Pakistan Economy - News & Updates - Archive

[Neo]

ISLAMABAD, July 28: President Pervez Musharraf on Friday called for fast-track efforts to translate the geo-strategic importance of Pakistan into economic opportunities for the country.

He was presiding over a high-level meeting which was also attended by Prime Minister Shaukat Aziz.

The meeting reviewed initiatives that were being taken to convert Pakistan into a developed, industrialised and knowledge-based economy by utilising its geo-strategic location as an energy, transport and industrial corridor for the countries of the region, including the Middle East, the Central Asian Republics, China, South Asia and South-East Asia.

President Musharraf said that the Gwadar Port can play a major role to achieve this objective and emphasized the need for fast-track development of rail, road, fibre optics, oil and gas pipeline linkages with the rest of the country and the region.

He said all ministries and departments concerned need closer interaction and coordination for achieving the desired objectives.

The president and the prime minister said continuity of policies of the last seven years had brought major dividends for the country in terms of macro-economic development, industrialisation and infrastructure development.

The president expressed firm commitment that these policies would be ensured and sustained in the medium and long term so that the fast-paced economic growth could be maintained.

He said the long-term vision of the Gwadar Port as an energy hub and gateway for the countries of the region was in line with the vision for economic prosperity of the country.

The president and the prime minister claimed that marked improvement had been noted in the environment for investment and increase in the quantum of foreign direct investment.

They said there was improved security environment and policies are investor-friendly.

The meeting decided that there would be a policy and supervisory board to provide strategic vision, lay down policy guidelines, ensure timely decisions and regularly review and monitor the progress on various infrastructure and other projects related to the Gwadar Port.

There will also be a steering committee under this Board which will be headed by the deputy chairman of the Planning Commission and will be entrusted with the implementation of the entire process and finalisation of terms to achieve the objective.

The meeting also decided to create special economic zones in Gwadar and other suitable areas to promote investment, industrialisation and job creation.

The meeting was also attended by the ministers for Industries and Water and Power, governor and chief minister Balochistan, ministers of state for Investment and Petroleum and Natural Resources, deputy chairman Planning Commission, secretary-general Finance, chairman Central Board of Revenue, foreign secretary, chairman National Highway Authority and advisor on Energy.

 

[Neo]

Recent growth performance of the economy has been among the reasons for optimism on the part of policy-makers. According to officials, sizable gains in per capita income (6.3 per cent in 2004-05 and 4.5 per cent in 2005-06) and enhanced consumer spending are the fruits of the measures taken by the government to put the economy on an even keel after the missteps of the past.

While lauding the economic turnaround in recent years, it is also advisable to take into account the risks that may hinder achievement of medium-term growth targets. Certain trends in the economy reveal that some slowing down from the fast paced growth of the last three years may well be necessary if we are to avoid exacerbating inflationary pressures and a balance of payments problem.

It is notable that Pakistan’s growth on the back of a consumption driven boom has taken place against relatively low rates of capital formation. Comparing Pakistan’s rate of investment vis-‡-vis other countries it is apparent we are under-investing in our infrastructure - roads, power grids, ports etc - as also our productive capacity. The following data shows that gross investment (which includes investment undertaken to replace worn out infrastructure) as a percentage of GDP in Pakistan has been lower than in other countries that have achieved similar or a higher average rate of growth in recent years. (An alternative explanation for a sustained period of higher growth that could occur despite lower capital investment in terms of what an economist would call greater “total factor productivity” - the greater efficiency in production of all inputs used including labour and capital - seems implausible in Pakistan’s case.)

To some extent the relatively high rate of growth in Pakistan has occurred because of the past availability of underutilised industrial capacity. However, now that the economy has used up its excess capacity and because of inadequate expansion of industrial and infra-structural capacity in recent years, it is likely that greater consumer spending will spill over into higher inflation as well as increased imports. There are several risk factors of concern.

First, oil prices could well go higher before they go any lower since worldwide oil demand and supply are finely balanced and any disruptions in oil supply for whatever reason could send oil prices into the stratosphere. A further oil “shock” would cascade throughout the supply chain and add to cost pressures not to mention the burgeoning deficit on the current account of the balance of payments.

Second, one of the major weaknesses of the present government’s economic performance is the lackluster growth of the agriculture sector. For the period 1999-00 through 2005-06, the compounded annual growth rate in agriculture sector value added was a meager 2.3 per cent - marginally higher than the rate of population growth. In sharp contrast, during the preceding 6 years (1992-93 / 1998-99) of relatively lower overall economic growth, the compounded annual growth rate of agriculture value added was significantly higher at 5 per cent.

What is disturbing is that total investment (public and private) in the agriculture sector over the last 6 years has been steadily falling not only as a percentage of agricultural value added but even in real (i.e., inflation adjusted) rupee terms. With a growing population and the possibility of weather or pest-related shortfalls in wheat and/or cotton production, we could well have a situation of rising food prices and/or a shortfall of raw cotton that could undermine our export prospects.

