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ISLAMABAD, Sept 7: Faced with the highest ever current account and fiscal deficits, the government is expected to announce two weekly off days and closure of petrol pumps for one day in a week to reduce oil consumption.

“An announcement about five-day week and closure of petrol pumps for one day is expected this week,” a senior government official told Dawn on Sunday.

The federal cabinet in a recent meeting decided to take steps to curtail consumption in transport and power sectors, but deferred the announcement till after the presidential election.

According to the decision, Saturday and Sunday will be off days while petroleum products will not be sold on Fridays.

The oil import bill, which surged to $11.38 billion or almost 30 per cent of total imports of about $40 billion in 2007-08, was more than 55 per cent higher than $7.33 billion a year ago, mainly because of higher international prices and increased consumption.

The Economy Monitoring Committee, headed by Finance Minister Syed Naveed Qamar, had directed the petroleum ministry to suggest ways of curtailing oil consumption. Among other things, the ministry proposed two steps -- five weekdays and closing petrol pumps for a day, which could reduce oil consumption by almost 20 per cent, the ministry said.

The last PPP government had also introduced two weekly holidays but the move was soon reversed because it resulted in higher than usual fuel consumption and government employees started taking three off days.

It was witnessed that people moved out of the cities and towns where they worked to enjoy longer weekends. Therefore, the concept of stopping petroleum sales on Fridays is being introduced to discourage the trend.

As a result of record international prices and higher consumption, the government had to pay $4 billion (Rs270 billion) more on oil imports in 2007-08 than in the previous year. The import of petroleum products showed a 65 per cent increase to $6.158 billion from $3.73 billion, while crude imports surged by 45 per cent to $5.22 billion from $3.6 billion in 2006-07.

The consumption of petroleum products went up by about 19 per cent to 10 million tons from 8.6 million tons, while crude imports surged by 5.2 per cent to 8.6 million tons from 8.2 million tons in 2006-07.

The fiscal deficit reached 7.7 per cent of GDP or Rs777 billion against the budgeted target of 4.2 per cent of Rs398 billion. The current account deficit, too, set a new record at almost $16 billion last year with no respite in the initial two months of the current fiscal year.

The government had estimated the oil import bill to stay at $8.8 billion in 2007-08, but it had to pay about $2.6 billion (Rs170 billion) more because the estimates had been based on an expected international crude price of $70 per barrel.

Petroleum emerged as the largest contributor to the total import of $39.97 billion in 2007-08, followed by machinery imports at $7.4 billion, which was 10.32 per cent higher than $6.7 billion of 2006-07.

The government increased duties on more than 250 items last month to discourage import of non-essential products. The opening of letters of credit is also subject to 100 per cent cash margin to discourage importers from unjustified flight of capital. The two measures are estimated to save about $1 billion.
 
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NEW YORK, Sept 7: In the wake of Asif Ali Zardari’s election as the president of Pakistan and increase in militant attacks, an American scholar who recently visited Peshawar has asked the Bush administration to expedite economic aid to the country.

In an article in the International Herald Tribune, Anatol Lieven, a professor at King’s College London and a senior fellow of the New America Foundation in Washington, applauded Senator Joseph Biden’s “long-term plan for the United States to help Pakistan economically, thereby strengthening the state against extremism”, but stressed that “Pakistan may not be able to wait that long.”

He said the United States should make these funds available to Pakistan immediately for this specific purpose.

“Secondly, America should give emergency aid to the hundreds of thousands of people displaced by the Pakistani military offensives in Bajaur in the

Federally Administered Tribal Areas and Swat in the North-West Frontier Province. This should be treated with the same urgency that the United States approaches natural disasters like the Pakistani earthquake four years ago,” Professor Lieven said.

“America should also use its influence with the IMF to procure its assistance to Pakistan. It is essential, however, that this should not be made conditional on cuts in subsidies and social programmes that will further hurt Pakistan’s poor; such cuts would undermine the Pakistani government still further.”

“Limited American financial help can tide Pakistan over its immediate crisis. At the same time, the United States should urgently craft longer-term aid programmes intended to strengthen resistance to the spread of insurgency.”
 
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By Khaleeq Kiani

Pakistan’s economy is fast approaching an insolvency-like situation. Liquidity is drying up. The cost to protect $2.7 billion sovereign bonds in the international capital market from preventing default, is increasing.

The external debt and liabilities have increased in rupee value by more than Rs705 billon in less than six months just because of over 25 per cent or Rs15 per dollar decline in currency value. The country’s overall external debt stock has increased by almost $7 billion to $47 billion since June 2007.

At the same time, the stock market has fallen to a 28-month low by registering over 42 per cent decline since April 2008. In the process, the stock market capitalisation has almost halved to $39 billion from a peak in April because investors generally avoid markets where there is political instability.

The government plans to introduce two weekly holidays (Saturday-Sunday) soon after presidential elections and close down petrol pumps for the third day (perhaps on Friday) to reduce consumption of petroleum products. The federal cabinet has already approved the plan and announcement would be made sometime this week. These measures are estimated to save about $3 billion per annum in oil consumption.

In another step, the government has already imposed higher regulatory duties on import of non-essential items while letters of credit (LCs) for imports are opened on 100 per cent cash margin to discourage misuse of foreign exchange. These two measures are anticipated to save about $1 billion per year. But the most worrying thing for the finance managers is the interest repayments on the back of dried up pipeline of financial inflows.

The country’s total debt stock now hovers around Rs7 trillion, up by about Rs1.4 trillion from Rs5.6 trillion in March 2008.This includes about Rs3.4 trillion domestic loan and Rs3.6 trillion in foreign loan and liabilities. For many years in decades, Pakistan’s external debt in rupee value has surpassed the domestic debt.

The cost to protect sovereign bonds from default that stood at 788.8 basis points on August 22 has increased to 975 basis points, overtaking Argentina’s number one position of being the riskiest investment paper. Foreign-exchange reserves have declined from their peak at $16.5 billion in October to just $8.89 billion, less than three months of imports, while trade and current account deficits are widening..

This is happening at a time, when foreign investors in the capital market are loosing confidence and flight of capital by Pakistanis mostly to the Middle East is gaining momentum. Despite remittances and exports on a mild growth path, the inflows are not catching up with the rising foreign currency requirements on the back of limited financial flows from multilaterals and bilateral sources. On top of that, the environment does not seem favourable enough to float major sovereign bonds or sell government entities because of political instability and overall security situation.

Meanwhile, the last year’s consolidated federal accounts showed that the budget deficit had increased to a record Rs777.2 billion or 7.4 per cent of GDP during 2007-08 that was met through the highest ever bank borrowing of Rs625 billion and over Rs75 billion cut in development expenditure. The most depressing feature was a massive reduction in revenue receipts that declined to 14.3 per cent of GDP compared with 14.9 per cent in 2006-07 despite higher revenues in absolute terms. In contrast, the total expenditure in 2007-08 increased substantially to 21.7 per cent compared with 19.2 per cent a year before.

The government is taking up with International Monetary Fund (IMF) at the top level to secure a letter of comfort that should help Pakistan persuade the World Bank and the Asian Development Bank to provide at least $1 billion in quick disbursement loans to overcome some of the immediate liquidity problems.

The senior level separate visits by the two bank officials last week have asked Pakistan to introduce tough decisions for macroeconomic stabilisation by allowing full pass-through in utility costs, removal of subsidies in petroleum products, reduced domestic borrowing and flexible exchange rate, so direly needed to reign in whopping fiscal deficit.

In this background, the IMF was expected to send its mission to Islamabad next week to take stock of economic situation on ground before issuing the required letter of comfort. Interestingly, both the ministry of finance and IMF’s office in Islamabad were unaware of the scheduled visit. Knowledgeable quarters suggest the government was trying to convince the Fund through some powerful capitals to help secure financing from the WB and ADB without going through procedural requirements given its severe financial problems as a goodwill gesture to support democratic forces.

Simultaneously, the PPP-government sent a delegation last week to Saudi Arabia with a wish-list of about $17 billion multi-year bail-out package for oil imports and balance of payment support. Led by foreign affairs minister Shah Mahmood Qureshi and comprising secretaries of finance and petroleum, the delegation met the Saudi leadership and sought oil supplies on deferred payments and other facilitations for budgetary support to boost foreign exchange reserves.

