Pakistan Economy - News & Updates - Archive

[Neo]

Increasing agricultural productivity​

EDITORIAL (October 05 2008): Prime Minister Yousuf Raza Gilani deserves to be applauded for taking timely and integrated decisions to raise agricultural productivity. He told a news conference in Islamabad on Tuesday that the support price of wheat would be increased from last year's Rs 625 to Rs 950 for the new crop.

Since the announcement has come well before the sowing season, it is expected to act as a good incentive for the farmers to grow more wheat. Gilani pointed out that the measure would cost the government Rs 10 billion whereas last year a hefty sum of Rs 62 billion was spent on wheat imports. Indeed, it is a pertinent comparison considering that food from abroad made a significant contribution to the inflating of our import bill.

And yet, the country continued to face serious food shortages, which were likely to get worse unless the government put its act together and paid serious attention to our own agriculture sector. Another welcome decision pertains to the launch of a Crop Loan Insurance Scheme under which it would be compulsory for loan seekers to insure all major crops like wheat, rice, maize, sugarcane and cotton.

Crop insurance has been tried and tested in a number of countries as an important means to provide farmers protection against natural calamities. Our government has taken a radical step forward in announcing it would share some of the burden of subsistence level farmers obtaining loans for major crops.

The banks granting loans to this category of farmers would pay the agreed premium to the concerned insurance companies, and claim reimbursement from the government on biannual basis following verification by the State Bank. Properly implemented the scheme can go a long way in increasing productively as well as improving socio-economic conditions in our rural areas, where live a vast majority of the poor.

As they go about their business the concerned banks and companies must pay due attention to the fact that illiteracy is rampant in these areas, and hence the procedure of obtaining production loans should be kept simple and easy to deal with.

The State Bank has also moved in conjunction with the government announcements to rationalise credit limits in view of the recent surge in the prices of various agricultural inputs, such as fertiliser, pesticides, fuel and electricity, etc. The Bank said it was enhancing the indicative credit limits for major as well as minor crops, orchards and forestry by an average of 70 percent.

There is also need for longer term measures to help raise productivity through not only better techniques and inputs with loans but also by giving land ownership rights to landless peasants. As the past experience shows, the landed aristocracy ruling this country would not allow any meaningful land reform in the foreseeable future. What is doable at this point in time is distribution of state lands among the peasants.

Indeed, there have been some such attempts in the past, but sans the provision of basic requirements, ie, loans for the procurement of inputs, and assured water supply. Notably, so far the goal has been to increase productivity through better inputs, which is important. But it is important to consider achieving that goal by enlarging farmers' participation as well.

Together with distribution of state lands among landless peasants the government should not only introduce loan schemes, but must also start work on new water projects. While announcing the latest agriculture-related sector measures, the Prime Minister did say the government was focusing on the availability of irrigation water, too, by building small dams. Hopefully, that focus will yield results sooner rather than later.

 

[Neo]

Punjab’s approach to fiscal autonomy​

PUNJAB has begun firming up its strategy for retaining the existing population-based formula for inter-provincial distribution of resources from the federal divisible pool of taxes under the National Finance Commi-ssion (NFC) award.

The provincial government expects the first meeting of the recently constituted commission to be held this month. It will determine the NFC’s terms of reference and formal discussions will be initiated for the next award.

While pressing for retaining population as the sole criterion for distribution of financial resources amongst the federating units, Punjab will also try to seek greater fiscal autonomy for the provinces.

“We will actually be beginning from where we left the discussions for the inconclusive sixth award in 2006,” a senior Punjab finance department official told Dawn following a briefing last week for provincial minister Tanvir Ashraf Kaira on the province’s stand.

Beginning with the demand for an increase in the provincial share in the divisible pool and cut in the federal government’s allocation, Punjab is also looking forward to greater autonomy for the provinces to raise cheaper debt from the domestic market and expansion of their tax-base.

“We want the central government to allow the federating units to impose and collect sales tax on services, and any other federal tax — for example, capital value tax on immovable property. Also, we want permission to raise debt from the domestic market,” the official said.

He said these issues are of immense importance for Punjab.

“Therefore, we want the terms of reference of the new NFC wide enough to include these issues.”

Punjab is hopeful that the other three provinces would support its demand for fiscal independence as agreed during an informal meeting of the four provincial finance ministers in June in Lahore.

The federal government has consistently rejected the demand for transferring to the provinces the right to tax major revenue generating services like telecommunication and financial sectors — which cut across provincial boundaries — to the federating units because it thinks it could cause a new dispute on “territorial” jurisdiction between provinces, particularly Punjab and Sindh.

Also, the centre feels that the proposal would deprive Balochistan and the NWFP of chunk of their share in tax revenue as the services sector there remain underdeveloped. But it is not averse to the provinces taxing services like retail and wholesale markets within their respective territories to increase their tax revenues.

Punjab will also oppose the federal government’s decision to benchmark the resource allocation under the NFC on the basis of the current expenditure and own resource generation of the provinces.

“The method adopted by the centre is to give a uniform growth rate on the actual current expenditure made by respective provinces in the financial year 2008, and project it over the NFC period. There is an element of discretion in this exercise, which is exploited by the centre,” said the official.

“This proposal is to the disadvantage of Punjab because of its conscious policy to reduce the level of the current expenditure — it amounts to penalising the prudent province and rewarding the undeserved ones.”

The officials are also hopeful that the provinces would unanimously demand an increase in provincial share in the divisible pool.