Why has agriculture been the laggard? In a rare moment of candor the author(s) of the latest Pakistan Economic Survey admits to the deficiencies in government policies towards agriculture in the following words: “The exclusive concentration of the successive governments to four major crops, namely, wheat, cotton, sugarcane and rice and no or little effort to increase yield per acre or no policy support to diversification of agriculture sector are mainly responsible for the decline in the {GDP} share of this sector. These four major crops only account for one-third of agricultural value added while rest of the two-third has received almost no attention from all the governments.” The author(s) might have added that had more attention been paid to the “rest of the two-third” there would have been greater headway in reducing poverty levels as the majority of the poor in this country live in the rural areas.

Finally, the amount of liquidity sloshing around in the economy has contributed to inflationary pressures on the demand side. The State Bank of Pakistan data reveal that the (broad) money supply has been increasing by an annual average of 18 per cent over the last four yearsóhigh by any standards. A sustained rise in the quantum of bank credit to households has undoubtedly stimulated purchases of all types of consumer goods but has also added to pressures on the current account of the balance of payments as many consumer durables manufactured/assembled in Pakistan depend on imported components (not to mention the additional oil imports required to meet the ballooning energy requirements of the growing number of motor vehicles as well as other consumer durables). With the level of foreign exchange reserves currently only around 6 months of projected imports, any further widening of the trade gap will exert downward pressure on the foreign exchange value of the rupee.

Cognizant of the growing imbalances in the economy, the State Bank of Pakistan has signaled its intention of reducing inflationary risks by recently raising commercial banks’ liquidity ratios; this will curtail their ability to lend and therefore reduce demand pressures. However, the government’s deficit spending may neutralise the central bank’s tightening and thus even sharply higher lending rates may not be sufficient to curb inflationary pressures and corresponding balance of payments problems. Hence the government needs to be vigilant on the fiscal front and should cut back on its non-development expenditure.By I Hussain

Recent growth performance of the economy has been among the reasons for optimism on the part of policy-makers. According to officials, sizable gains in per capita income (6.3 per cent in 2004-05 and 4.5 per cent in 2005-06) and enhanced consumer spending are the fruits of the measures taken by the government to put the economy on an even keel after the missteps of the past.

While lauding the economic turnaround in recent years, it is also advisable to take into account the risks that may hinder achievement of medium-term growth targets. Certain trends in the economy reveal that some slowing down from the fast paced growth of the last three years may well be necessary if we are to avoid exacerbating inflationary pressures and a balance of payments problem.

It is notable that Pakistan’s growth on the back of a consumption driven boom has taken place against relatively low rates of capital formation. Comparing Pakistan’s rate of investment vis-‡-vis other countries it is apparent we are under-investing in our infrastructure - roads, power grids, ports etc - as also our productive capacity. The following data shows that gross investment (which includes investment undertaken to replace worn out infrastructure) as a percentage of GDP in Pakistan has been lower than in other countries that have achieved similar or a higher average rate of growth in recent years. (An alternative explanation for a sustained period of higher growth that could occur despite lower capital investment in terms of what an economist would call greater “total factor productivity” - the greater efficiency in production of all inputs used including labour and capital - seems implausible in Pakistan’s case.)

To some extent the relatively high rate of growth in Pakistan has occurred because of the past availability of underutilised industrial capacity. However, now that the economy has used up its excess capacity and because of inadequate expansion of industrial and infra-structural capacity in recent years, it is likely that greater consumer spending will spill over into higher inflation as well as increased imports. There are several risk factors of concern.

First, oil prices could well go higher before they go any lower since worldwide oil demand and supply are finely balanced and any disruptions in oil supply for whatever reason could send oil prices into the stratosphere. A further oil “shock” would cascade throughout the supply chain and add to cost pressures not to mention the burgeoning deficit on the current account of the balance of payments.

 

[Neo]

Second, one of the major weaknesses of the present government’s economic performance is the lackluster growth of the agriculture sector. For the period 1999-00 through 2005-06, the compounded annual growth rate in agriculture sector value added was a meager 2.3 per cent - marginally higher than the rate of population growth. In sharp contrast, during the preceding 6 years (1992-93 / 1998-99) of relatively lower overall economic growth, the compounded annual growth rate of agriculture value added was significantly higher at 5 per cent.

What is disturbing is that total investment (public and private) in the agriculture sector over the last 6 years has been steadily falling not only as a percentage of agricultural value added but even in real (i.e., inflation adjusted) rupee terms. With a growing population and the possibility of weather or pest-related shortfalls in wheat and/or cotton production, we could well have a situation of rising food prices and/or a shortfall of raw cotton that could undermine our export prospects.

Why has agriculture been the laggard? In a rare moment of candor the author(s) of the latest Pakistan Economic Survey admits to the deficiencies in government policies towards agriculture in the following words: “The exclusive concentration of the successive governments to four major crops, namely, wheat, cotton, sugarcane and rice and no or little effort to increase yield per acre or no policy support to diversification of agriculture sector are mainly responsible for the decline in the {GDP} share of this sector. These four major crops only account for one-third of agricultural value added while rest of the two-third has received almost no attention from all the governments.” The author(s) might have added that had more attention been paid to the “rest of the two-third” there would have been greater headway in reducing poverty levels as the majority of the poor in this country live in the rural areas.