The delegation wanted to have a soft term credit facility of about $2.5 billion from Saudi Arabia for essential commodities like fertiliser, another $7.3 billion oil imports on deferred payments or reduced rates and rescheduling or write off of about $5.8 billion amount it was required to pay to the brotherly state on account of oil it had imported on deferred payments during 1999-2004.

Likewise, Islamabad also wanted to have an arrangement with Kuwait on special terms for diesel imports of over $4 billion over a period of two years. Pakistan imports about one million tons of diesel from Kuwait for Pakistan State Oil under a long-term agreement. Relevant government agencies believed the United States’ reduced crude imports from Arab countries offered good chances for Saudi support to divert its surplus production.

The members of the delegation were hopeful of a positive response expected to come soon after the presidential elections on September 6. Although the arrangements for imports of crude from Saudi Arabia are yet to be worked out, any relief from the brotherly nation are seen as the best solution to economic problems. This could provide reasonable breathing space to the government till such time it comes out of the political crisis surrounding presidential elections and concentrate on economic revival.

Sooner the country returns to political stability, overcomes judicial crisis and puts in place an economic revival plan, better it will be for the restoration of investor confidence needed to attract direct investment and revive capital market. That requires seriousness of the political leadership in economic revival, poverty reduction and macroeconomic stability.
 
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Total earnings of Rs7500, a little under $100 a month, from two jobs was not enough to make a living.

Mohammad Jaffar a young migrant working 14 hours a day in Karachi as a loader during the day with a contractor and a waiter at a small restaurant in the evening, was forced by demands of survival to vacate Rs3000( about $40 a month) rented house and shift to a hutment with his family.

Jaffar arrived in Karachi with his wife four years back. Despite being hardworking today he is deep into debt struggling to sustain his family of four children. One of the four, Azam is ill and dying for health care which is expensive and beyond means of his family.

But Jaffar still prefers to stay on in Karachi over going back to his home village in southern Punjab because he is still better off in the city. However, if this is better what the worse would be like?

For this family and their likes life is nothing but a painful journey into disappointments. Indeed, there is little to suggest that those in power really care.

The fate of poor in resource rich country is as dismal as it can get. Excluded from the gains of high growth during 2004-07, they are now being advised by the wise men of the government to endure more than their fair share of pain as the economy is under a difficult patch. For both internal and external reasons, Pakistan is currently grappling with high inflation and slower growth.

Today of 1000, some 79 infants die at birth, 99 more die before their fifth birthday. According to latest figures compiled by international economic monitoring agencies, Pakistan has the highest proportion of under nourished population in Asia Pacific region. The government might feel uncomfortable with such observations but would find it hard to challenge them because it is still busy collecting and processing data on social indicators for 2006.

Sadly this is where the country has reached riding the Asian tide-- what the ex-prime minister Shaukat Aziz used to call ‘stellar growth’ ----when the sale of motorcycles multiplied from 90 thousand to 900 thousand.

Some press reports suggest that the elected President will lead Pakistan’s delegation to the UN General Assembly in New York later this month. A few high profile meetings are reported on the sidelines of the meeting. But nothing has so far been published about one of the main themes of the UN Sept 25 meeting that is to review the progress on Millennium Development Goals. One wonders, with so little to show in absence of the current background material, how productive the participation of the political leadership would be in a meeting of 188 nations that made a solemn pledge to the eight goals in 2000.

At the half way point to the target year of 2015, the world prepares to meet to take stock of the progress made towards these goals. The leaders in words of UN are ‘to review progress, identify gaps and commit to concrete efforts, resources and mechanisms to bridge the gaps’.

Pakistan’s participation is expected to be as embarrassing as its progress towards 38 targets that it set out for itself to achieve eight goals. These MDGs are: eradicate extreme poverty and hunger, achieve universal primary education, promote gender equality and empower women, reduce child mortality, improve maternal health, combat HIV/AIDS, malaria, and other diseases, ensure environment sustainability, develop a global partnership for development.

Pakistan committed to half the poverty rate to bring it down to 13 per cent by 2015.

The elected leadership is too preoccupied by other issues to spare a thought for MDGs or targets. The government functionaries have failed to deliver. No one expects any wonders from them but unfortunately, they have also not been able to bring out 2006 MDGs progress report in September 2008.

“The report of the year 2006 should be ready over the next few months” Dr Arshad Amjad, Chief Economist Planning Commission told Dawn from Islamabad.

Salman Farooqui, Deputy Chairman, Planning Commission, when contacted was unable to comment off hand on the issue. He, however, directed Dr Mohammad Aslam Khan, specialist on fiscal and monetary affairs, Planning Commission to respond to Dawn’s queries. The gentleman told Dawn that Pakistan is on track on many goals but was not able to justify the delay of the publication of the progress report that last appeared in March 2007 reviewing the performance for 2005.

Insiders told Dawn that the delay was because of the government’s interference in functioning of the cell responsible for processing and analysing data. “We are not allowed to work with numbers independently. All relevant numbers are audited by the government so that no number that the government perceives to be harmful to its political image is made public”.

“The government is very sensitive with poverty figures as they carry political weight. The last government forced us to suppress provincial poverty numbers as they reflected increasing intra provincial disparities”, a senior economist privy to the monitoring process said.

Most worrying is the low level of public awareness on the eight goals or the 38 specific targets. There is absolutely no pressure on the government from local stakeholders to reshape its spending pattern or re-arrange its order of priorities to achieve targets leading to sustainable development.

Most leaders and people, who should be spearheading the process in achieving those goals, when contacted, were little or not informed at all on the subject. Many admitted that they were hearing the word MDGs for the first time. This unaware mass includes people from all strata of society including drivers, clerks, plumbers, teachers, salesmen, doctors, lawyers, traders, housewives, etc.

Except in the Punjab, the situation in rest of the three provinces is bleak. In NWFP, some spade work started in 2005 but the tide of extremism and related law and order challenges did not allow the provincial government to move beyond planning stage. The Sindh government was found to be too fragmented to focus on anything worthwhile. Balochistan is too volatile politically to plan or execute a programme for MDGs.

Even the private sector that is supposed to be the key driver of the economy has totally been kept out of the picture in formulation of targets or their implementation. Tanvir Sheikh, President FPCCI admitted his ignorance about the goals this week over telephone from Multan.

It appears that so far it has all been a closed door ministry level activity. Yes, the reference is made to the goals in official documents such as Medium Term Development Framework (MTDF), the State Bank annual reports and the Economic Survey. The two progress reports were prepared primarily for the consumption of World Bank, IMF, UNDP, etc.
 
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The changing political ground realities are raising hopes among stakeholders that the criterion for resource distribution among the four provinces is likely to be changed by the recently constituted National Finance Commission (NFC). These indicate multiple criteria based formula for future revenue distribution.

An 11-member NFC headed by the federal finance minister Syed Naveed Qamar was notified on August 26. Its members include special assistant to prime minister on finance, Ms Hina Rabbani Khar, provincial chief ministers and one non-statutory representative from each of the four provinces. The federal finance secretary will act as member-secretary.

Earlier, there was a lingering fear that Punjab may not be ready to accept any criteria of resource distribution other than the existing one and hence prevent any consensus on NFC award.

But the results of February 18 elections and formation of coalitions at the federal level and in provinces in which Pakistan People’s Party is a common factor has given rise to a possibility of a consensus. While the coalition in the centre has received a set back, the hope for a consensus in new NFC is still there.

“Punjab’s Chief Minister Shahbaz Sharif has expressed support to give due weight to poverty, inverse population density and other factors in resource distribution’’, a senior bureaucrat in Balochistan informed Dawn on telephone from Quetta. He recalled that Punjab’s chief minister made this public announcement recently in Quetta.

Mr Kaiser Bengali, a well-known economist, who is a Sindh nominee on the NFC as a non-statutory member, was however somewhat sceptical, as according to him, the official position of Punjab government, based on documents of the last NFC proceedings, indicates no change in Lahore’s position. Nonetheless, he too appeared optimist as new emerging realities can force political parties to shift from their traditional stance.

An attempt was made to reach Mr Ishaq Dar of the PML (N) who was federal finance minister in the coalition government before he resigned in compliance of his leader’s instructions. He did not respond on Tuesday evening but promised to answer NFC- related questions on the next day (Wednesday). However, he did not respond.