The provincial share, including subvention grants, is set to rise to 50 per cent of the total divisible pool funds in the last year, 2010-11, of the current interim arrangement.

The interim award was announced by the president in 2006 when the provinces had failed to evolve a consensus on the criteria for inter-provincial distribution of the funds.

Punjab stuck to retaining population as the sole basis for the distribution of funds and the rest of the provinces called for a formula based on multiple indicators.

Punjab feels that the demand for multiple indicators is being advocated “on the basis of political necessity rather than economic rationality”.

“Sindh’s argument that the NFC resources be allocated on the basis of revenue collection only takes the point of collection as the basis and not the point of incidence or the real taxpayer. We insist that the NFC should also take into consideration the contribution of taxpayers from Punjab towards federal taxes,” said the official.

Balochistan and the NWFP have always argued for inclusion of backwardness, poverty and area in the horizontal distribution formula. But Punjab says that it has the highest number of poor in absolute numbers and the provinces can be compensated for poverty and underdevelopment through the system of subventions.

Punjab’s insistence to stick to population as the only criterion for inter-provincial sharing of the NFC resources stems from its heavy dependence on transfers from divisible pool due to lack of natural resources.

“While other provinces have guaranteed royalties, excise duty and hydro-electricity profits under the Constitution that make them less dependent on their share from the divisible pool, we are heavily dependent on federal divisible pool share,” the official said. “Besides, if we closely examine the entire system of federal transfers, we are receiving far less funds than our share in population.”

“Punjab’s total share in the federal transfers and provincial own receipts is calculated at just less than 50 per cent against its share of 57.36 per cent in the country’s population,” the official said.

On the other hand, Sindh’s share of 30 per cent in the federal transfers and provincial own receipts far exceeds its contribution of 23.71 per cent to the population. The NWFP is also getting 14 per cent or slightly more than its population of 13.82 per cent and Balochistan seven per cent against 5.11 per cent.

An analysis of the federal and provincial budgets for 2007, for example, shows that Punjab’s share in the straight transfers (on account of natural resources) is only 11 per cent against Sindh’s 61 per cent, NWFP’s 16 per cent and Balochistan’s 13 per cent. Similarly, Punjab’s share in subventions — distributed on the basis of backwardness — is 11 per cent against Sindh’s 21 per cent, NWFP’s 35 per cent and Balochistan’s 33 per cent.

Punjab is getting lesser share — six per cent — from the divisible pool than its share of 57.36 per cent in the nation’s population because of distribution of 2.5 per cent GST under different proportions among the provinces.

Punjab is also ahead of the rest of the country in generating its provincial own receipts as was reflected by its share of 63 per cent in the total provincial own receipts of the four units together. Sindh’s share is 27 per cent and NWFP’s and Balochistan’s is negligibly low to just seven and three per cent.

“The per capita resource of Rs3,221 available to Punjab is also the lowest. Sindh gets Rs4,741, NWFP Rs3,722 and Balochistan Rs5338. Punjab must be compensated for this. Potential own source revenues plus straight transfers need to be realistically assessed and fiscal needs of the provinces taken into account. We will highlight absence of benchmarking and idea of cost of service provisioning and needs,” the official insisted.

 

[Neo]

Re-opening ancient trade route​

Following an agreement in principle between the two top leaders of Pakistan and India for allowing Indians an overland trade access to Afghanistan via Pakistan, businessmen are eagerly waiting to see the historic Grand Trunk Road re-emerge as a busy trade corridor between South and Central Asia.

The road built by the famous Pathan king, Sher Shah Suri in the 16th century linked Peshawar with Calcutta. For centuries, it served as a trade route between the Central and South Asia. Many business visionaries feel confident of revival of this old highway.

“On the political level, the two states continue to trade accusations, but businessmen from both sides remain locked in consultations without any break, to improve trade and explore investment opportunities’’, a Jodia Bazar trader said. He had a lot of information on what’ was going on quietly to improve bilateral business links.

He recalled that the first truck carrying tomatoes from India rolled into Punjab via Wagah for the first time on October 1 last year. Since then no official review has been made of trucks and railway wagons carrying goods from either side, to improve the traffic. But in the year 2007, imports from India exceeded $1 billion. Pakistan’s exports were a little over $400 million.

“In 2008, the two-way trade could be close to $4 billion,’’ he reckoned and estimated that the volume may go beyond $6-7 billion by 2010, once the two sides finalise mutual investment arrangements.

The Indian Prime Minister, Dr Manmohan Singh and Pakistan’s President, Mr Asif Zardari met recently in New York on sidelines of 63rd United Nations’ General Assembly session and announced mutual agreement on four vital business related issues. This accord will allow Indians an overland access to Afghanistan, open up the line of control between the two parts of Kashmir in October for resuming cross border trade and bilateral trading via railways of permissible 2,000 items at Wagah in Punjab and at Khokhrapar in Sindh.

May be, it is a mere coincidence that while the Zardari-Singh accord was being announced in the New York, Karachi businessmen were talking to executives of a top business house in Mumbai about a joint venture project for assembling of CNG buses in Pakistan. “The only hitch on moving ahead with the plan is law and order situation’’, said a businessman.

“Pakistan never sought import of CNG buses in CBU,’’ Tariq Sayeed, Chairman of Saarc Chamber of Commerce and Industry said, adding that the idea was to seek Indian co-operation for setting up a plant. The CNG buses and heavy vehicles have a big market in Pakistan, India and in Afghanistan. And Pakistan has initiated a six billion dollars international trade corridor project; on its completion, the demand for heavy vehicles will increase manifold.

