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Thursday, June 11, 2009

ISLAMABAD: Argentinean oil and gas holding company Bridas Corporation on Wednesday expressed interest in participation in Turkmenistan-Afghanistan-Pakistan (TAP) gas pipeline project and exploration of gas in various parts of the country.

A company’s delegation, led by Carlos Bulgheroni, Chairman Bridas Corporation, visited the Board of Investment (BOI) to explore investment opportunities in Pakistan, especially participation in the TAP gas pipeline project and in exploration of gas fields of Balochistan and Sindh.

In the meeting, Saleem H Mandviwala, Minister of State and BoI Chairman, BoI senior offices and representatives of the ministry of petroleum and natural resources were present. The BoI chairman highlighted the parameters of investment policy, which allows 100 per cent foreign equity in major sectors and full repatriation of profits and dividends in all sectors.

It was told that average rate of return is almost 30 per cent and in some cases up to 50 per cent.

The delegation was given a detailed presentation on the investment policy, incentive package and potential in the oil, gas and energy sector. Referring to opportunities for the private sector, the delegates were briefed about the current status of Pak-Iran gas pipeline project and Turkmenistan-Afghanistan-Pakistan (TAP) pipeline project. The delegation was also informed about Thar coal reserves, which are estimated at 175 billion tonnes, but are untapped.

The delegation appreciated the hospitality extended to them during their visit in Pakistan. Mandviwala assured to extend all possible assistance required to them.
 
Thursday, June 11, 2009

ISLAMABAD: Italy is ready to provide a soft loan of 20 million euros to Pakistan to strengthen and promote technical & vocational education and training sector in the country.

This was stated by Walter Zucconi, head of a two-member official delegation of Italy during his meeting with the Chairman National Vocational and Technical Education Commission (NAVTEC), held at the Prime Minister’s Secretariat here on Wednesday.

Italian delegation leader, on the occasion, said that his country could help in implementing the National Skill Strategy. He was of the opinion that the soft loan of 20 million Euros would help to realize the objectives of National Skill Strategy.

During its weeklong stay in Pakistan, the delegation will hold meetings with the relevant officials aimed at assessing and identifying some Italian development initiatives, as was announced in the international donors conference, held in Tokyo in April 2009.

The delegation was informed that NAVTEC provides policy direction and create an enabling environment for skill development and also guides the provinces in utilizing the public sector training facilities to the fullest.
 
Thursday, June 11, 2009

ISLAMABAD: The World Bank’s Board of Directors has approved $250 million for poverty reduction project (PPAF-III) of the Pakistan Poverty Alleviation Fund for next five years.

Addressing a media briefing on Wednesday here, Chief Executive Officer (CEO) PPAF Kamal Hyat said that the World bank funding is based on the consideration of PPAF’s output, lowest administrative cost, effectiveness of outcomes and impact on the poorest at the grassroots level.

Kamal Hyat said that PPAF will increase its focus on inclusion of poor people - including women, youth and ultra-poor households - in community organizations and strengthen their participation in all community decision-making processes.

“PPAF-III would focus on five key areas of social mobilization and institutional building, livelihood enhancement and protection, microcredit access, basic services and infrastructure and project implementation support,” he added.

He said cumulative disbursements of approximately $1 billion make PPAF the largest institution of its kind in the world impacting directly/indirectly 15 million people with microcredit with 100 per cent recovery rate, 16,000 water and infrastructure projects impacting 11 million with 50 per cent women beneficiaries, 162 health and educational facilities and 330,000 trained individuals (40 per cent women).

He said externally commissioned third party independent evaluations reveal a 21 per cent increase in the mean personal income of the borrowers, a 13 per cent increase in the mean household incomes, 19 per cent increase in average on household consumption, 14 per cent increase in food items consumption and a 16-26 per cent increase in assets.

He said the Poverty Alleviation Fund has disbursed assistance for 120,000 housing units, trained over 100,000 individuals in seismic-reconstruction technologies, rehabilitated over 400 damaged water and infrastructure schemes and reconstructed 19 health & education facilities in the quake-hit areas.

CEO PPAF said one of the unique features PPAF interventions is the induction of new and emerging technologies like microhydels, windmills, bio-gas and solar technology to cater to the ever-increasing energy needs, especially renewable, in less developed areas of the country.

“PPAF has also established a dedicated Water Management Center with geographical information system (GIS),” he added.
 

KARACHI: State Bank of Pakistan has decided to raise the foreign exchange exposure limit of authorised dealers to 20 percent of their paid up capital (free of losses) with a maximum cap of Rs 2 billion from June 15.