The two previous NFCs headed by Shaukat Aziz, the then finance and later the prime minister, failed to give any award. In 2006, ex-President Musharraf did not alter the population-based resource distribution formula.

Politicians and bureaucrats in Karachi and Quetta draw their optimism from a meeting of finance ministers of four provincial governments held in Lahore on June 6. In that meeting, the elected politicians urged the federal government to allow provincial governments supervision of federal-funded development programmes in their respective jurisdictions. Islamabad was asked to stop five per cent deduction at source of all taxes it collects and also on gas and oil related revenue. After the PML(N)’s exit from the coalition, politicians in Karachi do not foresee any major shift in Punjab government’s attitude. “For the first time, there is a clear divide between Islamabad and Lahore’’, a Karachi activist of PML(N) explained who said that Lahore in now on the other side of fence. Second, we have entered a coalition age and Lahore-based PML(N) is looking for allies in Karachi, Quetta and Peshawar and hence a shift from traditional approach is likely.

An over-centralised and authoritarian administrative, political and financial set-up has stimulated strong anti-centre currents in all the provinces including Punjab. Never before in last 60 years, the political leadership of provinces, no matter to which party they belong, were so articulate over their provincial rights, as they are now.

One manifestation of this assertion of provincial rights is the demand that federal government should not deduct five per cent of total tax collections at source.

“We plan to collect Rs1.25 trillion taxes in the current fiscal year’’, a bureaucrat in Quetta said to point out that the total of a five per cent deduction would come to Rs70 billion when the operational cost of Federal Bureau of Revenue (FBR) is hardly Rs9 billion.

“Give the provinces Rs60 billion” he demanded arguing that it may add to his province’s share Rs3-4 billion more in a year. For a cash- strap province like Balochistan, the additional amount of Rs4 billion revenue in a year means a big fortune though it may be insignificant for provinces like Punjab and Sindh’’, he said.

Politicians in Karachi and Quetta want a vertical distribution of funds on 50:50 basis between the federation and the provinces. “We want all taxes and levies to be included in the divisible pool that should be divided straightaway on 50:50 basis between the federation and the provinces’’ the senior official in Quetta asserted. His views are endorsed by politicians and officials in Karachi.

“Now that the concurrent list is set to be taken out of the 1973 Constitution and the provinces are to be given more responsibilities’’, a local PPP leader argued that the increase in responsibilities means need for more funds. “I tell you in final count, even the 50 per cent of federal pool of taxes will be insufficient for the provinces,’’ he said. As he foresees, the provinces in due course of time will have to generate their own resources to meet rising needs.

The finance ministers from four provinces, in their June 6 meeting, wanted sales tax on services to be returned to the provinces. The Constitution authorises the federal government to collect sales tax on import, export, production and consumption of goods but explicitly excludes services, which comes under the provincial jurisdiction. There appears to be a consensus now in all the four provinces that the federal government has over-stretched itself and is doing many jobs that are not its responsibilities.

“When provinces will start getting additional responsibilities in education, health care, rural development, roads, water supply, urban infrastructure, and many other areas, the demand for funds to maintain and repair the stock of infrastructures and to take up new projects will increase manifold’’, he argued to plead for increased share in revenue and representation in administration of federal government controlled institutions by the provinces. The MQM is on record demanding representation of Sindh province in port management. How far the new NFC headed by federal finance minister Syed Naveed Qamar will go ahead in responding to growing aspirations for fiscal devolution is yet to be seen. But officials in Balochistan Secretariat are busy in setting in place some sort of cell or committee of experts to look at the issue of resources distribution and capacity development in bureaucracy to cope with increased responsibilities. “We seek experts from Balochistan but would have no hesitation to engage people from other provinces if they are ready to help us in our job,’’ the official said.

Mr Gulfaraz, a non-statutory member on the NFC from Balochistan, is the only person who does not belong to the province. He is a retired army man, a former federal petroleum and natural resources secretary and an expert in gas economy.

Balochistan wants him to push its case for getting a just share in gas revenue. The federal government has recently increased well-head prices on a number of gas fields including Sui which, the officials say, largely addresses their years’ long complaint.

In Karachi, the first and preliminary session of Sindh NFC team was held on August 24.
 
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THE nation may get some good news soon on the rice front. While there are still some 45 crucial days left when fresh crop would hit the market, indication of better crop are evident — area under cultivation has increased by around seven per cent and the rains have not only supplemented water but also washed away pests like leaf rollers.

Most of the farmers and traders hope that the final yield would be around six million tons as compared to 5.5 million tons last year. If that happens, marketing hiccups and price crash would become distinct possibilities, which must be pre-empted to protect its home cereal advantage.

Last year, the country gained both in quantity and value of rice export. Its exports rose by 20 per cent (1.8 million tons) and earned $1.8 billion as against $1.2 billion the previous year. There is a need to build on last year’s performance and for long-term official planning for production and marketing--- not reactive to the size of each year’s crop.

Any planning about rice marketing must include enhanced credit line for traders, ensuring on-time availability of fertiliser, pesticides etc at affordable price and water. The last one may test diplomatic and political skills of the government because of neutral expert’s decision on Baglihar Dam on Chenab. Unfortunately, the entire rice belt (basmati) fall on both sides of the River Chenab and its flows can be rigged by India. In fact, India tried to tamper with river inflows for three days before intense pressure from Pakistan to get the situation corrected.

Despite protest from farmers’ bodies, especially the Pakistan Basmati Growers Association — a directly affected by the decision — the government chose to keep quiet on the issue. Since Pakistan has no site to build dam on the Chenab, it would remain vulnerable to Indian tampering of water. It also does not have link canals to feed the Marala and Khanki Headworks (read rice belt) from the Mangla Dam in case of Indian tampering.

Thus, Pakistan must move on two-pronged policy of challenging the decision of Prof Raymond Lafitte (a Swiss national) on Baglihar, which gives India a leverage to tamper with river flow if not stop them altogether. Even tampering for a fortnight during the rice season could affect crop beyond redemption. On the second plank, Pakistan should move to build link canals to feed the area from alternative sources (Mangla Dam) in case of India playing with flow, as it did in the third week of August when the river fell to historic low of 20,000 cusecs.

Availability of fertiliser and pesticides at the crucial time has been a problem for farmers, and this year is no exception either. Rice crop needs only 12 million bags of urea this year, whereas the total Kharif production of urea stands around 35-40 million bags. But still, urea is not available at Rs1,000 per bag against officially declared price of Rs635. No wonder, the fertiliser manufacturers declared 79 per cent profits this year — all at the cost of hapless farmers, and ultimately the end-user.

The DAP fertiliser though available, was simply not within the reach of farmers, being sold at Rs3,500 per bag. The pesticides and weedcides prices have also jumped by almost 40 per cent — the calculation is that farmers would pay Rs28 billion for the same quantity of pesticides, which they bought for Rs15 billion last year. The rice crop suffers from stem borer and leaf roller pests besides weeds. The additional burden of Rs13 billion on account of pesticides would only increase domestic price further and affect exports.

Last year, the minimum export price (MEP) of $750 per ton for coarse varieties and $1,500 for basmati brought the export money home, instead of staying in foreign banks. This year, the MEP on coarse variety has been withdrawn quietly, without taking growers on board. The country exported 600,000 tons of such rice last year. This year, with the MEP gone, no one knows how much of this money would come back and how much would stay abroad. Pakistan has around three to 3.5 million tons of rice per annum to spare for export. This year, if the total yield remains around six million tons, after deducting 2.3 million tons of domestic consumption, there would be 3.7 million tons left for export.

The increase in acreage this year can be attributed to increase in price last year. There have been reports of sowing rice even in cotton belt. If the trend continues, the rice crop could be narrowing gap between itself and the biggest Kharif crop i.e. cotton. Farmers are even compromising on fodder crops for rice. This year a target of 6.4 million acres was fixed: 4.3 million acres for Punjab, 1.42 million acres for Sindh, 0.153 million acres for NWFP and 0.51 million acres for Balochistan. But, the federal government figures show that sowing has actually touched around seven million acres.

As far as yield targets were concerned, Punjab was given 3.288 million tons, Sindh 1.77 million tons, NWFP 0.129 million tons and Balochistan 0.525 million tons — a total of 5.72 million tons. The acreage shows that rice crop falls behind only cotton crop in Kharif season.

