Pakistan Economy - News & Updates - Archive

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ISLAMABAD (April 24 2006): Describing economic turnaround as his greatest achievement, President General Pervez Musharraf has said the country has been put on course to move forward as a dynamic, progressive and enlightened society.

"My greatest achievement is economic revival of Pakistan - the possibility of pulling the country out of deep economic morass looked remote in 1999 - it looked almost improbable in the face of an inextricable circle of debt-servicing but we managed it," he told PTV's programme, A Morning with the First Family, aired Sunday evening.

First Lady Begum Sehba Musharraf, President's son Bilal Musharraf and his daughter Ayela Raza candidly shared their experiences, thoughts and hopes for the country's future in the programme.

The President referred to ever mounting debts, debt-servicing to the tune of $5 billion per annum and low income, abysmal forex reserves at the time of assuming responsibilities of the government in 1999 and said for a while he felt disheartened at the state of affairs in the beginning.

"We managed to bring about a turnaround. God has been very kind - now there is a complete reversal...we have everything: minds, potential and resources to progress and prosper; all these were mismanaged in the past," he stated, adding putting right people as heads of state-owned companies like Steel Mills and PNSC delivered.

The nation now is moving forward because the economy is growing, it lies at the heart of progress in all fields, he remarked.

In response to a question, the President said he would like the nation to remember him for saving the country and steering it as a dynamic society.

"Not only I saved the country from sinking but I would like to be remembered for taking it forward and putting it on a course to move forward as a dynamic, progressive and enlightened society - that is what we achieved for Pakistan.

President Musharraf saw a strong desire in the Pakistani youth to take the country forward and said the upbeat economic growth has replaced their disillusionment with hope.

"I have full confidence in youth, they have an urge to do something for Pakistan, they feel for Pakistan, I can see that urge in them, in the past there was disillusionment, now I can see light in them."

He told the interviewer that heroism means true leadership and not "commanding through weight of authority".

Heroism does not mean commanding through weight of authority but earning support, affection and liking of the people, he said and added he takes his colleagues along to have their ownership.

Continuing, President Musharraf said Pakistan army is fully with him because he has braved off difficulties and dangers with them.

In the wide-ranging interview, the President said improving the image of Pakistan has been close to his heart. He said he has initiated a number of steps to project soft image of the country through culture, sport and tourism and cancel out the negative perceptions about it.

The President recalled the 1965 and 1971 wars as important events of his life and said he was deeply hurt at the fall of East Pakistan.

Sharing his daily morning routine, the President said it includes glancing at newspaper headlines and editorial pages of about half a dozen leading national dailies.

In sport, the President said he plays tennis and likes swimming, at least three to four times a week.

The First Lady, in her message to the nation, called for a futuristic approach and said the young people must equip themselves with skills required for contributing to national development and strive for improving its image.

Bilal Musharraf said his father encouraged him to take part in sports and the two play tennis even now whenever they get a chance. He said his father has been friendly and a practical person, who believes in moving forward.

The son and the daughter of the President said their father respects their views and added that the parents have allowed them to develop their own individual personalities and choose their career paths.

They said they are proud of their father but do not believe in boasting to people that they are children of the President.

 

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ISLAMABAD (April 24 2006): The Asian Development Bank (ADB) has finally approved $42 million "Federally Administered Tribal Area (Fata) rural development project" designed to reduce incidence of poverty in far-flung areas of the region, it is reliably learnt.

The project was under discussion since 2002 as differences emerged about its design and execution among the bank, Fata secretariat and Ministry of States and Frontier Regions (Safron) delayed the project.

This is a soft loan project from the bank's Asian Development Fund (ADF). This is to be launched in three northern agencies - Bajaur, Mohmand and Khyber.

Objectives of the project is to contribute to efforts being made for reducing incidence of poverty among the rural population by increasing income and employment opportunities through a mix of economic and social intervention.

A well-placed official told Business Recorder, besides other problems, the contention between the NWFP governor's Fata secretariat and Ministry of States and Frontier Regions (Safron) for getting execution rights for the project delayed its approval.

A special high-powered delegation visited the ADB head office in Manila in March this year to finalise project modalities. The delegation comprised of representatives from economic affairs division (EAD), Fata secretariat and Safron, they said. Now issues relating to the project have been settled and the EAD is preparing for loan signing with the bank.

The project's total cost is $62.9 million. Out of which, the bank would provide $42 million from its ADF and the remaining amount will be arranged locally. Safron is now the executing agency, source said.

