Pakistan Economy - News & Updates - Archive

[Neo]

May 14, 2007
Economy: a reality check

By Yousuf Nazar

SEVENTY FOUR per cent of Pakistan’s population survives on a daily income of less than Rs120 (or $2) a day according to the recently released World Bank’s World Development Indicators.

While the government uses a different definition of poverty, the international definition of extreme poverty implies daily income of less than $1 and that of moderate poverty, income of $1 to $2 a day. The percentage of Pakistanis living below the poverty line (income of less than $2 a day) is much higher compared with 58, 43 and nine per cent in Kenya, the Philippines and Malaysia respectively.

Given that 74 per cent of people survive on less than the official minimum wage of Rs.4000, it is rather hard and even absurd to argue that any one living on an income of less than the minimum wage is not poor. But that has not stopped the government from claiming a figure of 29 to 34 per cent as the one representing those who are poor.

Furthermore, since even the official inflation rate has doubled from 3-4 per cent in 2002-03 to 7-8 per cent in 2006-07, the claims about any significant poverty reduction appear to be far removed from reality because the poor are most vulnerable to inflation particularly food price inflation which has been persistently higher than the overall consumer price inflation (CPI), which remains stubbornly high at eight cent and is unlikely to come down to this year’s original target of 6.5 per cent despite the central bank’s tight monetary policy.

The debate about the actual poverty levels points to the difficulty of commenting on the true state of the economy and development in a country where the statistics about even some key indicators like the GDP growth, employment, public sector spending, livestock and industrial production are not prepared and published on a quarterly basis; a norm in many developed and developing countries including India, Thailand and Vietnam for example. In the absence of transparent, reliable and regular flow of information, the discussions about the economy can often be quite subjective.

Most official estimates put current fiscal year’s GDP growth to be around seven per cent, driven principally by the services sector and to a lesser degree, by livestock and wheat production. However, other economic indicators like private sector credit, exports, foreign exchange reserves, textile production, and development spending show a deteriorating overall trend that stands in marked contrast to the rosy picture being painted by the government.

The textile industry - with slowing exports, heavy debt-burdens and declining profits - is struggling against its more efficient international competitors although growing cement sales do point to a rise in construction spending. However, the electricity generation – an important indicator of overall economic activity- recorded a slower growth of 9.7 per cent during the first half of FY 2006-07 as compared with 12.9 per cent growth during the same period of last year.

Thanks to a double-digit growth in the banking, telecommunication, and oil/gas industries in FY 2005-06, the tax revenues in the current fiscal year are expected to cross their target of Rs.835 billion. However, the development expenditure for the first half of FY 2006-07 has achieved only 34 per cent of its annual target compared to 45 per cent during the corresponding period in FY 2005-06.

The defence spending appears to be flat but it is not clear how the government accounts for about Rs60-70 billion per year in defence assistance that it receives directly from the United States. On the other hand, the government has not supplied any explanation for the lower level of the development expenditure during the current year. Still, it claims that the fiscal deficit will remain within the target of 4.2 per cent of the GDP. It is possible that the development spending (including spending on higher education) has been curtailed to meet this target.

Also significant is the drop in the bank-lending growth to around three per cent in real terms. A liquidity boom, best represented by a surge in the bank lending and consumption levels, has driven the GDP growth since 2002. During the period July 2006-April 2007, the bank lending growth slowed down to 12.6 per cent in nominal terms compared to 19.8 per cent a year earlier. If one agrees that the bank lending is one of the most critical economic indicators in Pakistan’s context, the economy is likely to slow down in the next fiscal year.

The current account deficit for the first nine months of the current fiscal year has widened to $6 billion ($4.3 billion in the corresponding period last year) and may reach around $8 billion or 5.4 per cent of the GDP – its highest percentage level since 1996-97. This has been caused by 15 per cent deterioration in the trade deficit to about $11 billion during July 2006-March 2007 from $9.6 billion a year earlier, as exports growth of 3.6 per cent has fallen behind an eight cent growth in imports.

However, the record foreign direct investments of $3.9 billion during the first nine months of the current fiscal year ($2.2 billion in the corresponding period last year), $1.7 billion in overall portfolio investments ($1.1 billion last year) and remittances of $3.9 billion ($3.2 billion last year) have prevented a deterioration in the foreign exchange reserves position and have limited the depreciation of Pakistan rupee to only 0.7 per cent against the dollar since July 2006.

The stock market has hit an all time high with foreign investments setting another record of $770 million during a single fiscal year, notwithstanding slower corporate earnings growth. However, the privatisation process – a key driver of the stock market performance since 2002 - appears to have come to a grinding halt, the bidding for the sale of Pakistan State Oil Company has run into legal and other problems, and it now looks improbable that it will be privatised by the next month as was planned.

The Prime Minister and his economic managers maintain that Pakistan is all set to become an Asian tiger with the GDP growth to continue at the rate of 6 to 8 per cent or even higher in the foreseeable future. Some international institutions (some respectable and some with questionable credentials) have also come up with favourable views about the current economic situation and the outlook. Some of the World’s most famous and powerful investment banks have tarnished their reputations in the past by presenting rosy prospects of the issuers whose paper (company shares or bonds) they were trying to sell. It is therefore important to take note of the latest World Bank report on Pakistan (released on March 30) that maintains that the rural growth is crucial to Pakistan’s future since “two-thirds of the country’s population and 80 per cent of the poor live in rural areas; unless there is sustained progress in these areas, rapid overall economic growth and poverty reduction are impossible.”

The report observes, “not all improvements in incomes are the result of government policies or sustainable increases in private-sector productivity.” It maintains that the “impressive gains” in agricultural output and real incomes of the rural poor relative to 2001-02 levels is in part a reflection of low output and incomes in that year due to drought and other adverse shocks. It points out that the longer term agricultural GDP per capita growth rate (1999-2000 to 2004-05) was only 0.3 per cent annually and much of the improvement in total incomes can be attributed to a steep rise in net private unrequited transfers from abroad (including workers’ remittances). By 2006-07, these transfers rose to more than Rs. 3,000 per person for Pakistan’s entire population, equivalent to more than two-thirds the real output of crop agriculture or livestock production. Yet, these transfer incomes may not continue to grow at the rates of recent years.

Hence, the discussions about the potential “population dividend” appear to be out of touch with ground realities. Pakistan has received a massive liquidity injection of about $50 billion in remittances, aid, debt relief, earthquake assistance and privatisation proceeds during the last five years, and a cyclical consumption boom accompanied by an extraordinary rise in the real estate prices in the urban areas has created an illusion of progress.

However, highly speculative stock and real estate booms and busts cannot enable Pakistan to compete with India’s 8-9 per cent GDP growth rate. A reality check: our national primary school enrolment rate for girls is only 48 percent (42 percent in rural areas), compared to 86 percent in India. High growth rate is impossible without greater female literacy and participation in the work force. Infant mortality – a key health indicator - per 1000 live births is 82 in Pakistan (88 in rural areas), compared to only 62 in India, 56 in Bangladesh and 12 in Sri Lanka.

Another reality check: on April 27, Pakistan made a request for a loan of $17 billion from international lenders for the construction of Diamer-Bhasha, Kalabagh and Akhori dams by 2016 to “avert flood, drought and energy crisis” according to the officials.

In conclusion, the economy is likely to slow down in 2008 onwards as the liquidity- consumption-driven growth cannot last for more than a few years and is unlikely to sustain the current growth rate in the backdrop of growing political instability, worsening energy crisis, shortage of skilled and educated workers, and a protection-addicted private sector – often lacking management depth - that is struggling to compete internationally.

The writer is a former head of Emerging Markets Equity Investments, Citigroup. yousufnazar@yahoo.com

http://www.dawn.com/2007/05/14/ebr1.htm

 

[Neo]

May 14, 2007
Badly neglected and mismanaged social sector

By Naseer Memon

SOCIAL sector has remained the most neglected sector. Riddled with bad governance, the country has been ignoring this sector. Carrying a history of wrong choices and inappropriate priorities, poverty has become an integral part of lives of a vast majority of citizens.

An analysis of budget figures from 1947 to 2,005, shows that development has received the lowest budget allocations, whereas combined expenditure on defence and debt servicing has been eating away the larger part of the pie.

During 1990-2005, the average share of health as per cent of GNP was 0.68 per cent and that of education 1.99 per cent, whereas defence spending stood at 4.6 per cent. Pakistan is ranked ninth among 117 market economies in terms of percentage of expenditure allocated to defence. Among 34 poorest economies, the country is ranked 17th in education and the last i.e. 34th in health in terms of allocations against total expenditure.

Education, health, drinking water and sanitation are major problems, yet they find the least attention of our policy-makers..

Multilateral donors have been extending loans to boost social sector allocations. However, wrong choices of decision makers, poor monitoring and regulation by donors and absence of vigilant civil society has resulted in less than desired outcomes.