The government needs to sustain the momentum of the rice crop by removing marketing hiccups. Five factors — water, fertiliser, pesticides, marketing and pricing — are and would remain very crucial to the future prospects of the crop. The government must come up with a strategy to balance interest of all stakeholders. The rice export income, which may cross the robust figure of $2 billion this year, is too crucial for the foreign exchange-strapped Pakistan to be left to market forces alone.
 
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COORPORATE farming encompasses the production of all crops as well as allied activities including processing of seeds and businesses relating to pesticide, fertilizers, agricultural machinery/equipment used and related research activities.

The average agricultural growth rate over last 40 years was 4.3 per cent which reflects good performance. Population growth rate averaged around three per cent over the last 40 years three per cent which is slightly below the growth rate of agriculture sector.

With the advancement in technology and awareness, the trend of food consumption is changing towards high nutritional and hygienic foods. This is also widening gap between demand and supply. Food crisis is being observed now-a-days which is likely to persist in future.

In this scenario, a higher growth rate of agriculture sector is needed so that the domestic needs could be fulfilled and the surplus exported to reduce the trade deficit.

The scope of horizontal expansion in agriculture production has become limited. After the construction of Mangla and Tarbela dams neither any big reservoir has been built nor any initiative taken so far in this direction.

But there is space for horizontal growth but it is limited due to shortage of irrigation water. The major scope is now in vertical expansion through improving farm productivity levels. This can be accelerated through corporate farming.

The following table of productivity/yield levels has been prepared based on the year 2006 data given in the websites of the UN, FAO and the Federal Agricultural Ministry of Pakistan.

The table depicts that there is the potential to increase farm productivity/yield as progressive grower is already obtaining almost more than double production than our national average yield. The average national yield/production of developed countries is more than double of our national average yield. By applying requisite resources and taking appropriate measures, our agricultural production can be doubled in the next 10 years.

There is a need to make quality seeds and fertilisers available at competitive cost; improved pest/weed management; transfer of agriculture-related technology and providing technical knowledge to farmers together with the requisite funds needed by them and introducing well-planned marketing mechanism.

In addition to improving facilities given to small growers, the government should formulate policies for initiation of corporate farming on persuasive basis.

Agriculture research and extension department needs to be revamped and its policies and programmes re-designed so that they may play vital role in bringing a revolution through corporate farming.

There is a need to make stringent laws in respect of adulteration of pesticides/fertilisers to enhance crop yield and protect farmers financially.

Investment in agriculture sector needs to be increased significantly--- by. 100 per cent for every subsequent year--- and this practice should continue till the achievement of desired results. Credits to conventional farmers should also be increased and monitored to ensure that it is consumed for the purpose it has been sanctioned. The SBP should ensure that any genuine and legitimate request in respect to corporate farming is not turned down by any financial institution.

Agriculture which is contributing around 21 per cent to GDP is highly neglected by the financial institutions. There is a need to make programmes and policies and necessary laws for development of this sector on ‘war’ footing so that financial institutions can offer loan to this sector like they offer to industry.

Higher and sustainable economic growth cannot be achieved unless we succeed in doubling our agriculture production in the next 10 years.

For this purpose, there is a need to make arrangements and provide desired share of financing i.e. at least 20-25 per cent from credit/loan portfolio of all financial institutions. That is suggested to be achieved gradually with in next five years.

The SBP needs encourage banks to invests in productive sectors like agriculture and industry and discourage to non-productive (consumer financing and capital market) loans.
 
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THE country is now facing high inflation particularly in essential food items mainly due to the State Bank’s lax monetary policy and inaccurate projections of wheat production by the previous government in conjunction with a sharp increase in world food prices.

According to the data by the Federal Bureau of Statistics, inflation rose rapidly in July, 2008 as the Consumer Price Index (CPI) and the Sensitive Price Index (SPI) increased by 24.3 per cent and 32.9 per cent, respectively, over the last year’s corresponding month. The rise in these indicators was mainly due to food inflation which rose substantially by 33.8 per cent during this period.

Since welfare of the population is determined in constant purchasing power term, any change in prices plays a critical role in determining the level of poverty in a country. Any rapid rise in prices may push the millions of vulnerable people below the poverty line. While absolute poverty at official level was estimated by the government at 24 per cent in 2004-05, the World Bank and the author’s empirical work showed a higher poverty level at 29 per cent in the same period. Since the government has not revised its poverty figure so far as it is still using 24 per cent population below the poverty line, this paper also uses the official figure in estimating the level of assistance needed to provide relief to the poor.

Even if the official poverty estimates is used, the fact remains that 37 million people lived below the poverty line of Rs878 per person per month in 2004-05 defined as minimum food (2350 calorie intake per day) and non-food requirement for physical functioning. While poor spend about 70 per cent of their income on food items, they are likely to be affected disproportionately more than the rich. If income does not keep pace with food prices, the rising food prices would result in higher poverty level by pushing vulnerable groups below the poverty line. It is, therefore, important to protect the poor and vulnerable by subsidising food prices.

Utility stores: A general, untargeted subsidy is provided by food rations where the subsidised commodities are restricted in quantity but not in coverage. Under the existing arrangements, a general subsidy is the provision of some food items at subsidised prices at utility stores in urban areas. However, the main disadvantage of this kind of subsidy lies in its inefficiency, since all groups whether poor or non-poor benefit, not only those targeted by the government objectives.

Support programme: Currently, a cash support of Rs3,000 per year (or 250 per month) is provided to a beneficiary under the Food Support Programme through a transfer in their bank account. The government has allocated Rs4.38 billion to provide support to 1.46 million households in 2006-07. However, the main problem is that assistance is provided in the form of a cash subsidy and not as stamps or card or coupons for the purchase of basic food items or in terms of goods.

Due to disbursement of cash, it is tempting the non-poor to find ways of abusing the programme leading to miss-targeting. Second, the process of cash transfer also takes longer time. Thus, there is a need to replace such programme by providing food cards or items rather than cash transfer and merge it with the proposed targeted Food Card Programme which will also increase the coverage of the poor households.3

Targeted poor: Any form of targeting can reduce the overall costs of the programme, if the process does not lead to the exclusion of targeted groups for which the programme is meant. Since assistance to the poor is needed to be provided at the household level, there is a need to compute households below the official poverty line. The use of official poverty line of Rs878 per person per month, gives 19.1 per cent or 5.51 million households below the poverty line in 2004-05.

Subsidy amount: To calculate the amount of subsidy, there is a need to know the extent of the short fall of the consumption of the poor household from the official poverty line at household level. The average poverty gap for all poor households (5.51 million) was 18.69 per cent in 2004-05. In rupee term, the consumption expenditure of all poor households was below Rs1231.95 from the official poverty line of Rs5359 per month for an average household in 2004-05.

Updating the average household official poverty line by the CPI gives Rs6925 per month per household in 2008. The updated official poverty gap comes at Rs1592 per month per household in current prices as per official statistics in May 2008.

To bring the consumption of the poor household equal to the poverty line, we have used information of the number of poor and their poverty gap. A sum of Rs7,594 million per month was required in 2004-05 to subsidise the poor in order to bring their consumption at the poverty line which would alleviate the absolute poverty, if targeted accurately. The annual budgetary cost (excluding all other administrative costs) of subsidising the poor comes at Rs91.13 billion in 2004-05. For 2008, the annual budgetary cost comes at Rs118 billion.

Alternatively, the amount of subsidy can be reduced to Rs1,050 per household which is nearly two-thirds of the average household poverty gap of Rs1,592 in 2008. In this formulation, a subsidy of Rs1,050 per household per month can be given. If the government is willing to subsidise all 5.5 million poor households below the official poverty line in 2004-05, the annual cost would be of Rs69.3 billion in 2008.

A recent Inter Agency Assessment jointly conducted by FAO/UNDP/UNESCO/UNICEF/ WFP/WHO recommended a response action to over seven million severely food insecure households or 45 million people in Pakistan that are vulnerable to a price spiral and food shortage in the short-run. Accordingly, the annual cost for providing a subsidy of Rs1,050 per household to seven million food insecure and poor households would be of Rs88.2 billion in 2008.