It is important to note that governor's secretariat (Fata) was eager to execute the project independently without the involvement of Safron. The bank has demanded of the secretariat to make it clear that it is independent in terms of utilisation of aid given by the international financial institutions (IFIs) or donor agencies. Besides, it has also expressed some reservations regarding the design and details of the project and its PC-I was still lying with the bank.

The issue emerged during the visit of ADB mission in 2004 wherein Fata secretariat demanded 100 feet height of nine small dams, which is not acceptable to the bank as small dams.

The EAD also informed the Fata secretariat about the instruction of water and power ministry that dams of 100 feet do not fall in the definition of small dams.

Endorsing the ministry's stance, the International Commission on Dams (ICD) also opined that reservoirs up to 15 meters height are small dams and more than 15 meters lie in the category of big dams.

After a series of meetings with Fata administration, sources said, the issue has been settled and the project's PC-I is in hand.

 

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ROHTAS FORT (April 24 2006): Prime Minister Shaukat Aziz said it was time that Pakistan properly showcased its rich heritage, culture and history to the world to attract tourists from around the world.

He was speaking here at the third annual sound and light show at the sprawling greens inside the Rohtas Fort, the only surviving pre-Mughal military architecture in Pakistan and a World Heritage Site, Saturday night.

He emphasised that preserving cultural heritage is crucial not only to restore the beauty and grandeur of the past but also in economic development of a country as it fosters the local cultural industries and promotes tourism.

About the 450-year old fort, which is undergoing extensive restoration, Aziz said his government will "do the needful" to make the work on conservation of the project "go faster" and reiterated government's support to all such projects in the country.

"We have a lot to look back and a lot to look forward," Aziz said referring to the many historical sites in the country ranging from the ancient Gandhara civilisation to the Mughals, spread across the country.

The Rohtas Fort built on the orders of the emperor Sher Shah Suri in 1541 and completed after his death was in ruins and the surviving parts are being restored by Shell Pakistan at a cost of Rs 27.2 million.

He said being close to Islamabad the site can be yet another attraction for domestic and international tourists who can visit these locations, both for historical and religious reasons.

The Prime Minister also referred to the many Buddhist sites, the captivating mountainous Northern Areas and Moenjodharo as national treasures that can attract thousands of tourists and further strengthen the national economy.

"Lets package, what we have, and show it to the world," Prime Minister Aziz said.

Prime Minister Aziz also appreciated the efforts of Shell Pakistan, Himalayan Conservation Foundation and the Government of Norway in the conservation of the fort and said such public-private partnerships can go a long way in supporting similar projects across the country.

Rohtas is now a protected monument under the Antiquities Act 1975, and maintained by the Department of Archaeology.

He inaugurated the Sher Shah Museum, which has on display swords, books, household pottery and utensils dating back to that era.

 

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SIALKOT (April 24 2006): The Punjab Chief Minister Chaudhry Pervaiz Elahi has released a special grant of Rs 12 billion to Sialkot district government for early establishing of Sialkot-Lahore Motorway. Punjab Minister for Industries Muhammad Ajmal Cheema disclosed this while talking to newsmen, here on Sunday.

Sialkot District Nazim Muhammad Akmal Cheema was also present on this occasion.

The provincial minister said that construction of Sialkot-Lahore Motorway would begin after June 30, 2006, with total cost of Rs 20 billions, which would open the new vistas of socio-economic development in the region including Sialkot, Narowal, Gujrat, Gujranwala and Sheikhupura districts, besides providing a strong industrial base.

He said that this motorway would also reduce the distance between Sialkot and Lahore and Lahore would be on the drive of only 45 minutes from Sialkot.

He said that the provincial government has won the hearts of people of Sialkot by approving and announcing the early construction of Sialkot-Lahore Motorway's grand project.

Cheema said the Punjab Chief Minister Chaudhry Pervaiz Elahi would inaugurate this grand project during his visit in beginning of May 2006.

 

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ISLAMABAD (April 24 2006): After failing to convince Iran, the Pakistan government has decided to offer 2000 acres land in Hub (Balochistan), primarily acquired for the Pak-Iran refinery, to prospective investors to establish oil refinery through international competitive bidding (ICB).

In 2002,Tehran had unilaterally refused to help in establishing $1.3 billion refinery in Balochistan's coastal areas, saying that the project had no rate of return.

"The Ministry of Petroleum has indicated that the land acquired by State Petroleum and Petrochemical Corporation (Perac) for setting up the Pak-Iran refinery, is available at Khalifa Point (in Hub), Balochistan," official sources told Business Recorder.

They quoted the Ministry as saying that the estimated cost of a mega refinery project, with 200,000 to 300,000 barrels per day (bpd) refining capacity, was about $2 billion.

