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Wednesday, 22 May 2013 1:47 pm
High 14 oC - Low 7 oC
Profit Column
Two pronged European predicament
The European debt crisis has donned the garb of that vicious circle that continues to tantalise and torment the thinking heads around the globe, simultaneously. Gulping Portugal, then Greece and the latest one to take a plunge; Italy – the problem has showed no signs of easing up. The year 2011 was being touted as the year when the European hierarchy got their act together, and came up with the solution to the recent to fix – as time told so cruelly for the Europeans; that wasn’t to be. The Greek tragedy evolved into a south European crisis, which then went on to became a pan-European dilemma. And at the tail end of 2011, the economic picture was unmistakably gloomy. And to those who flaunt the ‘inevitability’ of the chain of events, should take into account the blatant failure on the part of European leaders to curtail a couple of vicious spirals – which eventually culminated in the aforementioned vicious circle.
The first spiral traces its origin to the public debt to the banks and back; which also gave birth to doubts over the ability of the governments to service these debts, and this in turn absolutely pulverised any inkling of confidence that Europe’s banks might have had. The banks weren’t able to lend for obvious reasons, which resulted in the weakening of the respective economies and eventually the bond prices further fell – to pour more misery over the damaged European banks. The European Central Bank seems to have controlled the spiral some what via guaranteed liquidity for three years, but the doubting Thomas still believes that ECB’s actual agenda is alluring banks into buying the troubled countries’ bonds. Considering the fact that ECB’s provision of unlimited liquidity doesn’t actually solve the targeted debt problem, one senses the rationale behind the claims that ECB’s maneuvers are intended to cater to banking problems instead of the debt issue. Spiral number two covers fiscal consolidation and pedestrian growth. Tax augmentation and truncating public spending are still very much needed. There would come a point, inevitably, when recession and unemployment might instigate a political reaction, and of course uncertainty about the future governments wouldn’t exactly be a reassuring tonic. To counter this second spiral, growth is the segment that should be earmarked and worked upon, even though the external environment is not exactly favourable.
So what exactly is the way forward for the Europeans? Enhancing growth would require a two-pronged approach – one that caters to both supply and demand. Now, considering that SMEs (Small and Medium-size Enterprises) are the driving force behind the creation of job opportunities, ECB’s endeavour to restore liquidity to the banking system becomes absolutely pivotal. The governments as well, would have to do more than just chipping in to ensure that the supply-side measures are taken care of. There is a dire need of countering the interest groups that are becoming a major hindrance in the path of individual and collective recovery of the Europeans and covering this particular base would allow economic growth to finally take center stage in this European drama.
And of course, satisfying all stake holders would be a Herculean task; and while many a Hercules have performed this task in European history, it would take an unprecedented – at least in the recent times – level of understanding on the part of individual units if Europe wants to drag itself out of this fiscal fix. For this task Europe’s social model can become an archetype. All the stakeholders must be brought on a common platform, and the one that loses out must be given its due compensation; and building on from this mutual understanding, the goals – that seems improbable as this piece is being scribed – might finally become tangible realities.
Another important façade worth considering is the fact, that merely cutting interest rates wouldn’t make things fall into place. Upping asset prices and lowering euro’s exchange rates will result in ECB buying bonds on secondary market. To cut to the chase, the matter would then require quantitative easing. Europe can come out of its predicament if all the individual nations and the respective stakeholders do their jobs properly; keeping in mind the greater good of the entire continent and not only nurture the vested interests.
The writer is King’s College London graduate and currently employed as a financial consultant at Privitisation Commission, Pakistan.
Marketing waste
My mentor and good friend, Nadeem Chawhan an organisational story teller, once said, “If you’re smart and know how to market a product, you can sell anything even if its crap, packaged and presented in the right manner.” I looked at him, and thought, how on face value it seems to dwell a lot about the abilities of a marketer but can it really be true? Can waste really have any economic value for anybody? And as it is with all things ‘Chawhan’, it did turn out to be true. For only a few days back I came across a very interesting article titled ‘Waste Not: In Ghana, fecal sludge could be black gold’. Ghana, it turns out, does not have a proper sewerage system, with households relying on dumping companies to empty their latrines. Sometimes, when people can’t pay for the dumping trucks, the toilets are shut down and people have to rely on other places to defecate. The sludge collected is then dumped in the sea, with disastrous environmental consequences. What really struck me about the article was, that instead of treating it as a problem this social entrepreneur treated the problem as an opportunity. The plan, Murray introduced was simple. Instead of people having to pay for their tanks and latrines to be emptied, he plans to pay them for the waste – or take it for free and use it to convert it into a product that sells. What’s his idea? Along with their research and funding partners which include Columbia University, the Gates Foundation, and the Swiss Federal Institute of Aquatic Science and Technology, they will turn human waste into industrial fuel that can potentially run industries, and build the world’s first fecal-sludge-to-biodiesel plant funded by Bill and Melinda Gates Foundation. Enter 1986. The first PC virus ever made was a job done at Chahmiran, near the Lahore Railway Station. This virus was made by two brothers, Amjad Farooq Alvi, 26 at that time and Basit Farooq Alvi, 19 who were self taught programmers. In a shop called Brain Computer Services, expensive software was sold cheaply for as little as $1.50 each. This made it a very good bargain for foreigners thronging Lahore as well, and when they went back with copies of the softwares little did they know that those copies were infected with the Brain virus. The fact that two self taught managed to shake the world, sitting in the small part of inner Lahore is nothing less than pure genius. Want to know where the two brothers went? Well they opened their own company called Brain Net, pioneers in the field of the internet services industry. Why have I cited the two stories together, because this is exactly what Pakistan needs. We need creativity, we need ingenuity and companies and organisations owe us a responsibility to nurture these talented individuals of Pakistan. Telecom companies in Pakistan have taken a lead by identifying areas that need support and ensuring that communities, individuals and villages are facilitated. Such steps are surely very encouraging and one hopes that other companies will follow suit. Telenor for instance has sponsored training labs for disabled people, while Mobilink and Ufone have also launched a plethora of similar campaigns. At the end of the day, what really makes a difference is investing in social enterprise, in projects that convert a problem into an opportunity. People like the Alvi brothers are spread across Pakistan and their talents merely need to be tapped in, to find creative solutions to seemingly difficult problems that plague the country. All we need to do is market our products the right way and find out of the box solutions to our dilemmas. Writer is News Editor, Profit. Comments and queries at [email protected]
Research before taking the plunge
Flat after the bloodbath over four sessions that brought the KSE-100 benchmark below the psychological 11,000 points, was the good news Wednesday. Though around three points down, this still is some recovery from 277 points down and hovering around 10,700 mid-session Tuesday after the temporary pull back from the eyeball-to-eyeball confrontation between the government and the judiciary seemed to be edging towards its denouement.