Food card scheme: To provide subsidy, a targeted Food Card Scheme is, therefore, proposed to protect the poor and to increase their coverage significantly.

A food card or stamp will be issued to those households who live below the official poverty line. The scheme is aimed at providing free of cost wheat, pulses, sugar and edible oil; a monthly food card containing, on average, valuing at Rs1050 per month for a family of seven members or Rs150 per capita per month can be provided to the poor households by the government. An equivalent value of food items such as wheat or pulses or sugar and/or edible oil can be provided free of cost using this card.

The cost of buying 40 kg wheat, three kg pulses, four kg sugar and five kg edible oil at current market prices for a family of seven members comes at Rs2,120 per month. In this way, the government will subsidise about 50 per cent of poor household’s consumption expenditure on these food items.

The proposed food card can be used to buy subsidised food items from the utility stores and the identified retail shops of the private sectors in poor localities both in urban and rural areas.

In lieu of providing the subsidised food items to the beneficiaries, the owner of identified retail shops can get the reimbursement of the food card from the District Baitul Mall offices/or nominated bank branches in rural and urban localities.

Institutional set-up: To save the administrative cost, the Baitul Mall system already put in place will be responsible for the administration and implementation of the programme.

District offices of Baitul Mall will be responsible to distribute the food card to the poor households. These offices will also make an arrangement with bank’s branches in local areas for the reimbursement of the food card to retail shopkeepers.

The Pakistan Zakat Council will collaborate with the Baitul Mall for identification of the poor households as well as the retail shops through District/Tehsil/Mohallah/ Village Zakat Committees.

Identification: The Zakat committee at the Mohallah/village level in urban areas and village level in rural areas can essentially identify the poor and needy households which should be finalized by the District/Tehsil Zakat Committee.

The District Zakat Committees on the recommendations of Tehsil-/Mohallah/village Zakat Committees can prepare a list of beneficiaries along with their identity card number to distribute the food card to the entitled household. The district officers of the Baitul Mall can also distribute these food card. The production of the National Identity Card will be compulsory in order to get the food card.

Eligibility criteria: A household with minimum income of Rs6,000 per month is the minimum eligibility criterion on income basis. This criterion is derived from official poverty line which is at household level is Rs6925 per household per month in 2008 prices for the country as a whole. This criterion is also consistent with the minimum wage recently revised by the government.

The National Identity Card is the basic requirement to be eligible for the food card so as to overcome the problem of misrepresentation of the poor and misuse of quota allocated for the poor household in a particular location. Thus, food card can be issued by writing the identity card number which can only be used in the locality of the beneficiaries.
 
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The Reko Diq copper project in district Chagai, Baloch-istan is expected to commence production in next four years. Feasibility study of the project will be completed by next May.

The project is jointly sponsored by Chile’s Antofagasta with stakes of 37.5 per cent, Canadian miner Barrick Gold Corp with 37.5 per cent, and the government of Balochistan with 25 per cent. It involves an initial investment of $1.5 billion.

There are an estimated two billion tons of copper deposits in the district. An output of some 150,000 tons of copper per year is targeted. The capacity may eventually be raised up to 220,000 tons per day, with an investment of some $5 billion”, according to the Chilean company President Marcelo Awad. Many doubt the smooth execution of the project. Since the year 2000, the project has witnessed change of sponsorship among various stakeholder foreign firms.

The first contract was signed with the BHP Minerals International Exploration Inc in July 1993 with the company’s stake at 75 per cent. The BHP had failed to make any significant progress in exploring the copper resources and the Tethyan Copper Co Ltd. (TCC) of Australia secured the right to all BHP interests.

The stand of the ministry of petroleum and natural resources on the issue of transfer of stakes of Reko Diq project has been that, the BHP Billiton as a matter of their international policy could transfer their smaller interests to other junior mining companies with a usual provision for a claw back right in case of a major find.

As per their joint venture agreement BHPM had first offered their 75 per cent share to the provincial government, which had no resources to take over the stakes. Balochistan agreed to waive off their right of first refusal and allowed BHP Billiton to look for any other company capable to invest in exploration.

The Australian TCC, which planned to start the Reko-Diq project in 2003 with an investment of $130 million, had a joint venture with government of Balochistan. A few years back, the Chilean firm agreed to a $133 million joint venture with the Australian TCC to explore and exploit copper and gold.

The agreement involved the purchase of a 19.95 per cent stake in Australia’s TCC for $20.5 million as well as an investment of $37.5 million for a 50 per cent equity stake in company’s Pakistan mineral project. The agreement also involved a commitment to invest up to $75 million in exploration and development.

Chinese, British, Australians, Chileans and Canadians have so far acquired stakes in strategic copper and gold assets of Chagai on rising prices in the international market.

Chagai district is emerging as a hub for the mining industry in the province. Saindak and Reko Diq are the two mega copper mining projects currently under way. The Dasht-i-Gauran tenement in Chagai is located between Saindak and Reko Diq where significant porphyry copper-gold deposits have been discovered. The tenement covers a number of interpreted alteration zones identified from satellite images. One rock sample from reconnaissance geochemical sampling contained 1.06 g/t gold and 3.5 per cent copper.

The demand of copper will increase in future. The officials expect that annual production of 250,000 tons of copper from Reko Diq project would not only bring Pakistan on the world copper map but also help strengthen its economy.

While talking to a delegation of Antofagasta of Chile and Barrick Gold of Canada in June, Prime Minister Syed Yousuf Raza Gilani advised the team to ensure maximum number of jobs to the people of Balochistan; that arrangements be made to impart skills training to the locals so that they can avail job opportunities. The foreign firms reportedly sought adequate security cover and necessary infrastructure facilities in Chagai district to complete their projects.

Local experts believe that the production of copper is a lengthy and dangerous process. Smelting of copper ore at factories emits arsenic and carbon monoxide, which pollutes air and water near mines. Copper is heated at high temperatures for several times before metal is ready for export. For having no surface flow, the Chagai is faced with acute shortage of water. Like the Saindak project, the expected mining operations in Reko Diq will depend on sub-surface water. Exploration of underground water potential of the region is a pre-requisite for any mining project.
 
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The persistent failure of successive governments to overcome budgetary deficit, remove fiscal imbalances and check the ever-increasing wasteful expenditure has put the very viability of the economy at stake.

Budget deficit rose to Rs777.2 billion (7.4 per cent of GDP) during fiscal year 2007-08. It was met through the highest-ever borrowing of Rs625 billion and over Rs75 billion cut in development expenditure. The deficit showed increase of 95 per cent over the budgetary target of Rs.398 billion; it was 106 per cent higher than previous year’s deficit of Rs377 billion or 4.3 per cent of GDP.

The most lamentable act on the part of economic managers was cutting of development spending under the Public Sector Development Programme to Rs451 billion against the budgetary allocation of Rs520 billion to contain the deficit partially.. They claimed that it became unavoidable in the wake of massive reduction in revenue receipts that declined to 14.3 per cent of GDP compared with 14.9 per cent in 2006-07. In absolute terms, however, the total revenue increased by almost Rs200 billion and stood at Rs1.499 trillion compared with Rs1.297 trillion in 2006-07.

Tax revenue declined to 10 from 10.2 per cent in 2006-07. Non-tax revenue dropped to 4.3 from 4.7 per cent in 2006-07. In contrast, the total expenditure in 2007-08 increased substantially to 21.7 per cent compared with 19.2 per cent a year before. In absolute terms, the total expenditure amounted to Rs2.276 trillion against Rs1.675 trillion in 2006-07, showing an increase of more than Rs600 billion or 36 per cent. Current expenditure amounted to Rs1.858 trillion against Rs1.375 trillion in 2006-07, showing an increase of Rs482 billion.

The total gap between current expenditure and tax collection is over Rs400 billion. We cannot overcome the budgetary gap unless rulers drastically cut non-developmental waste expenditure and increase tax collection. They will have to show political will in collecting taxes wherever due.

An unshakable determination is required to curb the 61-year-old habit of defying tax laws along with complete purge in tax machinery. Do the fiscal managers really know why our total revenues have fallen from 18 to 10 per cent of the GDP during the last 20 years?