On May 16, 1991, Pakistan and Iran had signed an agreement to initiate the project, with a capacity to refine 120,000 barrels crude oil per day, but later Iran backtracked from the project and any argument from Pakistan side could not convince it in this regard.

The Ministry has now suggested to seek proposals from short-listed prospective investors (single entity or joint venture) to set up a state-of-the-art deep-conversion refinery of this capacity at Khalifa Point, on 'Build-Own-Operate' (BOO) basis, under the incentives regime applicable to projects established in the Export Processing Zones (EPZs), sources added.

They said that investment proposals would be evaluated on the basis of technical and financial soundness of development and operation of the proposed refinery.

However, the Ministry of Industries and the Central Board of Revenue (CBR) have locked horns with the Petroleum Ministry for declaring the refinery location as 'EPZ', according to sources.

The said that CBR was of the view that there was no provision to exempt crude oil imports from customs duty and other taxes, whereas Finance Ministry agreed with the proposal that no subsidy be provided under the proposed pricing mechanism and that the proposed concessions should not impact the competitiveness of existing refineries and also that the land may be leased out at nominal rates for the life of the project.

The country's current demand of petroleum products is about 16 million metric tons per annum, 82 percent of which is met through imports (crude and finished products) and the rest through indigenous resources.

Pakistan's total refining capacity at present is about 12.8 million tons per annum against total demand of 16 million tons.

Energy demand and supply projections indicate that by 2011-12, the total deficit of petroleum products in the country would be over nine million and 11 million tons, respectively.

The Economic Co-ordination Committee (ECC) of the Cabinet had decided in the last meeting that Petroleum Ministry and Ogra would select the party for setting up the refinery through ICB, with the objective to bring in quality investor which has the ability to set up a state-of-the-art refinery within the stipulated timeframe.

 

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FAISALABAD (April 24 2006): Federal Education Minister Lieutenant-General Javed Ashraf Qazi (retd) has said the promotion of education is the mission of government and every effort would be made for this purpose.

Addressing a function of University of Faisalabad, he said that education is key to progress, therefore, the government has adopted this sector as one of the pillars for poverty reduction and benefit of masses.

He said the government is fully committed to providing best educational facilities to the youth within the minimum possible time. The reasons for Pakistan's low educational status are varied, but one important factor is that Pakistan's educational system has been highly fragmented and segmented, he added.

It has, therefore, created some intractable problems in the optimal utilisation of human resources under the given labour market condition, said the minister, adding the existing National Education Policy 1998-2010 was formulated keeping in view the prevailing problems in the society.

Javed Ashraf Qazi said the government has initiated major administrative reforms, such as 'devolution of power' and Education Sector Reforms. Moreover, Millennium Development Goals (MDGs) and Education For All (EFAs) are the international policy concerns announced in 2000, which need to be properly reflected in our Policy. As such, the Ministry of Education has taken in hand an exercise to review the National Education Policy (1998-2010) for updating to bring it in line the current needs of the country, he added.

The minister said the National Education Policy is to make Pakistan's education system more meaningful and relevant, aimed at creating a knowledge-based society, designed to support economic growth and poverty alleviation.

Javed Ashraf Qazi said that private sector is playing a substantial role and supplementing the government efforts for promotion of education. He assured that government will encourage and support the private educational institutions, which are not commercialising the education.

Earlier, presenting address of welcome, Faisalabad Chamber of Commerce and Industry (FCCI) President Mian Mohammad Hanif emphasised the need for fresh investment in the education sector for meaningful purposes, while so-called registered education institutions should be highlighted in the best interest of the students' career and investment of the parents.

Later, Javed Ashraf Qazi visited the Expo-Faisalabad 2006 and expressed satisfaction over the International standard of stall.

 

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FAISALABAD (April 24 2006): The Punjab government is negotiating with the International Development Association of World Bank for obtaining $100 million as third and last Punjab Education Development Policy credit for budget support, which is implementing a wide-ranging sector reform agenda backed by fiscal and fiduciary reforms.

According to official sources, the Punjab education development policy credit would be third and last of a series of three development policy credits of International Development Association to support the provincial government's three-year education sector reform programme (PESRP) to improve quality of education.

The programme supported during the first year through $100 million Punjab Education Sector Adjustment Credit (PESAC) was approved by the World Bank in February 2004, and in the second year through the $100 million second Punjab Education Development Policy Credit, was approved in March 2005.

The proposed credit would help deepen the reforms that have been implemented with high commitment. The sources mentioned that the purpose of this third development policy credit is to provide budget support for the province, which is implementing a wide-ranging sector reform agenda.