Previously, it was 15 percent of their paid up capital with a maximum cap of Rs 1.5 billion. SBP said it had taken this decision in order to adjust the FEEL of ADs according to the changed market conditions & trade volumes. However, SBP reserves the right to assign the FEEL of any AD below 20 percent of Paid-up Capital (free of losses), based on the trends observed in the utilization of FEEL. The FEEL of ADs would now be reviewed annually on the basis of annual audited accounts and any changes would be communicated to each AD individually through separate letter, said the central bank.

In the case of banks incorporated in Pakistan the limit would cover all the branches including overseas branches, if any. The assigned FEEL should be meticulously adhered to and any breaches would attract penal actions, said the central bank. The guidelines for calculating the aggregate foreign exchange exposure as conveyed vide Para 4 of FE Circular No 12 dated May 29, 1999 would remain unchanged, SBP said.
 

ISLAMABAD: Adviser to Prime Minister on Petroleum and Natural Resources Dr Asim Hussain on Wednesday claimed that the government would save $1 billion in oil import bill annually after the import of Iranian gas under Iran-Pakistan (IP) gas pipeline project.

Talking to a group of journalists the adviser disowned that Pakistan had signed a deal with Iran at a higher rate. Iran was also importing gas from Turkmenistan at the rate of 10 per MMBTU and Iranian had made commercial deal with Pakistan, he maintained. Iran had an option to sell gas in LNG form if Pakistan had not moved ahead on the project.

Iranian gas would be used for the power generation and it would about 24 percent cheaper than power produced by furnace oil. The capital cost for the Pakistan section of the 42-inch pipeline was estimated at $1.25 billion and cost of the pipeline would be secured in only one-year, as Pakistan would be saving $1 billion import bill per annum, he said. He said that Pakistan had offered gas price linking to 45 percent of crude oil in 2007 and Iranian government had not accepted the offer price.
 

ISLAMABAD: At least Rs 150 billion will be set aside in the next budget as subsidy, a private news channel reported on Wednesday. The channel said the subsidy included the remaining Rs 1.5 billion for research and development support for the textile sector. Also, FATA would be given Rs 24 billion under the power head from this subsidy, it said. The channel said Rs 4 billion would be allotted for the Benazir Tractor Scheme and Rs 30 billion for the fertilizer industry. The subsidy for tube wells in Balochistan would be Rs 8 billion and Rs 7 billion for the small power consumers would be allocated, the channel said.
 

ISLAMABAD (June 11 2009): The government might miss even the revised export target of $19.5 billion for the current fiscal year as the latest trade figures of the Federal Bureau of Statistics (FBS) show that exports during the first 11 months of the current fiscal year remained $16.262 billion

The original export target of $22.1 billion for 2008-09 was revised by the government. Official trade figures released here on Wednesday show that the country's total exports stood at $1.499 billion in May. It seems almost impossible to register $3.23 billion exports in the last month ie June 2009 to meet the revised target.

The trade deficit ballooned to $15.221 billion during July-May 2008-09 with imports twice to the total exports. Analysis of the data showed that trade deficit during the current fiscal year was 19.03 percent less as compared to the same period of last year mainly because of contraction in imports. During the same period of last year trade deficit stood at $18.797 billion.

Analysis of the monthly trade data showed that trade deficit during May was $1.061 billion as a result of $2.56 billion imports compared to $1.499 billion exports.

Trade deficit in May over previous month witnessed a decline of 26.07 percent because of slight increase in exports. Exports May increased to $1.499 billion compared to $1.362 billion of previous month, showing 10.08 percent increase. Imports also showed a decline of 8.47 percent during May over previous month to $2.56 billion from $2.798 billion.

A comparison between May 2009 and 2008 shows decline in both exports and imports. Exports declined by 21.91 percent and imports by 34.02 percent during the period under review. With this decline exports have come down to $1.499 billion in May2009 from $1.920 billion of the same month of last year while imports have declined to $2.561 billion from $3.882 billion.

The high trade deficit as well as dwindling exports throughout the year has been the biggest problem for the economic managers as the country was facing sever energy shortage.

The textile industry, which in the past remained the major driver of export growth, remained sluggish owing to high input cost and non-availability of power. Economists believe these issues demand serious rethinking and solid steps for export boost.
 

LAHORE (June 10 2009): With major emphasis on energy sector development, the Public Sector Development Programme (PSDP) with total outlay of Rs 421 billion has been finalised by the Planning Commission. The energy sector spending, sources said, comes to 33 percent of the total PSDP. To overcome energy shortage, investment by the government and Wapda from its own resources during 2009-10 would be around Rs 139 billion for power generation and conservation.