The volumes have remained extremely thin and values have dropped. This is not likely to improve a great deal in the short term. And unless there is some shocking news that sends the bears on a rampage, the market would keep on hovering between here and 11,500.
To those Average Joe Investors who have taken a pasting in this sizable dip, my commiserations. But they need to remember: the possibility of a bounce back is always there, and in the mid-short term (which is over the next six months, as Mr Ali Malik, CEO of the First National Equities predicts), it could claw its way back to the recent high of 12,000 points. So those who have made their buying after due diligence and in fundamentally strong shares have only to bide time.
The good thing about low values is that it may provide the prop the market needs, for cheap buys always hold an attraction for all sorts to make a punt.
Despite the gas shortages, the fertiliser remains a popular sector and on Tuesday the recovery was led by it – with FFC up by Rs3.49 and FFBQ Rs1.43. To Hammad Malik, senior associate at the First National Equities, Fatima Fertiliser (the entity that has reportedly suffered the least owing to friends at the right places) is likely to go up to Rs27 – a gain of around Rs4 from its current value. It has already touched Rs25 some weeks ago, and may indeed still have some juice. This is a cheap option where even if there is a fall, it is not likely to be big. But one thing needs to be remembered: the company has never paid any dividend, though it is now said to be in the black. So there are both good and bad reports about it. Read between the lines and tread carefully.
In the oil sector, the additional public offering of Pakistan Petroleum Limited is expected in a few weeks, perhaps some time in February. That is anxiously awaited, for it might bring some spark to thus far an otherwise mostly cheerless season. For the moment, the company is going through a ‘size determination’ process. Once that is complete the price per share of the offering will be revealed. For the moment, it is being traded at Rs164 apiece – way short of its recent high of Rs210-220 range.
Mr Ali Malik is one analyst who has a very special knack of finding nuggets at places which most people ignore. He has come up with two inexpensive beauties in the power sector that have so far never paid a dime in dividend but are sitting on a sizable stash of cumulative profits that they are bound to dish out to shareholders this coming June. These are: Nishat Chunian Power and Nishat Power. The group is a force to reckon with – the largest in the country, the power sector is profitable and the price at an identical Rs13 apiece for both is a bargain. This is what you call a better than a decent tip – and in such times of turmoil worth its weight in gold.
That said, dear Average Joe Investor, do make your own research before taking the plunge.
The writer is Sports and
Magazines Editor at Pakistan Today
An opportunistic axis
The vanguards of democracy in the Asia-Pacific region, the United States, India and Japan have come together for a trilateral strategic consultation and have decided upon holding joint naval exercises this year in forming an entente among the trio of nations. Experts are touting this maneuver as a major reshuffle in the dynamics of the most lucrative zone in the world – as far as the economical ramifications are concerned. The latest strategy is asking for a rebalance towards the Asia-Pacific zone and Indian cooperation as an economic anchor and of course the hub of security provision in and around the fragile Indian Ocean.
This ‘entente’ is an uncanny throwback to the Franco-British-Russian “Triple Entente” of World War I, which was created to counter the German military muscle. Almost a century later, the Germany of the 21st century is China, the muscle being flexed by the Asian giant is economic and the menace being posed is of its wherewithal in the realm of foreign policy. And another thing reminiscent of the early 20th century is the manner in which the three countries are vying to counter the threat of this leviathan of theirs. The aim – like in the case of Germany – is not to contain China; au contraire, the US policy is to utilise economic interdependence and the integration of China into international institutions to put off their hierarchy from hankering after taking the helm of all matters in Asia. Round one of the dialogues has been held in Washington, and the noise being generated from inside the camps is imbued with sanguinity as we approach round two in Tokyo.
The word is that Australia might also be included in this strategic triangle, to make it an ominous quadrilateral, which would be touching all the proverbial corners of the world. However, experts believe that a more probable formulation would be of a parallel Australia-India-US axis, especially considering the fact that the intended four-party coalition talks are seemingly on the brink of nosediving into oblivion.
Nevertheless, the most important façade that the three nations should be considering is that for this trilateral cooperation to bear the desired fruits, some of their respective policies and strategic preferences need to be revisited. Take for example the fact that Tokyo has only established military interoperability with Washington, with New Delhi seemingly nowhere in sight. Japan must also connect with Indian naval forces to further beef up this three layered sandwich. And yes if Indian and the US forces continue along the same lines, which has seen them conduct a multitude of joint ventures in the recent past – the meal would become all the more scrumptious.
Considering the geographical dynamics, another important facet as far as the militaristic scheme of things are concerned is that Japan and China are separated by an ocean and US is no way near perilous proximity; hence that leaves India potentially donning the garb of caution, pondering over the ramifications on the southern half of the volatile Himalayan border. That little devil we call history, also divulges an unceremonious Sino-Indian bond and hence India might want to cover all its bases before it takes a veritable plunge into this strategic triangle. America has ramifications of its own to mull over with the fiscal quagmire that the country finds itself in. And Obama has recently announced plans for a leaner military and more profound dependability regional bondage; so he also has his plate full ahead of a momentous year on the personal and national fronts.