Presently, the collection of taxes by Federal Board of Revenue (FBR) is mainly based on imports and export as well as extraordinary profits by banks (who claim they have profit sharing accounts yet deny due share to deposit-holders!). Importers, contractors, retailers and even service providers are, in fact, passing on the tax burden to consumers and clients, courtesy presumptive tax regime introduced in income tax in 1991-92 and widened manifold since then. This faulty taxation is at the expense of equity and poor people are the real victims of this fiscal highhandedness.

Despite resorting to high-handedness, illogical policies and unjust withholding taxes, FBR has failed to improve the tax-GDP ratio, hovering around at 10 per cent for the last five years. The burden of a number of presumptive taxes levied under the income tax law (which are nothing but crude forms of indirect taxes) has been shifted from income earners to consumers and clients. These presumptive taxes have not only distorted the whole tax system, destroyed economic growth and made the consumer/client ultimate sufferers but these short-term, myopic and figure-oriented measures have even failed to bridge the fiscal deficit, which soared to Rs777.2 billion in 2007-08.

Those in power say that 60 years of problems cannot be solved in a few months or even in a five-year term for which they have been elected. Their main problem is how to deal with powerful tax machinery, which is inefficient and corrupt. On the recommendation of tax bureaucracy, successive governments have been announcing unprecedented concessions for the tax-evaders in the form of tax amnesty schemes, the latest one being, the “investment tax scheme” which is the worst of all.

The rulers admit massive tax evasion through these schemes and no further proof is required of culpability of tax officials in the entire episode. If elected representatives are sincere in mending the situation, they should pass asset-seizure legislation and confiscate all the ill-gotten and untaxed assets for the benefit of have-nots. In the wake of such a bold step, resource mobilisation will not be a problem any more.

If the present government brings big absentee farmlords into the tax net, manages to get taxes from the influential ones and succeeds in imposing sales tax across the board (preferably with a low rate of two per cent at one single point), there will be no budget deficit.

This goal can only be achieved if the government simultaneously tackles issues related to tax evasion and corruption in the tax machinery by not just throwing them out of job but rather, making the system workable.

Pakistan is quite capable of substantially reducing or even eliminating its fiscal deficit provided that a comprehensive programme, a well-designed work plan, scientific approach and multi-dimensional strategy is adopted for tax reforms and resource mobilisation.
 
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While the cost of doing business in Pakistan is stated to be high as compared to other regional countries, the rapid depreciation of the rupee would make matters worse for investors wanting to set up export-oriented industries based on imported technology.

The cost of investment may become prohibitive at a time when the $40 billion imports could offer opportunities for import substitution specially in areas where the country has domestic advantage for exports. Over the past half decade or more, there has been industrial consolidation and it is time to initiate expansion of manufacturing based on sophisticated technology. In new projects, the costs may have to be cut down by maximising the use of indigenous engineering and other production facilities.

It has been the normal practice to reduce imports and boost exports by not so much by increasing industrial productivity and efficiency, by innovations in technology or value-added products as by making imports costlier for domestic consumers and exports cheaper for foreign buyers. Devaluation brings short-term gains as costly imported industrial inputs make export goods costlier. Besides, the hike in interest rates is also raising financial charges.

The possible slowing down of new industrial investment will also coincide this year with slashing of the development spending by the government reportedly in the range of Rs100-110 billion. It may translate in slowing down of economic growth.

In the larger Pakistani market, with 160 million consumers, there are also problems for the traders and the industrialists. The cost of doing business here is higher than in India and China.

The cost of production is high, partly due to the shortage and failure in supply of electricity and irregular supply of water. These two are major deterrents to higher production in too many fields. The cost of transportation is also the highest in the region, according to the World Bank. The Karachi Port Trust is the most costly port in the region All these factors deter rapid development and industrial growth.

Labour is cheap but unskilled and is marked for its low productivity. Neither the government nor the industry has taken up this issue seriously. Red tape is a major issue. Provincial governments are not excited by some of the projects which the federal government wants to launch. Thus, some projects take a long time to mature.

Punjab government says that federal projects, initiated by the centre, distort provincial priorities for development.

Singapore tried to solve the problem of red tape by having an investment centre in the prime minister’s office to expedite problems sponsored by foreigners. Any foreigner with a project can approach the prime minister’s office and get the problem solved expeditiously. This approach has also been tried in Pakistan but lacked institutional approach.

We have an investment board with a senior officer but it does not have enough clout to untie the knots and solve the problems.

Judicial laxity is another issue. Cases take a long time to decide and once decided the judgment does not get implemented so easily.

The last government succeeded in attracting large foreign investment through a liberal free- for- all policy. It allowed a foreign investor to invest in any venture and make as much profit as possible and remit the money. But much of the investment came in telecom and financial sector through privatisation and sale of private enterprises to the foreigners. This policy failed to attract investment in export-oriented industries.

The policy is still valid and stands to attract foreign investors. In the last fiscal year, the foreign direct investment ( FDI) was over $5.1 billion , slightly higher than the previous year. With steep fall in rupee, foreigners with dollars will find it cheaper to invest in Pakistan. A window of opportunity is also to be opened up with sovereign guarantee in projects set up through public and private partnership.
 
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Pakistan will make another leap in Islamic banking sometimes this month when it launches its first Islamic bond or sukuk in the domestic financial market to reduce borrowings from the State Bank of Pakistan which skyrocketed recently.

In the just-ended financial year, the government borrowed Rs625 billion from the central bank to finance its fiscal deficit which rose to 7.4 per cent of GDP, compared with 4.5 per cent in the preceding year.

The auction target for the sukuk, according to Dow Jones, is stated to be Rs15-20 billion. The coupon rate on these bonds will be close to six-month treasury bill cut off yields of 11.49 per cent. Standard Chartered Bank and Dubai Islamic Bank will assist in its sale. Market circles are optimistic about its success since there is ample appetite within the Islamic banking industry. If this sukuk goes well, Pakistan will launch several bond offers of this kind in the months ahead this fiscal year. By launching its first sukuk, the government wants to diversify its source of funding at a time when the Islamic finance industry is searching for more investment opportunities. Contrary to phenomenal progress made in the Middle East and some western countries, Islamic finance in Pakistan has little avenues to invest, and most of the time their funds remain idle. But compared to Indonesia where Islamic banks account for only 2.1 per cent of the total industry, Pakistani Islamic banks’s share in total banking activity in the country is 4.1 per cent.

Indonesia said last week it has failed to raise what it had hoped from its maiden, rupiah-denominated, Islamic bond (sukuk) offerings. But analysts said the issuance was solid and has at least paved the way for a foreign currency sukuk later in the year. The offering is an important development for Indonesia’s Islamic finance sector, which lags behind that of neighbouring Malaysia which is much ahead.

Malaysia is, in fact, on its way to become a global leader in the Islamic finance industry which is believed to be worth one to two trillion dollars at the moment. It has the world’s largest sukuk market with $66 billion or 62.6 per cent of global outstanding sukuk issuance as at end-June this year. Its Islamic banking has 12 per cent market share in the country. It has decided to exempt taxes for three years on fees and profits earned from its foreign currency Islamic bonds outside the country with a view to boost the industry.

Islamic banks in Pakistan hold about Rs206 billion of assets, and have 2.6 per cent and 4.3 per cent market share in deposits and financing. The State Bank plans to raise market share of Islamic banking to 12 per cent by 2012 by evolving a regulatory framework, enhancing the spectrum of Islamic banking and strengthening Shariah compliance mechanism.

In 2003, the market share of Islamic banking in Pakistan was mere 0.5 per cent and there was only one Islamic bank. Now, the deposits of Islamic banks have reached Rs60 billion. Today, there are six Islamic banks with 230 branches and 12 conventional banks have 103 outlets for Islamic banking.

The Islamic finance has shown spectacular growth over the past ten years and is one of the fastest-growing in the world. It presents unique opportunities to both new entrants and existing players. There are now over 300 institutions offering Shariah-compliant banking, with an asset base of around $250-500 billion. Currently, Islamic finance activities are dominated by the GCC countries and Malaysia.

Although the roots of Islamic finance lie in Islamic principles since the days of the Holy Prophet, its development as an industry is relatively new. While conventional commercial banks provide financial intermediation services on the basis of interest (charged and paid), the basic premise of Islamic finance is the prohibition of interest. Islamic bankers have developed a number of instruments that perform financial intermediation functions without the involvement of interest. From a small banking experiment in rural Egypt during the 1960s, Islamic finance is currently expanding at a rate of 10-15 per cent per annum. It is now the preferred channel of banking for one fifth of humanity.