Finally, the amount of liquidity sloshing around in the economy has contributed to inflationary pressures on the demand side. The State Bank of Pakistan data reveal that the (broad) money supply has been increasing by an annual average of 18 per cent over the last four yearsóhigh by any standards. A sustained rise in the quantum of bank credit to households has undoubtedly stimulated purchases of all types of consumer goods but has also added to pressures on the current account of the balance of payments as many consumer durables manufactured/assembled in Pakistan depend on imported components (not to mention the additional oil imports required to meet the ballooning energy requirements of the growing number of motor vehicles as well as other consumer durables). With the level of foreign exchange reserves currently only around 6 months of projected imports, any further widening of the trade gap will exert downward pressure on the foreign exchange value of the rupee.

Cognizant of the growing imbalances in the economy, the State Bank of Pakistan has signaled its intention of reducing inflationary risks by recently raising commercial banks’ liquidity ratios; this will curtail their ability to lend and therefore reduce demand pressures. However, the government’s deficit spending may neutralise the central bank’s tightening and thus even sharply higher lending rates may not be sufficient to curb inflationary pressures and corresponding balance of payments problems. Hence the government needs to be vigilant on the fiscal front and should cut back on its non-development expenditure.

Country Gross Gross

Investment Investment

as % of GDP as % of GDP in 2000 in 2004

Pakistan 17.4 18.1

Bangladesh 23.0 24.0

China 36.3 45.3

India 22.6 22.9

Indonesia 22.2 22.8

Malaysia 27.3 22.5

South Korea 31.0 30.2

Singapore 32.5 18.3

Sri Lanka 28.0 25.0

Thailand 22.8 27.1

Source: Asian Development Bank

http://www.thenews.com.pk/daily_detail.asp?id=17578

 

[Owais]

SBP declares a tight monetary policy KARACHI: Governor State Bank of Pakistan Dr. Shamshaad Akhter has announced to tighten its monetary policy further.

This she announced here today at a press conference.

During the press conference, she also announced 0.5 per cent rise in discount rate. After this increase, banks now could get loans from State Bank’s discount window at 9.5 per cent rate in place of 9 percent, she said.

‘To rein the inflationary trend in the country, we cannot outgo the declared discount rate under the present circumstances,’ she said adding, ‘the target of eight per cent inflation of previous year was achievable only by the tight monetary policy of SBP.’

She also deemed the target of 6.5 per cent set for the current fiscal year quite attainable.

She briefed the press conference that measures like increasing statutory liquidity requirement (SLR) and cash reserve requirement (CRR) had been taken to control the inflation and further OMO operations were going to be executed.

 

[Owais]

Construction of Pakistan’s first industrial park from Aug 14: PM

KARACHI: Prime Minister Shaukat Aziz said Saturday that the construction Pakistan’s first industrial park would begin from August 14.

He stated this while addressing a ceremony to unveil the foundation stones of two significantly important projects of establishment of Korangi National Industrial Park and KarachiTools, Dies and Moulds Center.

These projects would play a vibrant role in boosting economic activity, fast industrialization and bring it globally competitive and productive.

The Prime Minister said that economic transformation policies of the present government have already started producing dividends with poverty level coming down and making a dent in unemployment.

"We will ensure the continuity of the policies and there would be no u-turn", he declared amidst big applause.

Stressing on significance of greater public-private partnership, the Prime Minister said, "We are committed to transforming Pakistan and together this partnership will create a Pakistan which will be prosperous, which is helpful in improving the quality of life of people and helps us in meeting global challenges".

He said although we have brought poverty level down and made a dent in unemployment, yet there are still poor and unemployed people out there and we have to see these things by maintaining the course and continuity of policies with no u-turn.

 

[Owais]

Rise in banks' figures termed 'window-dressing'

KARACHI (July 30 2006): The State Bank of Pakistan (SBP) estimates that the 44 percent increase in deposits and 50 percent rise in credit at the end of June FY06 over the June FY05 figures were mere "window-dressing of balance sheets" by banks to show improved performance.

Describing it as a deceptive practice, the SBP Statement of Monetary Policy, issued on Saturday, said that credit officers in a bank may encourage their clients to fully consume their credit lines; the amount would then be simultaneously credited to the clients' current account.

"This essentially is a book entry as the credit extended is not used to generate any economic activity. Similarly, a business officer in a bank may persuade his/her client to create temporary short-term deposits with the bank. Such deposits are withdrawn immediately after closing of accounts," said the SBP.

The increase of Rs 113.2 billion in deposit base of banks and of Rs 60 billion in credit did cause a surge in monetary growth before end-June. But after two weeks into July 6, Rs 49.6 billion in deposits were withdrawn and Rs 30 billion in credit to private sector were retired. The end-June increase in the stock of money supply (M2), however, did not reverse as it shifts to rise in money in circulation, the SBP noted.

 

[Neo]

ISLAMABAD (July 30 2006): President General Pervez Musharraf on Saturday approved a mass transit railway system for eight large cities, a Lahore-Rawalpindi high-speed rail link and a new track from Havelian to Khunjerab Pass to boost trade with China.

The President, speaking at a presentation on 'Modernisation and future plans of Pakistan Railways' at the Pakistan Railway Carriage Factory here, called for improving the signalling system, conversion to standard gauge rail track, and provision of rail track through Kohat Tunnel.