Hence, all the concerned parties should acknowledge their own limitations and those of their partners, before going gung-ho in global matters. The need of the hour for the three countries is to counter the hindrances that lie ahead before the trilateral companionship can evolve into being a seamless bond. Conjuring up flawless military interoperability will be no mean task – especially since there is a void of US-India treaty relationship – and groundbreaking policy making would have to be brought to the fore, if the potential of this tripartite relationship is to be realised.
The writer is Texas A&M University graduate who is currently employed with Telenor in the Products - Commercial Division. He can be reached at [email protected]
Copper politics and state of economy
No doubt, investment is of an utmost significance in the socio-economic advancement of a country. In circumstances the arrival of a foreign investor for investment would be a blessing of God. But salute to our leaders and their “multitalented advisors” who have failed to eradicate malpractices from PSE’s (Public Sector Enterprises); a noteworthy example of negligence is of Rekodeq Project. This copper-cum-gold mining project has become an apple of discord between the government of Balochistan and Tethyan Copper Company Pakistan Ltd. (TCC). This agreement was inked between GoB and BHP Billiton in 1993. In 2000, BHP transferred 75 per cent of it shares to TCC. This deal was, and is totally in line with Chagai Hills Exploration Joint Venture Agreement (CHEJVA) and Balochistan Minerals Rules (BMR) 2002. The estimated mine-life of this project is 56 years while the mineral reserves are estimated to be about 5.9 billion tonnes. 2006 onwards, the mining company has invested more than US $220 million on this project – the single largest foreign direct investment in Pakistan.
The government of Balochistan has discarded the mining license application of TCC that has invested its resources to bring Reko Diq on the map. The provincial government did not even bother to negotiate with TCC on their feasibility report and backtracked on CHEJVA that was signed seventeen years ago and was even endorsed by the Supreme Court in its hearing of the case. But media reports exuding fallacies synthesized many questions regarding the project’s future.
Now the company has gone for international arbitration to safeguard its legal rights which are in line with the CHEJVA Agreement and Balochistan Mineral Rules 2002. If the company succeeds in having the court’s decision in its favour then the government does not seem to be in a position to reimburse company’s finances. Sources claim that the provincial government has requested to the apex court to declare the said agreement null and void because it fears that the possible decision in result of arbitration will be in investor’s favour.
On the other hand, some Chinese and American firms have also entered in this “Copper-Gold Race”. The recent advancements on the part of the provincial government reveal that it has made its mind that it will not issue the license to TCC but is in a fix while earmarking the “friend-country” it should exalt; America or China.
The question is why the government has not given time to the company representatives? If the government is really interested in the well being of its people and is well aware of the far-reaching effects of this project on country’s economy then why it did not go for a new feasibility report? If the company was not following mining rules or by-passing any law then why the government did not bother to take a stern action against it in the past seventeen years?
I fail to understand why, and on whose behest, the chief minister of Balochistan and the nuclear scientist Dr Samar Mubarakmand are bent upon tarnishing the reputation of Pakistan in front of foreign investors by sabotaging a seventeen years old joint venture agreement by creating false propaganda I have no doubt about Dr Mand’s patriotic spirit but it’s not explicable how he will complete this mega-project without modern technology and finances while he is not feeling at home with the government machinery in the process of Thar Coal Project.
Projects like these require unlimited resources and people with proven expertise and track record. We don’t have such modern technology apparatus and financial resources which are considered necessary for the successful accomplishment of this project. For Balochistan to prosper, it needs much more than gold and copper reserve, which remains buried underground. Balochistan is in desperate need to improve its human capital to reap the maximal advantage from the natural resources. Remember what happened with Saindak Copper Gold Project. Foreign contractors build it in 1990s. When it came online and Pakistani government took over, it started generating loss after loss despite gold and copper flowing from it. It had become the world’s first loss-making gold mine by the late 1990s and the budgetary comity had to close it down to stop the losses. Later on, it was given to Chinese operators who are running it today!
The need of the hour is that the government should take some serious steps to decide this matter impartially. This is high time for the government to ensure its credibility by promoting investor friendly environment which will rejuvenate our market and will have a positive impact on the socio-economic development of the country.
Shahzad Ali Gill - The writer is a freelance journalist
Penetrating new IT domains
The Internet Corporation for Assigned Names and Numbers (ICANN) is about to expand general Top Level Domaown names (gTLDs). During the first round, ICANN will accept only 500 applications, while the subsequent rounds will be limited to 400 applications. The gTLDs expansion programme has the potential to add countless new names to the existing twenty one available top-level domains (.com, .net, .edu, .biz, .org) and over 100 suffices permitting brands, businesses, geographical regions and even individuals to apply for a virtually unlimited list of new gTLDs in different scripts including Arabic. It is expected that the first gTLDs will come online by 2013. Businesses and governments are analyzing the impact of proposed expansion of gTLDs on the internet with caution and concern. The focus for many brand owners has been to argue against the expansion of the name space, or at least to postpone it till the internet really needs such a change and till a more efficient brand right protection system is in place. But ICANN is going ahead with the program. A global awareness campaign to educate the world about the expected changes in the in the cyber space is in the air and will be launched anytime.
The decisions will vary from industry to industry and business to business but one thing is for sure; new gTLDs are not for everyone. The option is costly; $185,000 initial application fee plus $25,000 a year to run the registry. If someone else wants the same domain, bidding will determine the winner. And another fee will crop up when a registry is setting up secondary domains on a top-level domain. One wonders what might be the rationale for the proposed fee structure by ICANN - a nonprofit entity. The price tag alone leaves small and medium sized businesses out of the big name games.
