta

With the end of Copenhagen talks and the delegates returning home nearly empty-handed, one can safely say that this much touted summit was, alas, a failure. It is not very difficult to diagnose the causes for this utter fiasco. Without going into the numbers game which was played at the summit, let us understand clearly that countries the world over, both rich and poor, still define their aspirations in terms of economic growth.

Proactive measures to mitigate climate change impacts based on reduction in emissions, however, requires tempering of growth aspirations which no country is yet willing to undertake. To resolve this conundrum, we need a new approach so that the world trundles along on a business-as-usual basis.

While it is natural for the developing world to promote economic growth, the reasons for rich countries pursuing the same are more subtle. While all rich countries enjoy a very high level of per capita income, by definition, incomes are still unevenly distributed and unemployment is rampant. Thus, even with the present high levels of average income, the level of satisfaction of wants is still low.

If people concentrated in the lower half of the income distribution are to pursue their economic dreams, these countries would have to continue growing as drastic redistribution is politically infeasible. This tendency is reinforced by multinationals and other business players continuing to measure success in terms of financial turnovers. In other words, economic growth still remains a top domestic priority for even rich countries and cut backs like the ones required for mitigation of climate change impacts do not constitute an attractive electoral agenda.

To add to this, the immediate effects of climate change are being felt almost entirely by poor tropical and island economies. In fact, in the near future, it is expected that life in the more prosperous temperate zone will become more productive as well as pleasant, though temporarily so.

In other words, the present circumstances are not ideal for rich countries offering to make sacrifices at the world stage for the sake of global welfare. Hence the tensions, as we saw at Copenhagen. For emerging and developing economies, even the levels of per capita income do not correspond to a satisfactory quality of life. This makes non acceptance of the burden of mitigation measures justifiable both from a moral and practical point of view.

From the above discussion, it is quite clear that governments, whose fortunes are tied to the aspirations of local constituencies, cannot afford to cooperate with each other in pursuing domestic agenda that collectively contributes to global good while seemingly sacrificing narrow national interest. The same equation also applies to the stalled Doha talks of the WTO.

The Copenhagen talks were based on the assumption that a top-down mechanism of signaling works. Thus, it was envisaged that a consortium of global representatives could persuade individual countries to get producers operating within their boundaries to reduce their emissions. However, this plan underestimated the lobbying power that big businesses as well as the electorates have with individual national governments. Thus, Copenhagen outcomes turned out to be more a reflection of what powerful domestic stakeholders wanted rather than unencumbered opinions of national representatives open to influence at the world stage.

Given that the top-down signaling mechanism has failed at Copenhagen and promises to do so again and again in the near future, what are the options? The obvious one pertains to the use of bottom-up processes for influencing consumer and in turn business preferences. The nerve centre of this mechanism should be located in a coalition of civil society organisations; the only combine which has shown considerable promise of not catering to either narrow economic or restricted national interests. These should not be restricted to the sidelines of global negotiations, but ushered into the centre stage.

Many representatives of reputed CSOs work in countries other than their own and empathise with the interests of the poor and vulnerable, regardless of their national identity. It is, therefore, natural for the civil society to be the flag bearer of the processes of mitigation/adaptation to climate change. The proximity of the civil society to the grassroots and, therefore, its ability to update the world on the impact of climate change on ground realities is another compelling reason for it to lead this movement.

How then should the civil society go about this task so as to exploit its characterised privileged position? The process should start with a broad-based demystification of the causes and impacts of climate change. Such demystification should aim to stimulate both the selfish and altruistic motives of global citizenry.

The goal should be to convince the international community that climate change is a likely outcome of the unscrupulous growth initiatives that are being witnessed all over the world and show no signs of abating; that the outcomes of climate change are bound to be catastrophic and would almost immediately affect two-thirds of humanity and all of the rest within the next fifty years; that even if this likely outcome does not happen, the agenda for mitigating climate change is a worthwhile one given that it would economise on scarce non-renewable resources and lead to breakthroughs in using more abundant renewable ones.

Such an advocacy agenda, when pursued by a global coalition of civil society organisations, is likely to generate a response from individual consumers in terms of higher demand for green goods and services. In other words, consumers would be willing to pay a higher price for these than their non-green counterparts. Businesses would then be compelled to produce more of these not on the basis of altruism but purely to sustain their businesses.

In this way, stimuli applied at the grass roots will generate a whole cycle of responses leading to a cleaner and more harmonious global environment without a total negation of the economic aspirations of individual economic actors, whether on the consumption or the production side.

The first half of the last century belonged to governments. The next half belonged to markets and the actors these staged. Both phases led to euphoria which was short-lived. Hopefully, the civil society can lead to a better deal in this century.

The author is the Secretary General of CUTS International. Siddhartha Mitra and Shruti Mittal of CUTS contributed to this article

Current Issues in Macroeconomic Management

2009-12-26T22:03:00.000-08:00

Current Issues In Macroeconomic Management

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Food and Financial Crises: Impact Assessment and Policy Response of Pakistan

2009-12-23T10:26:00.001-08:00

Food and Financial Crises: Impact Assessment and Policy Response of Pakistan

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Combating Corruption

2009-12-01T11:34:00.000-08:00

The News
Tuesday, December 01, 2009
Abid Hasan

The recent damning Transparency International report on corruption in Pakistan has had the usual response. Critics are terming it a conspiracy against democracy—as if the report’s main corporate objective was to tarnish Pakistan’s high-performing and clean democratic system. In addition, they are questioning the survey methodology, insulting citizens’ intelligence by wanting them to believe that Pakistan’s pristine corruption-free record is not being picked up by a flawed survey methodology. This ostrich-like behaviour is similar to the outbursts by Gen Musharraf and his cronies on the sampling flaws of the surveys which started showing the rapid decline in his popularity. The prime minister would be well advised to admit that indeed corruption is an endemic issue, as it is in all developing countries, and distance himself from party loyalists taking the foolish stance of discrediting the report.

The government’s second response has been to establish an in-house committee. It is a well established practice around the world for governments to establish committees when they want to defer action. In this instance the in-house committee is also handicapped — either its members owe their jobs to their closeness to party leadership or they are civil servants who are not likely to recommend politically unpopular actions for fear of either becoming OSD or not getting government jobs after retirement. Although unlikely, that much will come out of this committee, but just in the one-in-a-million chance that they are serious about addressing the corruption cancer, a few suggestions for the prime minister and the committee.

The government should appoint a commission to prepare a credible and comprehensive National Anti-Corruption Strategy, which takes into account proven global practices, for presentation to parliament for approval. Pending the announcement of the strategy, the government should consider implementing the following actions immediately.

First, reforming the NAB by making it independent, expanding its jurisdiction to all organs of state, and appointing a retired “non-PCO” Supreme Court judge as its chairman. The NAB’s functioning is compromised by having its chairman from within the government (civil or military), while the appointment of Supreme Court judge to this position could ensure that the NAB works in a depoliticised manner and within the law. The NAB chairman and senior management should be appointed for a five- to seven-year non-renewable term, with safeguards to ensure that they cannot be easily removed. The NAB should focus on investigating corrupt practices of holders of public office and senior judicial, military and civil officers, and public contracts over Rs500 million, and not waste scarce resources going after patwaris, SDOs and police constables.

Second, the “reformed” NAB should engage a world-class audit firm to conduct an independent audit of all financial returns filed by elected officials with the EC, with the objective of verifying their reliability and faithfulness, especially matching the personal lifestyles and assets of the elected officials with their declared sources of income. This exercise is a critical first step in reducing corruption at the top, and curbing the influence of the corrupt in the political system. In addition, the prime minister should require all those ministers and public-office holders to resign from their positions, who, themselves or their immediate family members, have benefited from corruption-related NRO provisions and loan write-offs. Just as the fish rots from the top, pervasive corruption at the top will prevent any meaningful anti-corruption drive.

Third, the NAB should establish a national call centre, with toll-free numbers, for people to call in to report financial wrongdoings. While there will be frivolous calls and calls falsely implicating people, using up scarce investigative resources, such information could be easily screened out. Importantly, such a mechanism could act as a deterrent and generate useful leads. The NAB should also partner with the media in its crusade against corruption.

Fourth, the Public Procurement Regulatory Authority (PPRA) should be strengthened, and made independent of the government, starting with appointing as its chairman a person of high integrity and someone who has years of public procurement experience. In addition, in respect of large public contracts (say over Rs 100 million), these steps could be taken: (i) their award evaluation should be put on the PPRA’s website; (ii) at the time these contract are being signed, the electronic media should be invited and in their presence the signatories to the contract should make written and oral declaration that no commissions or kickbacks have been given or received in respect of the contract.

Fifth, the ethics rules in respect of “Public Office Holders and Senior Officials,” should be tightened as follows: (i) all gifts over Rs1,000 should be deposited with the Toshkhana and these should be sold through open public auction, with the gift receiver (and immediate family) prohibited from participating in the auction. Rare or unique gifts should be given to the National Museum for its collection; (ii) government officials and public office holders should be prohibited from taking up positions as Board members of public corporations, going on travel paid for by private companies, using cars provided by public corporations, and membership of procurement committees taking decisions in respect of contracts in which firms owned/managed by close relatives and friends are participating/ (iii) making it an offence for public-office holders to recommend individuals for government and public sector jobs; (iv) the FBR should be required to audit annual tax returns of all public-office holders and senior officials of all branches of government, and make the returns and audit findings public.

Sixth, the heads of all major public enterprises and key agencies (the FBR, the police, irrigation departments, etc) should be required to announce (and make it available on their websites) concrete steps to implement a “zero tolerance” policy to combat corruption, including steps to reduce discretion — which is a major source of corruption — and increase independent oversight and accountability. In addition, to enhance transparency of the government’s decision-making process, once a cabinet decision is taken in respect of economic policies and development projects, the related cabinet papers should be put in the public domain.

Seventh, taking the following actions to reduce opportunities for bribe seeking and to enhance availability of information to the public: (i) strengthening the Competition Commission and supporting it to aggressively pursue cartels and restrictive trade practices, which are a major source of corrupt practices and bribes to officials regulating these industries; (ii) civil government and military getting completely out of commercial businesses and housing land development, which are also a major contributor to corruption; (iii) e-filing of citizen’s complaints, FIRs, reporting fraud and corruption, which is easily possible now that internet is so widely available; (iv) strengthening implementation of the Freedom of Information Act; (v) using standardised stamp paper, generated by the FBR computer network, for all immoveable property transactions, and declaring benami transactions illegal.

The above will not eliminate corruption, but could diminish it. No country has eliminated corruption, but many have reduced it to very low levels by lessening opportunities for corruption and enforcing harsh penalties. Most Pakistanis, like citizens of all developing countries, have little hope of any meaningful action on the corruption front in an environment where the fox guard the chicken farm and where the system is captured by crooks, corrupt individuals and criminals. We may be in the Third World, but we must launch a crusade for higher standards of ethics from public officials and greater financial probity in use of taxpayers’ money.

The writer is a former operations adviser of the World Bank. Email: fffhasan@gmail.com

From: Forum on Trade 20th August 2008

2008-08-21T06:19:00.000-07:00

From: Forum on Trade

The EIU (Economist Intelligence Unit) which usually has a handle on events overseas and is considered by many as an authoritative source on country risk assessment highlights the following priorities that need to be addressed by any Govt in Pakistan:-
1) Energy (read electricity shortage). The current MW demand outstrips supply.
2) Inflation (specially food and fuel).
3) Security (current threat assessment is high).
4) Unemployment (resource pool for extremist elements).
5) Competitiveness (high skills training and ensuring that the labor market is available for FDI in value added manufacturing and agro-processing).
6) Widening and deepening of the revenue base (agri income tax plus a ST that is based on conspicuous consumption and luxury imports).
These are just some of the immediate high ticket items to prevent the house from being engulfed in flames and of course there are many others such as education, health and social welfare issues. In my view KASB, ABN-AMRO, Merrill Lynch, EIU and certain fee based on line subscriptions have good quality assessments on the issues and prescriptive solutions. Simply looking at the KSE Index, S&P and Moody's ratings etc are like checking the thermometer for the signs of a fever and not knowing what is causing it and what is the cure for the underlying ailment.
Regards,
Asad

Asad Hayauddin
Consul (Trade and Commerce)
Commercial Section
Consulate of Pakistan
333 North Michigan Ave. Suite 921
Chicago, IL 60601
Ph: 312-782-2383
Fax: 312-782-2384
E-mail: asad.hayauddin@wto-pakistan.org

The oil pricing formula

2008-08-03T10:04:00.000-07:00

Source: http://www.dawn.com/2008/08/03/ed.htm#5

By Asad Sayeed and Vikash Ahuja

AFTER yet another price hike in petroleum products, people reeling under the burden of a constant and seemingly endless inflationary spiral are legitimately asking the question whether such sharp increases in petroleum prices are necessary?

An increasingly vigilant media having dissected the different components of the retail price of petroleum products has challenged the government’s decision to keep taxing petroleum products and for allowing the refineries, the oil marketing companies (OMCs) and dealers to rake in huge profits at the cost of the consumer by linking their returns to international oil prices.

A number of these concerns are valid. However a focused analysis of the different components of pricing is necessary to understand who gets what and at whose cost. It is also necessary to understand the compulsions of the government in light of the external and internal imbalances it is confronted with.

There are essentially four elements that constitute the price that the consumer pays on petroleum products. The import parity price is the first element. This comprises the import price, adjusted for government subsidies and duties. To this cost is added the Inland Freight Equalisation Margin (IFEM) that is charged by the OMCs to sell petroleum products at a uniform price across the country. To these two elements is added a 3.5 per cent margin for the OMCs, and four per cent for dealers, of the combined cost of the two elements described above. The sum total of the above three is then subjected to 16 per cent general sales tax by the government.

The frequent lament in the media is that a large chunk of the retail price is the sales tax. The magnitude of taxation in the prevailing price of petroleum and high speed diesel comes to Rs11.95 and Rs8.92 per litre respectively. Moreover, an increase in the international oil price automatically increases the revenue yield of the government.

For the government to forsake revenue through the sales tax in given conditions will be a folly for two reasons. Firstly, once we factor in the subsidy the government provides, the relevant figure to look out for is net taxation (sales tax minus subsidy) rather than sales tax per se. For instance, in the fiscal year 2007-08, the subsidy on petroleum products was Rs175bn, whereas revenue from sales tax was Rs118.2bn. Net taxation in the outgoing fiscal year was, therefore, Rs56.8bn. If the government had reduced or removed the sales tax, the amount of subsidy would have been proportionate to the foregone revenue.

It is important to emphasise that subsidies are not a free lunch. State subsidies are generally financed either through bank borrowing (in other words by printing money) or by borrowing from international or domestic capital markets. If the subsidy is financed through printing money — as the Musharraf government did in the outgoing fiscal year — it creates an inflationary spiral in the economy and wipes out the benefit provided through the subsidy.

Alternatively, if the subsidy is financed through borrowing from capital markets, it creates a future liability on the taxpayer in the form of debt servicing. Now if there are good tidings expected in the future — in the form of a more favourable international environment and high GDP growth domestically — then it may be worthwhile providing a generalised subsidy. But if the future is uncertain, as it certainly is presently, then this becomes a risky proposition.