The Asian Development Bank conducted an evaluation of its social sector lending of 20 years i.e. from 1985 to 2004. The report titled “Sector Assistance Programme Evaluation for the Social Sectors in Pakistan” confirms that huge loans and amounts spent did not matched the unsatisfactory physical performance..

The frequent change of governments also obviously left negative impact on continuity of policies and service delivery.

The ADB approved $11.9 billion of public sector loans for Pakistan over the 20-year period 1985–2004. At $1.9 billion, social sector approvals were 16 per cent in shape of 28 projects -- 10 educational ($470 million), five health and population ($198 million), four urban development and housing ($232 million), five water supply and sanitation ($323 million), and four multi-sector ($670 million).

The evaluation results reveal that out of 24 social sector projects assessed only eight per cent were judged to be successful and none was highly successful, with one third declared unsuccessful (33 per cent) and 58 per cent partly successful.

From a total approved amount of $1.9 billion for social sector operations, about $0.9 billion has been disbursed (excluding disbursements from approvals prior to 1985) and the remaining $1 billion being either cancelled or not yet disbursed.

The evaluation report identifies a list of causes of such poor performance of social sector loans. Some of them are as under:

There has been a general lack of meaningful government and other stakeholder involvement in project design—the involvement that occurred was insufficient to generate ownership and commitment. This lack of engagement during design contributed to delays in effectiveness (senior government officials only focus on the project after its approval by ADB) and, ultimately, a failure to fully achieve objectives.

All projects suffered implementation delays—this is, in part, a consequence of the lack of government engagement during design. That delayed implementation continues to be the norm indicates that this reality is not being addressed in project design.

There is a lack of analytical underpinning and problem analysis for projects is evident in project design documents, which results in projects not always addressing the real causes of the identified problems, or not addressing them in a sufficiently comprehensive manner to achieve the desired results.

Lessons from previous projects have not been fully incorporated—they may be acknowledged, but significant design changes or innovations to avoid past problems are usually not made. Follow-on projects are usually designed without an evaluation of the predecessor project, despite the obvious partial success of these in many cases.

There is a lack of clarity regarding the role of ADB in project administration vis-à-vis that of the government, with consequent unclear accountability.

There is no meaningful external funding agency co-ordination in education sector projects beyond avoidance of the worst duplication of effort. There is a lack of clarity among all parties about what donor co-ordination means in terms of outcomes. True co-ordination can only come from the government.

Successive projects were funded to increase the number of classrooms and to train teachers. However, the existence of hiring bans made it difficult, if not impossible, to increase the overall number of teachers. Consequently, the new facilities almost always operate well below capacity.

Under the primary education (girls) sector project, 80 per cent of the funds for physical infrastructure were used but only 28 per cent of those allocated for institutional development.

With little variation similar reasons have been identified as responsible for the poor performance. Interestingly institutions like the World Bank and the ADB approve project designs and a large of amount is often pocketed by their consultants yet they do not take responsibility of design failures.

The long process of project approval provides ample opportunity to vet all the project designs. Also all operational policies of the lending agencies are strictly ensured by the implementing agencies. During the project life, several missions of lending agencies also do visit projects. Given these realities, one can not simply blame the government departments for all failures.

Some other very important factors have also been highlighted where external agencies truly have very little control and these factors are critical for project performance.

Delay in project completion, which also results in cost over run, is a major cause of less than desired delivery of social sector projects. According to the ADB report, the average extension for all sectors in Pakistan was 2.3 years, the worst of any developing member country. Social sector loans performed slightly better-yet not satisfactory--had an average extension of 2.2 years. Of the 16 social sector loans approved since 1985 that have closed, all but one required one or more extensions to the loan closing date. The average number of extensions was 2.7 with an average total time of extension of 2.8 years (2.2 years for loans outside the social sector), which represents a 48 per cent time overrun on average.

Part of the reason loan closing dates need to be extended is the very long time required for approved loans to become effective. Tedious process of project approval and post-approval activities always makes projects victim of delayed start. Across all sectors, the average time for loans that became effective over 1985–2004 was 249 days. ADB expects that loans will become effective in 90 days—the actual time taken for education, health and population, and water supply and sanitation loans were 333, 443, and 295 days, respectively.

Rampant corruption of all sorts is another major cause of project failures and under-performance. Bureaucracy and other vested interested have invented highly sophisticated forms of corruption. Lack of transparency and absence of institutional accountability has made this country a heaven for money makers at the cost of development of poor citizens. The ADB Project Completion Report acknowledges corruption in one the projects- the Middle School Project which suffered from financial mismanagement involving an embezzlement of $1.03 million. The recently constructed schools are already looking dilapidated with cracks in walls and ceilings, broken flooring pitted with holes and grounds left rough and underdeveloped.

According to ADB report, the informants in the health sector indicated that commission payments for securing contracts were usually of the order of 20–35 per cent although this was a general observation not linked to any project in particular. Corruption also affects the public provision of social services. Of patients visiting hospitals, 65 per cent reported irregular admissions and 96 per cent of those who were admitted said they were victims of corruption. Hospital staff was identified as the key facilitators of corruption by 65 per cent of the users and direct extortion was reported in 60 per cent of the total cases of corruption. Lack of accountability and monopoly power were quoted as key contributing factors.

These examples are merely a few examples. With this state of affairs achieving the Millennium Development Goals seems a remote possibility.

http://www.dawn.com/2007/05/14/ebr4.htm

 

[Neo]

May 14, 2007
Stubborn inflation

y Mohiuddin Aazim

Inflation, in nine months of this fiscal year, rose at an average rate of eight per cent against the full year target of 6.5 per cent. A senior official of the ministry of finance said, inflation might decline in the remaining three months. “But it would settle around 7.5 per cent at the end of the year.”

The State Bank of Pakistan (SBP) said in its second quarterly report that overall inflation might range between 6.7--7.5 per cent. The SBP Governor, Dr Shamshad Akhtar told Dawn that average inflation might close somewhere between 7-8 per cent by year-end. (See box)

The Asian Development Bank has projected seven per cent inflation. And this projection takes into account the impact on the price-line of reduction in domestic petroleum prices in January and continued tightening of the monetary policy.

Pakistan is experiencing a high inflation not only as a by-product of a faster GDP growth but also due to rise in food prices and as a result of an expansionary fiscal policy.

Food prices’ inflation rose 10.34 per cent in July-March FY07, against 7.37 per cent a year ago. Average inflation measured by Wholesale Price Index was 8.52 per cent during this period, up from 7.48 per cent. Since half of the increase in WPI inflation originated from higher prices of raw materials it continues to trickle down on consumer prices as well. The government would set major macroeconomic targets including that of inflation for FY08 later this month.

Official of the ministry of finance say that inflation target might be set at six per cent. But the SBP governor says it might be 6.5 per cent. However, the people would like to know, however, how the government and the SBP would contain inflation in the next fiscal year after they have failed in this task during this year.

Concerns on high inflation are growing also because low-income groups often suffer higher than average inflation. (Sometimes the trend changes —but only briefly like it did in March 2007 when inflation for the highest income group was higher than the overall CPI inflation).

Many a time, inflation measured by Sensitive Price Index (SPI) remains higher than the benchmark CPI inflation. This also indicates that the poor suffer from higher incidence of inflation.

It is true that the government can keep the prices of essential items stable through supply-side management and administrative measures. But the tendency of the central bank to watch core inflation more closely affords the government the laxity with which it deals with the issues that directly affect prices of the items of daily use including food and fuel.

The SBP tries to keep a balance between inflation and growth rather than just ensuring price stability and it tends to take credit in keeping core inflation in check.

In practice, people are concerned with the overall inflation. And they are even more concerned about which sub-indices of CPI push up inflation. The contribution of food group was 57.4 per cent in overall CPI inflation in March 2007, up from 32.6 per cent in March 2006. This again indicates that the poor are hit harder by inflation.

In the next fiscal year, keeping food prices stable would be a key challenge for the government because there is no hope for a dramatic rise in agricultural output. And attempts to supplement local food supplies with imports would further expand the trade deficit that is already at historic highs and creating problems in balance of payments management.

For the central bank, the most important challenge in the next fiscal year would be to curb demand pressures in the backdrop of a populist budget and expansionary fiscal policy. Prime Minister Shaukat Aziz has already said the government would not only improve the pay structure of its employees but would also set a higher benchmark for minimum wages.

Moreover, further spending on resettlement and rehabilitation of the October 2005 earthquake victims and initiation of big infrastructure projects would make fiscal policy all the more expansionary. And as such, the role of the monetary policy in fighting inflation would be central.