The President is the first head of state to visit the Carriage Factory. He said that the Gwadar deep-sea port would provide trade and economic linkages to regional countries through a modern communication infrastructure, including rail network.

Referring to Pakistan's geo-strategic location, he said that the country is a potential economic and trade hub for Central Asian Republics, Gulf, the Middle East, Western China and South Asia.

He said there was need to provide to the masses modern communication facilities through a fast and efficient network of roads, ports and rail tracks. Railways Minister Rashid Ahmed told reporters after the meeting that a number of important decisions were taken at the presentation for expansion of railway network and to provide better facilities to the travelling people.

The President gave approval for a fast train to run between Rawalpindi and Lahore, and Karachi, which would run at a speed of 250 km per hour, on a completely new alignment, between Shahdara and Rawalpindi, covering the 290 km distance in 90 minutes.

The President also approved proposals for carrying out pre-feasibility studies for laying a rail track between Havelian and Khunjerab Pass, and a track from Chaman to Spin Boldak on the Afghan border. Approval was also given to a pre-feasibility study for laying a track along the Kohat tunnel.

The President also directed preparation of feasibility reports for introducing mass transit trains in eight major cities. "Your focus and objective should be to provide better transit facilities to the people," the President said. He was appreciative of the Railways Minister, and said: "Well done, Sheikh Sahib".

The President was also informed in detail about the future expansion plans of Pakistan Railways. According to these plans, the Railways was conducting a feasibility study to link Gwadar sea-port with Quetta at an estimated cost of Rs 75 billion. New tracks would be laid between the two cities in the first phase, which would be extended later to Chaman and Kandhar in Afghanistan.

Pakistan has already offered China a rail linkage through Khunjarab Pass to Gwadar, providing it shortest route for expanding its trade with the Gulf and the regions beyond.

The pre-feasibility study will examine possibility of finding the most economical route to link Havelian with Khunjrab Pass and onward link through Chitral with Tajikistan.

The President was told that Pakistan Railways was acquiring 69 locomotives from China at a cost of Rs 5.89 billion, and 33 of these have been assembled at Pakistan Railway Carriage Factory, while 20 would be received from China next year.

The President was informed that 24 imported locomotives from China, that had developed cracks, had been repaired and were now operative. Rashid said that Pakistan Railways was also studying prospects of acquiring technology from Germany, USA and other countries to improve its rail infrastructure.

He said that under the track rehabilitation plan, 2,083 km track would be improved at a cost of Rs 9.4 billion, by December 31, 2007, and would also include upgradation of level crossings, rehabilitation of bridges and fences.

The President was informed that track from Lodhran to Khanewal would be dualised at a cost of Rs 3.29 billion, and was scheduled to be completed by the end of this year. It will also include modern signal equipment at a cost of Rs 1.2 billion.

The dualisation of 246 km Khanewal-Raiwind track would cost Rs 5.5 billion and would be completed by June next year. The Railways also plans to produce 600,000 sleepers per annum in collaboration with the private sector.

The Pakistan Railways is working on a plan to produce high capacity wagons for qualitative improvement in its cargo carrying ability. Around 1300 wagons are being assembled at Mughalpura Workshop, Lahore.

The President was informed that Pakistan Railways has also acquired 175 passengers carriages with a new design at a cost of Rs 7,776 million. Of these, 145 have been assembled, while work is on for 30 more. He was also informed about the measures adopted by Pakistan Railways to avert accidents.

Despite heavy rain and standing water at places, the President inaugurated the High Speed Coaches Workshop. He shook hands with the workers, including Chinese workers who waved and clapped as he inspected various sections of the facility. The President also inspected the passenger coaches acquired from China and the ones being built in Pakistan. He was appreciative of the quality and announced Rs 1000 cash for each of the 1200 workers, including the daily-wage earners. The President was presented models of a Chinese train and engines by Chinese engineers.

 

[Neo]

Sunday, July 30, 2006

ISLAMABAD: The government is considering providing free of cost land to those investors who will be investing $200 million and more to set up industrial units at the Gwadar Export Processing Zone (G-EPZ), an official told the Daily Times on Saturday.

The proposed incentive package that is being finalized for the Gwadar EPZ also includes this incentive for the investors who will be investing in the G-EPZ when it will be operational, the official added.

The official further informed that at present the cost of land in export processing zones (EPZs) is out of the reach of investors. Increase in the price of land for the setting up of industrial unit has also increased the cost of doing business in the country. With the provision of land free of cost for the setting up of industrial units in G-EPZ will be a major incentive for investors. This will help the government attract local as well as foreign investors in this zone and will ultimately reduce the cost of setting up industrial units in the G-EPZ.

The proposed incentive would be available to both local as well as foreign investors to encourage them to set up industrial units in the G-EPZ. The ministry of industries, production and special initiatives is at present finalizing the proposed incentive package to attract maximum foreign as well as local investment in the G-EPZ. After receipt of comments and proposals from all economic ministries and divisions, the ministry will finalize the package.

The federal cabinet, under the chairmanship of Prime Minister Shaukat Aziz, will approve the package during this calendar year and later it will be announced. The Gwadar Port, which is nearing completion, would be a best destination for local as well as foreign investors for investment. The government is in the process of providing latest basic infrastructure at the G-EPZ so that setting up of industrial units at the zone is completed in the minimum possible timeframe.