Second, for a revenue-starved state (remember Pakistan’s tax-GDP ratio at 10 per cent is one of the lowest in the developing world) the petroleum sector is a source of least resistance for tax collection. Until the state broadens its tax base to devise a truly progressive taxation structure and reallocates its expenditure away from territorial to human security, removing the sales tax on petroleum products will only amount to enhancing the fiscal deficit which will have to be paid by present or future taxpayers, perhaps at even more onerous rates. In the present milieu, it only makes sense to provide targeted subsidies to the most vulnerable sections of society rather than subsidise everyone.

The margins of OMCs and dealers, however, have rightly come under fire and in the recent price increase their margins have been frozen. But this is not enough. The formula of linking margins to a proportion of the import parity price and the freight equalisation margin is fundamentally unjust and irrational. It is irrational because distribution or dealership has no link whatsoever with fluctuations in international oil prices.

It is unjust because this formula enables the OMCs and dealerships to rake in profits on the basis of exogenous developments (international oil prices) at the cost of both the state and the consumer. If there was ever an example of blatant profiteering — devised by the Musharraf government, small wonder — as a consequence of collusion between self-appointed policymakers and the corporate sector, this was it. Rather than arbitrarily freezing the margin as has been done now, the formula needs to be altered and margins should be determined on the basis of actual costs and ‘reasonable’ profits to the companies and dealerships.

Rent-seeking by the OMCs, however, is not limited to margins only. The freight equalisation margin is another source of dubious profiteering by these entities. The IFEM is used to equate the prices of POL products across Pakistan and covers primary transport costs incurred by OMCs to transport petroleum products. IFEMs are recommended by the Oil Companies Advisory Committee (OCAC) and are subject to adjustment on the basis of actual monthly freight computations. Since IFEMs are added to IPPs to calculate OMCs’ and dealers’ margins, it creates incentives for OCAC to set IFEMs at higher than actual levels, which not only increases their actual reimbursement but their margins as well.

To illustrate the extent of rent-seeking on the pretext of freight equalisation consider the fact that between Sept 1, 2007 and July 1, 2008 freight margins were increased by 348 per cent for motor spirit, 319.5 per cent for HOBC, 304.2 per cent for kerosene, 81.4 per cent for light diesel and 82 per cent for high speed diesel. This increase in freight charges is nothing short of daylight robbery on the part of the OMCs. Thus, where the government is rightly moving in on curbing the margins on distribution and dealerships, a serious review of the policy on freight equalisation margins is also required.

Another element in the pricing formula that adds to the windfalls of the refineries is the deemed duty benefit that they receive in the import parity price, primarily for diesel but also for other products. In 2001, it was decided to allow the refineries to retain the duty that was charged on local finished products for one year to upgrade their capacity. While some products have been taken off the list, seven years later the refineries are still charging this amount on diesel which constitutes the bulk of the volume consumed in the market. There is no justification, therefore, in allowing this pilferage on the part of refineries to continue.

While the fact remains that the bulk of the price increase in domestic prices is driven by surging world oil prices, some relief can be provided if the pricing formula adopted by the Musharraf-Aziz combine to benefit big business at the expense of the consumer is altered. Lately the OMCs and the refineries have adopted a threatening tone with regard to reduction in their illegitimate profiteering. It is high time their bluff is called and for the sake of the consumer, this relic of the past is undone as soon as possible.

Modern-day slaves

2008-08-03T09:58:00.000-07:00

Source: http://jang.com.pk/thenews/aug2008-weekly/nos-03-08-2008/pol1.htm#9

Shifting the burden of its responsibilities on withholding agents, the federal government remains insensitive to their woes

By Huzaima Bukhari and Dr Ikramul Haq

"The only people who do not have to pass the Civil Services exam to work for the government are the withholding agents." (Anon) The federal government retains two percent as collection charges from all the provincial governments on General Sales Tax on Services, which it collects on their behalf (Para 9.6 at page 42 of Explanatory Memorandum on Federal Receipts 2006-2007).

On December 10, 1948, the General Assembly of the United Nations adopted and proclaimed the Universal Declaration of Human Rights, to which Pakistan is also a signatory. Following this historic act, the UN General Assembly called upon all member countries to publicise the text of the Declaration, and "to cause it to be disseminated, displayed, read and expounded principally in schools and other educational institutions, without distinction based on the political status of countries or territories." The failure to implement these instructions by the Pakistani authorities is another ghastly, grisly and hideous story.

Article 7 of the Declaration reads: "All are equal before the law and are entitled without any discrimination to equal protection of the law. All are entitled to equal protection against any discrimination in violation of this Declaration and against any incitement to such discrimination." This principle is also enshrined in Article 4 of the Constitution of Islamic Republic of Pakistan. In civilised societies, laws are supposed to apply equally to all the citizens and legal entities, without even an iota of doubt that one segment of society of class of people is being given preference over another.

Though such an ideal situation appears utopia, yet the responsible and representative governments, wherever possible, try to implement these. One finds no apparent or plausible justification for their non-enforcement. For example, it would be incorrect to accuse a hangman for murder or manslaughter when he pulls the noose around the neck of a convict, because he is merely carrying out the court's instructions; or to file a case against a police officer for assault and battery where he attempts to arrest a criminal, because he too is just performing his duty. No doubt, some laws may have different implications for different people, but generally there is a consensus that they should be non-discriminatory.

The implication of this is that barring a few issues related to essential services, what is good for the federal government should be equally good for the provincial governments and other corporate / non-corporate bodies too. Hence, if the federal government is entitled to retain two percent as collection charges from all the provincial governments on general sales tax on services, which it collects on their behalf, then other bodies should also have the right to retain the same percentage (if not more) on collections they make on behalf of the federal government. After all, cost incurred to carry out such obligations is separate from the expenses that are borne in the course of normal administration or businesses!

When the federal government has entitled itself to compensation (duly endorsed by the Parliament) for work that it does for others, then what prevents the legislation for similar compensation to those who toil relentlessly in collecting massive amounts of taxes for the Centre's treasury? This (mal)practice on the part of federal government constitutes not only forced labour, which is unlawful under Article 11(3) of the 1973 Constitution, but is also tantamount to modern-day slavery that is prohibited under Article 4 of the Universal Declaration of Human Rights: "No one shall be held in slavery or servitude; slavery and the slave trade shall be prohibited in all their forms."

One does not have to be a proclaimed slave for falling in the category of victim of slavery. In fact, it is the substance of the matter (nature of a job) that determines emancipation or otherwise. Therefore, when the federal government obligates withholding agents for collection of taxes on its behalf, it must bear in mind that these agents will have to spend substantial money to fulfill the imposed duty. This involves, in case of the corporate sector, an exclusive department with its own set of employees and other infrastructure that consumes a hefty chunk of their gross profit, which eventually leads to reduction in overall business profits and dividends. Of course, if any laxity or default is committed in the course of this bonded labour, then the withholding agents are subjected to penalties, additional taxes and even prosecution.

Shifting the burden of its responsibilities on withholding agents, the federal government has the audacity to remain insensitive to their woes. Over the last few years, it has been observed that with each passing day not only is this burden increasing but strong coercive methods are also being introduced to supervise their activities.

The Finance Act 2008 has inserted a new authority, the Directorate General of Withholding Taxes, in Section 230A of the Income Tax Ordinance, 2001. This directorate will exercise unbridled, unfettered and unlimited powers in whipping and lashing the 'withholding slaves', forcing them to submit to their masters without as much as raising a meek voice against them, what to talk of demanding some compensation for their labour. How else can a picture of slavery be painted? If this were not bonded labour, then would the government please clarify exactly what is meant by slavery or servitude?

Surprisingly, despite there being a huge department for collection of various taxes and duties, the major portion of revenue target achieved during a fiscal year is dependent upon the efforts of withholding agents. Instead of performing the duty of collecting taxes themselves, the revenue officers are largely engaged in overseeing the work of these agents -- as if they were their employees (or slaves?). Employees of the government earn salaries, but what do slaves get in return? Nothing: only punishment and fear of prosecution even for an inadvertent and small lapse.

It is a pity how an employee of, say the income tax department, can make the life of a withholding agent extremely miserable by his or her arrogance and attitude. There are many instances where withholding agents have been tormented by the presence of such people on their business premises on the pretext of audit and/or examination of accounts related to withholding. All these things could be tolerated if the government was generous enough to compensate these agents by allowing them a cut in the taxes collected by them. This way there would hardly be any grievance.

On the contrary, these agents would perform even better without being threatened of dire consequences. Keeping the corporate psyche in mind, a sensible legislation would greatly enhance revenue collection and reduce the burden of expenses on the withholding agents, guaranteeing a more amiable private-public relationship while upholding the tenets of both the 1973 Constitution and the Universal Declaration of Human Rights.

(The writers, tax advisers, are visiting professors at the Lahore University of

Management Sciences.

Emails: huzaima@hotmail.com & ikram@huzaimaikram.com)

Sindh revenue authority

2008-08-03T09:55:00.000-07:00

Source: Daily Dawn

KARACHI, Aug 2: The Sindh Board of Revenue (SBR) has said that the proposal for creation of a Sindh revenue authority is going on since 2001 and the previous government failed to finalise their views on the subject.

Commenting on a news item published in Dawn on July 30, an SBR spokesman said that the present Chief Minister, Syed Qaim Ali Shah, has constituted a committee under the chairmanship of minister of revenue, which has held meetings and will send their recommendations to the chief minister for further action.

The committee members include minister of excise and taxation, representatives of finance department and officials of excise and taxation and board of revenue.

What went wrong with food prices?

2008-08-02T05:31:00.000-07:00

The following material is from: 1) ADB report on food prices, 2) NBP Economic Bulletin.

What went wrong with food prices?

Four pronged reasoning:

1) Distinction between structural and cyclical factors:

Structural factors include: Demand side factors (growing population, growth in emerging markets particularly India), increased expenditure required on energy (eating away the budget share for food), falling stock of rice and other cereals becasue production has fallen below consumption for several years, bio-fuel demand increasing.

Cyclical factors include: Adverse weather, Drought in Australia and Central Europe, Flooding in South Asia.

2) Distinction between Supply and Demand:

Urbanisation and competing demand for land for commercial use, scarcity of water for agricultural purpose, neglect of inveatment in agricultural technology, infrastructure and extention programmes, pricing policies discouraging the farmers.

3) Relationship between International and Domestic Markets:

Governments restricting food exports and also giving price subsidies, food based safety net programmes contributing to budgetary costs.

4) Other factors:

Increased demand for food in Asian countries, increased use of grain especially corns to produce bio-fuels, commodities have attracted investors/speculators looking for a safe haven, higher oil prices leading to higher costs of transportation.

The 2008 Phenomenon

2008-08-02T05:25:00.000-07:00

This is what happened in 2007-08 (Sequentially):

1) Increase in Energy and Food Prices

2) Widening of trade and current account deficit (as both the above commodity groups were being imported in large quantities)

3) Rising fiscal imbalances (increased subsidies increasing budgetary burden)

4) Growing Poverty and Income Inequality

*for details: NBP Economic Bulletin.

‘Pakistan on the brink of massive economic crisis’

2008-08-02T04:04:00.000-07:00

Source: http://www.dailytimes.com.pk/default.asp?page=2008%5C07%5C22%5Cstory_22-7-2008_pg7_13

* Dr Meekal review says SBP missed opportunity to act early

By Khalid Hasan

WASHINGTON: The Pakistani economy today faces the looming risk of a full-fledged balance of payments crisis, domestic and external fiscal imbalances that have reached alarming proportions and show no signs of self-correction or correction through policy action, according to an economic expert.

Dr Meekal Aziz Ahmed, who served senior advisor to the IMF executive director dealing with the region and as senior economist with the Pakistan Planning Commission, writes in a brief review of Pakistan’s economic plight that inflation has accelerated to levels never seen before in the country’s history and it is set to rise further, devastating the fixed income groups and the poor. There has been “criminal negligence” behind the power crisis, which has led to untold losses in domestic production and exports. Added to these disasters the country has a food crisis, an oil crisis, an emerging water crisis, not to mention a political crisis. There is agreement among economists, he notes, that Pakistan’s short-term prospects are grim. With economic policies likely to remain broadly unchanged, the economy will continue to slide downward until the country runs out of its foreign exchange reserves. At the point of reserve exhaustion, Pakistan will not be able to pay for its imports or meet its debt service obligations. The country, in short, will be bankrupt, Dr Ahmed predicts.

Dr Ahmed points out that Pakisan’s present predicament did not happen overnight, but is the direct consequence of the government’s “short-sighted and misguided policies” in the recent past, characterised by its single-minded obsession with producing high growth GDP rates, without consideration to the quality or sources of growth which have a crucial bearing on sustainability. Such an economic strategy, largely consumption driven and fueled by cheap credit, rather than being driven by the more desirable route of investment and exports, was, sooner or later, bound to run into resource constraints. Eventually demand would outstrip available capacity, macroeconomic imbalances would widen and inflation will start to turn upwards. The view that today’s economic problems are the lagged consequence of past policies is neither conspiratorial nor does it amount to playing the blame game. There have been long lags between policy actions and policy outcomes and what the Pakistani economy is witnessing today are the lagged consequences of policy actions taken earlier. “The chickens have come home to roost,” he adds.

Dr Ahmed writes that the State Bank’s recent actions to tighten monetary policy reflect a failure to gauge the strength of the inflationary pressures building up and the failure to act in time. Given the long lags in the monetary policy transmission mechanism, the monetary policy should have been tightened much earlier. The State Bank missed the opportunity to act early and responsibly and its belated actions are a classic illustration of “too little, too late”. Dr Ahmed says he is dispirited by what appears to be the State Bank forfeiting its hard-won autonomy. Despite possessing considerable statutory powers, the State Bank seemed to have waited for a nod of approval from government, rather than act in accordance with its mandate and tighten monetary policy immediately. Inflation, many observers believe, is now out-of control, which is troubling because Pakistan has little experience with high inflation and policy-makers may not know how to control it.

According to Dr Ahmed, the new government missed an excellent opportunity to demonstrate that it was taking charge of the rapidly worsening economic situation by failing to devise a bold fiscal strategy aimed at reducing aggregate demand pressures and starting the process of restoring macroeconomic stability. This could have been achieved through the implementation of a sound 2008-09 budget. A tight fiscal stance, desirable in its own right from a macroeconomic standpoint, would have reinforced the tight monetary policy stance. The “awam dost” budget that followed showed that the government was no aware of the crisis towards which the country was hurtling. The budget was a major disappointment, being loose, abounding in exemptions and concessions and amnesty schemes, despite bitter experience from the past.

The poorly thought out plans to “help” the poor are likely to be ill-targeted, costly, and only make matters worse. The tax revenue target is fanciful and completely out of line with what the Federal Board of Revenue (FBR) has been able to achieve in the past six decades. To add to that, the budget expenditures are seriously understated. All this boils down to a fiscal deficit outcome that is likely to be significantly higher than budget projections. Demand pressures will grow, and spill over into the external sector via enhanced imports, the last thing the economy needs. With limited autonomous or induced financing, there is not much left to sell by way of privatization.