This would not only make available additional power but also help reduce cost of doing business, sources added. Allocation for health sector has been increased by 82 percent from Rs 14 billion to Rs 26 billion, reflecting overall continuous emphasis on improving the productivity of human capital and general quality of life. Major programmes include EPI (Rs 6 billion), MCH (Rs 3 billion) and Primary Health Care (Rs 7 billion).

The number of Lady Health Workers (LHW) will be increased during the next financial year to: achieve the target of 200,000 and provide health facilities at the doorstep in rural areas, sources said. Allocation for education and training has been increased from Rs 20 billion to Rs 32 billion (60 percent) so as to ensure availability of qualified human resources to match the highly competitive world market.

Productivity of Pakistani labour is very low as compared to other countries. To sharpen the skills of the labour force, Hunarmand Pakistan Programme is being financed. This programme will help improve skills of labour, which will create more demand for them both at home and abroad.

Major initiative in power sector is initiation of Basha Diamer Dam during 2009-10. Both the government and Wapda would arrange finances. In addition to hydel, said the sources, nuclear sources would also be used for power generation; projects such as C3, C4 with an investment of Rs 190 billion are being initiated. These projects would generate 600 MW electricity by 2016, sources said. Water sector allocation has been proposed Rs 58 billion which comes to 14 percent of the total federal programme.

According to the sources, 32 small and medium darns, 8 in each province are being financed under the proposed PSDP. Similarly, adequate allocation has been made to projects such as national programme of watercourses, irrigation system rehabilitation, lining of canals and distributions, etc.

In order to complete Mangla Dam Raising Project (including resettlement) Rs 12.0 billion have been proposed. The Wapda will be able to store 2.88 MAF additional water during next monsoon season, they said. On transport and communication sector, allocation of Rs 70 billion has been made. Of this amount, said the sources, about Rs 45 billion are proposed for NHA, and Rs 11.7 billion for Railways. This would ensure economic integration and balanced regional development, they added.

Under the new initiative of the government, to reduce poverty, provide employment, better quality of life, promoting good governance, skill development special initiatives have been launched. These included establishment of technical institutes of international repute in 27 Districts all over the country with a total cost of Rs 7 billion. Further continuation of income support fund involves social protection initiative with a total outlay of Rs 70 billion.

Housing programme for the poor and government servants was started during 2008-09. This programme would continue with an allocation of Rs 1 billion. This amount would be used as a revolving fund, sources said. Similarly, integrated agriculture marketing and storage infrastructure project is being initiated to ensure food security which in return help reduce poverty and better quality of life in the shape of higher incomes to farmers.
 

ISLAMABAD (June 11 2009): Pakistan has witnessed a substantial fall in foreign direct investment (FDI) inflows in 2008-09 in line with all other developing countries. However, the case of Pakistan is exacerbated by the deteriorating security environment.

According to the Economic Survey (2008-2009), US kept its distinction of being the largest investor with 23.2 percent stake in the FDI. Other big investors originated from Mauritius (10.0 percent), Singapore (7.7 percent), UK (6.9 percent), Switzerland (6.6 percent), UAE (5.3 percent) and Hong Kong (3.9 percent).

The communication sector (including Telecom) spearheaded the FDI inflows by accounting for 27.3 percent stake during July-April 2008-09 followed by financial business (22.4 percent), energy including oil and gas and power (22.7 percent), and trade (4.9 percent). The current wave of uncertainty in the global demand and economic activity in the country has a major backlash on FDI inflows.

The overall foreign investment during the first ten months (July-April) of the current fiscal year has declined by 42.7 percent and stood at $2.2 billion as compared to $3.9 billion in the same period of last year. The overall foreign investment has two components - foreign direct investment (FDI) and portfolio investment, ie, investment in the equity market.

Foreign direct investment (private) showed more resilience and stood at $3205.4 million during the first ten months (July-April) of the current fiscal year as compared to $3719.1 million in the same period last year thereby showing a decline of 13.8 percent. Private portfolio investment on the other hand showed an outflow of $451.5 million as against an inflow of $98.9 million during the comparable period of last year.
 

ISLAMABAD (June 11 2009): The Economic Survey 2008-09 has said that the Federal Board of Revenue (FBR) had shown very poor performance during 2008-09, which was evident from the substantial downward adjustment of FBR tax revenue-to-GDP ratio. The economic survey said that average growth of FBR tax collections was calculated at around 16 percent during 2000-09 as compared to the growth rate of 12 percent during the preceding decade of the 1990s.

If this increase is seen in isolation of the nominal GDP growth rate, the growth rate from 12 to 16 percent shows the positive impact of tax reforms. However, the falling tax-to-GDP ratio implies that nominal GDP grew at a faster pace than tax growth.