Owning a “.sports” TLD for anyone in the industry manufacturing sports goods sounds like a good idea provided the business can afford outbidding other sports goods manufacturers and the fee. The opening up of new gTLDs is certain to set off a wave of new activities on the internet domain space that could fundamentally change existing practices related to domain name use and search engine optimization; and more broadly impact internet based advertising, promotion and ecommerce. Unless it happens, no one can say how? Big businesses have already started research to judge the impact to their businesses of this impending change, and are reviewing the recently revised and published ICANN draft guidebook closely for insights. Some companies (like Canon) have already announced that they will apply for custom suffixes (.canon). Biggest advantage to ask for a new gTLD is to have a key generic term in any industry. The new internet domain space may open the potential for new ideas to improve an online presence in the marketplace. It can also open new opportunities for communities, cities and regions who would like to have more powerful presence on the internet. But who really needs a new gTLD? Analysts say that proposed gTLDs expansion will solve problems that do not exist. The current dot-com structure works fine as it is. The expansion of the gTLDs will only challenge existing online branding and brand protection and marketing strategies at all levels adding more noise. The businesses will feel forced to spend huge sums in fees to ICANN and legal firms in order to reserve names to protect their trademarks from cyber squatters who could use them for spam and criminal activities. The only winner in this program seems ICANN that will reap millions in fees for domain names that are not needed in the first place and the United States that intends to retain control on the Web's critical.
The writer is Deputy Controller of Examinations at Lahore School of Economics. He can be reached at [email protected]
Can SBP arrest the rupee fall?
For a poor country like Pakistan, which largely depends on imports, the fall of the rupee against the dollar produces multiplier effects in the economy. Increase in foreign debt and domestic inflation, rise in import bill, interest rates hike and increase in costs of production are some major shocks that the economy has to absorb in the backdrop of depreciation of the rupee in FY 12. The lower the vulnerability of the economy to absorb these shocks the higher the risk of failure for the economy.
The recent slide in the rupee to 91.30 against the dollar leaves economic pundits and businesses in dismay. The outlook for 2012 remains gloomy indeed. The rupee was traded around Rs62.00/$ in April 2008 and is trading around 91.30 in Jan 2012. Thus the currency has lost around 46 per cent of its value in nearly 4-years.
The slide of rupee may be attributed to unstable security situation in the country which accelerated the flight of capital and choked foreign investments-two extremely important sources which help provide a good base for foreign reserves to hold ground. Also the inflow of foreign aid/loans to the country has remained intermittent. Add to this picture, repayments the country has to make to the rest of world, have risen too. When reserves are limited, increasing foreign debt repayments coupled with rising import bill is making the task even more difficult for the SBP.
No doubt, whilst exports can benefit from the depreciation of the currency, the domestic economy on the other hand stands much to lose if the vulnerability is weak. As the local currency loses steam the cost of imports rises and if these are largely based on necessities (energy and food items), which in practice face inelastic demand, it will further stoke inflation.
Their savings, if any exist, evaporate gradually and the quality of life suffers and penury rises fast. This is a never ending cycle and if the SBP’s intervention, to stabilise the currency, is not timed well the economy might face perverse effects. The country is unfortunately caught in the same syndrome.
Foreign exchange reserves have already declined to $16.91b by Dec-end from a high of $18.31b on July 30, 2011. Besides regular import bill which might cross $37b mark in the FY 12, repayments of $1.2b to the IMF and total foreign debt payment $ 4.2b are also due. The current account deficit ballooned to $2.1b during July-Nov 2011 as against $589million in July-Nov 2010. The economy in FY 12 might need extra $12-15b to service its Balance of Payment deficit. If export earnings and home remittances were unable to generate much needed steam in FY 12, country’s reserves might come under extreme test and so might the currency.
The choice for Pakistani central bank thus gets limited to coddle the exchange rate in the backdrop of narrow and ever drying streams of foreign currency earnings and fast depleting reserves. Momentary interventions (such as selling of dollar in the open market and to banks) by the SBP could push the rupee slightly up but the long term movements of exchange rate will remain under pressure so long as outflows of dollar outpaced the inflows. Fast depleting reserves will force the SBP to rise from the bed and do something. Alas. ‘stillness and capitulation’ are perhaps the only options left with the SBP to see helplessly the fall of the rupee touching near 100 mark at the end of 2012.
The author is an Islamabad based freelance contributor and Director SZABIST, Islamabad campus. Views expresses herein are personal. He can be reached at [email protected]
The road to redemption
NHA (National Highway Authority) isn’t exactly known for its imaginative spark or the use of their neurons of ingenuity. However, if NHA were to think out of the book – so to speak – and stimulate their opportunistic senses, they would realise that a luminous bundle of hope – one that could instigate their stalled projects – is vying to penetrate inside their household; while the Authority slumbers on with their windows closed. The opportunity that lies in the wait is of the completion of the remaining segments of the Motorway, and sans the expenditure of even half a penny – the sort of opening that even their prognosticating catnap wouldn’t have allowed them to dream of. Now, economists tell us that with every opportunity comes a certain opportunity cost, and the tradeoff for the Authority is merely the act of hurrying up in getting themselves off their lazy backsides.
The current stand of the government to blockade NATO supplies and in turn the preparation of conditions that the organisation must meet before the resumption of supplies has resulted in a fairytale prospect for NHA. For over a decade, NATO and its troops have been using our road network for their supply to Afghanistan via Karachi to Khyber and Chaman; and as a result have damaged a lot of the roads. In fact, some of the aforementioned routes are bordering on worn out leftovers of gravels, rocks and asphalt. And of course it goes without saying that our dear NATO ‘friends’ weren’t generous enough to pay toll taxes for their relentless road deterioration enactments.