Dr Ahmed predicts that the speculative stock market and real estate “bubbles will pop,” creating havoc in the financial sector and wiping out the lifetime savings of small investors. According to some economists, the economy could fall apart as early as December this year or March 2009 by the latest, even with the respite offered by the recent Saudi oil facility. What the economy needs is an immediate and drastic tightening of macroeconomic policies, to be achieved principally through deep and durable expenditure cuts. These cuts have to be real and not cosmetic. They can be implemented quickly. Similarly, quick-yielding revenue measures could also be considered. Pakistan needs to halt adverse trends and start the process of reversing them. Valuable time has already been lost, confidence is being rapidly eroded as reflected in the recent fall of the domestic currency and the stock market, which are symptoms of accelerated capital flight. The government will become unpopular because of the belt-tightening, but there are no other options. Getting inflation under control and back into low single digits will not be easy, he warns. There is no “soft option,” Dr Ahmed adds, no easy way out. He rejects the idea of donor conferences as being unrealistic. Any aid given will be conditional and attached to a programme, which is consistent, coherent and doable, with assured implementation. He suggests that Pakistan should give the IMF a programme which is strong and credible, with appropriate conditionality, and ask the IMF and donors to finance it.

Addicted to the IMF

2008-07-24T08:03:00.001-07:00

Source: http://thenews.com.pk/daily_detail.asp?id=125888

Part II

Thursday, July 24, 2008
Meekal Aziz Ahmed

There are some other ideas that I wish to comment upon briefly. One economist suggests we let inflation run rampant because it cannot be controlled. Instead we should concentrate on protecting the poor through safety nets. Who the poor are, where they are, how they are to be reached, what kind of safety nets are envisaged and at what cost is left unclear. I, for one, await the implementation of the Benazir Card with trepidation. It will help no one, become a new avenue for corruption, turn into a scandal, and be quietly dropped, having only earned her a bad name.

There are disturbing reports that the government could impose quantitative restrictions on "non-essential" imports, harking back to the closed economy of the 60's. This would be another disaster to add to the list of disasters in Pakistan. The only beneficiaries of such import controls will be bureaucrats, price gougers and smugglers.

An interesting rumour is that the authorities might convince the World Bank into lending fast-disbursing money to Pakistan and also certify that our macroeconomic picture is satisfactory. However, it is not the job of the World Bank to certify any countries macroeconomic credentials. That is the job of the IMF, which has the mandate and expertise to make such a judgement. Would going with the World Bank without the IMF's financial involvement and only a "Letter of Comfort" from them convince donors to offer assistance? It is unlikely.

It is a fact that donors, multilateral and bilateral, have required, indeed have always insisted on, a formal IMF programme as a pre-condition of their pledge of assistance. Since it is the donors who provide the bulk of the financing, with the IMF only putting up roughly 10 per cent of the needed financing, they have an interest in making sure their money is well spent. Moreover, this aid must be spent in the context of some sort of overall programme. Most importantly to donors, the programme should have the formal seal of approval of the IMF on the macroeconomic situation and their financial involvement. Getting donors to pledge resources in the context of an IMF programme is the IMF's "catalytic" role working as it was designed to do.

As far as this writer is aware, there are no known exceptions to the rule of an IMF programme preceded by or concurrent with pledges of donor assistance for balance of payments and budgetary support. This rule is unlikely to change anytime soon. Detractors of this approach will argue that turning to the IMF would be a "disaster" because of the stringent conditions and overly-tight macroeconomic policies they would insist on. In my view, we are already in the midst of a disaster, or more appropriately, many disasters.

A major reason for the seemingly drastic nature of adjustment the IMF imposes is that countries are loath to turn to it until the bitter end and the economic situation has reached dangerously precarious proportions. Pakistan is such an example. Our country has waited till the last minute when the economic situation is on the verge of imploding. One such time was evident when Pakistan turned to the IMF for a bailout following Nawaz Sharif's "yellow cab scheme" which bankrupted the country leaving it with barely $100 million of foreign exchange reserves. This level of reserves was sufficient to pay for a couple of days of imports and no debt service.

The later a country turns to the IMF, the more drastic and urgent the adjustment needs to be. Fiscal and external imbalances are greater and the situation more precarious. In these circumstances, the country needs to pull back harder. In any event, it is true that no country would want to be told that it is courting economic disaster. But, as is often said, the IMF has a propensity to take away the punch bowl just as the party is getting started.

Even the IMF, for all its hard-nosed conditionality, has not been able to get Pakistan to implement serious, lasting economic reform. These reforms are ultimately in Pakistan's own interest and for which Pakistan should take ownership. This can be done by designing its own programme and presenting it to the IMF for financing. The latter for its part should not impose its conditions on Pakistan and in fact it should be the other way round.

To be fair, some good has been done under IMF pressure. However, by and large, Pakistan's track record with the lending institutional has been an embarrassment. It is replete with repeated failure in meeting targets, especially by the FBR, and an approach to economic reforms where they are started and then rolled back. The FBR has also falsified data for which Pakistan paid a heavy fine to the IMF of millions of dollars. In this writer's view, which is based on close and personal observation over many years, adjustment and reform under the IMF in Pakistan has been largely a myth.

If this is so, one wonders what all the fuss is about. If Pakistan has not accomplished much under IMF tutelage in the last fifty years in the context of the repeated use of IMF resources, the IMF could not have had much influence on policy-making. Hence, there would appear to be no reason for the angst about an impending "disaster" if we turn to the IMF. The fact is that the IMF, for all its visibility and power, has not been an important part of our economic decision-making process.

When Pakistan has faced a financial crisis, and there have been many, we seem to want to mend our ways. However we start to falter. As soon as the economy emerges from it's low point and starts to recover, and the reserves start to build up, and confidence returns, and as soon as the IMF programme is over, we stop being responsible. Reforms are undone, some policies are reversed, and anything of substance we may have achieved is lost.

This story has been repeated throughout our economic history. When the IMF programme was completed recently, policies were loosened. If we take inflation as an indicator of how responsibly an economy is run, we have moved from an inflation rate of around three per cent per annum at the time of the IMF programme and stable, to 29 per cent per annum now and rising. While not all of this surge in inflation can be attributed to irresponsible and loose policies, a significant part can.

There are many who feel that what Pakistan really needs is a full-blown crisis, a catastrophic meltdown. It does not need another IMF-sponsored bail-out in which no serious or lasting reforms will be undertaken, leaving the country pretty much where it was before the IMF programme, except with a lot more foreign debt. There are also those who believe the IMF presents a serious "moral hazard". It allows a country to mismanage and take risks because there is an un-spoken assurance that it will be bailed out. The IMF, the champion of sound economic policies, generates perverse incentives and encourages bad policies.

Countries that have successfully reformed, Argentina, Brazil, the Asian Tigers, have done so after facing heart-wrenching crisis and faithfully implemented very tough IMF programmes. They have learnt from their mistakes. Some have implemented reforms without assistance from the IMF, Malaysia being an outstanding example. These countries have no intention of going back to the IMF. In contrast, Pakistan has become what is called a "prolonged user", with no sign of getting rid of its addiction to IMF resources.

It is unfortunate that should such a serious crisis befall Pakistan, it is our poor who will suffer the most for no fault of theirs. They have suffered stoically for six decades, putting their complete faith in successive governments. They have been betrayed each time. The famous statement of Quaid-i-Azam that every successive government in Pakistan will be worse than the one before it has turned out to be correct.

In the meantime, our self-serving elite who hold the fate of our country in their hands and who have the power to change the complexion of Pakistan overnight should they choose, will continue, as before, exploiting the country mercilessly with not a blot on their conscience.

As an economist friend of mine observed, the elite with all their assets held abroad in dollars, and all their liabilities held domestically in rupees, are in an ideal position. They are ready to bolt at the first sign of trouble with their dual nationality passports in hand and enjoy their mostly ill-gotten wealth abroad. Life couldn't be better for these elitists. Only they can sleep easy in Pakistan with their power generators humming through the night.

Concluded

(This is adapted from a paper that he wrote for the Lahore-based think-tank Spearhead Research, headed by General Jehangir Karamat)

The writer has a doctorate from Oxford University and has worked at the Planning Commission and the IMF. Email: Meekalahmed2@aol.com

Pakistan's looming economic crisis

2008-07-24T08:02:00.001-07:00

Source: http://thenews.com.pk/arc_news.asp?id=9

Wednesday, July 23, 2008
By Meekal Aziz Ahmed

The Pakistani economy today faces the looming risk of a full-fledged balance of payments crisis. Macroeconomic imbalances, the domestic fiscal imbalance and the external imbalance, have increased to alarming proportions and show no signs of self-correcting or responding to policy action. Inflation has accelerated to levels never seen before in our history and is set to rise further, devastating the fixed income groups and the poor. There has been criminal negligence behind the power crisis which has led to untold losses in domestic production and exports. Added to these disasters the country has a food crisis, an oil crisis, an emerging water crisis, and a political crisis.

Economists agree that Pakistan's short-term prospects are grim. With economic policies likely to remain broadly unchanged, the economy will continue to slide downward until the country runs out of foreign exchange reserves. Unfortunately, Pakistan cannot print dollars. At the point of reserve exhaustion, Pakistan will not be able pay for imports or meet its debt service obligations. The country will be bankrupt.

How did things get so bad, and how is it that the government has not responded to try and arrest this alarming situation? Our present predicament did not happen overnight. It is the direct consequence of the government's past short-sighted and misguided policies which were comprised of a single-minded obsession with producing high growth rates of GDP. No consideration was given to the quality or sources of growth which have a crucial bearing on the sustainability of growth.

Such an economic strategy, largely consumption driven and fueled by cheap credit, rather than being driven by the more desirable route of investment and exports, was bound to run into resource constraints. Eventually, demand would outstrip available capacity, macroeconomic imbalances would widen and inflation would start to turn upwards. The economy would be in trouble.

The view that today's economic problems are the lagged consequence of past policies is evident. This view is not conspiratorial or a blame game. It is explained by the long lags between policy actions and policy outcomes. What the economy is witnessing today is the lagged consequences of policy actions taken months earlier. These are now being felt.

These lags underscore the need to frame economic policies within a forward-looking framework and for policy makers to act promptly to the first signs of economic stress because their effects will not be evident without a long delay.

The State Bank's recent actions to tighten monetary policy reflect a failure to gauge the strength of the inflationary pressures building up in the economy and to act. Given the long lags in the monetary policy transmission mechanism, monetary policy should have been tightened much earlier. The State Bank missed the opportunity to act early and responsibly. Its belated actions were a classic illustration of "too little, too late".

As one observer, I am dispirited by what appears to be the State Bank forfeiting its hard-won autonomy. Despite possessing considerable statutory powers, the State Bank seemed to have waited for a nod of approval from government, rather than act on the strength of its mandate and tighten monetary policy immediately.

In the meantime, inflation took-off and has continued to accelerate. To many observers, it is now out-of control. That is troubling because Pakistan has little experience with high inflation. Policy-makers may not know how to control it.

The new government missed an excellent opportunity to demonstrate it was taking charge of the rapidly worsening economic situation. It could have been bold in devising a fiscal strategy aimed at reducing aggregate demand pressures and starting the process of restoring macroeconomic stability. This could have been achieved through the implementation of a sound 2008-09 budget. A tight fiscal stance,desirable in its own right from a macroeconomic standpoint, would have reinforced the tight monetary policy stance.

What economic briefing the new government received on the economic situation will remain a mystery. It seems obvious that the government was not unduly alarmed by the economic situation. This was evident in the "awam dost" budget that followed.

The budget turned out to be a major disappointment. A critical opportunity was missed. The budget is loose and non-credible, abounding in exemptions and concessions and amnesty schemes from which policy makers never learned our past mistakes. They are poorly thought out plans to "help" the poor which will probably be ill-targeted, costly, and only make matters worse. It makes no sense to have a tax revenue target which is fanciful and completely out of line with what the Federal Board of Revenue (FBR) has been able to achieve in the past six decades. To have budget expenditures which are seriously understated makes the entire exercise frivolous.

All this will mean a fiscal deficit outcome that is likely to be significantly higher than budget projections. This budget will exacerbate demand pressures and inflation and spill over into the external sector via a faster growth of imports. This is the last thing the economy needs. With limited autonomous or induced financing, not much left to sell by way of privatization, our foreign exchange reserves will start to fall even faster as the trade deficit expand with surging imports and lackluster export growth.

The speculative stock market and real estate bubbles will pop creating havoc in the financial sector and wiping out the lifetime savings of small investors. According to some economists, the economy could fall apart as soon as December this year, or March of 2009, by the latest, even with the respite offered by the recent Saudi oil facility.

What the economy needs is an immediate and drastic tightening of macroeconomic policies, to be achieved principally through deep and durable expenditure cuts. These cuts have to be real and not cosmetic. They can be implemented quickly. Similarly, quick-yielding revenue measures could also be considered.

Pakistan needs to halt adverse trends and start the process of reversing them. Valuable time has already been lost. Confidence is being rapidly eroded as reflected in the recent fall of the domestic currency and the stock market, both of which are symptoms of accelerated capital flight.

It will become painfully obvious that confidence, once lost, is difficult to rebuild. The State Bank's most recent steps to shore up the domestic currency weer once again, "too little, too late". To be fair, however, the State Bank is helpless when the economy's "fundamentals" are deteriorating sharply. Critics of the approach of immediate macroeconomic tightening fear growth will falter, unemployment will rise, jobs will be lost and economic distress will spread. Such events will make the government of the day highly unpopular. This opinion is probably right.

Unfortunately, there are no other options. There is no other way known to economists to halt a further widening of macroeconomic imbalances which creates huge financing problems, other than to slow the economy down. Since the domestic and external imbalance can be seen to be related by definition, and one is largely a mirror image of the other, a slowing economy should bring about a gradual reduction in both these imbalances. At such a point, these imbalances can be more easily financed and our foreign exchange reserve loss can be halted.

Similarly, there is no credible way to start the long and painful process of controlling runaway inflation and bringing it under grips other than to arrest, or slow, the forward momentum of the economy.

Inflation will not abate if aggregate demand continues to outstrip aggregative supply by a wide margin as now. With inflation and inflation expectations deeply entrenched, and the risk of a wage-price spiral starting, attempting to get inflation back into low single digits will not be an easy task. It will take a painfully long time to achieve price stability again.

The view that there is a soft option, which has been propounded by some economists recently, does a great disservice to the people of Pakistan, who are desperate for a respite from their economic travails. These proposals lull the people into believing that there is an easy way out of our present economic difficulties if only the government would seize it. The fact is there isn't an easy option with no policy adjustment, no sacrifice, no hard decisions, no tears. To suggest that just a "promise" of reforms will induce unconditional financing is absurd.

Ideas about donor conferences where aid donors are supposed to volunteer to pledge financial assistance to Pakistan are at best naive and misleading. At worst, they are mischievous.

No aid donor, however sympathetic to Pakistan, will give money without conditions attached. Foremost of these conditions would be a well thought out medium-term adjustment and reform programme with specific targets and objectives. It would have to be a programme which is consistent, coherent and doable, with assured implementation.