With excise comprising 9 percent of total FBR revenues, Pakistan's tax revenue-to-GDP stood at around 9 percent of GDP during 2008-09. The indirect tax-to-GDP ratio stood at around 5 percent, and direct tax-to-GDP ratio at around 4 percent during 2008-09. This indicates that substantial tax policy measures are still needed to broaden the tax base and strengthen tax administration.

To achieve a tax-to-GDP ratio of around 15 percent, it is important to extend coverage of the tax net to the under-taxed and un-taxed sectors of the economy to promote judicious distribution of tax burden among various sectors. The survey says that FBR taxes in relation to GDP need serious review, and efforts must be made to extend the tax base to unexplored areas.

The current fiscal year is yet another reflection of the dismal performance of the FBR. The target of Rs 1250 billion was consistent with a nominal GDP growth rate of 17.5 percent. However, notwithstanding nominal GDP growth rate of around 24 percent, the FBR revenue grew by just 19 percent, thus leading to substantial downward adjustment of FBR tax revenue-to-GDP.

The share of direct taxes in federal tax receipts increased from 18 percent in the early 1990s to 32 percent in 2000-01. The share further increased to 39.6 percent in 2008-09. However, direct tax-to-GDP accounted for only 4 percent, in comparison with 7 percent for other developing countries at the same level of development. The indirect taxes currently account for 60 percent of total revenues, but in terms of percent of GDP they compare poorly with peer countries.

General sales tax accounts for more than 60 percent of the indirect taxes, which makes it the second major source of federal tax revenues after direct taxes accounts for 38 percent of total tax collections. This indicates that there is enormous potential for GST to convert it to full value-added tax.

On the other hand, customs collection reduced sharply over the past decade, mostly induced by trade liberalisation. It increased sharply from 2002-03 as a result of tremendous surge in imports owing to spike in aggregate demand. Customs collection as percentage of GDP declined from 3.4 percent in 1993-94 to 1.2 percent in 2008-09.

Customs duties accounted for 22.5 percent of the total indirect taxes as compared to 25 percent of last year. The current year has unique distinction as it witnessed massive fall in imports in response to demand compression measures as well as fall in international oil and commodity prices.

The FBR revenue collection for the fiscal year 2008-09 was targeted at Rs 1250 billion at the time of presentation of the 2008-09 Federal Budget. Tax collection during first ten months (July-April) of the current fiscal year amounted to Rs 898.6 billion, which was 17.7 percent higher than the net collection of Rs 763.6 billion in the corresponding period of last year.

Net and gross collections have increased by 17.7 and 17.1 percent respectively. The overall refund/rebate payments during first ten months of the current fiscal year have been Rs 61.3 billion as compared to Rs 55.8 billion paid back during the corresponding period of last year.

Tax collection performance felt the heat of the slowing economy and falling imports. Customs duty collection deviated from its recent past track record of high growth mainly because of the fact that dutiable imports underwent negative growth. Notwithstanding its meagre share even in indirect taxes, federal excise duty collections registered a vibrant growth of 27.6 percent.

Sales tax collections also rely heavily on imports and the sales tax at import stage witnessed marginal growth. On the other hand, a 47 percent growth in sales tax on domestic economic activity helped it to grow overall by 22.2 percent. When viewed in the backdrop of 23 percent growth in national income, the growth of 16.9 percent in direct tax looks dismal.

The overall FBR tax collection remained less than satisfactory, and actually witnessed deceleration in real terms. Consequently, the FBR tax collection to GDP ratio is likely to deteriorate to around 9 percent of GDP against the target of bringing it into the vicinity of 10 percent of GDP. Apart from FBR revenue, total tax revenue growth also lagged behind growth in nominal GDP; it exhibits a decline in tax-GDP ratio from 10.3 percent in 2007-08 to around 10 percent in 2008-09.

Direct tax as a major source of FBR tax revenues for the last two years contributed 37 percent of total FBR receipts during Jul-April 2008-09. Net collection was estimated at Rs 332.5 billion, against the target of Rs 496 billion. Hence, gross and net collection registered a growth of 19.3 percent and 16.9 percent during Jul-April 2008-09.

The current fiscal year witnessed a shortfall in collection of direct taxes for the second consecutive year. The entire shortfall will be difficult to replenish in the remaining months of 2008-09 due to a likely fall in corporate earnings, on account of a realisation of impairment losses arising from a decline in the value of financial assets.

Improved tax efforts and effective implementation of tax policy and tax administrative reforms have resulted in higher tax collection over the years. The share of direct taxes in federal tax receipts has increased from 15 percent in the early 1990s to around 37 percent in 2008-09.

Indirect taxes grew by 18.2 percent during July-April 2008-09 and accounted for 62 percent of the stake in overall tax revenue. Within indirect taxes, sales tax increased by 22.2 percent. The gross and net collection of sales tax stood at Rs 380.0 billion and Rs 358.9 billion, respectively.