The Saarc Chamber Chief disclosed that the deputy chairman of Pakistan’s Planning Commission visited India sometimes back and offered investment opportunities. “Every investment proposal will be considered on case to case basis,’’ Tariq recalled. But, he said, the Indians are keen to invest in transport, steel and coal fired electric projects etc. “Pakistan stands to benefit from Indian investment,’’ he argued because an auto project like CNG buses will help revive sagging vendor industry. It will also create jobs for our people.

Indian business houses have stepped up their investment exploration since last one year or so. As recently as in May this year, Ruia brothers, Shashi and Ravi of ESSAR group met Prime Minister Syed Yusuf Raza Gilani in Islamabad. ESSAR is interested in energy, steel and shipping sectors.

In the last quarter of 2007, top Indian businessmen landed in Islamabad with investment proposals. Ratan Tata is said to have come in his personal plane with about half a dozen directors of his numerous companies to discuss investment proposals with the then Prime Minister Shaukat Aziz. Ramesh Ambani from the House of Reliance, involved in a number of fields-telecommunications, energy, synthetic textiles, visited Islamabad and Lahore in late 2007. His main interest lay in setting up a giant polyester fibre plant that could cater to textile needs in India and Pakistan and the export markets. But no headway could be made on these proposals because of political developments.

“Possibly, this government will pick up the thread from where it was left by the previous one to begin a new chapter of business relationship with India’’, Siraj Kassim Teli, an influential former President of Karachi Chamber of Commerce and Industry said. “We want the governments of two countries to draw up an agreed framework of consultation on business which should be allowed to operate freely without any official interference,’’ Teli added.

Ejaz Khokar, a well-known sports wear manufacturer and exporter from Sialkot named half a dozen Indian fashion design companies and owners of store chains who are keen to work with Pakistani businessmen. Stop and Shop is one such chain in India looking for Pakistani products for sale.

Mr Rahul Mehta, a well-known fashion designer in Mumbai is seeking visa to visit Pakistan to talk to a Lahore-based fashion design gallery owner for putting his products on exhibition and for sales.

“You know Indian bridal dresses are now a craze in affluent classes in Karachi, Lahore, Islamabad and other places,’’ Ejaz said and pointed out that these much sought after bridal dresses are coming mainly through informal channels.

His proposal is to have joint venture for expensive dresses to cater to the needs of 15-20 million consumers in Pakistan and 300 million in India. At the same time, the two sides can join hands to offer low cost dresses to 800-900 million consumers in both countries through outlets under joint ownership.

Bilal Mullah, another garment manufacturer and exporter however advises caution before entering into a big business arrangement with Indians. “A small gap in bilateral trade is affordable but a big and ever-widening deficit can hurt us financially and also our industry,’’ he warns.

But as this debate goes on, there are many businessmen in Karachi, Lahore and other places who plead for joint ownership of retail outlets in India and Pakistan for offering various products.

“After all, we were earning over $3 billion from exports of low value products to the US,’’ an exporter said. He believes that India and Pakistan with so many common factors, poverty being one of them, should join hands in serving their people.

 

[Neo]

Government borrowing for budgetary support reaches Rs 173 billion ​

KARACHI (October 06 2008): The government borrowing for budgetary support has mounted to Rs 173 billion mark with an upsurge of 102 percent during the first 11 weeks of the current fiscal year due to increasing expenses and slow inflows.

The over 100 percent increase in government budgetary borrowing reflects that federal government is relying on the State Bank and other banks for budgetary support despite the central bank request to reduce the borrowing and retire the existing debt. State Bank of Pakistan (SBP) has revealed that government sector borrowing for budgetary support has gone up by Rs 87.546 billion during the July 1, to Sep 13 (approximately 11 weeks) of current fiscal year as compared to same period last fiscal year.

With the current upsurge in government's budgetary borrowing from banking system (SBP and other banks) has mounted to Rs 173.235 billion during the first 11 weeks of fiscal year 2009, as against Rs 85.689 billion in same period of last fiscal 2008, depicting an increase of 102 percent.

"Increasing oil and food subsidies have compelled the government to borrow from SBP to meet financial requirements, however the government is expecting that borrowed amount would be retired soon after the improvement in economy" economists said. They said that recently federal government has auctioned first Government of Pakistan Ijara Sukuk, which would help reduce the borrowing from central bank.

The issue of Ijara Sukuk also reflects the government's attempt to discover some new tools of financing as per SBP suggestion, they said. They added "therefore, in the future it is likely that government would reduce its borrowing form central bank", even though budgetary borrowing from SBP is still on the rise at present."

The statistics depict that borrowing from central bank has reached Rs 179.443 billion during the period as previously it stood at Rs 2.886 billion during same period of last fiscal year, depicting an increase of 6117 percent or over Rs 176 billion during the first 11 weeks. However, the government's budgetary borrowing from other banks shows sharp decline and government borrowing for budgetary support has stood at a negative position of Rs 6.207 billion from banks as compared to Rs 82.803 billion borrowing during the same period of last fiscal.

 

[Neo]

Tehran parleys widen gap of mistrust over IPI ​

ISLAMABAD (October 06 2008): Tehran parleys have widened the gap of mistrust between Iran and Pakistan over Iran-Pakistan-India (IPI) gas pipeline as the host country did not show any flexibility in its demand of reopening of agreed issues of the project.