SBP Governor Dr Shamshad Akhtar has, however, made it clear that monetary policy alone would not be able to contain the rise in inflationary pressures. Speaking at the FPCCI on April 30 she said: “The government will need to continue to alleviate supply-side constraints because of problems of market structure and distribution system.”

She went on to say that “success in containing inflation further depends on continued effective monetary management which requires minimising the government’s recourse to central bank borrowing, mitigating the monetary pressures arising from the surge in capital flows ensuring that these are sterilised.”

Dr Shamshad also revealed on this occasion that SBP would be launching preparatory work on inflation targeting to curb inflation more effectively. But before that there will be a need for introducing supportive legal and regulatory framework which allow for targeting inflation and for greater operational independence to the central bank.

She almost stunned the audience when she revealed that between July 1, 2006-April 14, 2007 the government borrowing from the SBP stood at Rs180 billion compared with only Rs37 billion in a year-ago period.

Officials of the ministry of finance say that the government has started reducing its borrowing from the central bank and it is now borrowing more from banks and non-bank sources. They say that this trend would continue in the next fiscal year. (On April 28, 2007, government borrowing for budgetary support from the SBP sank to Rs3 billion but its borrowing from the banking system shot up to Rs171 billion surpassing the full fiscal year target of Rs120 billion).

Officials say that National Saving Schemes (NSS) have once again become an effective tool to borrow from non-bank sources, which is least inflationary. In nine months of this fiscal year, NSS attracted net inflow of Rs44.6 billion. In the last fiscal year net inflow in NSS was Rs6 billion and a year before there was a rather net outflow of Rs50 billion.

As for checking volatile food prices, the government says it would further strengthen the concept of consumer courts and price magistrates besides offering incentives to farmers to produce more food crops. “I cannot give you the details, but you will see in the budget these and other measures that would be taken to keep inflation in check through supply-side management,” said a ministry of finance official.

He admitted that by keeping the interest rates high, the SBP has left no room for hoarding and unnecessary inventory building which was a cause for pushing inflation up in FY05 and before. “Now it’s our turn to curb hoarding through administrative measures and we are committed to doing that,” he said.

He made a quick reference to the plans for making Monopoly Control Authority a more powerful body “that would not allow distortions in the market that do many harms and eventually lead to inflation.”

Keeping a balance between a desired level of growth within a targeted level of inflation would be a challenge in the next fiscal year for another reason.

Since Pakistan has started experiencing huge trade deficit, imported inflation would keep creeping in. And as the government would seek larger foreign exchange inflows to keep its balance of payments in shape these inflows if not sterilized efficiently, would push up inflation.

In fact, one of the reasons for inflation remaining high during this fiscal year is a build- up in net foreign assets on the back of unexpectedly high foreign exchange inflows through workers’ remittances and foreign investment. Between July 1, 2006 and April 28, 2007 NFA grew at the rate of 12 per cent showing a 100 per cent increase over its growth rate of six per cent a year ago.

Also, currency in circulation grew at the rate of 13.4 per cent, up from 12 per cent in a year-ago period. This faster growth in CiC needs to be checked effectively without which it would be very difficult for the central bank to fight inflation effectively.

http://www.dawn.com/2007/05/14/ebr2.htm

 

[Neo]

May 14, 2007
More consumption, less exports

By Sultan Ahmad

PAKISTAN’S external trade deficit within the first 10 months of the financial year has soared to over $11 billion, which is 16.8 per cent higher than it was in the same period last year.

With exports inching up by only 3.36 per cent to a total of $13.3 billion in 10 months, the fear is that total deficit for the year will be $14 billion as compared to the last year’s deficit of $12.13 billion.

Even otherwise, a large deficit of $9.4 billion was originally projected, with exports fetching $18 billion. But imports, which have been rising by 9 per cent, have given rise to the fear that the import bill may this year jump to $30 billion, leaving a deficit of $14 billion and that will be in excess of the foreign exchange reserve of $13.7 billion now.

That has resulted in a current account deficit of over $6 billion in the first nine months of the financial year, which is straining the government’s capacity to meet its external commitments in the short-term. The Asian Development Bank had already cautioned the government about it.

The big current account deficit is despite home remittances by overseas Pakistanis to the tune of over $4 billion and foreign direct investment to the same extent.

The State Bank of Pakistan, however, says that textile exports have grown by 10.3 per cent during July–March. So the government has allowed import of long staple cotton from India via land route-- Wagah border-- instead of sea which would have cost Rs200 more per bale. The textile industry has reasons to be happy over this development.

The Economic Coordination Committee (ECC) of the cabinet has also decided to allow gas companies to set up power plants using low BTU gas.

Trade and industry want the government to help them compete in the international market. But the government is taking it easy because of $6.5 billion foreign direct investment it expects this year and the total home remittances of over $5 billion.

The government has promised more relief to exporters, particularly of textiles. What kind of relief is provided to the exporters in the forth coming budget remains to be seen.

Earlier, the government was confident it could manage such situations because of its sizable foreign exchange reserves. The reserve could then meet eight to nine months’ imports but now it could meet only five to six months of imports bill, which is rather small in view of the soaring import bill.

Meanwhile, Pakistan has opened free trade agreement negotiations with Egypt, a tough customer, and Malaysia, with whom we have been having FTA negotiations, wants Pakistan to reduce heavy import duty on palm oil if the latter wants concessions in textile exports to that country (Malaysia).

You sign an FTA at a price. It is not one-way traffic but a two-way operation. But Pakistan’s basic problem is its small exportable surplus compared to its large needs. And that arises out of its small industrial base and a narrow base with its focus on textiles, and the large population with as many conspicuous consumers, added to that is the higher prices of Pakistan’s exports because of the high cost of production which reduce their competitiveness abroad. At the same time Pakistan needs a variety of imports which inflates its import bill.

The largest single item of import now is oil with its high prices. The oil import bill is expected to rise to $7 billion while the earlier estimate was $6 billion. Much of the oil is used in producing power by the government power agencies as well as the privately owned power producers.

The need for furnace oil and diesel is increasing with the 12 per cent rise in power consumption annually. If 2.3 million air-conditioners are added every year, the magnitude in the rise of power consumption is understandable.

The second item of import is machinery for industrialisation and replacement of old equipment. Lately machinery import has declined as compared to earlier years of industrial rehabilitation and expansion.

The third major item of import is industrial raw materials to feed industries mainly export-oriented industries.

Cars import alone costs over a billion dollars and it is also a major source of revenue for the government so despite falling rate of customs duty, the custom revenue has been rising.

There are also a large number of items of import to feed the demands of the expanding consumer credit. The expanding pop music industry also calls for large imports. And homes and housing societies need a great deal of imported fittings and fixtures ranging from fancy light fittings to modern water equipment.

Some of these items are smuggled into the country but more and more are coming through imports. Import of such expensive items is increasing as more and more housing societies come into existence in Islamabad, Karachi and Lahore.

Imported TV sets are getting larger and larger, in addition to a great many steel and aluminium fittings imported for such expensive housing. Most of such luxury housing accessories are acquired through quickly-earned money such as through stock exchange or real estate or through corrupt income from official deals.

What we are developing is not a real economy but a substantially phoney one marked by its glitter and glamour. The government wants this process to continue as it regards it as a process of continuous growth and does not want to arrest it.

When it comes to foreign direct investment, not only the profits are repatriable but also the capital should be well spent and the country should gain by that to make such repatriation easy.

It is imperative now that the industrial base should be broadened and industrial production increased manifold, using mostly indigenous raw materials. The frenzy for consumption should come down, and the focus should shift to production.

Conspicuous consumption should be discouraged in a country in which, according to official figures, 25 per cent of the people live below the poverty level of a dollar-a-day.

We have a large population and there is not enough for consumption for all unless we produce far more than we do now.

http://www.dawn.com/2007/05/14/ebr11.htm

 

[Neo]

May 14, 2007
Social relief fund for the poor

By Sabihuddin Ghausi

The Sindh government is setting up a Rs70 billion Pension Fund, Rs50 billion General Provident Fund and a Rs40 billion Social Relief Fund to finance income-generating projects for the poor.

“We have already made a substantial headway in achieving all this'', a senior official of the government revealed while disclosing that more than Rs22 billion have been squeezed out from the last three years’ budgets including the current 2006-07 to set up these three funds.

Under its Accelerated Debt Retirement Programme, the Sindh government in last four years adjusted

Rs15.58 billion cash development and market loans. Only recently in April this year, it retired Rs5.81 billion debt from its cash balance. About Rs1 billion interest has been paid in debt servicing. Not only that Rs1 billion is being saved on account of debt clearance, the Sindh government is earning about Rs1 billion a year from parking of Rs22 billion fund in various banks at competitive rates.

The officials are confident that they would clear Rs28.6 billion remaining CDLs in next four or five years from the foreign loans expected to be flowing in for various mega projects. While these foreign loans will add to the liabilities to the level of discomfort, the Sindh government wants to create fiscal space in the future budgets by clearing CDLs and setting up funds to pay pensions and provident funds.