The reforms are being implemented by the district governments through annual terms of partnership agreements (TOPs).

Improvements in the education outcomes in Punjab have a countrywide impact, and success could motivate other provinces to follow a similar path and undertake sector-wide reforms. The credit supports the key pillars of the Punjab Education Sector Reform Programme, including public finance reforms to increase public spending for education to improve quality, access and sector governance.

The programme document of the first Punjab Education Sector Adjustment Credit (PESAC) presented the three-year PESRP. There has been steady progress and a number of sector initiatives are already beginning to show impact, including promising increase in school enrolments.

 

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Monday, April 24, 2006javascript:; http://www.dailytimes.com.pk/print.asp?page=2006\04\24\story_24-4-2006_pg7_12

ISLAMABAD: The government of Pakistan owes loans amounting to $15.467 billion to the World Bank (WB) and the Asian Development Bank (ADB).

Sources said the government owed the WB $9.155 billion up till February 28, 2006. The loans included IDA amounting to $6.950 billion and IBRD amounting $2.205 billion.

The rate of interest for IBRD on the basis of spread loan or variable spread loan are LIBOR + 0.5 to 0.85 spread. The IDA loans are free of interest but incur a commitment charge of 0.5 percent and service charge of 0.75 percent.

Sources said that the total amount Pakistan owed the Asian Development Bank as of January 31, 2006, stood at $ 6.312 billion. Out of this total loan amount, $1,891 million is from Ordinary Capital Resources and $4,421 million is from the Asian Development Fund.
http://www.dailytimes.com.pk/default.asp?page=2006\04\24\story_24-4-2006_pg7_12

 

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FDI reaches $2.2 billion in first nine months
KARACHI (updated on: April 24, 2006, 20:12 PST): Foreign direct investment in the country reached $2.2 billion in the first nine months of the 2005/06 fiscal, led by inflows into the communications and energy industries and the financial sector, official figures show.

Data posted on State Bank of Pakistan's web site on Monday showed FDI for the July-March period rose from $792 million in the same period of the 2004/05 fiscal year.

The communications sector attracted the most foreign investment in the period, $1 billion, followed by $304 million invested in the power industry, $265 million in the financial sector and $217 million in oil and gas exploration.

In the splurge on communications mainly stemmed from the sale of a 26 percent stake in Pakistan Telecommunication Co. Ltd. to Dubai-based Emirates Telecommunications (Etislat).

The United Arab Emirates led the list of foreign investors with investment of $653.8 million in the first nine months of the year, followed by the United States with $369 and Saudi Arabia with $272 million.

Inflows from foreign portfolio investment during the period were recorded at $407 million, up from $108 million in the first nine months of 2004/05.

 

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OGDC GDRs offering: Shaukat directs to materialise deal by June 30

ISLAMABAD (April 24 2006): Prime Minister Shaukat Aziz has rescheduled the Oil and Gas Development Company (OGDC) Global Depository Receipts (GDRs) offering, and directed the Privatisation Commission to materialise the transaction by June 30.

Earlier, the Privatisation Commission Board had fixed July 31 as the deadline for the offer. The Board had discussed the issue in depth in its meeting last month and referred the case to the Cabinet Committee on the Privatisation (CCoP) for approval. But the CCoP could not discuss the issue due to heavy agenda.

Sources said that the Prime Minister directed the officials to arrange road shows in Singapore, London and Washington to get maximum response for the offering.

OGDC GDRs will be Pakistan's first ever attempt to offer any organisation's shares in world stock market. Since Islamabad's idea to float bonds to stay in the world market had been a great success in the recent past, the officials expect positive response for the GDRs.

Sources said that the Privatisation Commission was working actively to select one of four short-listed banks' consortiums as lead manager for the offering.

The lead manager will have a multiple role in the offering. It will have to suggest to the government to pick up any world stock market for listing of GDRs. besides deciding the size for one receipt.

Sources said the lead advisor will also be responsible of promoting Pakistan's image in the world market, besides reporting and maintaining the books of the offering, on behalf of the government of Pakistan (GoP).

Four parties/banks consortiums have shown interest in handling the GDRs. They have quoted different fees and cost for the job. Deutsche Bank quoted Rs 838 million; a consortium of UBS and JP Morgan Rs 989 million; City Group and Goldman Sachs consortium Rs 1,258 million; and Merrill Lynch Rs 1,342 million as fee and cost for the offering services. Sources said that the Privatisation Commission was negotiating the fee and cost services with the short listed parties/banks consortiums, and its final decision to pick any one them was expected in a couple of days. An official said that fee and cost matter was a secondary thing in GDRs issue, and the first priority would be given to credentials of the parties in appointment of lead manager.