Pakistan's official delegation which visited Iran between September 27 and 29 told Iranian counterparts during the course of meetings that IPI was a 3-nation project and any agreed issue can be renegotiated once all the parties agree on it.

Iran demands reopening of gas pricing system, besides reviewing the gas sale-purchase agreement (GSPA) for IPI. Pakistan, however, is willing to carry on the formula that was agreed by the parties during the steering committee meeting in Islamabad.

Sources said Iran's changing demands are confusing the decision-makers in Islamabad to such an extent that they have started wondering if Tehran really wants the project to go forward.

A 4-member Pakistan delegation, led by acting Petroleum Secretary, G.A, Sabri, had visited Iran for discussing with Iranian counterparts modalities for IPI. The two sides had held four rounds of talks in Tehran, but they could not make progress on items in their agenda.

Iran had invited Pakistan to negotiate IPI-related issues which had been agreed upon previously in a steering committee meeting held in Islamabad in April last. Since Pakistan is keen to make IPI a reality as early as possible it showed flexibility by accepting Iran's demand to negotiate some issues of the project.

The officials in Islamabad claim that Iran has not reciprocated Pakistan's flexibility. They are of the view that Iran's changing stance is giving negative signal to Islamabad. "We have developed strong feeling now that instead of wasting more time and money on IPI Islamabad should take into account some other workable project to have an additional source for import of gas. The new development can shift our focus from IPI to Turkmenistan-Afghanistan- Pakistan-India (TAPI) gas line project, they said.

IPI is a case of inordinate delay. The project was conceived by India in early 90s. After initial survey, Iran and India thought it necessary to offer Pakistan to become a party to it. Energy-deficit Pakistan immediately accepted the offer and joined the project, which was then renamed as 3-nation gas line. Between 1994 and 2008, the project witnessed different phases. It has been a worst case of economic and geo-political situation. Delay has already pushed up the cost of the project from initial estimates of $2.5 billion to $7.5 billion. Even after an increase of 300 percent in cost, there seems no clear hope of early maturity of the project Pakistan once thought could bail it out from energy crisis.

 

[Neo]

Plan for cottage industries uplift ​

SIALKOT (October 06 2008): Punjab government has prepared a comprehensive plan for setting up maximum industries aimed at generating employment opportunities in Punjab. Under the plan government was utilising Rs400 million on the development and promotion of cottage industries in the province.

Official sources told Business Recorder here on Sunday that the step was being taken for further accelerating the pace of exports and enhancing the productivity in the Punjab. The development of industrial was top on the government agenda and making adequate efforts for redressal the problems being confronting by the private sector in the Punjab.

The government was also considering establishing mini industrial estates in remote rural areas aiming at promoting non-traditional products being produced in these areas and generate employment opportunities for skilled and semi-skilled persons in their doorsteps in the Punjab, sources added.

 

[Kumar]

Bloomberg.com: India & Pakistan

Pakistan's Rating Cut by S&P on Debt Payment Concern (Update3)
By Khalid Qayum

Oct. 6 (Bloomberg) -- Pakistan's credit rating was cut by Standard & Poor's, which doubts about the country's ability to meet $3 billion in debt-servicing costs as terrorism risks grow and investors flee emerging markets.

The nation's long-term foreign-currency rating was cut two levels to CCC+ from B, with a negative outlook, the U.S. rating company said in a report today. The rating may be lowered further if the government fails to stop the growing external imbalances, the report said.

Pakistan's President Asif Ali Zardari is seeking $100 billion to overcome the nation's economic crisis and to fight terrorism, the Wall Street Journal reported last week. The funds will help stop the outflow of capital from the country each time there is a bomb blast and it will build business confidence, Zardari said, according to the report.

``It is not a good sign for future foreign inflows,'' said Muzzammil Aslam, an economist at KASB Securities Ltd. in Karachi. ``This will halt efforts by Pakistan to raise funds from international financial markets and it will have to seek funds from bilateral or multilateral lenders.''

Pakistan is the world's riskiest government borrower, according to credit-default swap prices from CMA Datavision, with investors concerned by a deterioration in security that saw 53 people killed in a bomb attack on the Islamabad Marriott hotel last month.

``The negative outlook reflects our expectation that multilateral and bilateral aid, including deferred oil payment schemes, may not be timely enough,'' S&P said in the statement. The agency cut Pakistan's rating to B in May.

Foreign-Exchange Reserves

Pakistan is running short of money to repay state debt. Its foreign-exchange reserves have dropped 67 percent in the past year to about $4.7 billion, S&P estimated.

Pakistan's next interest payment on its dollar-denominated bonds is due in December and the government is scheduled to repay $500 million in February on a 6.75 percent note.

Credit-default swaps on Pakistan's $2.7 billion of dollar- denominated bonds outstanding have more than doubled since the start of September to 2,050 basis points, Royal Bank of Scotland prices show. That means it costs $2.05 million annually to protect $10 million of the country's debt from default for five years.

Karachi's KSE100 Index has lost more than a third of its value this year and the rupee has fallen 27 percent. The Karachi Stock Exchange imposed trading curbs on Aug. 28 that stopped stocks from falling below their Aug. 27 level. The curbs are due to be reviewed this month.

Balance of Payments

Pakistan's balance of payments deficit increased six-fold in the first two months of the year that started July 1 to $2.5 billion and the current account deficit reached 1.6 percent of the $150 billion gross domestic product, the report said.