The economic ministries and other departments were directed at a high-level meeting held recently to have closer coordination for fast track development of the Gwadar Port, which would translate Pakistan's geo-strategic importance into economic opportunities.

The meeting also decided that there would be a policy and supervisory board, which would be providing strategic vision, lay down policy guidelines, ensure timely decisions and regularly review and monitor the progress on various infrastructure and other projects related to the Gwadar Port.

There will also be a steering committee under the Board that will be headed by the deputy chairman of the Planning Commission and will be entrusted with the implementation of the entire process and finalization of terms to achieve the objective. The government will also create special economic zones (G-EPZ) in Gwadar to promote investment and employment.

The government is aiming to utilize the Gwadar Ports' geo-strategic location as an energy, transport and industrial corridor for the countries of the region, including the Middle East, Central Asian Republics, China, South Asia and Southeast Asia. The

long-term vision of Gwadar Port as an energy hub and gateway to the countries of the region is in line with the vision for economic prosperity of the country.

 

[Neo]

Sunday, July 30, 2006

KARACHI: Prime Minister Shaukat Aziz on Saturday unveiled the foundation stones of two significantly important projects of establishment of Korangi National Industrial Park and Karachi Tools, Dies and Moulds Center and said these would play a vibrant role in boosting economic activity and fast industrialization.

Addressing an impressive ceremony held at the Governor's House, he said that economic transformation policies of the present government have already started paying dividends with poverty level coming down and making a dent in unemployment.

The ceremony was attended, among others, by Sindh Governor Dr Ishratul Ibad Khan, Federal Minister for Industries Jehangir Tareen, Federal Minister Ghaus Bux Khan Mahar, City Nazim Syed Mustafa Kamal, the NIP chairman and the chairman of Karachi Tools, Dies and Moulds Center.

"We will ensure the continuity of the policies and there would be no U-turn", he declared amidst big applause. Stressing on significance of greater public-private partnership, the prime minister said: "We are committed to transforming Pakistan and together this partnership will create a Pakistan which will be prosperous, which is helpful in improving the quality of life of people and helps us in meeting global challenges."

He said although we have brought poverty level down and made a dent in unemployment, there are still poor and unemployed people out there and we have to see these things by maintaining the course and continuity of policies with no U-turn.

The prime minister pointed out that besides promoting industrial activity through these two important initiatives, the other objective is to promote an environment of creating investment.

Speaking about Industrial Park, the first in Pakistan being setup here, the prime minister told the gathering that one of the major challenges here is to start new business.

Sometime initiators go from pillar to post in finding a place, right environment, infrastructure which is very frustrating, he observed and said our effort is to minimize this running around to encourage the people, rather discouraging them and designing an environment which is attractive, modern and cost effective.

Mr Aziz said the country has a land bank and quite a few plots all over the country, which are lying there or encroached upon by the people. He said if prime property is not developed, one of the risks in Pakistan is that it will be encroached upon by someone.

So, he said, the government has decided that whatever plots are available in different cities with the federal government will be converted into productive use and that was the basic driver of this whole programme of establishment of Industrial parks. He appreciated KNIP Chairman Salman Burney who looked beyond Pakistan to get expertise from Singapore for the establishment of this industrial park here.

The prime minister emphasized that while giving out these plots, it should be mandated that building code, design code and standards must be adhere to, otherwise there will be total mismatch of what our vision is.

 

[Owais]

SBP raises discount rate by 0.5 percent, calls for issuance of more PIBs

KARACHI (July 30 2006): While raising the discount rate by 50 basis points, ie, 9 to 9.5, on Saturday, the State Bank of Pakistan called upon the government to issue additional long-term papers (PIBs) to finance the fiscal gap in FY2007. (Discount rate is that at which banks borrow for 3 days from the SBP.)

The Monetary Policy statement issued by the central bank on Saturday, advocates reduction in the recourse to bank borrowing for budgetary support and instead shifting the burden to non-bank sources, ie, Pakistan Investment Bond and long-term saving certificates issued by the National Savings Centre.

The federal budget FY2007 envisages bank borrowings of Rs 140 billion to meet the fiscal gap and issuance of PIBs of Rs 3 billion only. Business Recorder understands that the SBP had proposed issuance of PIBs worth Rs 60 billion in the first half of FY2007, while the government wanted to issue PIBs worth Rs 40 billion for the whole year. With PIBs worth Rs 37 billion maturing in current financial year, fresh issue will be Rs 3 billion only.

The SBP says: "The right blend of non-inflationary borrowing mix from commercial banks, non-bank and external sources will facilitate achievement of monetary stability."

EXTERNAL DEFICIT: The SBP statement notes that strong demand pressures coupled with trade liberalisation measures are swelling the external pressures on the economy. Rising domestic demand is increasingly being met through imports. Robust gain of 13.3 percent in exports has been eclipsed by the exceptionally strong 30.6 percent increase in imports.

Ironically, the widening trade deficit, in the short run, has probably helped to offset part of the inflationary pressure that emerged due to capacity constraints by augmenting the supply of goods. But, "without matching large non-debt creating inflows, this strategy would eventually lead to a vicious circle of debt creation, exchange rate depreciation and inflation," says the SBP.