(This is adapted from a paper that he wrote for the Lahore-based think-tank Spearhead Research, headed by General Jehangir Karamat)

The writer has a doctorate from Oxford University and has worked at the Planning Commission and the IMF. Email: Meekalahmed2@aol.com

Celebrating 'success'

2008-07-23T09:21:00.000-07:00

Source: http://jang.com.pk/thenews/jul2008-weekly/nos-20-07-2008/pol1.htm#8

The FBR is trying to take credit for something it has not done

By Huzaima Bukhari and Dr Ikramul Haq

The bosses of the Federal Board of Revenue (FBR) are taking credit and getting kudos for collecting more than Rs1 trillion for the first time in the country's history. The FBR has wasted a lot of taxpayers' money on media advertisements, congratulating the public and the tax officials for this 'extraordinary achievement'. It is strange that the FBR is trying to take credit for something it has not done -- 98 percent of the tax collection was made possible through withholding agents or voluntary payments. Secondly, there is no occasion for self-praise, because the FBR is duty-bound to collect revenues -- this is for what the whole army of collectors gets paid out of the taxpayers' money.

For exceeding the revised tax collection target of Rs990 billion by Rs10-14 billion, tax officers are getting special rewards. This is a mockery of reason and logic. The apex revenue authority is making a fool of everyone. The real potential of tax is not less than Rs3 trillion, while the FBR has collected only one third of that and is posing as if wonders have been achieved. It is shameful that the indirect tax-to-gross domestic product (GDP) ratio in 2007-08 was about six percent and the direct tax-to-GDP ratio only 4.5 percent. The latter comes to even less than two percent if withholding taxes are excluded.

The tall claims of broadening the tax base in the last decade are now proving to be false. The strategy devised by top managers at the apex revenue body is faulty and isolated from the ground realities. There has hardly been any effective co-ordination between policy-makers and field formations. The issues of motivation, integrity and efficiency are still lingering on despite the FBR being only months away from the last year of Tax Reform Administration Project (TARP), launched with borrowed funds without any public debate or support of stakeholders.

The FBR chairman recently said: "Though we are happy to cross the psychological barrier of Rs1 trillion in revenue collection in 2007-08, still there is a gap of Rs400-500 billion. This gap cannot be bridged until and unless we enhance our tax-to-GDP ratio from the existing 11 percent to 15-16 percent. It is not impossible unless we have the will, commitment and tools to do it."

It is sad to note that even the big boss of the FBR is unaware of the real revenue potential of the country. Our real tax potential at the federal level is not less than Rs3 trillion. It is sheer lack of will and incompetence on the part of the FBR that we have failed to collect the potential revenues where these are actually due -- unprecedented benefits are available to the rich and foreign companies are remitting huge untaxed profits through abusive transfer-pricing transactions. For the last many years, the government has been extorting money from the people who are not supposed to pay any taxes, and granting unprecedented concessions and exemptions to the rich -- a 20-year tax exemption has been give to operators of the Gwadar port as if they will be engaged in some charitable work.

For tapping our actual potential, there is an urgent need for taxing the rich, bringing undocumented economy in the tax net and distributing the incidence of various taxes judiciously among all the segments of society. The tax loss due to one section alone, [section 111(4) of Income Tax Ordinance, 2001] granting complete immunity from probe and taxation to untaxed money fictitiously remitted through normal banking channels by paying a very nominal commission to any money exchanger, is in billions.

The cost of exemption under just one head alone -- capital gains on stock markets -- in the financial year 2006-07 was Rs112.45 billion, according to government's own admission on page 262 of the Economic Survey 2006-07. Had this exemption not been granted, the total collection for the financial year 2006-07 would have been Rs953.85 billion. For the financial year 2007-08, it could easily have been Rs1.5 trillion. This exemption continues in the financial years 2008-09 and 2009-10 with negative revenue impact of about Rs250 billion and Rs350 billion, respectively.

The people of this country are accused of not paying income tax; whereas the reality is that even a petty shopkeeper in a village (whose total income is much below the taxable limit of Rs100,000) is paying as high a tax as Rs720 per annum. On the other hand, a rich absentee landlord having agricultural income of millions of rupees does not pay a single penny as income tax.

A person making millions in speculative transactions (shares and property) is enjoying tax exemption, whereas a widow on her meager income of Rs90,000 from a bank savings account pays full and final tax of Rs9,000. Interestingly, there is no tax on business or any other income falling under normal tax regime of Rs120,000. In case of salary, the non-taxable limit for the financial year 2008-09 is Rs180,000; for women, it is Rs240,000. Why a widow, being female, is subjected to discrimination, whereas she actually deserves more tax concession?

The collection of taxes from speculative transactions, taxing income avoided by big foreign companies through transfer pricing (cost of revenue is about Rs100 billion) and withdrawal of exemptions can easily increase our tax collection to Rs3 trillion. However, this requires strong political will, which is completely lacking as those in power have vested interest in safeguarding the landed classes, the rich and the mighty. The unwillingness to tax the rich and mighty reflects in pathetic state of affairs vis-a-vis tax-to-GDP ratio from 1990-2000 to 2007-08. The tax-to-GDP ratio of direct taxes is appallingly low. It may be noted that in the official figures, huge amount of indirect taxes is shown under the head of income tax. The actual tax-to-GDP ratio of direct taxes for the financial year 2007-08, after excluding presumptive taxes, is only about 1.4 percent, whereas officially it is projected at 4.5 percent.

It is an established fact that despite resorting to all kinds of high-handedness, illogical policies and unjust withholding taxes, the FBR has failed to improve the tax-to-GDP ratio. The burden of a number of presumptive taxes levied under the income tax law (which are nothing but crude forms of indirect taxes) has been shifted from income earners to consumers and clients. These presumptive taxes have not only distorted the whole tax system, destroyed economic growth and made the consumer / client the ultimate sufferer, but these despotic, short-term, myopic and figure-oriented measures have also failed to bridge the fiscal deficit. Of the total collection of Rs1.04 trillion by the FBR in the financial year 2007-08, regressive taxes were to the tune of Rs800 billion (after making adjustment of indirect taxes collected under the name of income tax!).

The rich and mighty, who do not pay personal taxes despite enormous wealth and incomes, are the real culprits. If the government removes all exemptions and concessions, brings big absentee feudal landlords into the tax net, manages to get taxes from the influential people and succeeds in imposing general sales tax (GST) across the board (preferably with a low rate of three percent at one single point), there will be a record collection of Rs3-3.5 trillion in a year. This goal can only be achieved if the government simultaneously addresses issues related to wasteful expenses, tax evasion and rampant corruption.

(Email: ikram@huzaimaikram.com)

Doha Round: the last mile?

2008-07-14T04:31:00.000-07:00

www.dawn.com

By Humayun Akhtar Khan

After having missed many artificial deadlines, it seems that the Doha Round is probably inching towards closure. It has been almost seven years since Ministers agreed on the Agenda and decided at Doha to launch this Round. This was to be an ambitious development round covering traditional issues, such as cutting tariffs to reforming agricultural policies that distort international trade, further opening up services and improving rules on trade facilitations, anti-dumping, subsidies on fisheries, intellectual property rights and a host of other issues. To achieve international agreement on all these issues, a rather ambitious time frame of three years was set.

However, this round turned out to be no different from the previous GATT rounds where negotiators tried to shelter their own sensitive sectors while ambitiously trying to get access to other countries’ markets. Since every previous round has been longer than its predecessor, it soon became clear that the Doha Round would take at least seven years which was the time taken by the Uruguay Round. Efforts at Cancun (Mexico) in September 2003 to prematurely bring it to a conclusion failed miserably and the negotiations had to be started afresh with a reduced mandate under which three out of four Singapore issues, namely investment, competition policy and transparency in government procurement had to be dropped. Only the issue relating to trade facilitation remained on the table.

Agriculture continued to drive the Round although other market access issues such as industrial goods and services also crept along. Although all 20 or so agenda items have to be negotiated and finalised as a single undertaking, the general view is that once negotiations on agriculture and industrial goods have been completed, other issues would not be problematic.

Recent signals by Pascal Lamy, Director General of WTO, that these issues are in the final stages of cooking up and that a ministerial level meeting is needed to be held at the end of July, means that the time has come to make a deal on these issues. Yet, the history of the Round allows us only guarded optimism. With 153 members, some with divergent views and so many issues still outstanding, it would be no less than a miracle if a final deal could be put together in the next few weeks.

What would be the implications if the ministerial gathering again fails to deliver?

A failure to conclude a deal on agriculture and non-agricultural market access (NAMA) by next month will probably mean the end of the Round. With the United States presidential elections getting so close, it would not be possible for them to engage. Without the active participation by the world’s biggest economy, no one else is likely to make any serious efforts. If the deal is postponed till the new US administration takes office, it is likely that the new administration might seek a re-negotiation of the Agenda. It has already happened in the case of bilateral trade agreements such as the one with Columbia. Unravelling the Agenda would effectively mean the end of the Doha Round.

With the world already going through unparalleled financial crises, with fuel and food prices breaking all records, breaking down of the Round can be catastrophic. We may see countries going back to protectionism. Just as in the past when the Roaring Twenties gave way to the Dirty Thirties because of the United States moving back to protectionism, we may see the growth cycle of 90’s turning in the opposite direction. Such an eventuality would mean sharp fall in business and manufacturing activity and hardship all around.

Why is the Doha Round so important for Pakistan? There is a general perception that Pakistan did not gain much from the previous rounds and the same would happen in this round. It may be true that our gains from the previous rounds were limited. However, our lack of engagement in those rounds was to blame, not the liberalisation achieved therein.

We were interested only in our defensive interests. It was at the end of the Uruguay Round that we undertook some commitments. But here again in the market access areas, we remained very defensive. We agreed to bind our agricultural tariffs at an average of 100 per cent. In industrial goods, we only agreed to bind a little over a third of our tariff rates and even then we only bound those tariff lines where there was hardly any trade. Unlike the rest of the world, we stayed out of Information Technology Agreement which now covers over 97 per cent of world trade in those goods.

The only effective commitment we undertook in 1997 related to telecommunications and financial services.Compliance with the WTO commitments in the telecom sector ended the exclusive right of the majority state-owned Pakistan Telecommunication Company Limited (PTCL). Under the WTO Financial Services Agreement, Pakistan committed to grant the right to establish new foreign banks and bring in more competition. As a result, both these sectors have undergone a dramatic transformation, and have contributed to the high GDP growth since we implemented those commitments in 2003.

It is commonly believed that our textiles and clothing industry has been a loser because of abolition of quotas at the end of 2004 under the terms of the Uruguay Round Agreements. Here again, statistics clearly show that while Pakistan may not have gained as much as China or Bangladesh or some other countries, it has been nevertheless increasing its exports at a steady rate. In 2004, prior to quota abolition, its exports of textiles and clothing to the EU and US markets were $5.432 billion which rose to $6.499 billion in 2007 or by about 6.2 per cent annually. This should certainly have been more if the political stability had been maintained and foreign buyers were at liberty to visit and place orders here.

Even if our gains in the previous rounds were limited, it should not be so for the Doha Round. There are various estimates what the total gains may be. World Bank studies show estimated gains of $287 billion over time whereas Carnegie Endowment for Peace estimates about $168 billion. Whatever the estimates of gains, there is no doubt that the world will be better off if the round is successfully completed. Of course, countries which are better integrated will benefit more than those which remain protected.

For Pakistan, this Round is of special significance. Despite Pakistan being a GSP preference receiving country in its major markets, the average tariffs that our exporters pay are more than 10 per cent as against one per cent being paid by the exporters of developed countries. Its other competitors, such as the least developed countries and other smaller economies, enjoy duty free access under various schemes such as the Everything but Arms (EBA) scheme of the EU or Africa Growth and Opportunity Act (AGOA) and Caribbean Basin Initiative (CBI) schemes of United States.

Therefore, the only way for Pakistan seems to be a successful Doha Round. With a successful round, tariffs in our major markets should come down substantially. All developed countries would have to reduce their tariffs to less than six per cent. In agriculture, our farmers would have a better chance to compete if trade distorting subsidies of rich countries are reduced substantially and brought under more discipline.

In services, Pakistan’s offensive interests lie in getting predictable market access for our Mod-4 temporary service providers globally. Our interests also lie in Mode-1 in the area of Business Process Outsourcing (BPO). Other areas of key interest are the existing rules. We are often unfairly targeted by the EU and even at present anti-dumping duties are being collected from our bed linen exporters. We should seek more balanced rules in this area.

There is almost nothing required of us in terms of market opening. But we have to do unilateral liberalisation so that our industry has access to cheaper raw materials and is also competitive.

The writer, a former federal minister for commerce, was Pakistan’s chief negotiator at the WTO from 2002-07.

Income Inequality

2008-05-04T10:30:00.000-07:00

Source: http://jang.com.pk/thenews/may2008-weekly/nos-04-05-2008/pol1.htm

For the rich only
Income and wealth
disparities galore in our society

By Huzaima Bukhari and Dr Ikramul Haq

According to a study conducted by the Centre for Research on Poverty and Income Distribution (CRPID), 63 per cent of poor in Pakistan fall in the category of 'transitory poor'. The State Bank of Pakistan (SBP) has also admitted in its annual reports that the standard definition of 'transitory poor' includes those households that are below the poverty line for most of the time, but not always, during a defined period.

The remaining 32 per cent and five per cent of the population that subsist below the poverty line are 'chronic' and 'extremely poor', respectively. 'Chronic' and 'extremely' poor are those households that are below the poverty line all the time during a defined period. Similarly, on the other side, 13 per cent and 21 per cent of total non-poor (above the poverty line) are 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 inequitable distribution of income and wealth, monopoly over assets and regressive tax policies. Rulers in Pakistan have never showed any commitment to economic and social justice as their primary political goal. One wonders if the new government is aware of this state of affairs and is devising some practical ways to help improve the situation.

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, 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 to the rise of a unipolar world power in the twentieth century; to the quest for monopolies in the twenty-first century.

In the last five years, unfortunately, no one has conducted a comprehensive research to determine all the dimensions of the rich-poor divide in Pakistan. Various studies, wherein inequality-measuring criteria like the Lorenz Curve and the Gini Coefficient have been used, however, provide estimates of inequality in Pakistan. According to A R Kemal, studies on income inequality in Pakistan show different estimates because of the following five important factors:

One, different studies use different data sets -- some are based on Household Income and Expenditure Surveys, others make use of income tax data and still others splice the two sets of data. Two, while some studies consider inequalities in income, others consider inequalities in the consumption expenditures. Three, while some studies are done for Pakistan as a whole, others examine income inequalities in both the rural and urban areas. Four, while some studies report income inequalities across households, others report inequalities across population or earners. Five, some researchers classify data by deciles prior to the estimation of the Gini Coefficient; while others employ the income intervals that are not uniform.

All studies, however, confirm that income inequality in 2000-2007 was more than in any other time period in the history of Pakistan. The poorest 30 per cent lost their share, while the richest 20 per cent 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 introduced 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, a lower Gini Coefficient indicates more equitable distribution of wealth in a society, while higher a Gini Coefficient means that wealth is concentrated in the hands of a few people. Sometimes, the Gini Coefficient is multiplied by 100 and expressed as a percentage between 0 and 100 ('Gini Index').

According to a US State Department report, released in 2006, the Gini Coefficient for Pakistan is 68.0. According to the same report, the 'Gini Index' for Japan is 14.9, for Sweden is 21.0, for Switzerland is 21.1, for Germany is 22.3, for the United Kingdom is 23.0, for Canada is 23.1, for France is 32.7, for Iran is 41.0, for the United States is 46.6, for Argentina is 52.2, for Mexico is 54.6, for South Africa is 57.8 and for Namibia is 70.7. According to another United Nations report, from 1987 to 1999, the Gini Coefficient for Pakistan was in the range of 0.33 to 0.43, but it increased to 0.68 in 2006, yet the previous government kept on harping the tune of a 'wonderful' economic turnaround.