``Pakistan's balance of payments is under significant and rising pressure,'' S&P said. Capital inflows are ``increasingly deterred by the prolonged political uncertainty and adverse security climate.''

An economic bailout may be considered by members of the Friends of Pakistan group, which is led by the U.S., the U.K. and the United Arab Emirates, at a meeting in Abu Dhabi this month, Dawn newspaper reported Oct. 5.

The group's first meeting was held in New York on Sept. 26 on the sidelines of the annual UN General Assembly. The other countries who joined the Sept. 26 meeting were Australia, Canada, China, France, Germany, Italy, Japan, and Turkey.

More than 2,000 people were killed in Pakistan in 2007 in terrorist attacks that the government blames on militants opposed to its support of the U.S.-led campaign against terrorism.

To contact the reporter responsible for this story: Khalid Qayum in Islamabad at kqayum@bloomberg.net.

 

[Neo]

WB to provide $2.25 billion for trade and energy corridor​

* Loan expected to ease burden on Finance Ministry for providing Rs 2 billion to PSO for oil terminal at Gwadar
* China to develop oil city in Gwadar, railway track to be laid to China​

ISLAMABAD: The World Bank (WB) is likely to provide Pakistan $2.25 billion to lay the infrastructure of a ‘trade and energy corridor’, a senior official in the Petroleum Ministry told Daily Times.

The official said Pakistan had requested the WB authorities to provide $2.25 billion for developing the infrastructure of the trade and energy corridor that would serve as a gateway for commerce and transport between South Asia, Central Asia, China and the Gulf countries.

He said negotiations were under way and the WB had indicated it would provide the loan.

Oil Terminal: The official said the government had planned setting up an oil terminal at the Gwadar Port and the Pakistan State Oil (PSO) had estimated the setting up of the terminal would require Rs 2 billion. He said the Planning Commission had asked the Finance Ministry to provide the amount to the PSO. He said the Finance Ministry was under pressure regarding the financing and WB funding could help in the circumstances.

China: He added China would develop an ‘oil city’ in Gwadar and many oil refineries would be set up, resulting in huge investment as well as enhancing Pakistan’s oil storage capacity. He said a railway track would be laid from Gwadar to China to provide transportation to Chinese investors.

He said that with the sustained inflow of investment, Pakistan would be able to execute projects worth billions of dollars and utilise the Gwadar Port’s key location to best advantage.

“Any land-based trade between the Gulf region and the South Asian states can best take place through Pakistan. The country would work as a link between the Gulf region, Iran, Afghanistan, China and Central Asia that would make all of us natural trading partners,” he said. “Pakistan is the ideal approach for the shipment of Indian goods to Afghanistan and the Central Asian markets,” he added.

He said transit through Pakistan could provide the most economical shipment route of fuel from energy-rich Gulf states, Iran and Turkmenistan to energy-deficient India. This would be particularly effective for natural gas pipelines from Iran and Turkmenistan.

 

[Neo]

SBP injects Rs54bn into money market ​

Central bank moves in after call money rates hit 32 per cent; rupee touches bottom, recovers as banks sell dollars to meet cash crunch​

Tuesday, October 07, 2008

KARACHI: The State Bank of Pakistan on Monday intervened in the money market to help cash- strapped banks.

The banks were facing severe liquidity crunch soon after the festive occasion of Eid to the extent that overnight rates (the rate at which banks lend to each other) were hovering between 28 and 32 per cent.

The State Bank of Pakistan through its Open Market Operation (OMO) on Monday injected Rs53.90 billion into the money market at 12.63 per cent rate of return for 7-days Reverse Repo.

The SBP received bids worth Rs54.40 billion offers of which it accepted Rs53.90 billion. The market sources said that SBP operation partially helped cash scarce banks in overcoming their liquidity shortfall, which helped overnight lending rates to simmer down to 18 per cent from 28 to 32 per cent quoted earlier in the day.

The primary cause of liquidity squeeze is said to be the depletion in country’s forex reserves which declined to $8.136 billion on September 27, 2008, as a result the net foreign assets have gone down by Rs167 billion - as against Rs24 billion fall at same time last year.

Banking sources said that without injection of additional liquidity banks were finding it difficult to extend cotton financing to textile sector at a time when Kharif season is about to kick-off. Volatility continued in forex market as rupee depreciated to the lowest level versus US dollar during the day but closed with significant recovery on Monday the first trading day of the week.

“On Monday usually the volume of outflows is higher than inflows but today there was comparatively lower demand for US dollar which reduced pressure on rupee,” a forex dealer said. “The banks are facing worst liquidity crunch and with dearth of cash they preferred to sell dollars reserves instead of pilling them up, which helped rupee to recover back some grounds,” a forex dealer said.

In early hours of day there were some obligatory foreign payments, which caused rupee exchange value to plunge to Rs78.60 on buying and Rs78.70 on selling counters, however, rupee recovered some grounds and closed at Rs78.20 on buying and Rs78.35 on selling counters in interbank market before day trade closed.

Banking sources said that accountholders withdrew approximately Rs1.3 trillion during Ramazan and before Eid in order to pay Zakat, fitr, and other religious obligations as well as financing of Eid expenses.

 

[Neo]

Foreign debt soars after rupee’s plunge ​

Tuesday, October 07, 2008

LAHORE: A sharp fall of the rupee has played havoc with the economy, with foreign debt rising from Rs2,759 billion to Rs3,493 billion, size of the economy dropping below $150 billion and per capita income slipping to $780.