``A Pension Fund of Rs11.3 billion has already been instituted'', the official said while disclosing that a high level committee headed by the Chief Secretary and several secretaries with representatives the from Securities Exchange Commission of Pakistan and the National Investment Trust has been formed. The government received 15 bids in response to the invitation for expression of interests. .

The committee will examine the bids to appoint a fund manager. The idea is to have an independent pension fund for which the target is Rs50--70 billion, he said. The government squeezed out Rs3 billion from the current budget and plans to take out Rs5 billion every year from the future budgets. In the meanwhile, the government is preparing a directory of all the retired employees.

The officials are also taking on priority basis, the task of setting up a General Provident Fund. So far Rs4.5 billion have been provided for this fund but the officials want to raise amount up to Rs50 billion. The income to be generated from this fund will be utilised for payment of provident fund to the employees who retire. Independent fund manager/managers will be appointed for the purpose.

The Social Security Relief Fund is a new concept being introduced as a poverty alleviation programme. In last two years, the government has earmarked Rs6 billion for this programme while the target is to create a fund of Rs40 billion. A high level committee will manage and administer the fund.

Not only this, the government has started looking after health care of its Karachi secretarial staff by entering into an agreement with a foreign insurance company. ``We will gradually extend this coverage to all parts of the province'', the official said.

While the ambitions are high and the goals lofty, the affairs are going do not seem to be very encouraging. After an investment of Rs53 billion (Rs35 billion by Sindh government plus Rs18 billion from the federal government) in development programme in the province during the current fiscal year, people continue to die of cholera and water-borne diseases, rains inundate cities and villages because of lack of drainage, the number of school-going children remain pathetically low, poverty is too gruesome in rural areas, unemployment is high and law and order is gradually assuming proportions that threatens the social stability Sindh's senior minister Syed Sardar Ahmad in his budget speech in June 2006 had disclosed investment of Rs117 billion in development of the province in last three years of which Rs53 billion came from the federal government. It means that over the last four years-2003-04 to 2006-07 about Rs170 billion has been invested in Sindh. For last four years the Sindh government has given up the practice of releasing a report of budget and economic analysis.

At the beginning of the year, it was claimed to usher in a `white revolution' in the rural areas by promoting livestock and dairy farming. At the end of the day, the prices of milk in Karachi has shot up to Rs34 a litre from Rs28 a year ago, mutton Rs260 a kilogram from Rs220 a kilo and beef about Rs200 a kilogram from Rs140 a kilo.

“Development investment takes time to give results in terms of economic benefits, service delivery and improvement in agricultural and industrial output'', a senior official remarked when asked, `where has all the money gone, he claimed that many abandoned school and dispensary buildings in the rural areas have been put to proper use. Teachers have been recruited, students are being provided with a set of books and a free meal at selected places and medicines are being supplied to the dispensaries and hospitals.

“We have released bulk of the budgeted development funds to the relevant departments and to the districts'', an official said who was unable to explain the utilisation and implementation status of development schemes. A conversation with the officials brought forth that the ruling coalition has managed to bring about some order in sharing of development funds. In the year, 2003-04 and then in 2004-04 the politicians demanded more funds. For this many new schemes were taken up. So much so that 46 per cent of funds went for new schemes and the remaining for the on going schemes.

The World Bank in its report took a notice of dispersal of funds in many new schemes. In the current fiscal year now approaching its fag end, the officials claim that the 75 per cent of the development funds have been allocated to ongoing schemes with more focus on those that are close to final stages of completion and only 25 per cent for the new schemes.

However, political leadership has preferred to remain silent on budgetary and development issues of the province. For the whole year, there has been no official briefing on the review of Rs32 billion annual development programme for this year. There was no explanation as to why Rs32 billion ADP is being expanded to Rs35 billion to accommodate Karachi's Nazim demand for money for certain priority projects. The Rs35 billion has two components. It has Rs8 billion development outlay for 23 district governments and Rs27 billion for the provincial government.

Many district Nazims come from the traditional feudal families. They have their own set of priorities which are to construct roads, irrigation facilities and other projects that benefit them directly or their families and their supporters. The collective interest of the poor people does not figure in their agenda and their political opponents are denied the benefits of irrigation water, electric supply and other facilities.

All said and done, the government is closing the year 2006-07 with a note of satisfaction as it has a cash balance of about Rs15--20 billion after having released all funds for the development. It even met on its own Rs3 billion increase from Rs32 billion to Rs35 billion of the ADP.

Except for tax on agricultural income, hotels and on electricity, the provincial government collected almost 92 per cent of budgeted revenue of over Rs15 billion. The provincial government set a farm income tax revenue target of Rs450 million against which the Board of Revenue mopped up hardly Rs83 million in first eight months. Officials are confident of recovering about Rs150 million in April and May to collect a total of about Rs300 million.

Not only that landed gentry is not paying taxes but is also showing no inclination to pay for the irrigation water being used by them. Against a target of Rs550 million for the entire year, the government collected about Rs160 million in first eight months. Irrigation is one department which is heavily subsidised by the public money. But overall, the non-tax revenue collection of Sindh has remained satisfactory. From a budgeted target of Rs6.70 billion, the provincial government has recovered 74 per cent or Rs3.3 billion.

The planners are now engaged in preparing about Rs210--215 billion budget for the next fiscal year in which the annual development outlay is likely to be around Rs40 billion. Unlike Punjab, where Punjab Development Forum provides an opportunity to bring donors, economists, politicians, civil society on a platform to air views on budget making, Sindh does not have such a platform.. In fact there is no attempt from government to seek views of the business, trade unions, economists, opposition political parties and legislators and civil society.

http://www.dawn.com/2007/05/14/ebr10.htm

 

[Neo]

May 14, 2007
The flip side of the economy

By M.Ziauddin

President Musharraf kicked off the budget season by announcing earlier this month that the revenue collection target for the next year should be Rs1 trillion and that the aim for next 10 years is to cross the mark of Rs4 trillion.

He did admit that the tax-to-GDP ratio was low but hoped that current year’s target of Rs835 billion surpass the Rs900 billion mark.

The president said that the Public Sector Development Programme (PSDP) had gone up to Rs415 billion last year from a mere Rs70 billion indicating perhaps that next year the PSDP would perhaps be more than the Rs500 billion.

Earlier, in April, Prime Minister Shaukat Aziz claimed that Pakistan's per capita income will cross $1000 next year. It was $847 last year, and is expected to be around $950 this year. According to his estimate, nearly 13 million people have been lifted out of poverty, out of which almost 11 million belong to rural areas.

However, it would not be out of place here in this budget season to have a look at the flip side of the coin as well in order to test the above claims and optimistic assertions for the benefit of the authors of the next year’s budget.

The rural poor: According to a latest World Bank report released in early April unequal distribution of land and access to water for the rural poor limit the scope for agricultural growth alone to rapidly reduce poverty in rural Pakistan. Around 35 million people in rural areas remain poor, representing about 80 per cent of the poor.

The report says, Pakistan’s rural non-farm sector faces numerous constraints, particularly related to access to credit and inadequate infrastructure. According to the 2000 Agricultural Census, only 37 per cent of rural households owned land, and 61 per cent of these land-owning households owned less than five acres. Access to usable water is also unbalanced. Because of this skewed distribution of ownership and access to productive assets, much of the direct gains in income from crop production, particularly irrigated agriculture, accrue to higher income farmers.

In most of rural Pakistan, the impact of agricultural growth on rural poverty is limited for two reasons. First, much of the gains in rural incomes are spent on urban goods and services. Second, growth-linkage gains to non-agricultural incomes and employment in rural areas are shared among a large number of rural poor.

The report says that a major reason for the limited impact of rural development efforts is a lack of participation and influence of rural poor households. This limits effective demand for public services and reduces the efficiency in development programmes. Although inclusive economic growth should be the main mechanism for reducing poverty, increased social protection efforts are needed to protect the most vulnerable.

The benefits of broad economic growth trickle down very slowly when the poor have little access to key physical, social, and financial endowments. To overcome highly unequal distribution of these endowments and achieve rapid pro-poor growth, poor people need new opportunities to organise, to generate business, and to link with mainstream development activities.

The real economy: And in order to understand what is happening on the front of the real economy as opposed to the one which is shaping into a bubble one needs to go through an internal report of an international investment bank in early March.

The recent upsurge in FDI, according to this report, is comprised mainly of merger and acquisition (M&A) activity in the financial, telecom, and consumer (FMCG) sector. However, in the longer term prospects it would be unlikely for the current quantum of M&A-driven inflows to be sustained. In one or two cases, the gross inflow is likely to be soon followed by lumpy outflows, as offshore entities repatriate their share of profit/capital as major share holders.