 

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KSE proposes capital gain tax relief for 5 years

KARACHI (April 24 2006): The Karachi Stock Exchange (KSE) has proposed to the government to extend the capital gains tax exemption for a period of five years to avoid selling in stocks and help sustain the current levels of the market, creating more appetite for new investments leading to accelerated industrial activity in the country.

According to budget proposals prepared for the next fiscal year, the capital gains tax exemption is available until financial year ending on June 30, 2007 and is in place since 1975. The government is extending it for every one to five years since then.

This exemption is tax-neutral as capital gains from sale of shares are exempted, while capital losses are not allowed to set off against other taxable incomes. In case of withdrawal of this exemption, capital losses shall be subject to adjustment against other taxable incomes, which may cause loss of revenues for the government.

The other proposals tabled by the Exchange are tax rebate for listed companies, exemption on dividend income, compulsory distribution of dividend by listed companies, improvement in mutual funds industry and voluntary pension scheme, investment allowance, demutualization and capital tax exemption on corporatisation of individual stock exchange membership.

The Exchange said that the government is keen to see more and more new listings of companies to attract general public participation in the industrial progress in Pakistan. The government often expresses its concern that despite the stock market boom new listings have not picked up. Though lately some public offers have taken place but mainly under privatisation program of the government and mutual funds and banking sectors. Private industrial units are still shy of getting listed.

THE REASONS FOR THIS ARE: Until June, 2002, there was a tax differential of 10 percent for listed companies. Unlisted companies were subject to income tax rate of 45 percent, whereas listed companies had to pay 35 percent. In the 2002-03 budget the government had decided to progressively reduce the tax rates of private companies, thereby removing the tax difference of 10 percent between and private company and public company, leaving no tax incentive for listed companies.

The tax rate on dividend from unlisted companies and listed companies have become same @10 percent again no advantage to listed companies. Until June, 2002 ,tax rate on dividend from unlisted companies was 20 percent.

The stock exchange on directives from SECP has introduced code of corporate governance on the listed companies making them subject to much desired discipline to protect the shareholders of the listed companies. Many of the listed companies consider it a burden on them, with no advantage to them vis-à-vis unlisted companies, particularly under the present environment of low interest rate with easy accessibility to credit.

In order to attract the companies for listing, it has been proposed that the tax rates for the public listed companies should also be reduced in the same ratio as the private companies so that the corporate tax rates for the listed companies are brought to the level of 25 percent and the non-listed companies at 35 percent. The differential tax treatment at 10 percent between the listed and non-listed companies will promote better disclosure of profits by the listed companies and will not only offset the revenue loss, if any, but would lead to growth of corporate tax due to reduced tax rates.

Tax on dividends of listed companies to be exempted from tax as dividend is distributed out of the profits earned after payment of corporate tax and is tantamount to double taxation. Revenue loss to the exchequer due to withdrawal of tax would not be much, as around 30 percent of the market is owned by the government and about 20 percent by mutual funds, which are already exempt from this tax. Similarly, 20 percent of market is owned by the corporates which are presently subject to 5 percent rate on dividends.

Hence, 30 percent of the market owned by the individuals would get the benefit of tax concession, which need to be encouraged.

Alternatively, tax rates on dividend income of listed companies to individual shareholders be reduced to 5 percent from 10 percent. The revenue loss against the total dividend amount of approximately Rs 40 billion would be less than Rs 2 billion, which will offset more than due to increased listings, growth and higher dividends as a result of this incentive.

The current saving and the investment rate in the country is low. The government has taken a good step with the introduction of an investment allowance. In last year's budget the government had increased the maximum limit of the allowance from Rs 100,000 to Rs 150,000, it is proposed to increase the ceiling of investment allowance at least up to Rs 500,000 so that the investments in equity can be further promoted.

 

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PC told to consult Petroleum ministry for PPL fields lease pacts rewriting
RECORDER REPORT ISLAMABAD (April 24 2006): The Economic Co-ordination Committee (ECC) of the Cabinet has directed the Privatisation Commission (PC) to consult Petroleum Ministry before re-writing agreements regarding lease, development and production of PPL (Pakistan Petroleum Limited) fields, official sources told Business Recorder.

The PC, which is processing PPL privatisation to sell 51 percent equity shares and transfer management control to the strategic investors, had sought government approval to extend lease of Sui, Kandhkot and Mazarani to cover their respective lives.