Now, while the government mulls over its shopping list that it would want Uncle Sam to finance, NHA can also throw in a few items to add to the list – most notably the construction of the Motorway. The stalled project from Gwadar to Kandahar – one that is used for NATO supplies and Afghan trade – should be the obvious inclusion in the list. And while we ostensibly have an upper hand in this shopping list discussion, for what it’s worth NHA can throw in a couple of other motorway projects into the mix as well. The remaining portion of the Lahore-Karachi Motorway – from Multan to Karachi – and another one from Gwadar to Ratto Dero – as a link to the Lahore-Karchi motorway can also be added to the demands.
While the list might make our uncle think of us as spoilt brats; one feels that we have done enough to deserve this little treat at the tail-end of the holiday season. There is a multitude of reasons that might urge the US to pull out its credit card. First of all, by constructing all these projects the US would be paying the compensation for the damage that it has caused to our road-network, and also recompensing for the toll taxes that were never paid. Afghanistan has also been using our roads candidly, and of course US would have to pay the arrears for that. And yes, it would also be the much needed gesture of goodwill from our dear uncle for the late November disaster that he conjured up. Efficiency of road network would also aid the US, because transport delays would be curbed. USAID should be asked to sign a deal with the government, and the former could ask American contractors to do the job and they could be paid directly. The Agency can discuss the matter with Washington. Meanwhile, NHA can use their funds – with motorway construction taken care of – to ameliorate the National Highway and other problem areas in the country. And of course with the new motorways up and running, the revenue generation would also precipitously increase.
We have been at the receiving end of skewed US policies, and barefaced ingratitude from Washington. About time we started constructing our road to redemption, as the US prowls on its boulevard of broken dreams.
The writer is Sub-Editor,Profit. He can be reached at [email protected]
Finance lesson for Asia
There are important lessons for Asia in the financial catastrophe unfolding in Europe. The more the continent’s leaders run from pillar to post to avoid contagion, the more they expose governments’ inability to safeguard interests of the people, since they have come in direct clash with interests of giant financial institutions. The rush to ease credit markets in the wake of the 2008 crash has brought to light the importance of protecting big banks, since they are bundled together in a complicated web of toxic debt, and letting one fail (on the lines of Lehman Brothers) risks unleashing a financial domino effect that will bring down the biggest banks on both sides of the Atlantic.
To understand this phenomenon, it is important to analyse the compatibility of the electoral democratic system with modern forms of recession. Candidates bankroll campaigns by banking on donor largesse. And when Bush Jr’s treasury secretary Hank Paulson, a former Goldman Sachs CEO no less, takes the first steps in tackling the greatest recession in more than half a century, it is only natural for him to tilt bailout goodwill to erring banks as opposed to suffering people (who, incidentally, put their faith in banks when the latter’s moral hazard had not been exposed). Therefore, when crunch time came, decision makers in America, as well as in Europe, chose to save speculative financial institutions with taxpayer money at a time when the labour market started registering unprecedented stress.
This bent complicated the aftermath of the credit crisis, creating a wide cleavage between the working class and the much more affluent financial elite. The occupy wall street movement is a symptom of this very grievance. Instead of being saved from banker excesses, the middle income groups are being subjected to painful austerity, all this while big banks have reverted to milti-million-dollar bonuses that typified the excesses of the past.
In Asia, the mass of people around and under the poverty line is much larger than Europe and America, especially since the last couple of years have eroded the continent’s middle class mercilessly. Here, governments will not be able to justify propping up financial or even state institutions at the cost of the working class for too long. The phenomenon of people’s mobilisation in the storm triggered by the so-called Arab Spring ought to be another sobering moment for decision-makers.
In a way, Asia is ideally placed to correct much of the west’s mistakes as time comes for the continent to deal with its own downturn. The emerging markets are no longer the growth nirvana, high-yielding stories of two years ago. China is crashing, India is slowing, and the periphery is not much more stable either. Asian leaders stand at a crucial crossroads. Do they shore up bank reserves and protect the financial elite, as in the west? Or do they do a surprise about-turn and instead bolster the working class population? As regards the former, we have one example after another of strict austerity for the population amid unprecedented bailout relaxation for finance managers only deepening the abyss. Interestingly, despite the severity of the recession, we have yet to see a government posture in favour of the worker.
Perhaps Pakistan occupies a unique position at present. Its weak financial integration with the international economy spared it the worst of the recession’s hangovers. Yet its own mismanagement, policies that ironically favour the financial elite at the cost of the common man, has pushed it to the brink of collapse. Unable to move out of deepening stagflation, Islamabad should be among the first to stand conventional recession-response practice on its head. We have a large army of labour, numerous precious resources and large tracts of very fertile land. All that is needed is placing those that yield greatest value addition ahead of those that have been eating off the fat of the land for far too long.
If anything, the banking sector needs to be reminded of its core responsibility – ensuring credit markets are solvent. So far, while receiving official patronage, banks all around have been reluctant to do what they are supposed to do – lend. The present environment will test our leaders to the maximum.
The writer is Chief Manager, SME Bank, with 30 years’ banking experience
Evaluating dependency on the US
The extrapolation of the neo-colonial discourse onto the Pakistani geo-political context provides the most commonplace and plausible explanation; the United States exercises control over the Pakistani political and economic system, and, of late its territories without formally declaring it a colony. And this hurts the likes of the common mindset because it chooses to believe that it is free to function independently.
So in the way of understanding why US is the most favourite buddy of the establishment, the military can be considered a good junction to begin analysis. Taking a prudent estimate, the government has budgeted an average amount of Rs300 billion annually to defense services in the 8-10 years, arriving at an estimated total of Rs3 trillion. In comparison, the US military assistance to Pakistan has amounted to approximately $7.89 billion (Rs694 billion)since 9/11 in addition to another $3.1 billion for economic assistance (Collectively Rs965 billion). Moreover, other sources claim that military and economy assistance to Pakistan since 2001 totals more than $20 billion (Rs1.8 trillion) of which 68 per cent is military specific. Thus, conservatively inferring, at least one fourth of the military budget has been funded by the US under the pretext of war on terror, in the face of little preoccupation for such a large standing army.