Another important contributor to the recent accretion in foreign exchange as been a sharp increase in portfolio inflows ($557 million between July 2005 to end-February 2007, according to SBP data). The rising stock of portfolio investment is potentially adding to the vulnerability of the external account, by exposing it to “sudden stops”. Portfolio flows can be capricious, as painfully underscored by the price action in global equity markets over the past month.

In the longer run, the fact that FDI inflows are concentrated in the services sector-as opposed to manufacturing –poses a challenge. Unlike FDI in the export sector, which can be expected to generate a stream of foreign exchange inflows over the life of the project, foreign investment in non-tradable services generally produces a one-time inflow, followed by steady outflows on account of profit/capital repatriation.

The report said that with the rise in privatisation-related inflows as well as cross-border M&A activity, foreign exchange payment liabilities to foreigners are being created. Under the base case forecast for the external account, we expect profit repatriation by foreign-invested enterprises (FIEs) to increase from $443 million in FY06 (actual) to over $1.1 billion in FY8, and to approximately $1.5 billion by FY10.

” Finally, two potential sources of payment stress in the 1-2 year horizon that need to be factored in include the resumption of servicing of debt rescheduled under Paris Club-III (an incremental $430 million in FY08), and the scheduled end in 2008 of safeguards against Chinese textile and apparel imports imposed by the US and EU. The latter development could pose a further challenge for Pakistan's textile and clothing exports,” said the report.

The bubble: So, the economy is growing at the rate 6.5-7 per cent and the per capita is increasing so robustly actually on the flows of foreign aid, mergers and acquisitions, remittances, telephony, real estate and the stock market. Nothing is happening on the front of real economy except capacity production of white goods and four and two wheelers which are being sold to mostly lower-middle income group consumers on costly credit whose ability to repay is highly doubtful threatening them with bankruptcy all the time.

And at the same time, both budgetary deficit and current account deficit are expanding at unsustainable rates. Investment rates are stagnating at around 16 per cent while exports have been hovering around 11-12 per cent of the GDP for the last five years. And the export economy is still dependent on just one item—textile. This is the reason why the foreign exchange reserves have fallen to the level of four months of import bill. And very soon, they are going to go further down and rapidly as expanding dividends and profits start getting repatriated by those who have set up mobile telephony and banks and bought financial institutions and the rescheduling bonanza comes to an end.

Meanwhile, the power and water shortages are going to start impacting adversely more seriously both on our agricultural production and industrial potential.

The military-led government has been promising the nation scores of mega water, power and other infrastructure projects since it took over some seven years ago. But so far neither has it been able to add one single megawatt of electricity to the already existing capacity, nor has it resolved the looming water crisis. So, in the years ahead the import bill is expected to go up steeply as more and more oil and gas will needed to be imported to power the wheels of industry and pump out water for irrigation which are threatened with shut down as supplies of both water and power outstrip even the existing demand.

http://www.dawn.com/2007/05/14/ebr16.htm

 

[Neo]

May 14, 2007
Strategy for reducing poverty

By Dr Mahnaz Fatima

Does the federal budgetary exercise conducted every year with great fanfare mean anything for the country’s poor?

With almost 45 per cent of total expenditure going towards defence and debt servicing, another over 44 per cent towards development expenditure, grants, and subsidies, there is just nine per cent that goes towards general administration that includes law and order, social, economic, and community services. Almost 89 per cent expenditure is allocated for creating an enabling and a conducive production climate with less than nine per cent aimed directly at the uplift of the poor.

Direct beneficiaries of the production climate that the budget focuses on are the upper income groups whose lot is more a function of budgetary outlays as compared to that of the poor who are expected to wait for the “benefits to trickle down” to them at an unknown point in time in the future. The government insists that their strategy is pro-poor growth and has benefited the poor which assertion requires closer examination to assess the effectiveness of the pro-poor growth slogan.

The policy makers are all out to prove that with their less than nine per cent federal expenditure on social, economic, and community services and some “trickle down effect,” the poverty picture has improved. According to official estimates, percentage of population below the poverty line has declined from 34.46 in 2001 to 23.9 per cent in 2004-05, that is, a decrease of 10.56 percentage points. Rural poverty decreased by 11.16 percentage points and urban poverty by 7.79 percentage points, according to official claims. While the above may look encouraging on the surface, it is important to know the poverty line that cuts off the poor from the non-poor. The latest inflation adjusted poverty line is Rs878.64 per adult equivalent per month (Pakistan Economic Survey[PES] 2005-06). For an average household size of 6.55, it may translate approximately to Rs5755 per month. Who would believe that an income of Rs6000 per month for a family of 6.55 would lift them out of income poverty or private consumption poverty?

It does not matter whether the officially defined poverty level is 34.46 or 23.9 per cent for as long as the percentage of population between the official poverty line and the poverty line above which the people would actually be lifted out of consumption or income poverty is unknown. That is the percentage of population with monthly household incomes roughly between Rs5755 and Rs15000 needs to be known, failing which, our poverty estimates will be grossly under estimated. Even at Rs15000 per month, a household of 6.55 will barely get by. There is actually a sea of poverty with whose severity cannot be reduced no matter how much the volume is scaled down in imagination for rosy paper presentations.

Before yet another attempt is made to force fit the reality to what might be desired on policy paper, it is important to take a look at the Household Integrated Economic Survey (HIES) 2004-05 used to support poverty estimates. Its sample of 14706 households is considered “representative” in a country with almost 23.5 million households (population of 153.96 million and average household size of 6.55). That is, HIES was based on 0.06per cent households in the country when there were about 8.0 million poor households with poverty level above 34 per cent population. That is, a study of only 0.18 per cent poor households can hardly be used to generalise for the whole country. If poverty for country’s 0.18 per cent poor households has reduced by almost 11 per cent, it cannot be deduced that poverty has also reduced for all the remaining 99.82 per cent poor households also.

For, what is true for a part may not be true for the whole. To conclude improvement in the poverty picture on the basis of only a small fraction of country’s households is to commit fallacy of composition that will not help the reality on the ground even if it makes one look good for a short period of time. People are quick to detect the actual situation as the World Bank too is now beginning to see.

Small percentage of total expenditure is not likely to make a real dent into poverty that not only remains visible to the naked eye but is also not ruled out by an analysis of figures presented officially.

According to the household survey figures presented in the PES 2005-06, the richest 20 per cent spent almost thrice as much on food in 2005 as was spent by the poorest 20 per cent. Even then the food expenditure of the richest 20 per cent increased by 19 per cent from 2001 to 2005 whereas that of the poorest 20 per cent gained 11.6 per cent in food consumption expenditure during the same period. In fuel and lighting, the richest 20 per cent gained 20.9 per cent during 2001-2005 whereas the poorest 20 per cent gained only 5.7 per cent during the same period.

The expenditure on personal care articles/service, clothing, and education decreased for the poorest 20 per cent during 2001-05 whereas expenditures on the same heads increased significantly for the richest 20 per cent during the same period. The only head under which the expenditure of the richest 20 per cent decreased during the period 2001-05 was medical care whereas expenditure on medical care increased by 14.6 per cent for the poorest 20 per cent during the same period. This may indicate the state of health that may have improved for the richest 20 per cent due to their better living conditions and quality of life as compared to that of the poorest 20 per cent.

The above shows a rich-poor gap not likely to close in the near future. There is an attempt to touch the tip of the multi-dimensional poverty pyramid by increasing consumption expenditures on basic necessities such as food, clothing, education, and personal care items. While the situation of 99.82 per cent poor households is not even known, the situation of 0.18 per cent poor households gauged does not show improvement on all fronts that it should without which the possibility of sinking back below the officially defined poverty line remains high.

Important question is whether poverty reduction is a mere function of social, economic, and community expenditures? If yes, a lot more needs to be spent to bring all the poor households above the poverty net. Financial resource mobilization would then remain an even more huge task. While tax evasion needs to be plugged that remains a daunting challenging, horizontal equity in taxation structure is long overdue. Agriculture contributes 22.5 per cent to GDP but its share in taxation is ridiculously low at 1.2 (PES 2005-06). Wholesale and retail trade’s share in GDP at 18.6 per cent is higher than that of manufacturing at 17.9 per cent (PES 2005-06).

While manufacturing’s share in taxes is 62.2 per cent, that of wholesale and retail trade is only 2.8 per cent (PES 2005-06). Transport, storage, and communication also contribute disproportionately less in taxes as compared to their share in GDP. These inequities in taxation need to be removed on a war footing failing which the financial resources needed to address social, economic, and community issues of the poor will remain unavailable.