Economists have urged the government to realise the urgent need of addressing the factors that are putting pressure on the rupee and damaging the economy. They say Pakistan’s foreign debt at the end of the last fiscal year in June stood at $44.5 billion, which has increased in rupee terms by Rs743.25 billion as the currency plunged after July from Rs62 to a dollar to Rs78.50. The decline is still on and the government has not taken any concrete steps to stem the rot.

Gross domestic product, which was $160 billion on the basis of the rupee value of Rs62, has slipped below $150 billion. Earlier, Pakistan was moving steadily to join the club of Middle Income Group countries as its per capita income increased to $990 at the end of the last fiscal in June. However, the per capita income has now declined to a little over $780 after the sharp fall in rupee’s value.

The country is likely to remain among ‘low income’ states for a long time. This, the economists say, is in line with the purchasing power of the rupee which has declined considerably during the past six months.

They say the government would have to revisit the poverty profile, which has deteriorated in line with the decline in the purchasing power of the country. Some economists state that poverty must have increased by 10 per cent to above 30 per cent based on the soaring inflation.

They say Pakistan had a better Gini Coefficient than India till the 1990s. Now Pakistan is classified among countries with Gini Coefficient ranging from 0.30 to 0.34 depicting huge inequality in society. India’s Gini Coefficient ranges from 0.35 to 0.39. (Gini Coefficient of zero indicates complete inequality and one depicts complete equality).

Constant increase in imports after over 20 per cent decline in the rupee is a dilemma which has surprised most economists who say Pakistan is perhaps the second country after the US which has seen its trade deficit widen irrespective of the value of the currency at that time. The US, however, bears a huge trade deficit because its foreign exchange inflows are three times its trade gap and it ends up with a huge current account balance.

Pakistan’s foreign exchange reserves are depleting and except for workers’ remittances from abroad other inflows are too low to cover its huge trade deficit.

Economic experts point out that every country in the world devises a trade policy which benefits the local industry. The US has average import tariff of less than five per cent but its import duties on textile products from Asian economies range from 11 to 25 per cent. This has been done to protect the labour-intensive clothing industry.

The economists say import duties on textile products from high-cost Western European countries are either zero or a little higher according to the prices of apparel which does not hurt their high value-added clothing industry.

The trade regime in Pakistan is operated in such a way which encourages imports and discourages local industry. Pakistan is the only major cotton-producing and textile-based economy in Asia where imported clothing and fabrics dominate local markets because of a flawed import regime. They point out that smuggling is another major menace which could only be controlled if those monitoring border checkposts are made fully accountable.

 

[Neo]

S&P downgrades Pakistan further into junk territory ​

Tuesday, October 07, 2008

HONG KONG: Standard & Poor’s cut Pakistan’s sovereign rating further into junk territory, saying the country’s worsening external liquidity may imperil its ability to meet about $3 billion in upcoming debt obligations.

The widely expected action comes after Pakistan said on Saturday its foreign reserves fell $690 million to $8.1 billion in the week ended September 27, an announcement that helped send the Pakistani rupee to a record low against the dollar on Monday. The country’s central bank, the State Bank of Pakistan, said its reserves fell to $4.7 billion from $5.4 billion previously, representing a little over two months of import cover.

S&P’s downgrade of Pakistan was its second this year, as the country faces the prospect it will default on its debt due to dwindling foreign currency reserves. Foreign investor confidence in the country has also been dented amid worries urgently-needed economic reforms will be delayed in a year plagued by political and security concerns.

S&P on Monday lowered its foreign currency debt rating on the country to CCC-plus from B, just several notches above a level that would indicate default. Pakistan’s local currency debt rating was lowered to B-minus from BB-minus. The ratings agency noted Pakistan will require external assistance in meeting its debt obligations, which includes $500 million in dollar bonds maturing in February, but expressed concern about whether it could count on the help in time.

S&P also noted the uncertain political situation and social tension cast doubt about whether the government would have the ability to adopt the appropriate policy measures. “The rating on Pakistan could be lowered further if the foreign exchange reserve cushion continues to shrink and meaningful economic stabilization measures remain wanting,” S&P warned in its statement.

Rival credit agency Moody’s Investors Service last month cut its outlook on Pakistan’s debt to negative from stable, citing similar reasons, though it maintained its ratings at B2. The cost of protection against a default in Pakistan’s sovereign debt trades at 1,800 basis points, according to its five year credit default swap , a level that indicates investors believe the country is already in or will soon be in default. An investor would thus need to pay $1.8 million annually to insure against $10 million of Pakistan’s sovereign debt.

TOUGH OUTLOOK: Pakistan is in fast need of cash. According to S&P’s estimates, the country’s $4.7 billion in net foreign reserves at the central bank marked a 67 per cent plunge from a year ago. Its current account deficit is also running well ahead of target, reaching $2.5 billion in July and August. That means that in just the first two months of the new fiscal 2009 year, Pakistan’s shortfall reached 1.6 per cent of gross domestic product, or more than a quarter of the government’s full-year target of 6 per cent of GDP.

Though the Asian Development Bank said last week it approved a $500 million loan to help Pakistan, the country will need far more money than that according to analysts. A senior adviser to the government said last month the country would need $7 billion in total to cover its projected current account deficit of $14 billion for the fiscal year, of which it needed $3 to $4 billion upfront.