Moreover, a large chunk of external assistance is channeled indirectly through our fanciful multilateral donors who would not lend the country a nail had the bountiful and favorable eye of the US not prevailed. In the absence of year-wise data, the data for 2008 and 2009 reveals that more than half of all external assistance is routed through the WB, IMF, ADB and others. So while one continuously complains about the lack of development spending in the economy, one can only imagine what life would be for more than 60 per cent of the population, if non-state actors would lose their funding. In 2010, this assistance amounted to about $4 billion (Rs350 billion) with each donor contributing between $1-2 billion whereas in 2002, total external assistance stood at less than $800 million. Thus, the spillovers on the educated elite in the country’s capital have been numerous and all at the behest of the soft side of the war on terror.
Additionally, the US also forms the country’s largest export market accounting for about 25 per cent of the export earnings. It is also the largest source of remittances on which the economy’s balance of payments structurally relies upon. Thus, the without quoting numbers, it can be profoundly stated that disengagement with the US, while not ‘suiting’ the military, would be mean the death of the miniscule bourgeoisie that has continuously struggled to survive since independence.
While blanket assertions about Pakistan’s dependence are made often, the caveat about disengagement are also coupled with fear of negative reaction from allies of the US which are already in the process of cutting down budgets in which ever way they can. Thus intuitively, by standing as a front line state, the economy feeds its existence and in ways its extravagance. And as a corollary, we are all in some way answerable for the plight of Afghanis whose children do not own a future.
If the Pak-US dependency were to cease, rest assured no one would go hungry, and consumerism may come to a halt. Ideally, if the military were to realise the little reasons that exist behind its existence, the resources of the last ten years may end up in ‘progression’.
But ironically, losing favour would also imply getting bipolarly “bombed”. The choice has historically stood between letting a few feed, or, life and living in general.
The writer is an economic
researcher and freelance financial journalist. She can be reached at [email protected]
In search of business confidence
Indicators such as the Business Confidence Index are useful measures to assess the efficacy of policy decisions
I have a personal confession: working in a role which requires observing as to what makes businesses tick, I often feel an entrepreneurial side stirring. At times I yearn to have my own company, being one’s own boss, calling the shots, innovating, creating, etc. But as blissful as these day dreams may be, they are quickly and rudely interrupted by that thing called reality. Leaving the all important capital constraint aside, the business environment is hardly suited for such initiatives anyway. The recently announced results of the 5th Business Confidence Survey, undertaken by the Overseas Investors Chamber of Commerce & Industry (OICCI), is reflective of the same – a serious lack of confidence amongst the business community and general pessimism with respect to doing business in Pakistan.
Business Confidence is essentially an indicator of positive / negative sentiments that prevail in the market, identifying the reasons which contribute towards the same. The survey is tabulated by assigning a positive point for each optimistic response and a negative one for a glum answer. Now here are the results: Business Confidence in Pakistan stands at -25 per cent. This is not a significant change from the previous -24 per cent; in fact the metric is totally consistent with the 4Q average of -25 per cent. Negative responses outweigh the positives; for every four greens there are five reds. Whichever way you may interpret it, bears outweigh the bulls and the business community carries depressed perceptions.
The survey yells out that the single biggest reason behind the decline in business in Pakistan is inflation; the answer of 43 per cent of the respondents. Persistent inflation is constantly raising the cost of doing business in the presence of limited demand side room. This spells gloom for profitability; the cornerstone for any business. The argument goes that a downward trend in CPI has been recently witnessed stemming from declining global commodity prices and higher domestic commodity surplus, let alone the change in constituent weights. But is the ‘Consumer’ price index a good indicator costs of business? Keep in mind that inflation in Pakistan has been cost push and impacts things like raw material prices, power costs and labor wages as far as a manufacturer is concerned. A company’s sensitivity to price of inputs depends upon its own unique overhead mix, not that which is assumed by CPI. On closer inspection, raw material prices have been going up, power costs are rising, and so are the costs of doing business.
Other drags mentioned include gas and electricity load shedding (39 per cent), poor governance and policy implementation (26 per cent), and law and order (19 per cent). So there seems to be an ironic improvement in the security situation but this has aptly been replaced by inhumane industrial gas and power shortage. The reference to absurdity of the situation is fitting as without power, how is one expected to produce, how are industries expected to run? And then to compound this, a month long suspension of gas is announced. I expect this shortage to overtake the top position in the problems list in the coming months. A reputed multinational recently announced plans to resort to wood-fired boiler systems to make up for lack of gas. Talk about going back to the stone-age.
Not to sound too morbid, however, there is a bright side as well. Some 34 per cent of businessmen expect their business to expand in the next six months, while 54 per cent are upbeat when it comes to profits. Most of these are of the manufacturing breed. Is this because they feel they have reached a bottom or is there actually conviction in their sentiments? I feel it’s a mix of both, as the country still presents opportunities to grow for those who are positioned to utilise the same.
Industry being the backbone of the economy is a no-brainer. Activity and investment in this regard is vital, without which unemployment and a general decline in living standards occur. Indicators such as the Business Confidence Index are useful measures to assess the efficacy of policy decisions – albeit in hindsight and assuming they are enacted anyway. What can be said for sure is that the economy clearly lacks confidence and rightly so. It’s up to the authorities to instigate a clean-up act; will they and will it be effective still remains to be seen.
The writer is a financial analyst at PACRA
Pakistan can get out of power crisis
We have resources to overcome power shortage
The power crisis is not local problem rather it is being faced by the whole region of South Asia. Load shedding is prevalent in the whole of India and Bangladesh but we seldom hear hue and cry from their media. It was really an amazing fact that India is facing shortfall of 20,000MW and this shortfall is met through load shedding of eight to 10 hours. Indians are aware of the shortage of electricity in their country and they try to compromise and help their government; but this is not the case in Pakistan.