Further, the SBP thinks that use of privatisation receipts (through sale of assets to foreign investors) can be an option for financing current account deficit. This, however, is only a medium-run solution as there is a limited supply of marketable assets and profitably run privatised assets would generate dividend outflows in the medium term.

A similar risk, said the SBP, lies in financing the current account deficit through portfolio investment flows. In FY2006, privatisation proceeds and equity portfolio inflows totalled $1.9 billion, which underlines the risk to the economy.

The SBP says that the data shows that while exceptional growth in imports may already be slowing down considerably, export growth is also slowing at the same time. This calls for greater support for exporters and projects to improve logistic chains and infrastructure need to be expedited. This also requires the central bank to be more vigilant against inflation, as price stability will be a key competitive advantage for the country.

Exchange rate adjustment can in theory help in reducing imports and increasing exports, said the SBP. However, such adjustments yield only short-term gains. Moreover this could destabilise the interbank markets with heavy consequent costs, besides feeding into inflationary pressures.

"Large or abrupt exchange rate adjustment (ie devaluation of the rupee) is neither envisaged nor desirable," adds the SBP. With most central banks taking a tighter monetary stance, there is a clear risk of a global economic slowdown, said the SBP. Lower liquidity in global financial markets together with macro imbalances has increased the level of uncertainty for investors and capital will flow to less risky environments.

The rising sovereign spread between US T-bills and bonds from emerging economies suggests that the environment will be less favourable to emerging economies' borrowers in the near future, warns the SBP.

 

[Owais]

EAD finalises 131 pacts with IFIs, foreign governments: transfer of Wapda loans to new entities


ISLAMABAD (July 31 2006): The Economic Affairs Division (EAD) has finalised 131 agreements with different international financial institutions and foreign governments for transferring of Wapda loans to the newly-created decentralised entities, official sources told Business Recorder.

These include Subsidiary Loan Assumption Agreement (SLAAs), Loan Assumption Agreements (LAAs), and Loan Guarantee Agreements (LGAs). However, the World Bank (WB), which is one of the major lenders of water and power sector projects, has refused to sign the agreements on the format prepared by the EAD, saying that the Bank would only sign the pacts on its own format, they added.

Sources said that Wapda had so far submitted 243 agreements, including SLAAs, LAAs and LGAs to the EAD, of which 131 agreements have been signed by the Government of Pakistan (GoP), and sent back to the utility whereas the remaining 112 agreements are in the process for the signature of the EAD secretary.

They said that Wapda informed the EAD at a recent meeting that a draft has been prepared for the 20 UBS loans pending with the companies, which would be handed over to the EAD for vetting by the Debt Management Wing of the EAD and the law ministry.

"The EAD had forwarded one LAA and one LGA to the World Bank for signature by their authorised representative, but the Bank did not send back it to the GoP and rather said they want the agreements on their format," the sources added.

Sources also said the EAD additional secretary is expected to convene a meeting shortly to be attended by World Bank Sector Specialist (Power) Rashid and Pepco Executive Director (Finance) Chaudhary Abdul Qadeer to finalise the format and draft of LAAs and LGAs.

Sources quoted the EAD additional secretary as saying at the meeting that transferring of Wapda loans is now near to completion and noted that it was a tremendous task to get the lender's consent and then unbundle the loans of Wapda and transfer them to the newly-created entities.

"This was not only time consuming, but also nerve-wracking, as it involved many stakeholders who had to be convinced to agree on certain modalities," the sources maintained.

They also said all the stakeholders within the government and outside had their own limitations and viewpoints and they had posed various questions on the modalities of transferring of loans.

Sources said the Privatisation Commission (PC) had expressed displeasure over the slow working of the EAD in seeking lenders consent for transfer of loans from Wapda to the companies and even recommended to the government that all the relent and GoP guaranteed loans of power companies should be converted into equity to make them feasible for privatisation.

"The current debt to equity ratio of respective Discos, Gencos, and NTDC as per the balance-sheets as such that neither prudent financial institutions would venture to finance such entities nor prospective investors would be interested to buy them, including Fesco and JPC, which is in advance stage of privatisation," the sources quoted the Privatisation Commission as saying earlier in one of its summaries to the Economic Co-ordination Committee (ECC) of the Cabinet.

The ECC had converted Discos small loans of Rs 3.988 billion into equity few months ago, even then the Privatisation Commission is of the view that the assumption of small foreign relent loans was not enough to prepare them for privatisation, the sources maintained.

Sources said the Privatisation Commission had also suggested that the restructured power sector entities would not be able to attract investors until their all loans are not converted into equity where adequate deferred credit are not physically available with the Discos.

They said the ECC converted Rs 3.988 billion into equity was taken after the EAD failed to obtain consent from the lenders except Belgium, France, and Kuwait.

It is pertinent to note that upon restructuring and unbundling of Wapda, a number of foreign loans relent by the Government of Pakistan to the utility have been allocated to various successor companies on the principle of liabilities to follow the assets.

 

[Owais]

Sales tax field audit suspension causes Rs 20 billion loss

ISLAMABAD (July 31 2006): The government has suffered a loss of over Rs 20 billion due to suspension of sales tax field audit since July 2004, which also contributed towards deterioration of the tax-to-GDP ratio during last two years.