Sales tax on domestic production and sales contributes to 54.2 percent of net collection, while the rest originates from imports. Within net domestic sales tax collection major contribution came from POL products, telecom services, natural gas, sugar and cigarettes. On the other hand, POL products, edible oil, plastic resins, vehicles, iron and steel and machinery and mechanical appliances had major contribution at the import stage collection of sales tax.
 

ISLAMABAD (June 11 2009): Government has allocated Rs 39 billion for Diamer Bhasha dam and Neelum-Jhelum hydropower project in the Public Sector Development Programme (PSDP) of upcoming budget 2009-10. Sources revealed to the Business Recorder that government has allocated Rs 8 billion for acquisition of land and Resettlement Plan, of Bhasha dam in the upcoming budget.

The total amount to be spent for the plan has been estimated at Rs 60.05 billion. An amount of Rs 15 billion has been allocated for "Construction of Diamer Bhasha dam" for 2009-10, the total cost of which has been assessed at Rs 805.087 billion. Government has allocated Rs 16 billion for Neelum-Jhelum Hydropower project in AJK with total cost of the project is Rs 84.502 billion.

Government has allocated Rs 22.967 billion for 800 MW Guddu Steam Power Project and Rs 18.418 billion for 500 MW combined cycle plant at Chicho Ki Malian. The amount of Rs 13.676 billion has been allocated for 425 MW combined cycle Nandipur Power Plant.

Government has allocated Rs 12 billion for Raising of Mangla dam including resettlement and Rs 2 billion for Gomal Zam dam. Islamic Development Bank (IDB) has also pledged $140 million loan for Neelum Jhelum Hydropower Project in AJK and Pakistan and IDB have inked Memorandum of Understanding (MoU) in this regard.
 

KARACHI (June 11 2009): Ambassador G R Baloch on Wednesday stressed the need of developing the world trade alliance with the international corporate sector to lure the foreign companies to invest in Pakistan.

Giving a presentation on "Developing Pakistan's Soft Power," at The Pakistan Institute of International Affairs (PIIA), Baloch who is also DG Research of Foreign Affairs Ministry apprised the audience that the corporate sector's role in acquisition of soft power will have a positive impact on the country.

Defining the soft power, he said that it rests on culture, political values and foreign policy with moral values and legitimacy. To achieve it, he suggested an independent and credible foreign policy which should be legally and morally correct on the global political and social issues.

In the context of objectives and tools of cultural diplomacy, he said that there should be a spread of Pakistan's culture and language through television and radio into the world community to make it think of this part of the globe too. He preferred building of soft power over the hard power namely nuclear capability, hi-tech submarines and so on to protect the country's integrity and borders.

Also defining the culture diplomacy, Baloch said that it is also a form of diplomacy aimed at boosting relations among the countries, which could be on the basis of literature, language, religion, music, sports etc. He said that such diplomacy is important to give projection to the country's rich cultural heritage, establishing people-to-people contact through culture.

He warned that Pakistan could be lost in the global cultural war if it failed to assertively promote its cultural values internationally. He said that the Pakistan's cultural policy exists since 1969 needs a revision which strongly emphasises on culture of tolerance and harmony.
 

EDITORIAL (June 11 2009): The Economic Survey 2008-09, a copy of which was published in the newspaper yesterday - prior to its formal launch, contains no surprises. The entire set of macroeconomic indicators revealed in the Survey were being cited constantly, as and when available, as they were required during critical quarterly negotiations with the International Monetary Fund (IMF) staff to assess whether targets set for the programme were met - a requirement for the release of the next tranche.

Thus the scaling down of the growth rate, from 4.5 percent target to 2 percent was already known. What however was not known was the fact that this growth rate was the lowest in the region: Bangladesh had a growth rate of 5 percent, India 4.5 percent and even Sri Lanka experienced a growth rate of 2.2 percent.

In effect external factors alone, namely global recession, cannot account entirely for the disparity in growth figures between South Asian countries which largely produce similar products and therefore are competitors in the world market. The main reason behind the slippage in growth according to the Survey is the "massive contraction in the industrial sector."

The list for this dismal performance is rather exhaustive: "major disruptions of extraordinary nature like political uncertainty hovered around for most part of the year, intensification of war on terror, acute energy shortage and a plummeting exchange rate with extremely high inflation by Pakistan's standard, massive adjustment efforts to regain stability from a highly disruptive year (2007-08) of exceptionally high macroeconomic imbalances, and above all significant demand compression both on domestic and external front."