Four parties, namely OMV Exploration and Production GmbH of Austria, a consortium of CNPC International and China ZhenHua Oil Co Ltd, a consortium of MOL Hungarian Oil and Gas Pic and Kuwait Foreign Petroleum Exploration Company (KUFPEC) and BP Pakistan Exploration and Production Inc have carried out due diligence.

The PC is of the view that analysis compiled by PPL technical consultants indicates that commercial production of oil and gas from most of PPL fields would continue for many years, beyond the expiry of their respective leases.

It said that all the parties interested in buying the shares in Sui, Kandhkot and Mazarani fields had sought assurances that the lease terms could be extended for the duration of commercial production, adding that in the absence of such safeguard the parties would heavily underestimate the value of PPL, even if they agreed to bid.

The maximum term of any lease depends on whether it is an 'Oil Mining Lease' (ML) granted under Pakistan Petroleum (Production) Rules, 1949 (the 1949 Rules) or a 'Development and Production Lease' (D&PL) granted under the Pakistan Petroleum (Exploration and Production) Rules, 1986 (the 1986 Rules).

The PC had argued that in order to create enabling environment for the PPL-operated leases to be extended to cover the producing lives of the fields, a fresh notification would need to be issued by the GoP under the Regulation of Mines and Oil-fields and Mineral Development (Government Control) Act 1948 (the 1948 Act).

Such a notification would allow extension of PPL-operated leases to cover their economic producing lives through exemptions on the application of the 1949 and 1986 rules, respectively.

Sources said that the Privatisation Commission would issue revised notification for extension in lease, development and production.

 

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ISLAMABAD (updated on: April 24, 2006, 22:28 PST): Prime Minister Shaukat Aziz has said that Pakistan is tapping all possible sources of energy including hydel, thermal and nuclear in view of its rapidly growing energy requirements at 8 to 10 per cent per annum.

He said this while talking to Andre Mernier, Secretary General of the Energy Charter Secretariat who called on him at the Prime Minister's House on Monday.

The Energy Charter Treaty is a multilateral inter-governmental agency for cross border energy trade, transit and investment.

Giving an overview of Pakistan's energy needs, the Prime Minister said that Pakistan is focusing on obtaining energy from hydel sources as five out of the twelve highest mountain peaks in the world are located in Pakistan making it an ideal place for harnessing hydel sources.

Shaukat Aziz said Pakistan is also considering the possibility of importing gas from Iran and Turkmenistan through pipelines capable of being extended to India. Pakistan has a highly developed gas distribution system spread over 60,000 kilometer, which makes gas available all over the country.

To meet its growing energy requirement, Pakistan is considering import of liquefied nitrogen gas (LNG) and establishing an LNG terminal at the Karachi port from where it will be injected into the country-wide gas distribution system, said the Prime Minister.

He said Pakistan is also engaged in tapping alternative sources of energy including wind, solar and biomass energy and it expects to generate 500-600 MW of wind power by 2007.

Pakistan requires to generate 8800 MW of nuclear energy by 2025 with a view to ensuring energy security, which is critical to maintaining a growth rate between 6-8 per cent.

The Secretary General informed the Prime Minister that Pakistan, which is already an observer of the Energy Charter Treaty is being considered for its full membership in view of its growing energy requirements.

 

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By Naween A. Mangi
In its second quarterly report on the economy released late last week, the State Bank of Pakistan warned that sustained growth in the long term would be dependent on improvements in infrastructure, implementation of further reform to strengthen governance and institutions and greater liberalization.

The central bank also cautioned that in the short run, “emerging macroeconomic imbalances that are still small and not threatening” need to be addressed. These include a widening savings-investment gap, rising trade and current account deficit, a weakening fiscal deficit, and persistently high levels of inflation.

The SBP’s prescription for long-run success is valid. The report says GDP growth will fall below the seven per cent target but will be in the range of 6.3 to 6.8 per cent. Disappointing harvests of cotton and sugarcane as well as lower-than-expected growth in large-scale manufacturing will be the major reasons for this. Typically, higher-than-expected GDP growth takes place when a bumper crop comes as a surprise. Last year, for example, a record cotton crop added 1.3 percentage points to the high GDP growth of 8.4 per cent. The SBP’s forecast of lower growth underscores the need to reduce continued dependence on agriculture and undertake serious investments in the sector which will increase productivity and yield in a sustainable way in the long term.

In the short term, there is far greater urgency than the SBP would have us believe to address the economic imbalances which are far from just “emerging” and indeed have firmly taken root in the economy.