Sources told Business Recorder on Sunday that the figure has been specified in a report of the Directorate-General of Inspection and Audit, Indirect Taxes, which has strongly criticised suspension of sales tax audit.

They said that the Board had scrapped the report because it contained 'anti-reforms material'. The Board did not agree with the findings of the report. As such the entire study has been quashed. That is why the annual report (2004-2005) of the Directorate General, Inspection and Audit, Indirect Taxes has not been released yet, they added.

Sources said that it has been decided that the report would not be issued as it contains highly objectionable remarks on the reform initiatives and suspension of sales tax audit.

About the suspension of sales tax audit, according to sources, the report said that "the revenue loss due to stoppage of audit is in no way less than Rs 10 billion per annum. Lack of accountability and payment of substandard emoluments were the main causes of rampant corruption by auditors besides harassment to taxpayers".

Sources were of the view that the figure of Rs 10 billion loss per year due to suspension of audit was based on annual detection and audit observations of Rs 10-15 billion in 2003-04.

The detection had led to recovery of billions of rupees in sales tax in 2003-04. If Rs 10-15 billion sales tax detection was made in the past year, then minimum loss due to suspension of field audit would definitely come to over Rs 10 billion per annum, sources added.

Referring to the report, they said that it had also specified that the corrupt auditors and their sponsors (some tax officials) have not been punished since the suspension of field audit. The net result is rampant evasion by unscrupulous persons either by not paying the due amount of tax or by fraudulently claiming refunds. This also contributed towards deterioration in the tax-to-GDP ratio, they said.

 

[Owais]

SPA may be first choice for Gwadar port management

ISLAMABAD (July 31 2006): Singapore Port Authority (SPA) is likely to be the first choice of Government of Pakistan (GoPP) for Gwadar port management SPA's vast experience in handling big ports world-wide is its advantage over the other two parties in the run for the contract.

The officials in Islamabad are pretty confident that SPA can get good business for Pakistan by making Gwadar port an attraction for big shipping lines.

An official said "We are assessing the proposals of all three parties for getting the right group for this mega project but, frankly speaking, our first priority will be a party that can handle the port in an efficient manner, besides bringing maximum shipping lines to Gwadar port to secure maximum business for Pakistan, and SPA is in a better position to meet these requirements."

The other two parties are Dubai Port World of UAE, and China Harbour having a consortium with Cosco, China.

China Harbour's investment plan is also an attraction for Pakistan and the officials would take its all aspects into account before taking any final decision about the contract. China Harbour is interested in setting up a big refinery at Gwadar to supply oil to China, India, Afghanistan, Central Asian Republics and other countries of the region.

A meeting chaired by President General Pervez Musharraf was given a detailed presentation on Gwadar port. It also covered proposals with specific investment plans of the three parties.

The meeting was told that Pakistan was targeting 2011 for bringing Gwadar port in operation with complete infrastructure and best facilities for handling cargoes.

Gwadar will be the best port in the world having an advantage of 18-metre water depth to handle longest and biggest ships with the most modern facilities. Gwadar has natural advantage. Its 18-metre water depth is a natural advantage to Pakistan to build a big port for largest ships.

Gwadar port is seen as a catalyst to give a boost to Pakistan's economy. It will serve as a centre for different corridors to help Pakistan meet its growing demand in different key areas and provide the shortest and viable route to the entire region for supply of energy, quick transportation of goods, world-wide trade and industrialisation.

The officials working on the project are confident that Gwadar port alone will help Pakistan secure $10 billion foreign investment in the next four to five years and would subsequently push its growth rate in double digit by 2018. It would also generate huge business activity in Pakistan and serve as the best facility to other countries of the region to supply their goods to any country of the world in shortest possible time.

The official said the government would expand all kinds of network to provide basic infrastructure to set up industries at Gwadar port and other areas which would be linked to it through roads and train links.

 

[Owais]

Setting up of power plant: KESC invites German firms to carry out study

KARACHI (July 31 2006): The Karachi Electric Supply Corporation (KESC) has invited some German companies to carry out study on setting up nuclear power plant in the metropolis. Nuclear power generation is a viable option that can help in catering to the future power demand of the country.

The Chief Executive Officer of KESC, Frank Scherschmidt, in an exclusive interview with Business Recorder said, "It can be too expansive and take a long in the planning. It may even be politically not acceptable. But we have to sit on it and discuss it. If there is any possibility, we will discuss it."

He said: "This (nuclear power generation) is essential due to climatic change in the world as carbon dioxide is affecting seriously, and we have started influencing our (world) climate."

He said: "A nuclear power station is costly: it is four times costlier than coal based power station. But in the long term it is cheaper in maintenance and production. On the other hand, the same magnitude of solar power system requires 180 square km land to generate power.

"The Karachi Electric Supply Corporation (KESC) is also planning another power generation plant after 2008, for which the corporation is working. In this regard, the power utility is considering other options for power generation like coal and nuclear."

The coal at Lakra is feasible for the corporation and, keeping in view the transmission losses, the power utility may lay its own line from that power station directly to the city, he added.

"The gas-based power generation is the cheapest and cleanest, but it is limited in the country and we have to plan beyond that and consider other means."