No one can challenge the multiplicity of factors that have negatively impacted on the manufacturing sector with large scale manufacturing registering a negative 7.7 percent growth rate during the year. Major contributors to this decline were: automobile group (negative 39.0%) followed by electrical (negative 31.3%), petroleum (negative 9.2%), food, beverage and tobacco (negative 10.5%), steel products (negative 5.62%), tyres and tubes (negative 4.0%) and textile (negative 0.73%).

The textile sector most affected by the global recession witnessed a decline of 7.6 percent in its export performance with cotton yarn's export performance declining by 15.5 percent, bed wear declining by 11.7 percent and ready made garments by 13.1 percent. The Survey looked at four public sector corporations and excluding Pakistan Steel noted that production value of all operating units under three corporations (NFC, PACO and SEC) decreased by 32.90 percent against the same period last year.

Privatisation never did become the focus of the present government, a lack that appears to be steeped in PPP's ideology. Small and medium enterprise sector mainly include wholesale and retail trade and restaurant and hotel sectors. This sector too suffered due to law and order problems in the country. Mining and quarrying registered a flat growth of 1.3 percent however given the potential of this sector this flat rate can be viewed as continued failure to develop this sector.

Services sector's contribution to GDP grew by 3.6 percent against a target of 6.1 percent and last year's actual growth of 6.6 percent. The reason the Survey argues is "due to poor show of the financial sector beside saturation level attained in the communication sub-sector". The GDP growth rate is largely accounted for by the agriculture sector and the output of major crops mainly wheat, gram and rice.

The reason can be partly accounted for by higher than the average rainfall this year during the monsoon season as well as during the winter season. The increase in the support price of wheat was instrumental in many a farmer cultivating the crop. In addition July-March credit to the farm sector rose by 9.6 percent in 2008-09 in marked contrast to negative 34.7 percent in the corresponding period last year.

But what is of great significance is not the green tractor scheme, where price differential between local and imported tractors has become an issue, or higher credit to the subsistence farmers but to the crop insurance scheme that would be mandatory for all the five major crops and the government would bear the premium for the subsistence farmers up to a maximum of two percent per crop. However this scheme has not yet been launched.

Total investment increased by average around 19.7 percent - a decline from last year's growth of 22 percent. The Survey acknowledges that "gross fixed capital formation could not maintain its strong growth momentum and real fixed investment growth contracted by 6.9 percent."

A decline in investment has a multiplier effect on the growth rate and it is little wonder that the growth rate declined to two percent. Foreign direct investment (private) showed more resilience and stood at $3205.4 million during the first ten months (July-April) of the current fiscal year as compared to $3719.1 million in the same period last year thereby showing a decline of 13.8 percent.

Private portfolio investment on the other hand showed an outflow of $451.5 million as against an inflow of $98.9 million during the comparable period of last year. National savings rose marginally to 14.3 percent from the previous year's figure of 13.5 percent in spite of the rise in interest rates by the National Savings Centres.

The reason could well be that with inflation at over 20 percent, with food inflation over 25 percent, and with the withdrawal of subsidies on oil and products, including energy, negative growth in large scale manufacturing that impacted negatively on employment levels there was simply not enough disposable income that could be saved for future consumption.

Thus it is no wonder that the Survey notes that "consumer spending remained strong with real private consumption rising by 5.2 percent as against negative growth of 1.3 percent attained last year". Foreign currency debt rose from 40.7 billion rupees in 2007-08 to 43.8 billion rupees in 2008-09. This rise is about average with foreign currency debt at 36.75 billion rupees in fiscal year 2007 and 33.9 billion rupees in 2006.

Rupee debt as was expected under the IMF programme declined from 54.4 billion rupees in 2007-08 to 51.6 billion rupees in 2008-09. The Survey pointed out that "due to sustainable debt policies and favourable rescheduling of debt, external debt and liabilities (EDL) as a percentage of GDP declined from 51.7 percent in end-June 2000 to 28.3 percent by the end of June 2007 (Musharraf era).

By end-March 2009, EDL as a percent of GDP stood at 30.2 percent, increasing by 2.1 percentage points." This is a disturbing trend indeed. In addition the Survey notes that interest payments exceeded the budgeted level by 61 billion rupees, a situation that is unacceptable as interest payments are on past loans and failure to budget for these payments can be seen as indicative of deliberate misrepresentation on the part of the government.

And finally the tax to GDP ratio did not improve due to mainly "structural deficiencies in the tax system and administration, both at the federal and provincial government levels." This was identified by the government in its Letter of Intent submitted to the IMF Board prior to the release of the stand-by facility and unfortunately it remains an issue almost seven months down the line. This is the area that needs urgent targeting in the forthcoming budget for fiscal year 2009-10.