Income inequalities in Pakistan, as elsewhere, largely reflect inequalities in the distribution of assets. Since the poor have virtually no assets and the lower middle-class owns very few assets, income distribution is skewed. Distribution of state land; development of plots and houses for the common people at affordable rates; the sale of shares of public enterprises in smaller lots; human resource development; and credit to micro-, small- and medium-enterprises are some of the ways that might help the poor in acquiring assets. However, the role of various official bodies set up by federal and provincial governments in this regard has been poor to say the least.

The income inequality in Pakistan has increased drastically in the last eight years and the trend continues unabated despite all claims 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.

However, the single most devastating factor for increased income and wealth inequalities in Pakistan remains the regressive tax system. Incidence of tax on the poor in the last 10 years has increased substantially (by about 35 per cent), while the rich are paying almost no direct tax on their colossal income and wealth. Study of Pakistan from this political economy perspective is very crucial, as our society is fast adopting dehumanising characteristics. We are faced with economic disparities, shortage of food and lack of essentials services. The great divide between the rich and the poor in today's Pakistan is assuming alarming proportions, and may eventually lead to a civil war if preventive measures are not adopted immediately.

(The writers are tax advisers and legal historians. They also teach at LUMS).

Can the World Survive US Downturn?

2008-05-02T11:16:00.000-07:00

source: http://www.time.com/time/printout/0,8816,1736303,00.html

Wednesday, Apr. 30, 2008
By Michael Schuman

Finding an empty table at a Starbucks in Hong Kong on a Sunday afternoon these days feels like winning the lottery. So does getting a reservation at a good dim sum restaurant or renting an affordable apartment. While the U.S. suffers the convulsions of an impending recession and massive wealth destruction, here the malls are stuffed full and the streets bumper-to-bumper with BMWs. The good times keep rolling, and not just in Hong Kong, but across much of emerging Asia, from Shanghai to Mumbai. Sure, the U.S. turmoil has had some impact — jittery investors have knocked back stock markets from last year's lofty heights — but in general, the story of America's economic woes has been confined to the morning newspapers.

Recession? What recession?

In the past, any downturn in the U.S. economy would send Asian policy makers, businessmen and workers into cold sweats. The reason is that Asia has been so dependent on exports to the U.S. that any slowdown in demand in the American economy inevitably dragged down Asian growth as well. In recent months, however, there has been a debate raging among economists over whether the forces of globalization have weaned the rest of the world off its heavy reliance on the U.S. The hope has been that the global economy can continue to grow quite nicely even if the U.S. fell into recession.

So far, that seems to be true, at least here in Asia. Though the exact extent of America's downturn is still uncertain, the early signs tell us that Asia isn't as reliant on the U.S. as it once was. "Economies in Asia will see potential to grow at reasonably fast rates" says Robert Horrocks, head of research at fund management firm Mirae Asset Global Investments. Nigel Richardson, chief investment officer for Asia at AXA Investment Managers says that "the U.S. is still the driving force of the world economy" but "Asia is probably far more resilient than it would have been in the past."

Why is that? One theory is that the region has enough centers of growth of its own — mainly, the roaring economies of China and India — that trade within Asia can drive the region's GDP onwards even if the U.S. economy wanes. The idea is called decoupling, as if the continent has just extricated itself from an unhappy relationship. By this reckoning, America just isn't as important to the region as it used to be.

But can that possibly be the case? Can the U.S. really become economically irrelevant?

On the surface, decoupling seems outright fantasy. The U.S. economy is three times bigger than the next largest (Japan), and 15% to 20% of the exports of most Asian countries head to the U.S. The Asian development bank, in its recently released 2008 outlook on Asian economies, showed there is a clear link between retail sales in the U.S. and other industrialized countries and Asian exports, since Asia manufactures and ships so many toys, shirts, TVs and other consumer items to America. Any retrenchment of U.S. consumer spending will, therefore, take a bite from Asia's export growth. Though trade within Asia is increasing rapidly, the goods shipped between Asian countries tend to be components or raw materials for final products, which eventually get sent off to the U.S. or Europe.

Asia, then, is as coupled to the U.S. as it always has been, perhaps even more so. Signs that a U.S. slowdown is rippling through Asia are already apparent. In March, growth of Taiwan's export orders slipped under 13% from a strong 18% in February. Keeping Asian economies bubbling without a thriving and spend-happy U.S. looks like trying to win the Super Bowl without your MVP starting quarterback.

Yet the ADB's growth estimates for 2008 are nevertheless pretty perky. Overall, Asia's economies are expected to surge 7.6% In 2008. The U.S. slowdown is dampening Asia's prospects — last year, Asian economies grew 8.7%, the fastest rate in nearly two decades — but not enough to create anything close to a major downturn. China's GDP growth is projected to clock in at 10% and India 8%.

Maybe we don't need that MVP after all.

It's not that the U.S. and Asia are somehow more loosely linked. With increasingly interconnected global manufacturing and financial systems, the influence of the U.S. isn't going to just vanish. However, Asia's developing economies are becoming so advanced that they can generate their own growth. It is domestic demand and investment that are protecting Asia's economies from the U.S. recession. Asians simply have more money to buy the TVs, cars and houses to keep their own economies roaring on. Wages in China's urban areas, for example, jumped nearly 19% in 2007. "It is the internal dynamics that are giving Asia its dynamism," says Ifzal Ali, chief economist at the ADB in Manila.

This is a good thing. Eventually, consumers in China and India will begin to compete with those in America for the title of engine of world growth. This might mean that the U.S. economy doesn't play the dominant role it has in the world over the past six decades, but it does mean a healthier global economy. With more sources of growth, a sick America can no longer send the rest of the world into the hospital ward.

Common Currency is a column on global economics by Michael Schuman that appears weekly on TIME.com.

Pakistan among top for doing business: WB

2008-05-01T19:56:00.001-07:00

Source: The News

Thursday, May 01, 2008
KARACHI: Pakistan has been ranked as one of the top favourable economies in the world, states “Doing Business 2008”, a recent report released by the World Bank.

According to the report, Pakistan ranks second compared to other South Asian countries, based on certain economic indicators such as ease of doing business, dealing with licences and protecting investors as identified by the analysts.

The following countries are Sri Lanka, Bangladesh and Nepal. Pakistan has a comparatively better business environment in terms of paying taxes and registration of assets, the report adds.

The report evaluates business activities based on regulations affecting the 10 stages of a business life, which are starting a business, dealing with licences, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business.

It is pertinent to note that in the overall global rating of 178 countries, Pakistan is rated 76th, as compared to India at 120. With Pakistan’s fast-paced IT industry, it is emerging as a powerhouse in the South Asian region due to the government’s friendly policies.

These include 100 per cent foreign equity ownership, 100 per cent repatriation of profits for foreign investors and tax exemption for the sector till 2013.

The availability of a large pool of English-proficient skilled professionals, affordable connectivity rates, competitive infrastructure and operational costs are some of the other benefits that Pakistan enjoys. Due to the same, an increasing number of foreign IT companies prefer Pakistan for their outsourcing operations and setting up development centres.

“Doing Business 2008” is the fifth in a series of annual reports that evaluates the regulations which directly impact economic growth, provides objective measures of business regulations and their enforcement. The data is collected across 178 countries and selected cities at the sub-national and regional level.

Economic experts for equitable taxation

2008-04-29T21:55:00.000-07:00

Source: The News
Sunday, April 27, 2008
By By Mansoor Ahmad

LAHORE: The economic experts have advised new economic managers to stop the blame game and take some concrete steps to correct the inconsistencies in economic policies that tend to benefit the rich and burden the poor.

They warned that the common man is not prepared to pay heed to the oft-repeated slogan of trusting the government and bear some pains for his future well-being. Economic decisions at the expense of the poor to generate more revenues are the same that were recommended by the IMF about two decades ago, only after it failed to convince the rulers to generate revenue from the rich.

Pakistan, the economists added, is facing a resource crunch. The governmentÕs expenditures are higher than its income. There is a need to increase the income in a sensible manner by plugging the loopholes in the tax machinery and this can only be possible if there is 100 per cent transparency in governmentÕs affairs.

The economists pointed out that Federal Finance Minister Ishaq Dar, immediately after assuming charge, vowed that resources would be generated according to the capability of each segment of society. But the new economic managers have not come up with a sound and tangible strategy to ensure equitable taxation that spares the poor and targets the affluent segments of society. They said that successive governments in Pakistan have succumbed to political pressures and instead of generating revenue from those that have the capacity, opted for the easy way out by accumulating resources through indirect taxation. The time has come when each citizen should be forced to pay taxes according to his capacity and it is unlawful to generate 65 per cent of taxes in a way that they are shared equally by the poor and the rich, indirectly.

They said petrol levies, gas surcharges, sales tax, excise and customs duties are recovered from the poor by the rich, with interest. In fact, many manufacturers, they added, conceal their actual production to save sales tax and excise duty and under-file their import invoices to pay less import tariffs. However, they charge the consumers for government taxes on their own products.

They said an analysis of the income tax collected by the Federal Board of Revenue (FBR) would reveal that 80 per cent of this tax is collected from 100 corporate sector companies. The salaried class comes next, contributing over seven per cent of the total income tax while thousands of manufacturing and trading firms contribute only 13 per cent, out of which, five per cent comes from traders and transporters. This means that the manufacturers in Pakistan including cement, textile, sugar, and engineering, pay almost the same tax as that paid by the salaried class.

They said this time around instead of asking the common man to suffer any more, the planners will ensure that all tax evaders and under-filers not only pay their due taxes but also share their fortune with the workers by providing them with daily use items at subsidised rates.

They said that inflation as a result of high oil and food rates, has plagued all developing nations. However, they added that inflation is comparatively lower in nations that have a transparent system, while in Pakistan it has crossed double digits since February 2008, in India it is 7 per cent and in China, 8.4 per cent.

They said the policy makers have unsuccessfully tried to control inflation by increasing interest rates. This they added has slowed down investment but triggered high growth in non-productive sectors such as property, finance and capital market.

The government as the major borrower has ensured high profitability in the banking sector. It has also given an upper hand to the banks in sanctioning credit to the private sector. This practice they added, would have to be curbed.

POL prices to be increased again: Dar

2008-04-29T21:49:00.000-07:00

Source: The News

Sunday, April 27, 2008

By Aftab Maken

ISLAMABAD: Finance Minister Ishaq Dar on Saturday made it clear to the parliamentarians that the POL subsidy had to be done away with and the whole brunt of the skyrocketing POL prices would have to be passed on to consumers before the end of the new fiscal year.

Responding to queries raised by a senator in the Senate Committee on Finance, Senator Ishaq Dar said the government would not further absorb Rs 18-20 per litre subsidy on POL and would pass it on to the end users gradually.

In order to bridge the burgeoning gap regarding the balance of payments, the minister informed the committee that the government was arranging $3 billion, and in this regard the Asian Development Bank (ADB) had pledged one billion dollars. However, he ruled out knocking the doors of multi-donor agencies for balance of payments.

To a question by one of the members about the economic managers of the previous government who were now part of the present economic team as well, the chairman of the committee said that those who were responsible for economic mismanagement should resign.

Giving a break-up of the total shortfall of Rs 557 billion in the upcoming budget, Ishaq Dar said the oil subsidy would eat up Rs 157 billion against the budgetary allocation of Rs 15 billion, electricity subsidy would soar to Rs 123 billion against Rs 52 billion, wheat subsidy to Rs 45 billion against no allocation in budgetary estimates; Rs 125 billion for interest rate on domestic debt with no mention in budget documents, Rs 32 billion for R&D with no mention in the budget and Rs 75 billion as miscellaneous expenditure mainly for Swat and Wana operations.

Ishaq Dar said the government would halt the development budget and also supplementary grants to the federal departments and divisions.

The finance minister, during a presentation on “bankruptcy draft law” by Governor State Bank Dr Shamshad Akhtar, objected to the reporting of media persons and asked the committee to intervene. The chairman of the committee with the consent of members allowed the media to cover the event but later decided against it, keeping the sensitivity of the issues in view.

Senator Nisar Memon of the PML-Q objected to the finance minister’s viewpoint and reminded him of his party’s stance on the issue, saying that the ruling coalition always supported the free media policy and demanded coverage of even more sensitive issues on defence and security.

Secretary Finance Dr Waqar Masood also gave a detailed presentation on the current economic situation of the country.

Krugman's conundrum

2008-04-22T13:42:00.000-07:00

Source: http://www.economist.com/finance/economicsfocus/PrinterFriendly.cfm?story_id=11050137

Apr 17th 2008
From The Economist print edition

The elusive link between trade and wage inequality

“THIS paper is the manifestation of a guilty conscience.” With those words, Paul Krugman began the recent presentation of his new study of trade and wages at the Brookings Institution. Mr Krugman, a leading trade economist (as well as a New York Times columnist), had concluded in a 1995 Brookings paper* that trade with poor countries played only a small role in America's rising wage inequality, explaining perhaps one-tenth of the widening income gap between skilled and unskilled workers during the 1980s. Together with several studies in the mid-1990s that had similar findings, Mr Krugman's paper convinced economists that trade was a bit-part player in causing inequality. Other factors, particularly technological innovation that favoured those with skills, were much more important.

At some level that was a surprise. In theory, although trade brings gains to the economy as a whole, it can have substantial effects on the distribution of income. When a country with relatively more high-skilled workers (such as America) trades with poorer countries that have relatively more low-skilled workers, America's low skilled will lose out. But when the effect appeared modest, economists heaved a sigh of relief and moved on.

In recent years, however, the issue has returned. Opinion polls suggest that Americans have become increasingly convinced that globalisation harms ordinary workers. As a commentator, Mr Krugman has become more sceptical. “It's no longer safe to assert that trade's impact on the income distribution in wealthy countries is fairly minor,” he wrote on the VoxEU blog last year. “There's a good case that it is big and getting bigger.” He offered two reasons why. First, more of America's trade is with poor countries, such as China. Second, the growing fragmentation of production means more tasks have become tradable, increasing the universe of labour-intensive jobs in which Chinese workers compete with Americans. His new paper set out to substantiate these assertions.

That proved hard. Certainly, America's trade patterns have changed. Poor countries' share of commerce in manufactured goods has doubled. In contrast to the 1980s, the average wage of America's top-ten trading partners has fallen since 1990. All of which, you might think, would increase the impact of trade on wage inequality.

But by how much? If you simply update the approach used in Mr Krugman's 1995 paper to take into account today's trade patterns, you find that the effect on wages has increased. Josh Bivens, of the Economic Policy Institute, a Washington, DC, think-tank, did just that and found that trade widened wage inequality between skilled and unskilled workers by 6.9% in 2006 and 4.8% in 1995. But even with that increase, trade is still far from being the main cause of wage inequality. Lawrence Katz, a Harvard economist who discussed Mr Krugman's paper at Brookings, estimates that, using Mr Bivens's approach, trade with poor countries can account for about 15% of the growth in the wage gap between skilled and unskilled workers since 1979.

