Insurance and Shari’a

With the widespread availability of financing after the liberalisation of financial sector, insurance is fast becoming a necessity in Pakistan. Car financing, for example, by banks and other forms of lending by banks and other financial institutions require the borrowers to buy insurance on the items purchased through financing. While shari'a compliant financing is now widely available from the fully-fledged Islamic banks like Meezan, Dubai Islamic, Bank Islami and others and from conventional banks like Muslim Commercial Bank, Bank Al Falah etc, the same cannot be said for shari'a compliant insurance, which is still at an initial stage of development. Although there are five takaful companies operating in Pakistan, their market share in the insurance market remains insignificant. Takaful, supposedly a shari'a compliant version of cooperative or mutual insurance, is being provided by a small number of players in Pakistan. While takaful is being presented by the proponents of Islamic insurance, as a mutual or cooperative form of insurance in line with the shari'a requirements, it remains a fact that takaful business by and large is not cooperative in its governance structure and operations. All takaful operators in Pakistan (five in number) are set up as joint stock companies and not as mutual organisations. This raises a fundamental question whether takaful business is actually cooperative and follows principles of mutuality. From shari'a viewpoint, conventional insurance has problems because it is interest-based and involves elements of gambling and contractual uncertainty. How? An insurance arrangement can be defined as a contract between two parties whereby one party (the insured) pays an amount of money (either in a lump-sum or in easy instalments during a certain time period) to another party (the insurer) who undertakes to pay certain amount of money (significantly larger than the money received from the insured) if and when the insured suffers a loss due to happening of an event in which the insured has a real interest. Thus, a person who buys car insurance pays a certain amount of money called insurance premium (either in a lump-sum or instalments) to an insurance company who undertakes to pay a certain amount of money in case the car's value suffers a loss due to an accident or fire, or indeed is stolen. Many insurance policies also pay for the third party damages. This arrangement is in effect exchange of unequal amounts of money between the insured (who pays less than what he receives) and the insured (who may actually get all the premia and pay nothing if no valid claim is made or pays a significantly higher sum following a valid claim by the insured). This is by definition a case of the prohibited interest or what is known as riba in Islam. Similarly, there are elements of gambling in the conventional insurance. The very fact that someone may receive a large sum of money by paying a relatively small "entry fee" (premium), dependent upon occurrence of a random event in its nature is gambling. Given that insurance is now modern time commercial necessity, it was deemed important by the shari'a community to agree on a shari'a compliant alternative to this vital economic institution. Thus, cooperative insurance was deemed more in line with shari'a than the conventional insurance, which is commercial in its nature and practice. The consequent takaful model that emerged is, however, also commercial in nature. Modern takaful businesses have a two-tier structure: a cooperative pool of funds and a commercial entity called takaful operator, which manages the takaful funds. In practice, it is the takaful operator that takes the lead role in takaful business, and hence controls all aspects of the business, which makes it more in line with the commercial insurance than cooperative takaful. In Pakistan, prominent shari'a scholars like Mufti Taqi Usmani have for long emphasised on the need for a pure cooperative takaful business, based on the institution of waqf, but it has yet to emerge as a significant business activity in the country. Given the near failure of Islamic banks to commit themselves meaningfully to social responsibility, is it the right time for takaful companies to develop a pure cooperative business model to serve the communities rather than profiting from the market forces? If takaful companies fail to take this challenge, it will be a lost opportunity for which the stakeholders in the industry may have to regret for a long time to come. The writer is a Shari’a advisor to a number of banks and financial institutions and can be contacted at humayon@humayondar.com

Leveraging support prices

In a recent move the government has announced to increase the support price of wheat crop across the country in a bid to help farmers ward off inflationary impacts on agriculture. While most of the farmers do agree to and readily accept the support price, arguments against and in favour need be heard before any such decision is made. Pakistan being an agrarian country has high stakes in how the delicate equation of agrarian economy is kept afloat. One way or another, it has to look after the needs of its large populace whose major chunk is still reeling under poverty. Pakistan’s agriculture sector abounds with problems. They may be as varied as a lack of trained human resource to profiteering by the middlemen. But nothing stands out as a worse downside factor than the totally uneven distribution of prime farmland in the country. On one hand, we have landlords with large land holdings while on the other, we find only sustenance farmers, owning not more than 20 acres of land. This huge difference leverages unjustly to the farmers with large land tracts. Complicating the situation, this huge unbalance creates certain problems that run even deeper. A small time farmer is forced to care for his household, his family, his cattle, and pay for the amenities that are at his disposal besides his share of income tax, land revenue, property tax among other needs of routine life. What complicates the situation for him is the fact that he is ultimately sucked in to the trap of the loan sharks. Support prices for agricultural produce are used all over the world as a guarantee against the inflationary trends, natural disasters, high yield, and as an incentive to lure the farmers into farming a certain crop, and wean away from certain other cash crops. Beneficial as it may be, there are strong arguments against it too as it may make the farmers choosy about a certain crop, causing a severe dent in the balance of demand and supply of crops in the market. Moreover, it may totally be useless to sustenance farmers. To illustrate the above statement, here is a case in point: say a small farmer has 10 acres of land in a fertile district of Punjab. He cultivates wheat as one of the two crops in a year. Even with an average of 40 maunds per acre yield (Punjab’s official average is around 26 maunds per acre), he is only able to earn 42,000 rupees per acre per year. Experts put the production cost of wheat crop per acre in between its 60-70 percent of its total sale price. This leaves him with only 13,000-15,000 rupees in savings per acre per year. Multiply it with 10 acres and we get a meager amount of 130,000-150,000 per 10 acres per year, which is in fact nothing less than a slap in his face for the effort. Logically, we are forced to ask as to how he makes it through the year. He is forced to look towards other crops which are in fact his life support. Come May-June and he will be looking forward to grow cash crops such as potato or corn. With a bit of luck and no flooding, he can usually save enough to sustain and move on with his next year’s plans. Unsettling as it is, this is but only half the story. As huge tracts of prime farmland are owned by the big fish, the ones with thousands of acres, it is they who benefit the most from government’s support prices for they can then afford being lethargic and not experiment with GMC or high-yield varieties of crops. Farmer exploitation and farmer discrimination takes place in many ways, some not as apparent as this. It is in this perspective the support price offers a unique incentive to farmers to grow certain crops. But, maybe the government needs to revise its policy of support price in a more targeted manner.