Another disturbing development, apart from growth, low savings and investment and increased indebtedness, was that inflation is still stubbornly high despite a very tight fiscal policy followed during the year under the advice of the IMF. A high inflation, particularly in the food group, along with rampant unemployment and rising poverty is devastating for the ordinary people and a kind of alarming bell for the policy makers.

This also raises the question regarding the efficiency of strict demand management in ensuring financial stability in the country. The argument both in favour and against strong demand management are now voiced openly and even Asian Development Bank has now joined the debate and argued against the strict policy framework prescribed by the IMF under SBA.

Hopefully, the Ministry of Finance and the State Bank would try to take a more balanced view during 2009-10 in order to reconcile various objectives to spur growth with price stability and mitigate the problems of common man, who seems to be on the verge of losing patience. We know the difficulties of the government when it is faced with so many challenges but major slippages on the economic front at this juncture could be very harmful and compound the problems further.
 

EDITORIAL (June 10 2009): It is quite clear that Pakistan is trying desperately to overcome its financial woes in a crunch situation through every possible means. After considerable assistance from multilateral institutions such as IMF, World Bank and the Asian Development Bank and substantial commitments from the Forum of Friends of Pakistan, it has now asked the United States to write off its debt to help overcome the economic crisis caused by the war on terror, displacement of people from the Malakand region and global recession.

Such a request was made by Prime Minister Yousuf Raza Gilani during a meeting with the US envoy for Pakistan and Afghanistan, Richard Holbrooke, who is reported to have said that his country would look into the matter. Pakistan, it may be mentioned, owes dollar 1.35 billion to the US. Prime Minister also urged the US administration to initiate action in the Congress for a substantial increase in aid and to put military supplies for Pakistan's campaign against terrorism on a fast track.

However, he acknowledged that the US had helped Pakistan in providing relief to the displaced people through an aid package of more than dollar 300 million and expressed the hope that major European and Muslim countries would also follow the US lead and come up with timely assistance.

Although, it does not seem very appropriate for a sovereign state to make such a request and Pakistan should have been able to confront the present multidimensional crisis with its own resources, given the enormity of problems at present, there was probably no alternative for the Prime Minister but to ask the international community, particularly the US, for a helping hand.

The truth of the matter is that even in normal times, the country was obliged to seek considerable inflows of foreign resources to meet current account deficit year after year with the result that total external debt and liabilities of the country had risen from dollar 40.5 billion in June, 2007 to dollar 46.3 billion at the close of FY08 and now are estimated at over dollar 50 billion, which is about 30 percent of the country's GDP.

At the end of June, 2008, debt owed to Paris Club and multilateral agencies was dollar 13.9 billion and dollar 21.6 billion respectively and must have risen further by a few hundred million dollars by now. Total debt servicing of the country consumes nearly 45 percent of the total revenues of the government. Debt servicing in the recent years would have been higher if external debt would not have been rescheduled earlier at the Paris Club by the lending countries.

With the rescheduled amount becoming due, and high expenditures on the ongoing war against terrorism, the country is bound to face further funding problems and there is no other way to tide over the situation but to call on the friendly countries for writing off their old debts and extend more assistance.

Besides, they must be asked to give preferential treatment and better access to our exports in their markets at least till the time Pakistan is faced with the extremely difficult situation. If this is not done bilaterally, the country may be forced to go to the Paris Club once again. We feel that the request of the Prime Minister is fully justified because the stakes are very high.

Everybody knows that infrastructure has been badly damaged by the Swat Operation, which had become inevitable, and the timely provision of efficient infrastructure and other basic needs such as health, education and justice have become very crucial and urgent in stemming the tide of militancy. Such an effort would require huge infusion of resources.

However, it needs to be pointed out that while the country is asking for all kinds of assistance including cancellation of debt from other countries, the government of Pakistan also must tighten its belt and prove to the world that it is serious in meeting the challenge and also prepared to make the necessary sacrifice.

Besides, it needs to be understood that the request of debt forgiveness has not been made at a very high level and it is still too early to say whether or not the relevant US authorities would be prepared to consider it with seriousness that it really derserves. The US Senate, in particular, is generally very careful in offering such concessions at taxpayers' expense.
 