According to a Citigroup report last week, Pakistan is losing about $1 billion of its foreign exchange reserves a month, at a time when the prospects of raising money whether through asset sales or international bonds have become very difficult in the midst of a global financial crisis.

“At this juncture, Pakistan does not appear to have the financial sources to service its near-term amortizations, including the $500 million maturing Eurobond in February,” the analysts said in the report. Those maturing bonds were trading at 44 cents to the dollar before S&P’s sovereign downgrade.

 

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FPCCI demands ban on import of luxury items ​

Tuesday, October 07, 2008

KARACHI: Former president of Federation of Pakistan Chambers of Commerce & Industry (FPCCI) Tariq Sayeed has suggested to the government to slap a ban on such imported goods for six months without which the country could survive.

He advised that it should be regarded as a short-term approach to improve the balance of payments, which will help avoid conditional loans from the IMF and other such agencies. He was of the opinion that instead of promoting import liberalisation, production-oriented policies should be adopted with a special focus on promoting the agriculture sector to save huge amounts of foreign exchange, the acute deficiency of which had brought economic turmoil in the country.

He demanded the remodeling of policies to reduce the import bill of such products without which the country could survive. He also emphasised on maximising production to gain surplus and to check the influx of such imported goods, which were unnecessary and could be produced locally.

A country like Pakistan, which had already been facing fiscal deficit of more than 8 per cent of GDP, burdened with foreign debt of more than $44 billion and trade deficit of over $20 billion, cannot afford importing such luxurious items, which account more than $8 billion, said Sayeed.

He counted several such items like import of over $1.5 billion of chocolates, candies, canned juices, confectionary items, assorted fruits etc, stating that they were not affordable for an agro-based country such as Pakistan.

Similarly he criticised the huge import bill of over $1.0 billion in respect of cellular phones and allied equipments, coupled with unnecessary electrical home appliances like refrigerators, air conditioners, ovens, accounting for over $1.5 billion in addition to the import of cars, motorcycles and other completely built units of over $500 million, which not only add to the trade deficit but have increased the import bill for oil.

“If the government puts a ban on the import of vehicles and other such equipments, the import bill for oil can be reduced to $2 billion” Sayeed articulated. He said that the government earnestly needs to review economic policies for effective utilisation of available resources, further arguing that though in the era of globalisation, it was not possible to ban imports but such bold decisions will have to be taken to safeguard the country from an economic collapse. He feared that if tangible measures were not adopted, the country may face irrecoverable losses.

 

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Pakistan launches Economic Diplomacy Initiative ​

Tuesday, October 07, 2008

ISLAMABAD: Foreign Minister Makhdoom Shah Mahmood Qureshi launched the Economic Diplomacy Initiative by holding a meeting with the heads of Chinese companies engaged in business/projects in Pakistan here at the Foreign Office on Monday.

The focus of the meeting was on undertaking increased investments and projects in Pakistan and pre-visit preparations for the forthcoming visit of President Asif Ali Zardari to China. The foreign minister, while acknowledging the significant role played by the Chinese companies in Pakistan's national development, underscored the importance of corporate sector in further improving the economic and commercial content of the Pakistan-China fraternal relationship.

He said that Pakistan and China had developed a comprehensive architecture for economic and project cooperation in various fields like trade, power generation, financial and banking sector, and exploration of natural resources.

Foreign Minister Qureshi emphasized the need to translate this framework into on-ground project implementation on fast-track basis.He described the Government's vision to broaden economic cooperation with China to bring it at par with the excellent political and security relations that existed between the two countries.

The foreign minister said that during his forthcoming visit to China, the president will hold meetings with the heads of Chinese companies and financial institutions. He also assured the Chinese companies of the fullest cooperation and facilitation by the government to promote their businesses in Pakistan.

Pakistan launches Economic Diplomacy Initiative

 

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Debt crisis looms for Pakistan after rating downgrade​

ISLAMABAD: The risk that Pakistan could become the bankrupt state it was before a military coup nine years ago loomed larger on Monday as the rupee struck an all-time low and its debt was relegated deeper into junk bond territory.

The six-month-old civilian government led by President Asif Ali Zardari is engulfed with crises left behind by former army chief General Pervez Musharraf, who resigned as president in August.

On Monday, amid gloom over an economic morass and a security threat posed by Islamist militants after Islamabad’s Marriott Hotel was blown up last month, the rupee hit 78.65 per dollar. That took its loss since the start of the year to more than 21 percent. The central bank has just enough foreign currency to cover two months of imports, and a potential default on a sovereign loan is looming in February.

The fiscal and current account deficits are unsustainable. Inflation is over 25 percent and rising.

Rating agency S&P cut the rating on the country’s sovereign debt rating to CCC-plus, a few notches above default level.

S&P said Pakistan’s worsening external liquidity may imperil its ability to meet about $3 billion in upcoming debt payments.

“The Pakistani authorities now need to demonstrate that the financing gap in the balance of payments is capable of being bridged,” said Tim Condon, economist at ING Bank in Singapore.

Analysts say Pakistan’s best hope lies in the goodwill of multilateral lenders and friendly governments, like the United States and Saudi Arabia, keen to see the six-month-old civilian government succeed and stop a nation on the front line of the global war on terrorism sliding into chaos.

“That’s their only lifesaver. The rest is a mess,” said a Singapore-based fixed income fund manager from a major US asset management firm, who asked not to be named.

The Asian Development Bank finally came through with a $500 million loan last week, but much more was needed.