Savings-investment gap: One worry is the widening gap between the rates of savings and investment in the economy. The rate of savings has been on the decline leading to a widening gap between savings and investment. The savings rate stands around 14 per cent whole the rate of investment hovers near 16 per cent. Clearly, rising levels of consumption far exceed the nation’s ability to save. The SBP warns that in coming years Pakistan will be increasingly constrained in its ability to meet the growing consumption and investment needs without generating inflationary pressures and rising levels of debt. But the SBP clubs this problem with other “emerging” imbalances which need to be addressed in the long term. To the contrary, the declining rate of savings and the rising gap with investment have been problems that have been emerging for some years now and should have been analysed and addressed by now. Economists say the rate of investment needs to rise to 23 per cent to keep growth in the economy strong. And the rate of savings needs to climb above its long-term historical trend rate in order to prevent the need for greater borrowing. However, the government has not yet proposed a plan on how to tackle this and the seven to eight per cent gap between savings and investment will need to be financed by foreign capital.

Current account deficit: Another increasingly worrying concern is the ballooning trade and current account deficits. The SBP predicts the current account deficit will close the year at 4.7 per cent of GDP as the trade balance continues to widen. Export growth is not insubstantial but is far from able to keep up with the 50 per cent plus growth in imports. The exchange rate has been maintained with a pro-import stance that penalizes exporters and with general elections scheduled for next year, it is unlikely the rupee will be allowed to depreciate this year. The SBP says it would favour a policy of reducing the rate of inflation and transport costs to reduce the trade deficit rather than resorting to large, sudden exchange rate adjustments. This makes little sense when the bulk of imports are consumer goods that do not add productive resources to the economy. Economists say the rupee needs to weaken by three to five per cent to help reduce imports and raise exports.

However, the real question is why the SBP chose to ignore in its report the serious and growing problem of massive consumer imports? In a research note put out this week, Sakib Sherani, chief economist at Abn Amro Bank points out that in the period from July to October 2006, consumer goods excluding food and oil food amounted to 36 per cent of total imports and for almost 40 per cent of the increase in imports over the same period last year. These numbers are alarming. Sherani predicts that the current account deficit will rise from $1.6 billion in 2005 to $8.9 billion in 2007. The SBP admits that in the longer run, larger current account deficits would initiate a vicious circle of debt creation, exchange rate depreciation and inflation. But it is severely disappointing that the central bank failed to take a hard line on this matter.

Fiscal worries: Part of the problem, of course, is that these economic imbalances have become dangerously intertwined. If imports are drastically curtailed in a bid to cut down the trade and current account deficits, revenue collection which has become heavily dependent on import duties will be hurt and the fiscal deficit will worsen. Already, the fiscal deficit is expected to widen to 4.5 per cent of GDP. The SBP points out that the revenue balance is in deficit in both years and even the primary balance has deteriorated significantly this year. This is as a result of lax discipline on both the expenditure side—where unproductive current expenditure is rapidly increasing—and on the revenue side where import taxes excluded, collection is unable to match growth in the economy.

The issues on the fiscal front too, need to be addressed immediately rather than in the long term as the SBP says. Despite heavily publicized reform, the tax base has not been widened in any meaningful way. Sectors that have traditionally escaped the tax net continue to do so and the limited sectors that have always paid taxes continue to bear the burden. The Central Board of Revenue does not appear to have evolved a strategy to address this concern and impressive tax collection figures are largely a result of higher collection from import taxes as imports of consumer goods continue to rise.

Similarly, fiscal indiscipline has crept in and the government’s current expenditure continues to rise and add pressure to the fiscal deficit.

Persistent inflation: To finance its deficits, the government has resorted to heavy borrowings which are adding to already substantial inflationary pressures in the economy. The State Bank says that while the rate if inflation has moderated in recent months, the “downtrend is still unsettled” and “inflation remains at relatively high levels.”

The SBP expects consumer price inflation to fall between 7.7 per cent and 8.3 per cent by the time the fiscal year draws to a close. However, several inflationary pressures remain in the pipeline. Primary among external factors is international oil prices which have not stabilized. Abn Amro’s Sherani says that every five dollar increase in oil prices that is passed on to domestic consumers increases the CPI by 3.5 percentage points. That is a major concern. Moreover, as the SBP points out, hoarding and collusive price setting by industry needs to be tackled by the government through tough monitoring in order to prevent internal inflationary pressures from rising in the economy. However, there is little hope on this front since no real plan has been put in place to revamp the powerless Monopoly Control Authority and manipulative industrialists resort to hoarding and profiteering with the greatest of ease, as has been the case in the sugar business. Political considerations are clearly paramount to the government and take precedence over consumer problems which is why President Pervez Musharraf and Prime Minister Shaukat Aziz wasted no time in calling off a NAB investigation on the sugar crisis.