An economy in recession

An economy in recession

Much of what was unveiled by the ministry of finance via the Economic Survey 2008-09 was expected and served to only confirm that the economy is well and truly in recession. A telling statistic was the reduction in imports for 2008-09 -- by over 26 per cent compared to the previous year. Since a country's imports are a direct correlation of its income and GDP, the single statistic alone should be enough to confirm that the economy is now on a recessionary path. Another related statistic is growth in the manufacturing sector which actually shrank by 3.3 per cent during 2008-09 compared to an increase of 4.8 per cent last year (large-scale manufacturing, a sub-head, shrunk by 7.7 per cent). The economy's growth rate was markedly down from estimates made at the beginning of the financial year – when it was predicted to be well above five per cent – at a worryingly low two per cent. This is more or less half of what the economy managed to achieve during 2007-08 which was first put at 5.8 per cent and has now been clipped to 4.1 per cent – which means a reduction by almost 50 per cent! This is to be expected given the significant pressures on the economy: the worldwide recession (other countries have suffered far worse, a case in point being several EU states where GDP is predicted to actually in real terms) and the fallout of the war on terror in terms of a vastly deteriorated law and order situation and its obvious consequence in terms of a negative outlook for business and investment prospects.

As far as poverty reduction is concerned, the government has promised a 'rapid' household income and expenditure survey given that by World Bank estimates the poverty rate 'could rise' to over 25 per cent by 2009-10. The survey also cites an internal report by economists of the Planning Commission based on 2004-05 poverty figures according to which the poverty rate is estimated to be around 29.9 per cent by 2008-09. An estimate of the poverty rate by the government's taskforce on food security is also mentioned in the survey according to which the poverty rate could be as high as 36.1 per cent by 2008-09. This is a startling though not entirely unforeseen or unexpected figure given the state of the country's marginalised and displays a singular lack of initiative and planning by successive governments to lift the poor out of poverty. While the intention to conduct a 'rapid' survey to ascertain the actual figure is well and good, the government needs to take urgent measures to rejuvenate the obviously inefficient current poverty reduction initiatives.

On other matters, the survey says that the fallout in terms of investment inflows on the economy of the war on terror was particularly severe during 2008-09. According to the document, the government's "overall vision is to regain macroeconomic stability and to attain GDP growth rate of six per cent by 2012-13 from two per cent in 2008-09". This may seem an unrealistic goal for now given that one of the major burdens on the economy – the war on terror – is perhaps only going to get worse in the foreseeable future and its effects on the economy could become even more adverse than they have so far been. This also means tripling the growth rate – two per cent for 2008-09 – within the next three to four years, with the state of the world economy uncertain. Furthermore, a key component of any such growth potential being realised is the business outlook and investment prospects, which in turn are largely dependent on perceptions related to law and order, and in that regard surely a sea change needs to take place before foreign – or even domestic -- investors appear positive about investing in Pakistan in next year or two years. Also, we do not seem to be putting to good use taxes that are collected – the survey says that interest payments as a percentage of total expenditure for 2008-09 were 23 per cent which means roughly a quarter of all resources are spent on not even repaying any debt but simply on paying the interest on it.

The survey cites a so-called "nine-point programme" by the government to give the economy a boost. Some of them such as "protecting the poor and the vulnerable" are in direct contradiction to the programme's other points, such as "strong adjustments" to petroleum prices or "periodic adjustments" to energy prices because in both situations it is those in the low- and middle-income brackets whose household budgets are hit the most. Surely, elimination of subsidies is not going to help the government achieve any significant reduction in poverty. In other crucial sectors, the survey confirms the government's dismal – or rather non-existent -- efforts to improve the quality of life for most Pakistanis. Consider the energy sector where the survey says that Pakistan's installed generation capacity increased by a mere 188 megawatts – from 19,566MW to 19.754MW – during 2008-09, and hence, no wonder that the people of the country have to undergo endless hours of loadshedding. Surely, more funds need to be set aside for this very important sector, not least because demand vastly outstrips current supply. Also, in this regard, the inflation rate of 22.3 per cent (for the first 10 months of 2008-09 – food inflation was 26.6 per cent) is simply far too high to allow for any tangible reduction in poverty levels any time soon and is bound to hit low- and middle-income families particularly hard. Monetary policy measures taken to contain this figure are clearly not bearing fruit – not at least yet.

As far as the telecom sector is concerned, much of the growth took place in mobile phones and the figures released by the survey only reinforce the belief that monopolies in the fixed land-lines sector (now in the private sector) perhaps need to be broken so that consumers can benefit and the teledensity figure (for land lines) goes up. Looking towards social services, the survey admits that public expenditure on education as a percentage of GDP is 'lowest' in Pakistan because of 'fiscal resources constraint'. We should call a spade a spade and say clearly that the reason this happens is that we are not willing to divert funding from defence and the running of the government (traditionally the largest and second largest heads of spending in a typical budget) to educating our people. The reason is not 'fiscal resources constraint' but failure by governments (or perhaps their inability) to set their priorities right for future generations. Spending on defence is all well and good but what point is having nuclear weapons when 70-75 million people are illiterate and cannot read and write (and this is by the government's literacy rate of 56 per cent).
 
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