Nature has given all resources to Pakistan for overcoming oad shedding and our energy needs could be easily met in the coming three to five years but this is not the case in India; where according to estimates the power shortfall would increase in the coming 10 to 15 years.
India used to produce 65-68 per cent of electricity from thermal sources, 22 per cent from hydel generation and around 10 per cent from nuclear and renewable resources. Despite constructing dams on our water still India does not have huge potential of producing hydel electricity.
India does not have a huge potential of producing hydel electricity and at the same time its energy needs are increasing at least 10 per cent annually. According to Central Electricity Authority (CEA) in India, the generation capacity in 2010-11 was 118,676 MW against the energy demand of 136,193 MW thus shortage of 17,517 MW. The shortage of electricity increased in the summer, when power demand rose and shortfall touched 20,000MW. This shortfall is overcome by eight to 10 hours of load shedding. Rural areas are the most severely affected. States periodically and chronically affected by load-shedding are Delhi, Uttar Pradesh, Tamil Nadu, Bihar, West Bengal, Assam, Maharashtra, Madhya Pradesh, Rajasthan and Andhra Pradesh. There is no way that India could overcome energy crisis in the coming ten years and it is forecasted this crisis would be further exacerbated.
The situation in Bangladesh is no different, where per capita energy consumption is one of the lowest (136 kWH) in the world. Bangladesh has small reserves of oil and coal. Its installed electric generation capacity was 4.7 GW in 2009; only three-fourth of which is considered to be available for use. Only 40 per cent of the population has access to electricity. Because of huge gap in demand and supply, extensive load shedding is carried. A major hurdle in efficiently delivering power is caused by inefficient distribution system. Around 30 per cent of power is lost during transmission.
Pakistan is altogether different from both of these countries. We have enough potential of producing electricity from hydel sources. Currently, we are producing 35 per cent of electricity from hydel and 65 from oil and gas. A number of dams like Bhasha (4,500MW), Munda (740MW), Kurram Tangi (83MW) and Akhori Dam (600MW) are already announced by the current government while other dams like Bunji (7,100MW), Dasu (4,320MW) and Golen Gol (106MW) have a massive potential of producing hydel generation and it would also come in national grid in the coming years. The government has also planned to use coal reserves for electricity production and in the coming three to four years around 1,000MW would also be produced from the coal projects. By and large, electricity production would increase and it could easily overcome the power demand in the country. At the same time, projects for importing gas from neighbouring countries would also end the gas shortage for the power plants. It is high time that we sit together and understand that in this time of crisis we have to overcome the problem through mutual understanding and cooperation.
The writer is an employee of NTDC/PEPCO
Agri collapse in ’12
With 2011 rightly dubbed a black year for agriculture, the outlook is not much rosier in the new year for the economy’s largest employer. A number of crucial factors combine to put unbearable downward pressure on agriculture growth and productivity. And failing urgent and immediate action, the spill-over will not only affect the sector’s growth, but also the national GDP, employment and export earning.
One, due to obvious time lags between policy implementation and on ground results, much of the policies introduced in ’11 will take intrinsic shape in ’12, with the prospect of a more dismal outlook for the latter. Two, area of wheat cultivation has been reduced by 10-15 pre cent, which will compound losses in agri-GDP because of flash flood losses in Sindh. Three, cultivation mechanics have been altered, as indicated by tractor off-take in H2-2011 dropping by an alarming 33 per cent. Comparing with 33 thousand in the first half of the year just ended, the number for the last six months came at only 12 thousand. The trend implies that the ongoing year will record a tractors offtake shortfall of approximately 40-50 thousand, which in turn means that a similar number of farmers will not posture towards mechanisation. So, not only will no new land come under cultivation, but rather even the present amount will decrease.
These developments have made wheat cultivation non-feasible for a bulk of the farmers. The wheat support price, set at Rs1050 per maund, is just not feasible in light of rising input costs alone. This sets a very dangerous precedent. Wheat is the country’s staple crop for rich and poor alike. And considering price distortions and cost-benefit feasibility, farmers with bare-minimum initiative will shift out of wheat production.
The cotton situation, too, is alarming. Unlike the sugar industry, which enjoys popular political patronage, the cotton sector has not been blessed with government intervention this year. The industry is already suffering with international cotton prices at their lowest level in two years. And since the crash followed an abnormal hike last season, the export industry has been caught off guard as well, with compound losses for national growth. The worst sufferer, of course, is the helpless cotton farmer, whose livelihood erodes with little chance of help from concerned quarters.
Overall, I see the agriculture sector taking a 10-15 per cent battering in ’12. Support price distortions and lack of official patronage are not all. This season has so far been without the usual rainfall, a situation aggravated by the decision to close dams. Plus, with diesel price flirting with the Rs100 level, coupled with savage energy shortage, farmers are unable to continue using tubewells as their alternate water source. The prohibitive cost means water will remain scarce. Hence low growth, low productivity and poor sectoral results in the current year.
Therefore, ’12 is likely to be a very dismal year for the agriculture sector, particular the farmer. The government no longer sits comfortably on its strategic reserves either. Reports indicate that a good 30 per cent of the stock has been lost to poor storage arrangements. The turbulence is concerning and can quickly cause numerous spill-over shocks. Deteriorating agriculture will push yet more people from the periphery, burdening the already unsustainable city-urban structure. At a time of low growth, increasing unemployment will further tear the fragile social structure at the seams. And loss in agriculture output will seriously compromise export earning, something the country can ill afford when the other arm of revenue generation – tax machinery – is not much to write home about. Unless timely action is taken, farmers too will join the tidal wave of public discontent, a worrying sign for all parties concerned, especially a government in election year.