Meanwhile, Saudi utilities and corporates are emerging as major drivers of Islamic finance transactions with a spate of high-powered and, in some instances, pioneering structures coming to the market in the last few months. This augurs well for the Islamic finance sector, especially in Gulf Cooperation Council (GCC) countries, where governments play key role and actively participate in establishing Islamic financial institutions (IFIs) in an effort to take greater control of the sector which has been growing at an estimated 20 per cent growth rate per annum.

Islamic bankers would prefer more active involvement of Saudi and GCC private sector in view of the growing migration of capital into the Islamic finance sector. Although the rapid growth of this sector in the GCC is led by both private and government-owned entities but the latter is still playing an ever-increasing role as is evident from recent establishment of Alinma Bank in Saudi Arabia, Masraf Al-Rayan in Qatar; Al-Hilal Bank in Abu Dhabi; Ajman bank in Ajman and Noor Islamic Bank in Dubai.

In a recent report, Moody’s Investors Service, the international credit rating agency, said that GCC governments may get more involved in the sector because they “do not want to see the Islamic banking industry over-dominated by the private sector, and (for that purpose) want to keep the whole thing under control.” The reason is that “if governments have an increasing share of ownership in IFIs, the risk of consumers perceiving an IFI as insufficiently compliant with Shariah is somewhat mitigated.”

The GCC governments are concerned that the fast-paced growth of the sector could lead to some lapses in corporate governance and Shariah compliance because their region is under-regulated. There is lack of adequate enforcement of policies and there is a litany of conflicts of interest including instances where ministers are allowed to serve on the board of IFIs.

Saudi Arabia is by far the biggest player in the Islamic finance market simply because the kingdom boasts the largest pool of funds in the sector. Bahrain may have several IFIs incorporated there but most of the shareholders’ equity comes from Saudi high net worth individuals and institutions.

The expansion of Islamic industry is largely centred on retail and consumer finance especially housing finance and current accounts and savings products; infrastructure and project finance; acquisition finance; and real estate development finance.
 
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Multilateral lenders are becoming increasingly uneasy over the slowing pace of crucial, ongoing governance, fiscal and economic reforms undertaken by the Punjab government under its flagship Punjab Resource Manage-ment Programme (PRMP) due to what many officials term as visibly weakened ownership of the programme by the new political leadership of the province.

“The donors are concerned whether or not the timelines for the current financial year agreed under the programme for various interventions to push the reforms agenda in the province forward would be met,” a senior official of a donor agency, who did not want to give his name, told this scribe.

“The Asian Development Bank (ADB) has already decided to halve the first tranche of $200 million for health related reforms in the province,” he said.

The ADB had committed last year to disburse $400 million in two equal instalments over a period of three years for undertaking health related reforms in the province to achieve targets set in the Millennium Development Goals (MDGs).

“The donors’ concerns mainly stem from lack of any progress in different reform areas during the last several months caused due to the official inaction and failure to fill the top vacancies at the PRMP. One of our main development partner - the Asian Development Bank (ADB) - has, for example, recently conveyed the highest decision-making authorities in the province that immediate appointment of a new Programme Director of the PRMP is crucial for moving the reforms agenda forward and to meet timelines agreed with the bank,” a Punjab government official, who has remained involved in the implementation of the reforms programme during last couple years, said on the condition of anonymity.

A provincial finance department official, who also did not want to be identified, acknowledged that the delay in the appointment of a fulltime programme director and three deputy directors at the PRMP was a major factor that had slowed down decision-making on how to move forward with reforms significantly.

“But it is not a PRMP-specific phenomenon alone. Officers - senior and junior both - are kind of scared, unsure, and are reluctant to take decisions. Nobody knows if the decisions he is supposed to take would be approved of by his seniors and political leadership or not. The wholesale transfers of officials since the inception of the Pakistan Muslim League-Nawaz’s government in the province has frightened many of us. You may be posted against a vacancy in the morning and moved to another place in the evening,” the finance department official said.

Unless the political leadership, especially chief minister Shahbaz Sharif, starts taking policy decisions - rather than focusing only on the day-to-day populist measures like ordering arrest or sacking of one official or the other for alleged corruption or mismanagement or some other charge, there is little hope of things moving forward in any area, let alone governance reforms,” he said.

The previous government had launched wide-ranging governance, fiscal and economic reforms initiative under the PRMP in 2003 with ADB’s financial assistance of $500 million, spread over five years. A major chunk of the ADB loan proceeds under PRMP was utilised for retirement of high cost federal debt, capitalisation of pension and provident funds and spending on development in the province.

The main objective of the reforms agenda agreed between Punjab and the ADB was to strengthen the capacity of the provincial administration for “efficient and sustainable delivery of public services in order to improve socioeconomic indicators as outlined in the provincial Poverty Reduction Strategy Paper (PRSP)”.

That objective was to be achieved “through reforms in governance structures, systems, and processes to strengthen provincial finances, realign provincial institutions for pro-poor service delivery, and create opportunities for growth and income generation in the private sector”.

On completion of the first PRMP in 2007, the Punjab government and the ADB agreed to undertake the next phase of reforms under the second PRMP. Under the next phase of reforms, the ADB had committed to provide $750 million in three equal tranches spread over five years to 2012.

The PRMP-II was to focus improvements in public fiscal and financial management, deepening of pension reforms, strengthening of efficient and effective civil service and facilitation of greater private sector participation in the economy and in the public service delivery.

The ADB released first tranche of the soft loan towards the end of last fiscal and the second is due to be released at the end of the current financial year after an appraisal of the reforms by the ADB team.

“We can meet the reform timelines and qualify for the second tranche provided the political leadership decides to bring its focus back on the reforms agenda. The governance reforms are not only crucial for qualifying budgetary support from the donors but also to achieve sustainable economic growth, create jobs, reduce poverty, and improve public service delivery,” the finance department official said. “Not everything is lost. We should pursue the reforms for the betterment of our own people,” he said.

He agreed with the suggestion that the pace of reforms in the past had been painfully slow and the previous government had failed to fully achieve the targets because of its own political agenda. Yet, he said, the kind of political ownership of the reform programme shown by the previous government endeared it to the donors who were prepared to give any amount of money to the province for budgetary support.

“The present leadership will do itself a lot of good if it reverts its attention to the reforms agenda for improving the life of its citizens,” said the official.
 
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London equities fell midway through last week, with fresh falls for leisure and retail stocks as the pace of growing concern about the outlook for the UK economy deepened.

The latest UK Services PMI index showed activity in Britain’s key services sector declined for the fourth successive month in August. And the news that Nationwide Building Society’s consumer confidence index remained mired at a series low added further to the gloomy economic scenario.

The FTSE 100 fell 111 points, or two per cent, to 5,509.3. The FTSE 250 was 1.8 per cent lower at 9,412.2, losing 131 points. Both indices reacted to more corporate news of significantly low consumer activity bringing the share prices in companies depended on consumer spending under further pressure.

Sterling continued its sharp decline as currency markets reacted to the worsening outlook for the UK economy. The pound fell to a 12-year low against a basket of currencies of the UK’s major trading partners. It also hit a renewed 2½-year low against the dollar at $1.7703.

The pound’s woes were compounded on Thursday as figures showed UK house prices fell at their fastest pace since 1991 in August, while UK retail sales plunged to their lowest level in 25 years.

The pound’s recent sharp fall is seen as good news for the future prospects of the UK’s exporters. But it is not expected to prevent the Monetary Policy Committee of the Bank of England from having to cut interest rates aggressively in response to the deep downturn in the housing market and domestic economy.

The Capital Economics Limited, a London based research firm expects interest rates to start to fall before the end of this year – perhaps as soon as November - and to fall to 3.5 per cent or even less in 2009.

However, according to more conservative economists the prospect of lower interest rates to stimulate the economy appeared a more distant prospect with publication of the British Retail consortium’s shop price deflator which showed prices rising a year-on-year rate of 3.8 per cent in August, even more rapidly than the level in July.

In another gloomy development UK employers indicated further job-shedding in August, with losses greatest in the hotels and restaurants sector. The employment index was 47.9, up slightly from 46.6 in July but below 50, indicating contraction.