Most of electricity generation is based on water, coal, gas and oil and when a power generator runs out of one source, it could switch over to other source. "As far as wind energy is concern, if there is no wind what a producer can do? It could not be switch over to any other means."

He said: "Wind power is not a reliable medium for any power utility. It's considered as an additional source of electricity generation, but no one can rely on it."

Frank said: "We can save primary energy (coal, gas, oil) but we cannot do it as an alternative energy."

He said that nuclear based power generation is under consideration. "But first we are considering the coal based option. The newest technology of coal based power plants reducing the CO2, perhaps gasification of the coal reduces the sulphur and so on."

He said the other solution is the coal on the coast, as coal brought from the international market and shipped to the power station.

"We are in close contact for the future planning of the metropolis. It goes to the north-east of the city. So we need energy there and when we put (install) all at the coast like Korangi and Bin Qasim power plants," he said, adding that "One cannot do anything with electricity without transmission losses."

The KESC faces transmission losses from both Jamshoro link and Hubco link. "Alone if we take up this link Hubco, we have additional power of 20MW (less power losses) instead of Jamshoro link," he said.

He said the power stations should be close to the consumers so this is all to calculate and optimise.

"We have just started internal planning for additional load. When we bring back all pending cases (load) and those producing own electricity comes to corporation, we need more power. There are lots of projects coming that also need additional electricity," he added.

"We have three different plans--long, medium and short term plans--to overcome the on-going power crisis in the city," he added.

The KESC is installing power station at Korangi of 480MW, from which the city would get 120MW in mid-April next year, while 120MW more from that same station will be add in mid-May; another 120MW in June. And the project will be completed in mid-July. The corporation would further enhance its power plant capacity by 270MW later with additional gas based generators on the same system to use same gas.

The corporation would buy power from other producers like Kannup that provide additional 45MW; DHA's water-cum-power plant 80MW; and 11MW. By July 2007, about 605MW additional electricity will be added in the KESC supply system, he added.

Presently, the power demand is divided into many parts such as 1000MW consumed by the industry, 700MW by residential consumers, 400MW by commercial, 100MW by agriculture. On pending load side, 500MW produce by industry to meet their demands, 40MW is pending load to KESC while 200MW is the power shortage of the city which would be doubled (400MW) by 2007.

Frank said KESC is going to introduce merit and incentive based package to its employees soon to increase efficiency of power utility, but could not give the exact time for that package.

 

[Neo]

KARACHI (July 31 2006): An increase in the central bank's discount rate on Monday, along with earlier steps to restrict liquidity, is likely take some heat out of national economy without impacting growth too much, analysts said.

The State Bank of Pakistan (SBP) announced on Saturday its discount rate would go up to 9.5 percent from 9.0 percent from Monday.

Days earlier, it raised banks' mandatory cash reserve requirement to 7 percent from 5 percent, and their statutory liquidity requirement to 18 percent from 15 percent.

"I think the liquidity ratio rise and the hike in discount rate will significantly deflate demand in the economy," said Sakib Sherani, chief economist at ABN Amro Bank in Islamabad.

"As for inflation, food and oil are the big wild cards, but if we do not assume any worst case scenario, I think it will come around the 6.5 percent mark," said Sherani.

The government brought down average consumer price inflation to just under 8.0 percent in 2005-06, after it stood over 9.0 percent a year earlier. For 2006-07, the target is 6.5 percent.

Despite the dampening of consumption and demand, Sherani said the growth rate would lose little, as a better crop performance and capacity building in the industrial sector should keep the economy on track to meet a GDP growth target of 7.0 percent in 2006-07.

For those reasons, analysts foresaw the stock market taking the tighter monetary conditions in its stride.

"May be the stock market will fall 50-100 points around the opening, but we do not expect any major impact," said Mohammed Sohail, director of research at Jahangir Siddiqui Capital Markets.

The KSE-100 index closed at 10,353.52 on Friday, down 0.74 percent on the day, but it had risen through the week on expectations that corporate results out soon will bring good news.

"However, we do expect a 20-30 basis points increase in Treasury bill yields in the upcoming auction," Sohail said.

In the last auction on July 19, the cut-off yield for the benchmark six-month T-bill came at 8.4869 percent. The next auction is scheduled for August 2.

EXTERNAL IMBALANCES:

And while the struggle to manage inflation continues, another major concern for the central bank is a current account balance that has swung from a $1.8 billion surplus in 2003-04 to an estimated $5.7 billion deficit in 2005-06.

"The central bank can play a role in rationalising the external imbalances by curbing aggregate demand, and it is on that track now," said Asif Qureshi, head of research at brokers, Invisor Securities.

It has already taken steps to make cash cheaper for exporters, while the rate hike has made borrowing more expensive for importers and consumers of imported goods.

"They have temporarily delinked the export sector from the T-bill yields and the overall level of interest rates, which is also a move in the same direction," he said.

Earlier this month, the central bank announced a reduction of 1.5 percentage points in its export refinance rate to 7.5 percent, ending its linkage with the six-month T-bills yield.

Qureshi said this was the right time for the central bank to adopt a slightly aggressive monetary posture, as economic growth is expected to be bolstered by a strong farm sector performance.