The SBP says it will keep monetary policy tight and may even tighten further. The bank appears confused about whether price stability or maintaining growth is its real objective.

The way ahead: There are also greater worries ahead. While the economy will grow at a solid six to 6.5 per cent this year, the period beyond 2006 is far more uncertain. Elections in 2007 means there will be a reluctance to pursue tough reform. That, in turn means present import-friendly policies will continue, leading a ballooning current account deficit. It also means the government will be reluctant to crack down hard on tax evaders and so the fiscal deficit worries will persist. Additionally, the reluctance to tackle manipulation by industrial cartels will persist and intensify, leading to greater inflationary pressures in the economy.

Meantime, the dependence on external inflows will continue to grow. Privatization-related flows and promised funding for earthquake related spending all remains uncertain. This is perhaps a major factor that has forced the government to declare that sovereign bonds will be issued every year as a matter of policy. While Islamabad argues that this is a deliberate plan developed keep Pakistan on the radar screens of international investors, it is by now amply clear that the strategy is also borne out of necessity to finance the uncontrolled deficits in the economy.

 

[Neo]

By Ashfak Bokhari
A bilateral investment treaty (BIT) with the United States, that has been under discussion for long, was billed to be signed on the eve of President Bush’s visit to Islamabad last month as a mark of Washington’s special favour to Pakistan, though no match to what it offered to India.

However, the signing ceremony was put off because the US draft contained some provisions, which President Musharraf later said were highly objectionable and, therefore, unacceptable, and needed to be renegotiated to both parties’ satisfaction.

While little is known if the controversial provisions, which mostly related to security of investment and intellectual property rights, have been re-opened to a fresh round of discussion or not, commerce minister Humayun Akhtar has expressed eagerness for early conclusion of the proposed BIT in his meeting with assistant US trade representative, Douglas Alan Hartwick , who visited Islamabad mid-April.

He suggested that a meeting of Trade and Investment Facilitation Agreement (TIFA) council be held in Islamabad before June-end. The council last met in Washington in September 2004. Under the US policy, it is only under the good offices of the TIFA that negotiations can be held for a BIT and then an FTA. So, TIFAs set up a joint council to identify and discuss ways to remove regulatory barriers to trade and foreign investment.

A conspicuous feature of this exercise is the negotiating fatigue which is deliberately designed by the developed country partner.

This is especially acute for developing country governments holding talks with powerful countries like the US. Keeping pace with technical, complex and arcane legalistic negotiations puts a great strain on under-resourced officials and ministries of a government like ours, who often have little access to necessary information about these deals and can easily be pressured or bribed.

Pakistan thinks an FTA with the US will result in an enhanced volume of exports to that country and officials in Islamabad cite the example of Jordan whose exports to the US, after an FTA was signed, increased from $17 million to $1 billion. More than 85 per cent of Pakistan’s exports to the US consist of textiles and apparel and other garment made-ups.

President Pervez Musharraf had himself been keen to see an early conclusion of a BIT and FTA with the US and had earlier raised the issue with President George Bush at a meeting in Washington in December 2004, and again in September 2005 in New York.

Last year, the US gave its ‘final text’ of the proposed BIT duly approved by various departments and insisted that it should be accepted by Islamabad without any amendment. The text included a “confidentiality agreement” which Pakistan argued needed to be changed and that it should be made open so that the investors should not have apprehensions about it.

Then, there was a clause about “pre-establishment phase of investment” which Pakistan wants to be deleted. According to this clause, if a US investor suffers a loss when he is still in the process of establishing his business in Pakistan, he would have to be compensated through a court of law.

Recent reports say that the World Bank and the Asian Development Bank are now putting pressure on Pakistan to adopt a dispute resolution mechanism in a manner as desired by the US and the corporate sector of the West , without much delay, if it was really serious to have foreign investment in a big way. So far, only non-West investors have shown interest in Pakistan and that too in the service sector or privatized units.

In many BITs, where a dispute cannot be settled amicably and procedures for settlement have not been agreed to within a specified period, they can be referred, for example, to the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) or the UN Commission on International Trade Law (UNCITRAL). Nafta lets unhappy investors choose between the two. Both recourses, however, represent the privatization of commercial justice. And Americans are unwilling to seek justice from Pakistani courts.

Pakistan is reluctant to accept the ICSID as a forum for dispute resolution or arbitration, which the US favours, but would agree to the UICITRAL for this purpose. Recently, the attorney-general of Pakistan and other legal experts had cautioned Islamabad against rushing into signing bilateral investment treaties (BITs) with foreign countries (the US in particular) for these can create ‘painful’ legal implications.