Adding to the overall despondancy Alistair Darling, the Chancellor in an interview in Saturday’s Guardian newspaper said that the UK economy was passing through its worst phase in 60 years while admitting at the same time that he had been taken by surprise by the credit crunch and warned that the economic downturn would be more “profound and long-lasting” than most people had feared.

And perhaps realising the enormity of the situation and to revive the housing market whose collapse is believed to have played the biggest part in pushing the economy into a serious bout of recession, Prime Minister Gordon Brown on Tuesday announced a new £1 billion housing package. He said the package would give first-time buyers a leg-up onto the housing ladder, help homeowners in difficulty and support the UK’s housebuilding industry.

There will be a one-year stamp duty holiday for all properties sold for up to £175,000 - helping to restore market confidence and giving first-time buyers the extra help they need. And, alongside this, 10,000 more first-time buyers will benefit from a new £300 million shared equity scheme called, “Homebuy Direct”.

The PM also introduced a new £200 million mortgage rescue scheme to help thousands of vulnerable families threatened by repossession.

And to encourage social rented housing the PM brought forward £400 million of government spending to deliver up to 5500 new social rented homes over the next 18 months.

The annual increase in food prices jumped to 10 per cent in August, up from 9.5 in July and from 4.7 per cent in April. Non-food prices also rose in August, albeit at a slower pace. Paradoxically, with food prices showing a sustained rise for the first time in decades, the farming sector feels highly optimistic about its future.

Food price inflation in the UK is now around 14 per cent, according to government figures, reversing the trend of the last 50 years. In the 1960s, food made up nearly a quarter of the average household budget – by 2003, this had fallen to less than eight per cent.

But the rising trends in food prices are encouraging overseas investors, City buyers and even investment funds to buy agricultural land, sending its prices to record heights.The industry contributed £5.8 billion ($10.5billion, €7.1billion) to the UK’s economy in 2007, and rising food prices mean this contribution would rise even further.

However, farmers are still not very certain about their margins as fuel, one of the biggest input is becoming dearer, and the rise in diesel prices has been unbearable. Fertiliser and pesticides have also soared in price. It used to cost about £70 to produce a tonne of wheat but now it is nearer £120 a tonne.

Many farmers are still dependent on subsidies. British farmers will receive about £3 billion from the Common Agricultural Policy (CAP) this year.

However, because of UK’s subsidy reform, instead of receiving money for the quantity they produce, British farmers receive a payment based mainly on the amount of land they farm. Farmers are also said to be vulnerable because most make their money only a few times a year.
 
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One way for Pakistan to pull out of its present economic difficulties is to think differently about economic development, to give up on the old ways of promoting growth and adopt a strategy that is more in keeping with modern times.

If this approach were to be followed, agriculture will be the most affected sector.

It could also become the most dynamic part of the economy, helping to accelerate the rate of GDP growth, reduce the incidence of poverty and narrow the income and wealth inequalities among different segments of the population and different regions of the country.

Two significant changes have occurred in the sector of agriculture in the last few years and both present Pakistan with amazingly rich opportunities. The first is the paradigm shift in the prices of agriculture products.

For the first time since development economics came to be treated as a separate discipline, terms of trade have moved decisively in favour of agriculture. This is indicated in the accompanying table and graph that show the unrelenting increase in the index of food prices maintained by the Rome-based Food and Agriculture Organization, the FAO. The index has increased by nearly 60 per cent in the last 18 months.

The trade-off between manufactured products and the produce of land has moved in favour of the latter. Students of development economics will recall that in the early ’fifties, when the discipline was in its formative stage, several influential thinkers, in particular Raul Prebisch from Latin America, believed that the economic system of production dominated by the industrialised countries was tilted against the developing world.

It was organised in a way that the prices of the commodities produced by the developing countries would always remain low relative to the prices of manufactured products produced by rich countries. The only way to escape from this trap was for the low income countries to industrialise and reduce their dependence on the industrial countries.This thinking was at the heart of the earlier development plans that guided policymaking in many developing countries, including Pakistan. There were also political reasons why policymakers neglected the development of agriculture and concentrated their attention on industrialising the country. In the immediate post-independence period, policymaking was in the hands of the urban elite which showed an urban bias in managing economic development. India also forced Pakistan to industrialise quickly by halting all trade in 1949 thus depriving the struggling citizens of the new country of basic manufactures they needed.

Pakistan is now semi-industrialised, having pursued for decades an import substitution policy. This involved protecting what economists call “infant industries”. Tariffs on imports were kept high, taxes were relatively low, and the state stepped in whenever some parts of the industrial sector faced difficulties. This kind of coddling by the state did not produce an efficient industrial sector that could compete in the international market place. One consequence of this was very poor performance in exports.

The country is paying the price for this industrial policy as exports remain stagnant while imports continue to increase. One way out of this difficulty is to build agriculture as an export oriented sector.

The recent changes in the terms of trade have brought about a new set of opportunities for the developing world. This change will last for the simple reason that the structure of demand and the refashioning of the system of industrial production have moved in new directions so that a given quantity of agricultural produce will buy a larger quantity of industrial output. This puts at great advantage countries such has Pakistan that have not realised the full potential of the sector of agriculture.

The second major change affecting agriculture is taking place right in Pakistan’s neighbourhood. It is the product of the rapidly growing demand for agricultural products in the oil producing and exporting countries of the Middle East. The transfer of incomes to the oil exporting countries that has resulted because of the catapulting in the price of oil has changed the structure of domestic demand in these countries.

It has, in particular, increased the demand for high value added agricultural products – animal products, exotic fruits, vegetables, flowers and many types of processed foods. Some of these oil rich countries are looking for ways to ensure secure sources of supply of these important items for domestic consumption.

The problems they face are well illustrated by a recent analysis by two knowledgeable persons about the Middle East. “Saudi Arabia has no permanent rivers and lakes. Rainfall is low and unreliable. Cereals can be cultivated only through expensive projects that deplete underground reservoirs. Dairy cattle must be cooled with fans and machines that spray them with water mists. This is not, in short, a nation that would normally be associated with large scale agriculture,” write Javier Blas and Andrew England in the Financial Times.

The same description applies to Bahrain, Qatar, Oman and UAE. It is not surprising that these countries are looking to invest in countries that have the potential to export agricultural and livestock products.

Several Middle Eastern countries are interested in acquiring land which they can use for producing for their domestic markets. During a recent tour of Central Asia, Khalifa bin Zayed, the UAE president, underscored the need for his country to secure supplies for agricultural products. He had gone to the area, attracted by the regions empty land.

“The UAE is looking at implementing some agricultural projects in Kazakhstan as part of its efforts to develop stable food supply sources for its needs,” he said. Some countries have made tentative moves in Pakistan. Qatar is reported to be interested in setting up a large animal farm in the Punjab for importing meat and dairy products. But these are ad hoc developments which need to be channelised in a way that the country’s agricultural sector benefits broadly.

The Pakistani state needs to get formally involved to invite these kinds of investments. How could this be done and in what way Pakistan could take advantage of this opportunity as well as the changes in the terms of trade? One would suggest that the initiative should come from the provincial governments and should be directed at developing a partnership between the private capital and the state.

One approach would be to establish agriculture and livestock production and export corporations, one for each of the four provinces. Since, the four provinces are differently endowed they will specialise in the production of different products. These should be joint enterprises with the provincial governments and the Middle Eastern investors as the owners. They should be listed in the Pakistani as well as the Middle Eastern capital markets. They should be given some of the land the government owns as equity with capital for developing the land coming from the partners in the Middle East.

This type of approach would bring several benefits to Pakistan. It would bring in new form of foreign direct investment into the country. It will help to commercialise agriculture. It will increase exports by developing new lines of products. It will have multiplier effects by introducing other farmers to new technologies and markets. And, it will help to increase the country’s export earnings.

Pakistan has lost many opportunities in the past to develop its economy by encouraging exports. Consequen-tly, the country remains dependent on foreign capital to pay for the growing trade deficit. This is not a sustainable strategy. Now, that the increase in the price of commodities and the demand for agricultural and livestock products in the Middle East (also China, which is making investments in agriculture in the countries with potential in that sector) has presented the country with another opportunity to expand exports, it must move forward. This opportunity should not be lost.
 
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