Poverty is not an issue that can be addressed through borrowed money. Also, poverty is not an issue that can be addressed on a sustainable basis by only pouring money into the segment without building capacity of the poor to generate own incomes. This virtuous cycle requires government intervention also through an earnest attempt to reduce asset poverty of the poor. Without land to the small farmer and extension services aimed at building small peasants’ resources and capabilities, asset poverty will remain. It will keep feeding back into their income and consumption poverty that cannot always be addressed by constantly replenishing their incomes from national resources — internally generated or externally funded.

Prophet Muhammad (PBUH) had himself made an axe from an income-poor man’s hidden asset and encouraged him to use the axe to generate income instead of asking for financial help. The poor man’s income had thus increased manifold and the Prophet (PBUH) had said that that was the best form of life. Lesson for us is that asset distribution and availability remains at the centre of a sustainable poverty reduction effort.

And, land assets might be aplenty and under-unutilised in rural agricultural sector whose equitable distribution require a definite resolve to kick start a poverty reduction programme to address poverty issues meaningfully. Otherwise, attempts to make a poverty situation look good only on paper will remain a hard sell internally as well as externally.

http://www.dawn.com/2007/05/14/ebr13.htm

 

[Neo]

May 14, 2007
Robust corporates keep investors in the arena

THE Karachi Stock Exchange 100-share index last week confidently stood well above the recently broken psychological barrier of 12,000 points despite some massive jolts in between as positive news on the corporate front did not allow investors to leave the arena.

Leading bulls assisted by some foreign investors are eyeing the widely speculated index level of 14,000 points during the next couple of weeks if all goes well with the Saturday’s massive rallies by lawyers and the MQM in a highly charged atmosphere.

According to some leading foreign investors, oil, bank and cement shares at current levels still provide them attractive bait for enhanced capital gains as well as are ideal for long-term investment.

Despite early week massive shakeout caused by fear of imposition of emergency, the share market managed to pull itself out from the initial lows but failed to make further gains as widely speculated, owing to sudden change in the backgrounds leading to the absence of foreign investors.

After official denial with regard to imposition of emergency, the market did recover from the early lows and sustained the index level above the barrier of 12,000 points, but bull-run faded under the cross–current of negative news.

The KSE 100-share index managed to finish well above its weekly low of 12,079.75 at 12,367.62, off 144.46 points on strong mid-week short-covering at the lower levels, trading volume showed a sizable contraction. The market capital also suffered a fall of about Rs42 billion at Rs3,601 billion. The KSE 30-share index was off 293.01 points at 15,663.38.




Click to view the larger image


“The sanity to stock trading is expected to return by next week as some of the steps taken by the Supreme Court to defuse the prevailing tension between the contenders of power on the judicial crisis are expected to reduce the tension”, a leading analyst Hasnain Asghar Ali, said.

Although the corporate results season for the quarter ended March 31, is over, but investors are lining up stocks of those companies whose board meetings are due, higher capital gains being the motive behind the fresh covering.

Oil, bank, cement and leading shares on some other counters are expected to lead a decisive recovery beyond the index level of 12,000 points possibly by next week.

The chief inhibiting factor behind the relative slow down in the share trading was fears linked to the Supreme Court Chief Justice’s arrival in the city and MQM’s rally on the same day and rumours of violence.

But as far as corporate fundamentals are concerned they are positive and the market is capable of resuming its upward drive beyond the recently established all-time peak index level of 12,512.08 by next week if all goes well with the Saturday’s rallies.

Earlier, the KSE index crashed from the recent all-time high of 12,512 points by 432.33 points or 3.43 per cent at 12,079.75 points on massive selling triggered by fears of imposition of emergency and that the SECP has sought rationale behind the proposed increase in CFS limit.

It was the current year’s biggest single session plunge but not all-time lower as it has had already fallen by 468 points in March 2005 crash and 491.02 points or 4.43 per cent on March 8, 2006 on selling fuelled by tax on shares.

But what seems to have accelerated the pace of early panic selling was heavy unloading by foreign investors on the perception that massive welcome to the Supreme Court Chief Justice during his Saturday’s Lahore visit could lead to political uncertainty.

“It was, however, not a single factor behind the market plunge”, analyst Ahsan Mehnati said adding a hint by the prime minister about imposition of emergency had also contributed to the fall.

But some others said it appears to be brokers’ manoeuvering or a silent protest to SECP refusal to accept their demand for the increase in the existing CFS ceiling of Rs55 billion to Rs65 or Rs70 billion to meet the growing market demand.

All the leading base shares fell in unison under the lead of OGDC, National Bank, Pakistan Petroleum, D. G. Khan cement, and Bank of Punjab but most of them recovered and some even higher from early lows on strong short-covering at the lower levels.

Forward Counter: Barring Nishat Mills and some others, which managed to finish modestly higher on active short-covering, all leading shares fell on profit-selling.

Leading among the losers were OGDC, Pakistan Oilfields, Pakistan Petroleum, National Bank, MCB, Bank Alfalah and Fauji Fertiliser Bin Qasim.—Muhammad Aslam

http://www.dawn.com/2007/05/14/ebr17.htm

 

[Neo]

May 14, 2007
Investments of scheduled banks increase by Rs47 billion

On May 9, the State Bank of Pakistan raised Rs19.51 billion through the auction of 3, 6 and 12 month T-bills. The SBP had set a target of Rs15 billion.

According to the Statement of Affairs of the State Bank of Pakistan, for the week ended July 2April 28, 2007, both notes in circulation and those issued decreased in the week. Notes in circulation stood at Rs882,947.379 million against earlier week’s figure of Rs890,260.950 million, a fall of Rs7,313.571 million. When compared to the corresponding week a year ago when it was Rs783,483.478 million, the current week’s figure is higher by Rs99,463.901 million.

Total notes issued also decreased in the current week over preceding week’s level. At Rs883,146.782 million it was smaller by Rs7,217.624 million over the figure of Rs890,364.406 million recorded a week earlier. In the corresponding week last year it amounted to Rs783,656.834 million, which shows current week’s figure to be higher by Rs99,489.948 million over last year’s corresponding figure.

Approved foreign exchange increased in the week to Rs601,012.279 million or by Rs7,623.254 million over preceding week’s figure of Rs593,389.025 million. When compared to the corresponding week a year ago, when the figure was Rs536,378.400 million, the current week’s figure is higher by Rs64,633.879 million.

Balances held outside Pakistan in approved foreign exchange declined in the week under review. It stood at Rs125,611.001 million over preceding week’s figure of Rs131,523.808 million, a fall of Rs5,912.807 million. Compared to last year’s corresponding figure of Rs132,237.907 million, the current week’s figure is smaller by Rs6,626.906 million.

Loans and advances of scheduled banks to the three sectors – agricultural, industrial and export showed a mixed trend in the week under review. The agricultural sector received Rs60,183.529 million, similar to preceding week’s figure. The current week’s figure is smaller by Rs1,467.394 million over last year’s corresponding figure of Rs61,650.923 million.

There was an inflow of Rs41,776.558 million to the industrial sector during the week under review, a rise of Rs73.693 million against preceding week’s figure of Rs41,702.865 million. When compared to last year’s corresponding figure of Rs6,113.726 million, the current week’s figure is higher by Rs35,662.832 million.

The export sector received Rs138,363.958 million against previous week’s figure of Rs137,844.206 million, a rise of Rs519.752 million. Current week’s figure was larger by Rs29,333.844 million over last year’s corresponding figure of Rs109,030.114 million.

According to the weekly statement of position of all scheduled banks for the week ended April 28, 2007, deposits and other accounts of the scheduled banks stood at Rs3,177.075 billion, higher by Rs17.586 billion over preceding week’s figure of Rs3,159.489 billion. Commercial banks deposits showed a rise of Rs17.561 billion over the week to Rs3,165.922 billion, against preceding week’s Rs3,148.361 billion, while of specialized banks it fell by Rs0.025 billion to Rs11.153 billion, over previous week’s Rs11.128 billion.

Borrowings by all scheduled banks increased during the week over preceding week’s figure. It rose to Rs426.994 billion over preceding week’s figure of Rs408.218 billion, a rise of Rs18.776 billion. This was primarily due to an increase in the borrowings by commercial banks, which rose to Rs344.073 billion against previous week’s Rs325.025 billion, or by Rs19.048 billion, while borrowings by specialised banks stood at Rs82.921 billion, against preceding week’s figure of Rs83.193 billion, showing a decline of Rs0.272 billion.

Gross advances stood at Rs2,387.597 billion in the week under review, an increase of Rs11.328 billion over preceding week’s figure of Rs2,376.269 billion. Advances by commercial banks rose to Rs2,293.356 billion against earlier week’s figure of Rs2,282.064 billion, or by Rs11.292 billion, while of specialized banks it stood at Rs94.242 billion against preceding week’s Rs94.206 billion, showing a rise of Rs0.036 billion.