Even this is almost certainly an overstatement. Many imports from China have moved up-market from easy-to-produce products, such as footwear, to more sophisticated goods, such as computers and electronics. As a result, to use economists' jargon, the “factor content” of American imports—in effect, the amount of skilled labour they contain—has not shifted downwards. Mr Katz says factor-based models suggest trade with poor countries explains only 5% of rising income inequality.

Mr Krugman argues that the effect is bigger, but that import statistics are too coarse to capture it. Thanks to the fragmentation of production, Chinese workers are doing the low-skill parts of producing computers. Just because computers from China are classified as skill-intensive in America's imports does not prevent them from hurting less-skilled American workers. Mr Krugman may be right but, as he admits, it is hard to prove.

Blame it on the rich
Robert Lawrence, another Harvard economist, has looked at the same evidence and reached rather different conclusions. In a new book, “Blue Collar Blues”, he points out that the contours of American inequality sit ill with the idea that trade with poor countries is to blame. Once you measure income properly, the gap between white- and blue-collar workers has not risen that much since the late 1990s when China's global integration accelerated. The wages of the least skilled have improved relative to those in the middle. Some types of inequality have increased, notably the share of income going to the very richest. But there is little sign that wage inequality has behaved as traditional trade theory might suggest.

Mr Lawrence offers two reasons why. One possibility is that America no longer makes some of the low-skilled, labour-intensive goods that it imports. In those goods there are no domestic workers to lose out to foreign competition. Second, even when America does produce something that is imported from China, it may make it in a different way, with more machinery and only a few high-skilled workers. If imports from China and other poor countries compete with more-skilled American workers, they may displace workers but will not widen wage inequality.

Given the lack of fine-grained statistics, none of these studies settles the debate. It is possible that globalisation is becoming a bigger cause of American wage inequality. But contrary to the tone of the political debate, and the thrust of Mr Krugman's commentary, the evidence is inconclusive. “How can we quantify the actual effect of rising trade on wages?” Mr Krugman asked at the end of his paper. “The answer, given the current state of the data, is that we can't.”

* Sources

“Growing World Trade: Causes and Consequences”, by Paul Krugman, Brookings Papers on Economic Activity 1:1995

“Blue Collar Blues: Is Trade to Blame for Rising US Income Inequality?”, by Robert Z. Lawrence, Peterson Institute for International Economics, January 2008

“Trade and Wages, Reconsidered”, by Paul Krugman, Brookings Papers on Economic Activity (forthcoming – a draft version is available)

“Globalisation, American Wages and Inequality”, by Josh Bivens, EPI Working Paper 279, 2007

Futures caused the market manipulation

2008-04-21T05:28:00.000-07:00

Futures caused the market manipulation
Krishan Bir Chaudhary

Source: Financial Express

Futures trading in wheat, rice and pulses like tur and urad has been suspended by the Forward Markets Commission as it caused market manipulation, leading to a rise in prices. But, still, futures trading is being carried out in a number of agricultural commodities.

The government knows for certain that futures trading in farm commodities is the cause for market manipulation. Finance minister P Chidambaram, while presenting Budget 2008-09, slapped a commodities transaction tax (CTT) on options and futures on the lines of the existing securities transaction tax. “The commodity futures have come of age in the country and should be treated at par with the equity market,” he had said. Chidambaram also brought the commodity futures exchanges in the ambit of service tax. These measures were aimed at curbing manipulation.

But the government’s move is only a piecemeal approach although it has realised the damage futures trading in agricultural commodities can cause. It should nip the problem in the bud by banning futures trading in all agricultural products.

There is a wrong notion that the farmers are benefiting from the existing futures trading in the country. The farmers get the lowest price for their produce in the season at harvest and, thereafter, the produce passes into the hands of traders and corporate houses that manipulate high prices for commodities in the futures markets. Farmers have no opportunity to participate in this.

The Economic Survey 2007-08 clearly says: “Direct participation of farmers in the commodity futures market is somewhat difficult at this stage as the large lot size, daily margining and high membership fees … work as a deterrent to farmers’ participation in these markets. Farmers can directly benefit from the futures market if institutions are allowed to act as aggregators on behalf of the farmers.”

Farmers have no time to participate directly in the futures markets. They have to prepare the field after harvest for the next crop. The concept that institutions or corporate houses should act as aggregators on behalf of farmers amounts to leaving the peasants at the mercy of these marketing giants.

The government has now gone into a panic mode as inflation, as measured by the point-to-point movement of the wholesale price index, reached a 40-month high at 7% for the week ended March 22, 2008. Yet, it is not totally critical about the neo-liberal architecture of the economy that it has imposed upon the nation. It is taking a piecemeal approach like banning exports and liberalising imports of certain commodities. It is time the government rejected this neo-liberal and corporate-led agriculture model and replaced it by a farmer-centric one.

There is no shortage of food either at the global or at the domestic level. According to a recent report of the International Grain Council (IGC), the world wheat production would be at 646 million tonne (mt), an increase of 42 mt over the previous year, due to a 2.5% increase in the area under cultivation. The global prices of maize were around $240 a tonne by March 27. The IGC forecasts global maize output to decline by 20 mt to 748 mt. Barley output would increase 10% to 148 mt.

According to the official estimate, India has achieved record grain production of 219.32 mt in 2007-08, including 94.08 mt of rice, 74.81 mt of wheat, 36.09 mt of coarse cereals, and 14.34 mt of pulses. The cotton output is estimated at 23.38 million bales of 170 kg each, an all-time record. The oilseeds output is estimated at 27.16 mt.

Despite the good production, there is a deliberate manipulation of food prices both at the global and at the domestic levels. At the global level, there are a few corporate players in the food business that buy produce from farmers cheap, hoard the stock and manipulate the prices. The bio-fuel programme in Europe and the US is also a contributing factor to price rise.

In India, too, the corporate houses and retail chains have been allowed to buy produce from farmers, hoard and manipulate the market. The farmers do not gain in the process as they are paid relatively lower prices than what the corporate houses quote on the futures exchanges or in the spot market, or at what the retail chains sell to the consumers.

—The author is the president of Bharatiya Krishak Samaj, India’s largest and oldest farmers’ organisation

Currency devaluation and its impact on the economy

2008-04-21T04:41:00.000-07:00

Source: http://jang.com.pk/thenews/apr2008-weekly/busrev-21-04-2008/p3.htm

Devaluation is usually undertaken as a means of correcting a deficit in the balance of payments. Some analyst are of the view that weakening the value of currency could actually be good for the economy – since a weaker currency will boost exports, which in turn will lift employment and all this will set in motion economic growth and keep the economy going
By Parveen Zaiby

Devaluation means decreasing the value of nation's currency relative to gold or the currencies of other nations. Devaluation occurs in terms of all other currencies, but it is best illustrated in the case of only one other currency. Devaluation and Depreciation are sometimes used interchangeably, but they always refer to values in terms of other currencies and the value of currency is determined by the interplay of money supply and money demand. In common modern usage, it specifically implies an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign currency. In contrast, (currency) depreciation is most often used for the unofficial decrease in the exchange rate in a floating exchange rate system.

Historically, early currencies were typically coins stamped from gold or silver by an issuing authority which certified the weight and purity of the precious metal. A government in need of money and short on precious metal might abruptly lower the weight or purity of the coins without announcing this, or else decree that the new coins had equal value to the old, thus devaluing the currency.

Present day currencies are usually fiat currencies with insignificant inherent value. As some countries hold floating exchange rates, others maintain fixed exchange rate policy against the United States dollar or other major currencies. These fixed rates are usually maintained by a combination of legally enforced capital controls or through government trading of foreign currency reserves to manipulate the money supply. Under fixed exchange rates, persistent capital outflows or trade deficits may lead countries to lower or abandon their fixed rate policy, resulting in devaluation (as persistent surpluses and capital inflows may lead them towards revaluation).

Devaluation is usually undertaken as a means of correcting a deficit in the balance of payments. Some analyst are of the view that weakening the value of currency could actually be good for the economy—since a weaker currency will boost manufacturing production, which in turn will lift employment and all this will set in motion economic growth and keep the economy going. But the dangers of a falling rupee too quickly, would be that the foreigners will stop investing in the country, which would make it impossible to finance the current account (trade) deficit. It will then be forced to push interest rates up to defend the rupee (crashing rupee stock and bond markets is supposed to make the rupee more valuable), and that could create recession.

In an open market, the perception that a devaluation is imminent, may lead speculators to sell the currency in exchange for the country's foreign reserves, increasing pressure on the issuing country to make an actual devaluation. When speculators buy out all of the foreign reserves, a balance of payments crisis occurs. Economists Paul Krugman and Maurice Obstfeld state that the balance of payments crisis occurs when the real exchange rate (exchange rate adjusted for relative price differences between countries) is equal to the nominal exchange rate (the stated rate). In practice, the onset of crisis has typically occurred after the real exchange rate has depreciated below the nominal rate. The reason for this is that speculators do not have perfect information; they sometimes find out that a country foreign reserve are at lower level after the real exchange rate has fallen. In these circumstances, the currency value will fall rapidly. This is what occurred during the 1994 economic crisis in Mexico.

Devaluation of a currency was a matter of prestige in the past. However with the lapse of time it has been learnt that such an operation is sometime necessary to save the country from economic hardships. Devaluation is not an enduring way to improve the economy, unless the Government revises its method of economic planning and execution of plans, no amount of devaluation will stabilise the external value of our currency. We must give highest priority to the consolidation of our economy vis-a- vis expansion. A strong discipline should be exercised over all the unproductive expenditure whether it is in public or private sector.

Possible impact of the devaluation on the economy

Possible impacts of the devaluation on the economy could be the stimulation of merchandise exports, discouraging merchandise imports and thus improving terms of trade, increase revenue collection and savings in repatriation of profits and royalties by existing foreign investors, bringing illegal foreign exchange leakages into official channels and putting an end to gold smuggling. Inflow of foreign capital can be improved by devaluation only if prices do not rise. It is supposed to provide an escape from vexation import controls that prevent utilisation of full industrial capacity, stifle export drive, bestow monopoly profits on a few, inefficient market regulation and pressure on budget and domestic prices will sky rocket. The obvious consequence of devaluation in the short run would be to worsen the balance of payment position and raise the burden of Pakistan’s foreign debt and debt service liability and foreign loans repayment would break the back of the budget, which would in turn increases the trade gap. It will upset all the cost-price relationships in the economy, lead to galloping inflation, and will stall many ongoing projects due to rising costs.

Persistent adverse trade balance and disequilibrium in balance of payment are the main causes, which compels a country to devalue its currency. Major components of trade balance are exports and imports of a country. Adverse trade balance is generally the result of slackness in exports in comparison to imports. It might affect exports prices and thus wipe out all the edge that might be hoping to gain in the export markets through devaluation. The markets for Pakistan’s traditional export are inelastic, therefore devaluation may thus in fact give no big boost to their exports, because there is a small quantum of value added exports and major requirement is based on export of raw material. Further the quality of export not competitive in the foreign market. If an export -boom in agro-based industries does come about, the consequential diversion of land from food crops will raise food prices and cause a rise in wages unaccompanied by any gains in productivity. Moreover, most of the bigger enterprises will face increasing difficulties in loan repayments and the cost of new industrial investments will shoot up sharply.

In Pakistan, industries are heavily dependent on imported raw materials for industrial goods and capital goods and components, and their access too many advanced countries are blocked by quotas and tariffs. , any rising of the prices of such inputs through devaluation, would raise industrial costs and reduce the intensity of capacity utilisation. Therefore, it should be avoided as a resort to deficit financing. Devaluation with its implications will cause a contraction in economic activity and consequential slide down in income tax receipts will raise the burden of Pakistan’s defence equipment, and foreign debt overnight. It cannot stop smuggling as long as black- market transactions in foreign exchange continue. Devaluing the Pak. Rupee means devaluing the price of Pak labour and talent in the international market who send foreign exchange through home remittance. Devaluation will make Pakistan lose heavily both as seller and as a buyer and will make no good substitute for remedial changes in economic policies and developmental planning. Devaluation of Pakistan Rupee will mean devaluation of Pakistan labour and talent in the international market evaluation will serve as a drug rather as a stimulant and cause an unprecedented inflation.

Bold steps must be taken to enliven capital market and more foreign aid procured. Strong disciplined should exercised over all unproductive expenditure, whether it be public sector or private sector. Lavish spending of aid was bad enough, but it would be even worse to raise the cost of debt repayment through devaluation, whose benefits in terms of larger foreign investment are quite illusory.

Central exercise as well as sales tax receipts and custom duties should go down due to lower volume and high prices of imported inputs resulting in cut-backs in industrial production.

Devaluation in Pakistan in different periods

Pakistan had experienced an increased in wholesale price, after its first devaluation in 1955, due to inelastic production structure, which had generated uncontrollable inflationary pressure. Again on 11th May 1972, Pakistani Rupee was devalued by 56.7% in terms of gold to a new, unified Official Rate of PRs11.00 per U.S. Dollar and 4.5% fluctuation range for the currency was also introduced. At the same time, the entire Export Bonus Voucher scheme with its complex accessory rates was abolished. On 8th January 1982, the Rupee was devalued when the currency was unhitched from its link to the U.S. Dollar and the fixed Official Rate abolished. A controlled, floating Effective Rate for the Rupee, initially at the Rupee dollar exchange rate was Rs9.9 per U.S. Dollar was established in relation to a trade-weighted basket of currencies, Pakistan has been on a system of managed float since January, 8, 1982, under this system the country has experienced massive downward slide in its exchange rate. In 1997, retail prices rose significantly to 20 to 24 rupees/kg (US 55.4 to 66.5 cents/kg), indicating short domestic supplies, the devaluation of the rupee against the dollar was highest in 1996, which contributed to the rise in price since sugar had been traded internationally in US dollars. As imports had increased in the 2 years period, the rising price of imported sugar (in rupees) was also reflected in the rising domestic price. An import tariff of 10 percent was removed in mid-1997, so as not to contribute to increasing sugar prices. It rose to very high amounting to Rs64.1 in July 2001. The economic indicators showed some visible improvement since the year 2001-02 and it continued to be so, which helped the authorities to turn around the creeping devaluation and the rupee has stabilised in the range of (Rs) 59-60 per dollar till 2006 and May 2007 (Rs60), but after that the currency has started devaluing since 2007 to date i.e., April 2008 it stands to now Rs63.40 against a dollar. It is concluded that devaluation may temporarily boost exports only if the demand of exported goods in the foreign country is price elastic, but this is not necessary for those goods for which the demand is not price elastic. We therefore, should first try to analyse the price elasticity of demand of goods exported from Pakistan, because experienced has taught that devaluation did not lead to increase in exports. Further to this, it has been observed that successive devaluation in the past have failed to evoke a favourable long term response in terms of improved exports. Apart from encouraging speculation it also shatters the confidence of the foreign investor in the domestic economy. It takes the economy on the path of devaluation aided cost push inflation and is a never ending vicious circle. A long term plan is required to put the economy on the right track. This should provide a framework for exporting value added branded products, improving the quality and image of existing products, finding new export markets and better marketing strategy.

We should try to effectively utilise the human resources, which is abundant in Pakistan and is under- utilised. Moreover, cut in government expenditure, improvement in budget and trade deficit, multiple and persistent exchange rate would also be of great help. But devaluation is not the solution of the current economic crisis and should not be resorted to in future.