The writer is President,
Farmers Association of Pakistan
Derivatives and shari’a
Are derivatives acceptable in Islamic finance? Of course the answer is yes, but one must appreciate the difference between Islamic derivatives and their conventional counterparts. Furthermore, while the use of derivative contracts is acceptable in Islamic finance, there are limits to trading in them. On a philosophical level, almost all Islamic financial products are in fact examples of derivative contracts. For example, a Sukuk (an Islamic equivalent of a bond) may link the returns of an asset (e.g., a property) to an interest rate mechanism such as LIBOR. What are derivatives? Any financial product that may derive its returns from an asset other than what it immediately invests in may technically be a derivative product. The most common examples of derivative products include options, forward and futures contracts. While the commonly held view amongst shari’a scholars is that trading in such contracts is forbidden in Islam, the financial engineering in Islamic banking and finance has resulted in a number of Islamic options, forward and futures contracts that may be used for risk management and hedging.
Amongst the contemporary shari’a scholars, Professor Hashim Kamali is perhaps the only one who has taken an unambiguous view on derivatives. Most other scholars’ opinions are in line with the rather conditional view of the Fiqh Academy of the Organisation of Islamic Conference (commonly known as the OIC Fiqh Academy), which states that the way derivatives are structured and traded in conventional financial markets is not permissible.
It must, however, be emphasised that trading in options (rights to buy and sell), forwards and futures contracts is not permissible under shari’a. The use of such contracts is permissible solely for hedging purposes and not for pure speculative reasons. Consider the following example: Party A is a Pakistan-based commodity broker who has bought soya beans from a US-based commodity broker for a price of $3m to be paid in one month. Party A would like to hedge against this foreign exchange (dollar) exposure in a shari’a compliant manner. This can be done in various shari’a compliant ways including the following: This structure is based on two promissory arrangements:
A bank gives a promise to Party A at a given time to buy Rs210 million for a price of 1.3c per one rupee on a future date – Promise 1. Simultaneously, Party A gives a promise to the bank to sell $3m for a price of Rs.70 per dollar (or a price of one rupee for $0.01428) on the future date – Promise 2.
The following are important shari’a considerations for promises:
1. Promises in Islamic law are not like contracts, i.e., while contracts are binding on both the transacting parties, promises are binding only on the promisor if the promisee decides to call upon it.
2. Only unilateral promises (or two or more unequal promises) are binding.
3. Two equal and oppoaite promises are considered as a contract, and if such an arrangement gives rise to a binding forward sale contract, this is deemed not in compliance with shari’a.
4. Two promises are considered as equal and opposite if they are given by the same two parties on the same object for the same price exercisable at the same time (or during the same period) but one of them is a promise to purchase and the other is a promise to sell.
5. Two promises are not considered as equal and opposite if at least one of the following conditions is not met:
(a) The two promises are given by the same two parties;
(b) Promises are given on the same object;
(c) Promises are given for the same price;
(d) The two promises are given for the same date (or period); and
(e) One promise is to purchase and the other promise is to sell.
In the above example, the condition 5(c) is not met, as the agreed exchange rates differ (one rupee = 1.428c versus one rupee = 1.3c). Hence, they are not equal and opposite, and are therefore not considered together as a binding forward sale contract. In conclusion, we assert that it is possible to structure derivatives in conformity with shari’a.
The writer is a shari’a advisor to a number of banks and can be contacted at [email protected]
Policy issues as elections draw near
The new year brings fresh challenges for the government, especially since decision-making traditionally alters in Islamabad as elections draw near. Given the present situation, the government’s options are limited. The fiscal deficit is still pretty high and budgeted earning and revenue targets look suspect. The Coalition Support Fund is compromised, putting additional upward pressure on fiscal liabilities. Abandoning the IMF program has distanced other multi- and bi-lateral donors for whom the Fund’s posture is a litmus test for lending. And estranged relations with the US and nato mean further rollback of crucial aid. Hence the pressure on the current account will be tremendous.
Now, if this is to be the election year, the political government must make sure its organs do not indulge in irresponsible expenditure, or the situation will get completely out of control. If the practice of money printing picks up any more pace, there will be added pressure on deficits, jacking up inflation, straining the balance of payments, weakening the rupee and diluting foreign exchange reserves.
At this juncture, the government is well advised to exercise fiscal prudence by cutting expenditure and adopting official austerity measures that have already been approved. It must also urgently improve management and efficiency of all public sector enterprises, especially since their privatisation is off the shelf, at least for now. They are an immense drain on the government’s fiscal position, and leave little elbow room, which will be troubling in the election environment. Present times also require the government to think out of the box and initiate prudent debt management techniques through asset management and sales. It is a great challenge, but the fiscal deficit should be managed between the 4-6 per cent range.
Continuing the momentum on improved tax collection is critical. The 27 per cent improvement over last year is appreciated. Now, FBR reforms need to be pushed through with greater force, while closing policy loopholes, to build on the success, because there is little fat left to chew on. And while progress on agriculture tax is too much to ask for in election year, tax collection gains need to be protected. They will play a crucial role in easing the government’s fiscal burden.
The balance of payments position is not much rosier. The trade gap is widening with exports not only held hostage to growth slowdown in our main export markets, but also the unfortunate incidence of cotton prices crashing in the international market. Presently, they are at their lowest level in two years, far from last year’s scenario when commodity price hike prompted larger than usual trade inflows. Also, shortage of gas and electricity has crippled industry, with a pronounced impact on exports. At this time, spending on imports needs to be curtailed. Concerned quarters much ensure import of luxury items is checked. It will be important now to shift focus to bolstering remittances. We started actively promoting remittance inflows in ’09, and now they have increased to approximately $12 billion. There is still capacity to raise this number to the $12-13 billion tune over the next 12 months if correct policy decisions are taken.
Considering how election year policy making invariably involves more-than-usual expenses, the need to plug unnecessary leakages, while building on the narrow earning base, cannot be stressed enough. Yet it is also in such environment that people-friendly policies are framed. The government has a difficult juggling game ahead of it. But at the cost of repetition, without exercising austerity and prudence, it will have to wriggle hard to avoid the axe.
The writer is a former finance minister
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