Investments of all scheduled banks increased in the week by Rs47.468 billion to Rs1,022.787 billion against preceding week’s figure of Rs975.319 billion. Commercial banks investment rose to Rs1,012.484 billion, from earlier week’s Rs964.716 billion, higher by Rs47.768 billion, while of specialized banks it stood at Rs10.304 billion against previous week’s Rs10.602 billion, lower by Rs0.298 billion.

Cash and balances with treasury banks of all scheduled banks decreased by Rs5.968 billion during the week to stand at Rs320.915 billion against earlier week’s Rs326.883 billion. The figure for commercial banks stood at Rs318.716 billion against preceding week’s figure of Rs324.725 billion, a fall of Rs6.009 billion. For specialised banks there was a rise of Rs0.041 billion to Rs2.199 billion, against earlier week’s figure of Rs2.158 billion.

Total assets of scheduled banks stood at Rs4,297.101 billion, higher by Rs45.314 billion, over preceding week’s figure of Rs4,251.787 billion. Meanwhile, commercial banks assets stood at Rs4,185.388 billion, higher by Rs45.693 billion over previous week’s figure of Rs4,139.695 billion. Specialized banks assets fell by Rs0.379 billion to Rs111.713 billion against previous week’s Rs112.092 billion.

http://www.dawn.com/2007/05/14/ebr18.htm

 

[Neo]

May 14, 2007
Power shortage will grow to 2,500MW in 2 months

By Khaleeq Kiani

ISLAMABAD, May 13: The current spate of energy shortage would more than double to 2500MW in the next two months and the deficit would remain unmet even in the coming winter when demand for power falls drastically.

There will be no let-up in the load-shedding — described as load management in official jargon — both in summers and winters although it will fluctuate between 1400 to 2500MW beyond 2008-09. This shortage would prevail despite significant investments in system rehabilitation and load-management practices. The crisis may subside in financial year 2009-10.

This has been estimated by the government and Water and Power Development Authority (Wapda) on the basis of economic growth rate of 7-8 per cent and after taking into account planned investments for power generation and system improvement over the medium term.

Background discussions with government officials on these projections suggest that next capacity addition will be in January 2008 when two public sector projects of 80MW each start commercial operation. This (160MW) will be the only improvement in capacity throughout the financial year 2007-08 although demand during the period is likely to surge by more than 1000MW.

The household power consumers are currently facing a load-shedding between two to four hours in cities, except some posh areas, and up to eight hours in rural areas, like parts of Azad Kashmir and interior of Punjab and Sindh. This is in addition to business closure after sunset, staggering of industrial activities and use of tube-wells in the night.

Estimates put the shortage at 1320MW in June this year, rising to 1430MW in July before peaking at 2400MW in August. The shortfall will come down to 800MW in October but will rise again to 1360MW in November-December and cross 1800MW in January next year.

The government expects that a total of 22 projects -- both in public and private sector -- would start production during September 2008 to June 2009 to enhance generation capacity by 4700MW that would take total installed capacity to 22400MW. As a result, November and December of financial year 2008-09 would be the only time when there will be no power shortfall. But in January 2009 there will again be a shortfall of 1520MW that will subside to 330MW in June 2009.

These projections suggest that there will be no shortage during July 2010 to June 2011 because of about seven projects with a generation capacity of 1180MW would come into commercial production during September 2009 to June 2010. However, there would again be major energy shortfalls -- rising from 600MW in July 2011 to 2000MW in July 2013 and staying there throughout the financial year 2013-14.

The government expects that a 1000MW project based on imported coal would come into production in June 2012, followed by Kalabagh dam that would start producing about 2400MW of electricity in July 2014. Among the major projects, Kalabagh dam will be followed by 969MW Neelum-Jhelum Project in July 2015 and then 2250MW of Bhasha dam in January 2016. Bunji power project with an expected capacity of 2700MW would come on stream in December 2016.

By December 2016, Pakistan’s total generation capacity would reach 43,300MW and the country will have a surplus capacity of more than 3000MW provided all the plans envisaged for completion in the next 10 years are materialised.

http://www.dawn.com/2007/05/14/top7.htm

 

[Neo]

Growth without equity

While the worsening economic indicators are signalling a slowdown, the government has pitched the GDP growth rate at 7.2 per cent for the next fiscal year. The second Poverty Reduction Strategy Paper stipulates growth in excess of seven per cent over a five-year period. The economy has expanded on rising investment, surging exports (up to December 2005) and a significant increase in consumer spending, facilitated by easily available cheap bank credit and a rising inflow of remittances. But for the remittances, there are visible signs of reversible growth trends in these areas. In the first ten months of this fiscal year, private sector credit expansion dropped sharply to 12.6 per cent from 19.8 per cent in the corresponding period last year. Demand for fixed investment (creation of new industrial capacity) remained subdued. Unless the real sector problems are addressed, bank credit may be made to carry more than normal banking risks. With a dismal savings rate, also eroded by a high rate of inflation (currently at eight per cent) and a sharp rise in interest rates, consumer financing is becoming a more risky business for lenders as well as borrowers. Debt-default cases are on the rise. Consumer spending with low savings is turning out to be a short-term option. Finally, export growth has plummeted to 3.6 per cent this year.

Export-oriented industrialisation has suffered under a faulty foreign trade policy. With production lagging behind domestic demand, shortages are met through huge imports — estimated at $30 billion this year — that provide jobs to foreigners and make a negative contribution to the GDP. The surging trade and current account deficits are met by capital and financial inflows that include $1.7 billion portfolio investment or hot money. Foreign direct investment is not export-oriented and remittances of profits and dividends are going up. The pressure on the overall external sector is mounting. To boost the GDP growth rate, the government reportedly plans to increase development spending to Rs500 billion from the current year’s Rs415 billion. But the pace of fund utilisation is slow and only 34 per cent of the annual financial target was achieved during the first half of the current fiscal year as compared to 45 per cent last year. The tardy pace of implementation of foreign-aided projects locks up substantial sums of money. Delays and cost overruns widen the gap between the financial and physical targets. Often the planning, designing, implementation and monitoring of major development projects is faulty.

In the absence of governmental reforms, the delivery system is pretty weak. Although the poverty reduction strategy stipulates pro-poor growth, the yawning gap between the poor and the rich is widening despite a high growth rate over the past four consecutive years. The government’s failure to recognise that it is the source of economic growth — whether production is driven by technology that creates redundancies or if it is labour-intensive which creates jobs — that determine how the fruits of economic development are shared. A high growth, though important, can be without equity in the current development phase that tends to weaken the trickle-down effect and promotes social exclusion. It is time to consider using development with social indicators as the yardstick to measure social and economic progress. In the long term, growth without equity is neither economically nor politically sustainable.

http://www.dawn.com/2007/05/14/ed.htm#1

 

[Neo]

Rs 2.1 trillion outlay for next budget worked out

ISLAMABAD (May 15 2007): The government on Monday worked out an outlay of Rs 2.1 trillion for budget 2007-08, and set a target for Central Board of Revenue (CBR) of Rs 1.12 trillion of tax collection at a meeting held here. PM's Adviser on finance Dr Salman Shah was in the chair.

The senior officials of Finance, Water & Power, Commerce ministries; Central Board of Revenue (CBR), Planning Commission, Economic Affairs Division (EAD) and other ministries and divisions attended the meeting.

Sources said CBR Chairman Abdullah Yousaf gave a presentation to the meeting on revenue collection of the first 10 months of the current fiscal year and conveyed that the CBR may cross the target of Rs 835 billion by June 30. He said that projected revenue collection target of Rs 1.12 trillion for the next fiscal year was achievable subject to inclusion of some new areas in tax net.

Sources said Dr Salman Shah hinted at positive response to the CBR call for bringing the new areas under tax in the forthcoming budget. He said the matter will be discussed at the highest level before giving it final shape for announcement.

The meeting also reviewed Public Sector Development Programme (PSDP) for the next fiscal year. It was told the PSDP for the next year will be increased considerably to ensure adequate funding for a number of big projects and initiate some new plans to expedite the process of development in both rural and urban areas.

Sources said Dr Salman Shah endorsed the PSDP size of Rs 505 billion for the next fiscal year and asked the authorities concerned to present it before the Annual Plan Co-ordination Committee (APCC) meeting here on May 21-22. The APCC will discuss nitty-gritty of the next years budget and finalise it for the National Economic Council (NEC), which is likely to meet on May 30. Prime Minister will chair the meeting.

The meeting was told that a major portion of PSDP 2007-08, will go to the provinces for meeting demands for their developmental projects. The federal government's projects like National Safe Drinking Water, Child and Mother Care, HIV and Hepatitis Control Programme and other mega water-related projects will be completed on priority basis.

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Shenhua group rolls back 1,000 megawatts coal-fired plants

KARACHI (May 15 2007): A Chinese state-run company, Shenhua Group Corporation has decided to roll back its plan for setting up 1,000 Megawatts (MW) coal-fired power plants worth $1 billion at Thar.