An adviser to Prime Minister Yousaf Raza Gilani said last week that $3-4 billion was needed fast to stabilise the economy.

Pakistan’s foreign reserves fell $690 million to $8.13 billion in the week that ended on September 27. The State Bank of Pakistan said its own reserves fell to $4.68 billion, representing a little over two months of import cover.

Liquidity Crunch: The constant pressure to pay import bills and meet debt payments has drained liquidity, and forced the government to borrow more from the central bank.

Data released on Monday showed government borrowing was more than 100 percent up at $2.21 billion — all of it from the central bank — in the first 11 weeks of a fiscal year that began on July 1, compared with year-ago levels.

Coming back on Monday for the first full day’s trading since the Muslim festival of Eid al-Fitr, Pakistan’s illiquid money markets saw volatile call money rates surge to 40 percent before settling back below 30 percent. Pakistani bankers called for urgent central bank action to stop a liquidity crunch putting banks in jeopardy.

“It should do something immediately, as there is risk for systematic failure,” said a senior banker, who requested anonymity due to the authorities’ sensitivity regarding management of the markets.

Some bankers said they expected State Bank of Pakistan to cut banks’ statutory liquidity requirement (SLR) or cash reserve requirement (CRR) by at least 50 basis points, or possibly both.

Longer term, bankers said the central bank may need to raise the discount rate, which was hiked to 13.0 percent in July.

Stock Exit Plan: While the currency has slid and the money market dried up, Pakistan’s stock market has been propped up by an artificial floor placed under the index at the end of August.

Authorities are expected to review on Friday how long to keep the floor and to consider establishing an exit mechanism for foreign investors, a senior official told Reuters.

The floor has killed trading volumes, with investors unable to sell at prices that could attract buyers in a market that has lost almost 35 percent since the start of the year. The benchmark 100-share index ended flat at 9,178.97, less than 34 points above the 9,144 floor.

The imposition of an index floor could result in Pakistan being removed from the benchmark MSCI emerging equities index. Remy Briand, the global head of index research at MSCI Barra warned that countries which curb the free flow of capital were likely to be relegated to the “frontier markets index”, which covers economies with underdeveloped stock markets. reuters

 

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Oil reserves fall by 7.6%, gas 8% in FY08​

KARACHI: The country’s oil and gas reserves dropped by 7.6 and 8 percent in 2008 versus previous year as the original recoverable reserves of some key fields were slightly revised down by their respective operators, a report said on Monday.

Major oilfields that witnessed depleting of reserves were Zamzama, Sakhi, Bobi, Jabo, South Mazari, Zaur and Chak-66 NE fields (representing a cumulative 8.6 percent of the total oil reserves of the country). This is downward revision in their original recoverable reserves, an analytical report prepared by Investcap said. However, the report added, the downward revision in these fields was partly offset by an upward revision in the Mela field by an approximately 50 percent year-on-year which increased its original recoverable reserves to 23.86 million bbl in FY08 from 15.87 million bbl a year earlier, especially since the Mela field represents approximately 6.7 percent of the country’s total oil reserves. On a company wise basis, BP’s oil reserves fell by 4.3 percent YoY in FY08, which represents approximately 10.4 percent of the total oil reserves of Pakistan.

This downward revision was moderately countered by an upward revision of 1.4 percent in Oil and Gas Development Limited’s (OGDC) original recoverable reserves, which represent the lion’s share of 45 percent of the country’s total oil reserves.

Amongst the gas fields, which saw downward revisions were the Bahu (-20 percent), Miano (-40 percent), Rehmat (-42 percent), Chachar (-8 percent) and Sawan (-35 percent) fields, which cumulatively represent approximately 4.5 percent of the total recoverable gas reserves of the country. An upward revision of 2 percent in the Uch field from 4.99tcf to 5.01tcf slightly offset the fall in reserve numbers from other fields. The Uch field represents approximately 15 percent of the country’s total recoverable gas reserves, the Investcap report said.

Of the 11 discoveries made in FY08, the reserves of a meagre three have been included in the latest figures released by the PPIS, namely Adam (operator – PPL), Missri (BP) and Moolan North (OGDC). Of the previously discovered fields, reserves of three fields were added, namely Zaur West (operator – BP), Ahmed (OPII) and Tando Allah Yar North (gas - OGDC). Reserve addition of the eight other discoveries should provide a welcome boost to the countries total oil and gas reserves.

The report said that Pakistan Petroleum Limited’s (PPL) oil and gas reserve lives remain comfortably positioned at 24 and 16 years respectively. Although the addition of Adam field helped in increasing the company’s reserves, its high production seems to be having an eroding effect on the company’s total gas reserves as no major addition was made to the reserves. The gas reserve replacement ratio (RRR) of the company was at -67 percent in FY08.

However, reserves addition from the promising Mami Khel field is expected to improve the company’s gas RRR. On the other hand, an upward revision in the oil reserves of Mela field propelled the oil RRR of PPL to 144 percent in FY08. No oil and gas reserve additions were made by Pakistan Oilfield Limited (POL) because of which the company’s RRR was recorded at 0 percent while its oil and gas reserve lives stand safely at 20 and 41 years respectively. However, POL’s high reserve lives stem largely from a low production base, thus undermining its significance. OGDC remains nestled in its position with respective oil and gas reserve lives of 11 and 31 years. Mela’s upward revision also boosted OGDC’s oil RRR to 14 percent as the company has a 56 percent stake in the field. Gas RRR in FY08 was at 1 percent.