Mobilisation of savings for self-reliance

2008-04-21T04:35:00.000-07:00

source: http://jang.com.pk/thenews/apr2008-weekly/busrev-21-04-2008/p2.htm

By Aftab Ahmad Khan

The inability to mobilise adequate domestic resources to finance development has continued to restrain the rate of growth in Pakistan. This is an important reason why the actual rate of development has been below the potential rate of development. It has been responsible for increasing our dependence on external savings in the form of loans, investments and grants to an extent that it now impinges on our economic sovereignty. According to Prof. Ragnar Nurkse “the vicious circle of poverty” that runs from low income to low investment to low productivity and then back to low real income can be broken by an increase in the ratio of savings and investment to national income.

Pakistan’s national savings to GDP ratio in FY07 was 18.0 per cent as compared with 17.2 per cent in FY06 and 17.5 per cent in FY05. Savings –Investment gap in FY07 was 5 per cent of GDP as compared with 4.6 per cent of GDP in FY06.

Savings to GDP ratio in Pakistan is quite low as compared with the regional economies. According to Asian Development Bank (key indicators 2007), gross domestic savings as a percentage of GDP in 2006 were 32.4 India, 20.3 in Bangladesh, 50.5 in Singapore, 43 in Malaysia, 47.3 China and 13.7 in Pakistan.

The State Bank of Pakistan has quite appropriately pointed out that a large savings-investment gap is not desirable for the country in the long run because of its negative impact on macro-economic stability. It results in accumulation of external debt and puts additional burden on the country’s balance of payments in terms of mounting debt servicing.

Despite low rates of national savings, Pakistan has somehow managed to sustain a respectable growth rate of domestic output. This apparent contradiction is resolved if one accepts the view that estimates of savings and investments are considerably under-stated as they do not take into account saving and investment activity in the parallel on black economy. A more likely explanation might be that Pakistan over the last decades has been depleting its existing stock of capital and neglecting maintenance and replacement, thus attaining high income growth with low investment at the expense of future growth. This is visible in the public infrastructure facilities under-maintained roads, railways and irrigation networks, and by the low level of investment in social sectors. Whatever the reason, it is prudent to assume that the Incremental Capital Output Ratios (ICORs) will be higher in the future. The composition of future investment with heavy infra-structure requirements for every, irrigation, transport and urban renewal as well as new emphasis on social sectors will entail more capital per unit of output and therefore higher rates of investment.

The prevailing rates of investment and savings are not adequate to support future economic growth at the socially necessary rate of 8 per cent per annum. Pakistan therefore has no alternative but to make determined and sustained efforts to raise significantly its national savings and investment rates.

Various reasons have been advanced to explain Pakistan’s lacklustre savings performance. These include the existence of a large unorganised black economy whose savings are not captured by official statistics, a feudal outlook characterised by wasteful expenditure, a development strategy which has emphasised the production of consumer goods, conspicuous consumption and ostentatious living by the elite, rates of inflation higher than the rates of return on financial savings, lack of adequate attention to the efficiency dimension of investment, a high population growth rate with a concomitant high dependency ratio and low level of per capita income.

The most frequently cited reason, however, is a culturally induced bias in favour of consumption. But while such a bias would affect the propensity to save, it cannot by itself satisfactorily explain all aspects of Pakistan’s savings performance and by constantly citing this cultural factor as a principal reason for Pakistan’s low savings rates, the importance of other determinants tends to be either disregarded or discounted. In our case, it is quite clear that inadequate returns on financial savings and unequal and inefficient distribution of credit have exercised inhibiting impact on the process of savings and investment. Admittedly, the rate of return is not the only determinant of savings, but the evidence suggests that it is far more important than bankers and policy makers have acknowledged for a long time.

Savings, like other economic variables are related to a large number of factors, such as income expectations, investment opportunities, import regulation, pattern of industrialisation, inter-sectoral transfer of income and distribution of income etc. The rate of savings can be influenced by many of these variables.

Growth and savings feed back into each others in the virtuous circle of savings-investment-growth-savings.

The feed back mechanisms depend on the efficiency with which savings are channelled into productive investments. Hence, financial infrastructure, such as banking systems, stock and bond markets, insurance and the degree of monetisation play a key role in packaging risk for savers, transmitting information and lowering the cost of equity for firms.

The main imbalance between savings and investment in Pakistan arises in the public sector. Budget deficit i.e. the gap between consolidation revenues and expenditures has been one of the most serious problems facing the economy and is an important cause of the low level of domestic savings. During the 1980s and 1990s it annually averaged 7.1 per cent and 6.9 per cent of GDP respectively.

The budgetary deficit was, however, brought down to 4.3 per cent of GDP in FY06 and FY07. In the current fiscal year FY08, unfortunately on present indications it is likely to substantially exceed 4.0 per cent GDP target.

It is heartening to note that the present government has realised the importance of a significant fiscal adjustment involving major public resources mobilisation effort and expenditure control / rationalisation measures accompanied by steps aimed at improving tax administration.

The present tax structure of Pakistan unfortunately falls short in all major functions of a modern tax system. The system is characterised by the dominance of indirect taxes (around 63 per cent of total tax receipts). At the same time the system has many exemptions and concessions. Furthermore, those subject to taxation, with the exception of wage and salary earners are known to pay only a fraction of their share. In order to maintain the present low tax-GDP ration (10.2 per cent), the tax system needs to be supplemented with frequent ad-hoc measures.

Moreover, tax evasion has encouraged the growth of a parallel economy which in turn results in cumulative loss to the public exchequer.

In the context of stepping up the rate of national savings, the necessity of avoiding ostentation and waste in public and private expenditures cannot be over-emphasised. In our bi-polar society wherein a small island of opulence and privilege is vulnerable to an ominously rising tide of poverty and despair, conspicuous consumption and waste (manifesting itself in palatial houses and costly furnishings, high priced conveyances, expensive banquets and marriage ceremonies, vulgar display of jewellery and frequent trips to foreign countries) rub salt as it were on the wounds of large number of poor. In the case of a poor country like Pakistan, extravagant living is highly immoral insofar as it involves the unproductive use of limited resources; moreover, (this is of much greater significance), the frustration and discontent generated by it impede the process of social cohesion and stability.

The very high incomes, which accrue to businessmen, industrialists, landowners and speculators, have their justification only, if these lead to increased savings and high productive investments.

Using remittances for development

2008-04-21T04:34:00.003-07:00

Source: http://dawn.com/2008/04/21/ebr15.htm

By Nusrat Khurshedi

REMITTANCES have emerged as a major source of foreign exchange. Global official remittances have increased from $2 billion in 1970 to the present level of over $80 billion. About sixty per cent of the global remittances’ flow towards developing countries. And these exceed the global official development assistance as well as capital market flows to the developing countries.

However, over the years, concerns have been expressed on the limited productive use of these remittances. It is estimated that 50-60 per cent of remittances are spent on current consumption and only about 10 per cent go into investment.

Much of the remittances are used for repayment of loans, in daily expenses such as food, clothing, child education and healthcare and basic subsistence needs. Funds are also spent on building or improving housing, buying land or cattle or durable ,consumer goods such as washing machines and televisions. Remittances are also utilised for financing migration of other family members on social ceremonies and community development activities.

Generally, only a small percentage of remittances is used for savings and what is termed ‘productive investment’ e.g. income and employment-generating activities such as buying land or tools, starting a business and other economic activities with multiplier effects.

Due to poor infrastructure, lack of access to credit, and limited opportunities for small-scale investment, the migrants are making rational decisions about the use of their remittances.

While Overseas Pakistanis Foundation (OPF), offers investment advisory services to returning migrants and assists them in obtaining services from relevant government departments in setting up business, much more effort is needed to influence the pattern of utilisation of remittances for productive purposes.

First, there is a need for policy change to promote remittances. For migrants, the desire to remit savings through official channels is a function of convenience, flexibility and profitability of their transaction. Convenience depends on the ready availability of financial intermediaries who can easily remit funds to their families. Flexibility affects deposits more than remittances and is related to the availability of facilities for migrants to keep their deposits in foreign exchange and make withdrawals when desired. Profitability is determined primarily by the gap between the official rate of exchange and the unofficial rate available to the migrants. Besides this gap other important factors relate to the ‘real’ interest rate, inflation rate and exchange rate, as well as expectations regarding changes in these rates.

In order to encourage migrants to hold their saving balances in financial assets at ‘home’ as opposed to the host country, the government has introduced foreign currency denominated bonds. A special package of foreign exchange remittance card (FERC) has been implemented and under these, five categories of remittance cards are offered to those overseas Pakistanis who remit $2,500 to $50,000 in a year. A wide range of incentives are also being offered to the foreign exchange remittance card holders.

To encourage savings, the government provides temporary and permanent migrant workers with the incentives to remit to foreign–currency accounts (RCFAs), which can be repatriated, by domestic banks by offering a premium over and above the interest rates available in the international financial market. However, Bangladesh offers additional incentives through a preferential exchange scheme applied to conversions of foreign exchange from the RCFAs to local currency. Its Wage Earners Scheme (WES) enables migrants to sell their foreign exchange to importers at daily auctions at a premium over the official exchange rate.

In India, non-resident Indians are allowed to open foreign currency non-resident accounts which can be denominated in dollars or pounds sterling. The balances on these accounts and interest earned are repatriable The deposits are also exempt from wealth tax.

In terms of productive investment of remittances, it is noted that the focus of the incentive policy regime is on the high skill/income migrants living abroad permanently, either in the industrialised or developing countries. There is very little effort that is addressed to low skill, low income, temporary migrants, mostly workers in the Middle East who provide a substantial amount of foreign exchange through transfers and re-enter the labour market in search of employment on their return. The prospective returnee should be provided an enabling environment to place her/his saving into ‘productive’ investment.

South Korea has launched an experimental training programme for returning migrants. It aims at training returning migrants in new skills so that they can move to other industries or establish their own businesses. In Thailand, banks offer an advisory service on investment opportunities to its migrant-worker customers. The workers who seek advice are also eligible to obtain supplementary loans from the bank if they have a good record of savings.

In the Philippines, the POEA (Philippines Overseas Employment Administration) in collaboration with the ILO has established training centres in various high-migration regions. These centres provide business consultancy, information services, training in small-scale business management and financial supports to returning migrants and their family members. In Sri Lanka, the Department of Labor initiated a counseling service for return migrant. A “Return Migration Branch” was established in the Research and Development Division of the Ministry of Labour, to identify the problems of returning migrants and provide counseling and advice.

Along this, Pakistan has a “Non-Repatriable Investment Scheme” under which overseas Pakistanis (including those returning permanently) are allowed to import machinery and equipment at concessionary rates of duty to establish manufacturing enterprises. Migrant workers are also encouraged to invest in export processing industrial zones. In India migrant workers are given preferential access to capital goods and raw materials. Even Bangladesh offers special incentives for domestic investment..

Sri Lanka was the first labour-exporting country in Asia to launch an entrepreneurship development programme for returning migrants. This programme, inaugurated in 1982 by the Sri Lankan Ministry of Labour in collaboration with the Merchant Bank of Sri Lanka (referred to as ‘ML-MB Programme’) aimed at guiding returning migrants in business creation. In Turkey and Yugoslavia, investment by migrants, is encouraged through workers’ companies and ‘village development cooperatives’.

Policy makers in Pakistan need to focus on diverting remittances into productive avenues.

Alternative energy sources for rural areas

2008-04-21T04:34:00.001-07:00

Source: http://dawn.com/2008/04/21/ebr9.htm

By Abdul Waheed Bhutto

The eradication of poverty, improved environment and a better quality of life for the poor are unachievable without electricity needed for lighting homes/ schools, clinics and for running industry.

A significant per cent of the rural population has no access to electricity.

People living in remote areas still depend on traditional biomass i.e. fuel wood, charcoal, animal dung etc, to meet their daily energy needs. The present extensive use of these sources of energy has led to depleted natural resources and degraded local environment.

Traditional stoves cause indoor concentrations of pollutants. Such exposures are linked to acute respiratory infections, chronic obstructive lung diseases, low birth weights, lung cancer and eye problems, found primarily, among women and children..

Similarly, kerosene-based household lamps are inefficient, expensive, and source of health and fire hazards. These lamps produce unhealthy fumes which in poorly ventilated homes pose serious health hazards such as respiratory and eye problems; and lighting using kerosene can be twice as expensive as and up to 19 times less efficient per lumen of output than fluorescent lights using electricity as the energy carrier.

The poor often pay higher unit costs for energy than do the rich due to high cost associated with kerosene and LPG. Kerosene stoves are also a major cause of fires. LPG is relatively cleaner and safer fuel, but is poorly distributed. Its high cost is also a problem for poor households because of the initial cost of deposit or outright purchases of gas cylinder and stove compared to a kerosene stove.

Access to modern energy enables development of productive economic sectors in rural areas. Energy services add to economic growth by reducing unit costs. Additionally, if connected to the national grid, people would benefit from subsidised tariff rates. In the absence of modern energy services, the workers, teachers, doctors and nurses are reluctant to live in rural areas.

In the recent years, technological developments in small hydropower, biomass utilisation, wind energy and solar photovoltaic systems have created new opportunities for rural development. The decentralised rural electrification (DRE) is a proven competitor for grid extension.

The new renewable energy (RE) is still in its initial stages of development, and has not made any notable contribution to national electric supply. The government has set a target to generate 2,700MW electricity through renewable by 2015.

Currently, photovoltaic (PV) technology is being used for stand-alone rural telephone exchanges, repeater stations, highway emergency telephones, cathodic protection, refrigeration system for vaccine and medicines in hospitals, etc. Solar energy can be used to warm and cool buildings, heat water for industrial and domestic purposes, distil water and dry the agriculture products etc.

In Balochistan, 77 per cent of the population lives in the rural areas. The population density is very thin. About 90 percent of villagers are yet to be electrified. These villages are separated by large distances with absolutely no approach roads. Transmission lines are very expensive and there is no chance of grid connection in the near future. These conditions favour development of solar energy for off grid electric supply. With rising fuel prices, most of the solar energy technologies are becoming economically viable.

Along the coastline and in number of North-West Frontier valleys Pakistan possesses about 50,000 MW of economically exploitable wind-power potential. The sea coast is about 1,120 kilometer long and has a rural population of about 10 million people. Most of small coastal villages do not have access to electricity, which could be supplied through the use of wind power, available all year round in these areas.

Unfortunately, at present there is almost no share of wind in the energy mix. However, about 30 wind mills for pumping water have been installed on experimental basis in different parts of Sindh and Balochistan. The experiment suffered due to low quality equipment and lack of proper infrastructure.

Research has identified Pasni and Jivani as the prospective sites for use of four kW and 20 kW wind machines while locations of Karachi and Ormara can utilise wind power throughout the year using four kW machines. Small wind unit do not need grid system and can be deployed locally in rural and remote areas for generating electricity and pumping water for irrigation purposes.

Small hydropower plants are an alternative that has emerged as a desired option, especially for hilly terrain where natural and manageable waterfalls are abundantly available. Within the range of small hydro power, mini-hydro refers to schemes below one MW, micro-hydro below 100 kW and pico-hydro below for five kW. Although these technologies could be regarded as small hydro power, they have specific technical characteristics that warrant their own definition. Generally speaking, micro- and pico-hydro technologies are used in developing countries to provide electricity to isolated communities where the electricity grid is not available, whereas mini-hydro tends to be grid connected. In most of the cases, no dam or reservoir storage is involved in pico-, micro and mini-hydro schemes.