Sources told Business Recorder on Monday that the decision came at a meeting held in China recently attended by high-powered Pakistani delegation, including Pakistan's ambassador to China, in which the Chinese side withdrew its power generation at Thar coal-sites.

Sources said that the company was not happy over power tariff rates offered by the Government of Pakistan saying it was not enough to continue power generation. Security and domestic workload were also quoted as reasons that forced the company to surrender the plan, sources added.

The government had re-established contacts in October 2006 after 2002 with Shenhua group to start its work at Thar coal sites and also attracted by offering increased rates of purchase of power. Since it was made compulsory that tariff once agreed would not change for 30 years, so the company was insisting to increase the tariff, which would be viable enough to run the business.

The company had already made the decision for not pursuing the project because it had shifted all machinery to another China-run company, working at Sonda-Jherruk, Thatta, sources said. They said this decision would be a major set back for the country as it was facing serious power shortage. After re-establishing contacts with Shenhua it was hoped that about 1,000 MW would be added to the national power grid in three years.

Sources said the failure would harm the other ongoing Chinese projects particularly in coal mining and power generation sectors. Government officials in Sindh Mines and Mineral Department said that in the past that Shenhua company was engaged in China to facilitate electricity generation for the Olympic games, therefore, the company would start work after completion of the task.

Shenhua has vast experience in generating electricity from coal-fired power plants and completed detailed feasibility in collaboration with Geological Survey of Pakistan, sources said and added the other company, which was awarded contracts might not accomplish the work as per requirements.

Sources said that uniformed pricing formula for electricity purchase is needed to guarantee foreign investors for setting up coal-fired power plants in the country as was done for wind-based power generation. This was the only way the government could increase share of coal in country's energy mix to at least 19 percent by 2030 and 50 percent by 2050.

Sources said that several foreign and local companies had prepared feasibility reports in the past and confirmed availability of coal deposits but they were reluctant to start power generation due to unfair pricing formula for coal fired power generation.

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Karachi losses estimated at Rs 20 billion

KARACHI (May 15 2007): Economy faces losses over Rs 20 billion, as the trading and industrial activities in the economic hub of the country, Karachi, were suspended completely for the last three days due to political unrest and violence across the city.

Karachi being the major engine of country's economy, where around more than 14,000 large industrial units are operating and contribute 68 percent to the national exchequer.

"Out of 14,000 industries, none has been operating since Friday evening, halting production process completely in all the five major industrial areas including SITE, Korangi, F.B area, North Karachi and Landhi industrial area of Karachi due to unavailability of labour," an industrialist said.

Pakistan's per day economic activities generate around $500 million out of which Karachi contributes at least 25 percent or $150-175 million per day, therefore, Karachi has faced with around $300-350 million (Rs 18-21 billion) due to suspension of two days' economic activities, said economist Muzamil Aslam.

Shahid Hasan Siddique another economist said, "Karachi's industries suffered production losses over Rs 12 billion due to violence, deteriorating law and order situation for the last three days, tarnishing country's image internationally."

He forecasts that economy faces further direct and indirect financial losses in the shape of dim prospects of foreign investment due to political turmoil and increasing security concerns.

"Twelve billion rupees is the estimated figure of financial losses, while the long-term losses are higher than these," he added. He said that international media have widely covered the Karachi violence on Saturday that has confirmed Western media reports that Karachi is an unsafe city for investment.

It is also expected that now foreign investors will also avoid visiting Pakistan especially Karachi due to new travel advise issued by different countries, he added.

"Karachi contributes Rs 1.25 billion per day in term of taxes to the national exchequer and during the last three days not a single penny has been paid in taxes," said Zubair Motiwala former chairman SITE Association of industry. He said that national exchequer has suffered loses of Rs 3 billion only due to the suspension of industries and trading activities in the metropolitan.

Political activities in the city have badly hit the export process and shipments have not been dispatched since Friday due to political tension in the city, he added.

Masood Naqi chairman Korangi association of industry said that export oriented industries of Korangi industrial area remained completely shut during the last three days. He claimed that Korangi industrial area has faced financial losses over Rs 3.5 billion in the terms of production, besides Rs 750 million taxes.

Small traders have claimed that they have suffered losses over Rs 5 billion in terms of sales. Atiq Mir chairman Alliance of Market Associations said that more than 500 trading market and around 25,000 shops remained closed since Friday, while more than 10 shops of small traders have been torched during the violence. Other than traders, the daily wagers have been affected losing source of income during the period.

Transporters also have suffered huge financial losses as more than 25 busses have so far been set ablaze by the mob during the violence in the city on Saturday and Sunday. They informed that we are compiling exact figures and will release them today, which approximately stand at Rs 20 billion. The port sources also confirmed that port activities have come to a halt as not a single export shipment has yet reached the harbour for export during the last three days.

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KPT seeks $79 million from World Bank for KDLB closure

KARACHI (May 15 2007): Karachi Port Trust (KPT) has finalised negotiations with the World Bank for $79 million loan agreement as direct borrower for closing the Karachi Dock Labour Board (KDLB), it is reliably learnt.

The KPT was assigned by the Ministry of Ports and Shipping to negotiate with the World Bank the KDLB issue in line with the overall objective of National Trade Corridor Improvement Programme (NTCIP) for its closure to reduce the cost of port handling.

This was also part of the government's comprehensive plan for ports improvement and modernisation to reduce dwell time for cargo at lower charges. The negotiation process between KPT and World Bank was also witnessed by Economic Affairs Division (EAD), Ministry of Finance and co-ordinated by Ministry of Ports and Shipping.

The ministry of ports and shipping (MOPS) has sent the summary of the discussions between the KPT and World Bank to the Ministry of Finance for onward submission to the Prime Minister. Once the Prime Minister clears the summary, the matter will be considered at the next available meeting of World Bank Board in Washington via the Bank's Islamabad office.

Sources told Business Recorder that out of $79 million loan, an amount of $73 million would be spend on providing financial package to remaining 3,272 dock workers. While the rest $6 million would be spend on labour redeployment services and counselling etc.

According to documents made available, the mission expressed concern about the appropriate timing of the Statutory Rule of Order, and emphasised the need to ensure that labour redeployment services and social assessment as well as monitoring procedures be in place before dock workers are de-registered and the KDLB disbanded.

The mission also noted to identify how the physical assets of KDLB like officer, training center, medical services would be handled. Identify a feasible scheme for the commutation/continuation of accrued pensions and assess the legal status and compensation benefits applicable to KDLB officers and staff.

In an agreements, it was agreed that the KPT would provide a draft SRO to the mission for review and comment by February 24, the mission would respond by March 2, and the KPT would finalise and forward the SRO to the Government by March 10.

The SRO would not be formally issued and KDLB disbanded until the project unit is established and labour redeployment services and social assessments are organised. The KPT, at the time the SRO was enacted would issue administrative regulations requiring all 'Stevedoring Companies' employing dock workers, as a condition of gaining entry to the docks to place workers under labour contracts and register them with health and pension systems (ie, Sessi and EOBI).

The KPT will inform the WB on how the disposition of KDLB physical assets (ie, administrative building, hospital, training center and others - including equipment) would be handled by March 30. The KPT's legal counsel will expand their legal opinion and provide an assessment on the pending legal issues summarised above by February 26, 2007.

STATUS AND AGREEMENTS ON LOAN FINANCING: From the discussion regarding the financing the loan, two options are envisaged; firstly, financing from the WB to the Government, with on-lending to KPT (however this could entail high on-lending costs to KPT).

Secondly, direct lending from the WB to the KPT, with a Government guarantee. As far as repayment of financing loan, three options for financing loan repayment were discussed including, Ministry of Finance from the budget, KPT from its own resources and continuation of a 'CESS' which would share repayment between KPT, Shipping Agents and Stevedore Companies that are already contributing to the 'KLDB CESS'.

The first option does not appear viable under the current government policy. KPT expressed reluctance over the second option due to the need for resources to finance proposed port investments. The mission expressed concern over the third option as it may not result in as large or immediate reduction in port labour costs as other options.

It was agreed that the option for direct lending from WB to KPT would be exercised providing government and WB policy allows and repayment would be accomplished by continuation of a modified CESS, provided that the CESS would be disassociated with KDLB. With the understanding that the labour costs would be accrued immediately at the port as the revised CESS would be less than the existing KDLB CESS.

The and actual dock workers costs would be considerably reduced with the disbanding of KDLB, due to the elimination of oversize gangs and reduction of actual labour costs for individual dock workers. The KDLB management offered twice the Voluntary Retirement Scheme (VRS) to its workers.

The Karachi Dock Workers Scheme (Regulation of Employment) was promulgated through an ordinance in 1973 which was eventually passed as an Act in 1974.

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