In fact, PCRET has implemented 290 micro-hydro power (MHP) schemes in FATA and the northern areas with a total capacity of 3.5MW, ranging from 3-50kW per plant, with the participation of local community. All of these plants are run-of-river type in the low (four meter) to medium (30 meter) head range.

Similarly, Aga Khan Rural Support Programme (AKRSP) has constructed 171 micro- hydro units providing electricity to around 17,000 households in the remote and isolated region of northern areas, and currently provides 11,000 households with electricity at remote locations.

These plants not only provide electricity for light at night but are also used to run small industrial units such as flour mills for wheat and maize threshing, and cotton ginning during day time when electricity is not required for lighting. Once the plant is installed, the local community takes the operating responsibility.

A major advantage of micro hydro is that it can be built locally at a relatively low cost. For instance, imported turbine sets generating up to 50 kW cost nearly $500--1000 per kW, while the local manufacturers offer facilities for turbine manufacturing at $170--250 per kW, with marginally reduced turbine efficiencies. The cross flow turbine used by PCRET and AKRSP are manufactured in local workshops.

The costs of local manufacture can be reduced by developing local engineering capabilities and advisory services. Unfortunately, turbine used by PCRET and AKRSP is manufactured in local workshop having no design or quality control facilities. In order to accelerate the development and enhance the performance of small hydro power, it is imperative to benchmark the work of the SHP industry to identify and adapt the proven best practices of the world leaders in the industry. As the huge potential of hydro power remains as yet untapped, there is a great potential for benchmarking in the SHP industry.

Decentralised renewable energy systems can also help reduce energy distribution losses and result in system-wide and national efficiency gains. Mainstreaming of renewable energy and greater use of indigenous resources can help diversify the energy mix and reduce dependence on imported fossil fuels, thereby militating supply disruptions and price fluctuation risks. In addition, costs and risks relating to fuel stocking, transportation, and temporary substitute arrangements are also irrelevant for renewable energy systems, except for backup purposes.

High investment but low operating cost is a common characteristic in renewable and advanced energy systems. Because of this, most of these energy systems are not very cost-competitive with other conventional systems on the basis of the initial investment cost. However, as these systems have much lower operating cost compared to conventional systems, the overall cost of energy appears much more attractive on the basis of life-cycle analysis. Moreover, when, due to the non-polluting nature of their operation, environmental credit is given to these sources, many of them appear cost-competitive with conventional technologies.

Chopping apple tree for firewood

2008-04-21T04:33:00.001-07:00

Source: http://dawn.com/2008/04/21/ebr2.htm

By Dr Zafar Iqbal & Hasaan Khawar

THE government is considering raising money through exchangeable bonds from the international financial market. An exchangeable bond comes with an embedded option to exchange the bond for the stock of a company at some future date under certain terms and conditions.

The company linked with the proposed exchangeable bonds, in this case, is likely to be Oil and Gas Development Company Limited (OGDCL), a prized strategic asset with majority share held by the government.

Apparently, the option of exchangeable bonds has surfaced after the government has been advised by some foreign banks that the other alternatives may not be viable. Despite the urgency and gravity of the matter, the government must consider a few key questions, before going for such an option. While on the broader level, the issue a fortiori, highlights the need to review the overall finance and debt policy on the micro level, it raises some important questions like why, if at all, the exchangeable bonds are more feasible than other options.

What is likely to be the impact of such a step on OGDCL’s shareholding? Are there any alternative options, which are better than exchangeable bonds? And last but not the least, is such a step aligned with the privatisation policy?

Last time, in 2004 when Pakistan ventured into the global debt market by launching Eurobonds worth $500 million, the foreign exchange reserves were at $12 billion and rising. The Eurobonds offering resulted in huge over-subscription, which was seen by the then government as a sign of confidence of international financial community in Pakistan’s economy.

The critics however, at that time, questioned the rationale behind raising money from the international capital market in the presence of such a heavy pool of foreign exchange reserves. The government was quick to defend its policy and claimed that the reasons for raising money were strategic in nature as the country was coming out of IMF’s programmes and such a step would set the tone for future capital-raising initiatives.

Unfortunately however, only four years later, the strategic premise, taken by the last government, seems to be falling apart, as the government has been advised not to float Eurobonds. Moreover, the widening current account deficit, poised to exceed $12 billion for FY 2007-08, has also raised serious questions about how much money the government is planning to raise through these bonds. The situation might be an indicator of the real story behind the widely acclaimed economic success of the last government. Evidently, the options of floating Eurobonds and ‘Sukuk’ - the two other alternatives considered by the government - have been discarded due to the global credit crunch. The international capital market is going through a severe crisis, ever since the defaults in the sub-prime loan market started sending the exposed banks into a tail spin with Bear Stearns as the most recent victim. As a result, the spread between the lowest investment grade bond and the US treasury in the 10-year segment has more than doubled from some 1.5 roughly a year ago to around 3.4 per cent more recently, making the capital even more expensive.

As a reference point, last time, the government ventured to raise dollar debt in the international capital market, its bonds were rated B+ i.e. below investment grade. More recently, the debt traded at as high a spread as 4.4 per cent over US Treasuries. This problem is further compounded by the fact that Standard and Poor’s has maintained a negative outlook on Pakistan, quoting economic and political risks facing the newly elected government. While all these reasons can be cited for not floating Eurobonds, which are a form of unsecured bonds, one may wonder why the ‘Sukuk’, the Islamic form of secured bonds offering a protection to investors against default, are ruled out given the phenomenal growth that this sector of Islamic finance has experienced over the past some six years, especially in the Middle East.

Even if the reason for global credit crunch for not floating Eurobonds and ‘Sukuk’ is accepted on its face value, one may question the rationality behind floating exchangeable bonds and not going for other alternatives. The exchangeable bonds yield lower than the bonds of comparable maturity and risk but give the holders the right to exchange their bonds for the shares of a company at a pre-specified price. They not only give the investors option to invest in a company but also offer some inflation protection, as the exchangeable bonds trade like bonds when the share price is far below the exchange price but trade like stocks when the share price is above the exchange price.

While this is a reasonably attractive proposition for investors, it lowers the cost of capital for the borrower but caps its upside gains on shares to the conversion price. One therefore, may argue that if the exchangeable bonds offer the right to bond holders to buy the shares only on the upside, i.e., if the shares are doing well, why the government instead is not considering offering Global Depository Receipts (GDR) for OGDCL instead of floating exchangeable bonds.

If, however, it was felt that the time was not ripe for such an option then one innovative method worth evaluating is increasing the leverage of OGDCL through an international corporate bond issue, the proceeds of which are paid out in dividends to the shareholders with the government as a major beneficiary.

Another possible option, which apparently the government has disregarded so far is private placement of the government bonds, which may be far better considering that only a few years ago, the Eurobond offering was more than four times over-subscribed. One final thought in this regard could be to tap foreign currency holdings of non-resident Pakistanis through attractive long-term deposit schemes, an option that India once actualised successfully. Needed also is a close examination of the ‘Hundi’ channel so as to come up with methods to route it out to improve slippage in remittances.

Coming back to the issue of exchangeable bonds, it is also not clear that how the proposed offering is linked with the privatisation policy, currently under review. Mr. Naveed Qamar, who has recently taken over the portfolio, has vowed to make the privatisation programme more popular among the people and to transfer its benefits to the common man.

OGDCL is a strategic asset for Pakistan and is the local market leader in terms of reserves, production and acreage. In an environment where industrialised and fast growing industrialising countries (e.g. China) are building stakes in the oil sector worldwide, any decision to privatise OGDCL must be critically reviewed and be made part of the overall privatisation policy.

Linking OGDCL’s shares with the issue of exchangeable bonds is likely to put OGDCL on a tight leash, as the exchangeable bonds generally ensure the holders protection against equity dilution, hindering the future privatisation efforts for OGDCL.

The decision to offer exchangeable bonds therefore needs to be critically evaluated to see if it really is the best option to raise money. Above all, the policy of debt financing and debt management itself should be thoroughly examined to make sure that as a nation, we are not chopping up the apple trees for firewood. ( The writers are faculty members of FAST-NU, Lahore campus.)

Food, fuel and fiscal crises

2008-04-21T04:31:00.000-07:00

Source: http://dawn.com/2008/04/21/ebr1.htm

By S. M. Naseem

The sky-rocketing food prices have emerged as the new crisis not only in Pakistan, but also on the global economic horizon, eclipsing the already looming fuel and financial crises, which had been dominating the headlines.

The world is thus engulfed in a new hydra-headed crisis, with three essential components: food, fuel and finance. The three components have different geographical origins and their effect on different segments of the globe and their inhabitants is highly uneven. But the transmission of these crises in the global economy has become much easier and faster since the regime of liberalisation of trade, capital flows, deregulation and privatisation was imposed through the Washington Consensus in the early 1990s in the name of achieving higher growth and reducing global poverty.

Pakistan is affected by all the three components of the mega-crisis in varying degrees. But its economic managers have always tried to deal with such crises individually, rather than as a whole, and in an ad hoc, rather than a systematic manner.

The new government, which has yet to come to grips even with the more immediate problems facing the economy, has hardly given much thought to these issues, while the outgoing government had hardly paid any attention to these developments as it relied on the continuing aid and investment, epitomised by its parroting of the precept of a minimalist role of the government in the economy. However, with the economy once again in dire straits and these external shocks looming like a meteorite to strike any time, it is about time to be prepared for the worst and consider pro-active economic policies – both domestic and external – which can provide some protection against them, at least to those most vulnerable to them.

Although the food crisis is now a world-wide phenomenon, ordinary Pakistanis are more concerned about whether to buy an additional nan or a 10kg atta bag (the minimum size carried by utility stores, which costs as much as the daily minimum wage) or to buy medicines, shoes or books for the child or to walk five miles to work to save the enhanced bus fare than about knowing how the markets are loaded against the poor, both at home and abroad.

The government in its zeal to publicise its “stellar” economic performance and growth record, did not pay much attention to the needs of the poor. It mistakenly believed that the government could outsource to the market– through the “trickle down” effects – the responsibility towards protecting them against any calamity, such as the one stalking them now in the shape of food inflation.

The current food crisis in Pakistan is often blamed on the past government’s ineptitude – wilful or otherwise – in over-estimating last year’s wheat crop and in allowing the export of 0.5 million tons of wheat and then having to import 1.7 million tons of wheat at much higher prices, costing about $1 billion.

Plausible and reprehensible as this may be about the culpability of a discredited regime, it oversimplifies the complex issues underlying the current food crisis, which are not unique to Pakistan. From Haiti to Hanoi, the food crisis is rearing its head in all corners of the globe, especially – though not exclusively – in the developing world, where food consumption constitutes up to 70 per cent of the family budget.

A dramatic rise in the worldwide cost of food is provoking riots in many developing countries where millions more of the world’s most vulnerable people are facing starvation as food shortages grow and cereal prices soar.

It threatens to become the biggest crisis of the 21st century – a century in which poverty is supposed to become history. However, unlike the past, food shortages and famines are not the result of the Malthusian spectre of population growth – which most developing countries have managed to control dramatically in the last half-century – or even the Ricardian concern about decreasing returns, but much more the result of the inequalities of income and the growing geographical disparities – both within and across national borders – in the degree of development and incidence of poverty. Some of the problems facing these countries are structural and global, rather than cyclical or transitory and contextual or domestic, in nature. Among the structural problems on the supply side are climatic changes, natural disasters (such as tsunami and earthquakes) and the decline in productivity as a result of the petering out of the Green Revolution. These factors have had particularly adverse impact on the access to land and other income-earning assets (e.g. coastal catchment areas for fish-farmers or terraced lands in mountainous areas) of the poor, whose incomes have fallen, while average per capita incomes have shown steady increases.

On the demand side, the structural shifts have arisen from a rise in the incomes of middle classes and the shifts from food grains to cash crops and the increase in demand for processed foods, such as bakery products and fast foods, as well as increase in poultry and meat consumption. The latter has also led to increase in the acreage and production of corn used in raising livestock and poultry – it takes eight kgs of grain to produce one kg of beef – at the expense of wheat and other food crops.

As a result of globalization, there has also been considerable increase in demand for agricultural exports, especially of non-food crops, such as vegetables and fruits, reducing the acreage for and supply of food crops. Further, the rapid pace of urbanisation, especially in Pakistan, has made severe encroachments on farmlands in contiguous areas, which also results in the diversion of irrigation water to meet urban needs.

Water is likely to soon become as scarce as oil, the most important ingredient of the second major global crisis, i.e. that of fuel or energy

With the price of oil per barrel likely to remain in triple digits in dollars (if not in euros), it has also both direct and indirect effects on the pocketbooks of ordinary people. Transport costs, which feed into all other economic activities, are the main carriers of inflationary pressures from this source.

The rise in oil prices has also had the inadvertent effect of increasing corn production for the sake of producing ethanol as a partial substitute for oil, but resulting in the lower production of consumable food grains and raising corn prices.

The other main effect of the fuel crisis is the generation of electric power, which affects both industrial and home-based activities that are playing an increasing role after the introduction of computers, internet, cell-phones and other electronic gadgets. This has led to increased load-shedding with consequential loss of working days in factories and wages for the workers.

Rising transport costs, load-shedding and food inflation are conflating to produce a combustible bomb of social unrest, which may prove more potent than the terrorist threat that has preoccupied public attention.

The rising onslaught of consumerism in which Pakistan has always had a lead has further aggravated the problem and has resulted in imports rising much faster than exports and giving rise to unsustainable current account and fiscal imbalances (as much of the domestic energy consumption is subsidised).

This leads us to the third most important crisis in the global arena, which could engulf the world into a deep recession comparable to the Great Depression of the 1930s, which also started in the US, with incalculable political and economic consequences.

The present financial crisis in the United States owes its origin in the sub-prime crisis triggered by the housing bubble which started sputtering two years ago and was itself the result of the central bank’s efforts to combatan earlier recession in the wake of the bursting of the dotcom boom in 2001, through a series of interest rate reductions.

The US economy’s growth after that recession was largely jobless, and the Federal Reserve remained deeply concerned about the possibility of Japanese-style prolonged economic stagnation. What the US central failed to do, however, was to prevent the banking sector from financing the housing boom without due diligence and prescience about the consequences of indiscriminate lending.

Over the last two decades banks had lobbied in the US to get the government out of its business and to obtain freer rein for “financial innovation”, such as hedge funds and mortgage-backed securities. However, when the housing bubble burst and the banks’ losses climbed into trillions and when the likes of Citibank and Bear Stearns and UBS came on the brink of bankruptcy, they lobbied for the Federal Reserve to intervene and bail them out through an unprecedented government rescue plan.

Whether this bail-out will succeed in saving the United States’ financial system on which the global economy rests or whether it would result in a “de-coupling” of the US economy with the rest of the world remains to be seen.

The structural shifts taking place in the global economy need to be factored in to the economic management of Pakistan, along with the domestic political imperatives emanating from the 18 February elections, by the country’s new economic managers.

There is a need for new thinking and new institutions, as well as the revival and re-tooling of the old institutions, such as the Planning Commission, the National Tariff Commission and the Security and Exchange Commission, along with the country’s think tanks and NGOs to prepare Pakistan for facing the challenges of the domestic and global crises.