The writer is sub-editor Op-Ed, Pakistan Today

Will Pakistan default in 2012?

I see food inflation, economic repression and social unrest in the next six months - This is an easy question to pose, but a hard question to answer as a financial economist/banker. In my humble opinion, there are too many players (USA, Russia, Saudi Arabia, UAE, China) involved in this region who don’t want Pakistan to go down economically. The recent monetary statement of the SBP indicates, that targeting inflation is high on the Central banks agenda. I see food inflation, economic repression and social unrest in Pakistan in the next 6-months. Depreciating currency will lead to inflation which is happening again at the moment when Pak Rupee is trading at Rs90 against the US Dollar (losing 3.4 per cent against the Dollar in a week’s time). I don’t see any political maturity in the leadership with neither a farsighted approach nor brinkmanship to deal with international players tactfully. However at this crucial juncture, hats off to our military leadership led by Gen Ashfaq Pervez Kayani and his men who have again displayed strategic leadership, integrity and foresight to deal with the imbroglio we found ourselves stuck in. Pakistan will be making payments to IMF in 2012. 25th January is an important date when the government will make $800 million as the first payment. The Pak rupee will continue to bleed going forward. Those present government had not really given the strategic focus to the economy that was required when they took power in March 2008. It was very disappointing to see that they had considered the wrong strategy from the start. GoP adopted an expansionary fiscal policy which did not increase the GDP size, increased budget deficit, increased poverty levels, depreciated currency, unabated printing of money/QE, facilitated corruption, lowered purchasing power, projected negative real interest rates, lowered confidence in the economy, debilitated the living standards of the people and above all tarnished the image of the country. Capitalism is like a bicycle. Any child can easily ride a bicycle forward. No one has ever ridden a bicycle backwards. Capitalism only works well in a growth government. It does not know how to cope with an economic environment of low or negative growth. If we analyse the economic situation of Pakistan in the last 5-years, World Bank, and SBP reports indicate that GDP growth rate decreased from 5.7 per cent in 2005 to 2.3 per cent in 2011, and inflation climbed from 11 per cent to 27 per cent. During the same time, the external debt witnessed a gargantuan increase of 24 billion dollars and poverty levels deteriorated from 35 per cent to 60 per cent. This situation is alarming to say the least. The above figures clearly illustrates that Gilani and Zardari government have added misery to the woes of the people. Poverty levels are rising (increase of 71 per cent). Government debt has risen (rise of 63 per cent) considerably. The question is what is the marginal productivity of debt to GDP growth in the last 3-years? Negligible. Government has wasted its resources on valueless projects, with rampant corruption amounting to Rs1.7 trillion per annum and above all have actively taken steps to destroy state institutions like PIA, Railways & WAPDA. So the billion dollar question is can we turn the tables in our favour? We can follow two strategies for the next 18 months. Government should adopt McKinsey style spending which is valuable for the economy. Canadian government adopted similar strategy from 1994 -1996. We can look up to them for economic guidance if we are missing out on the strategy paper at hand. Pakistan’s government should not waste funds on expenditure where employment generation, productivity enhancement and GDP growth are not happening. GoP should strategise its policies on value addition projects going forward to boost economic productivity and to enhance living standard of the masses. In an economy where government is monetising its budget deficit by printing money, poisoning the financial system, tax increase like VAT or RGST is not the answer. Economic success stories of Late Milton Friedman — Nobel Laureate from Chicago School and Adviser to President Reagan, USA, advocated tax cut and sustainable government spending that pulled the US economy out of recession. We need to study those successful models. Prudent economic policies, educating females, cutting down on spending and effective monetary policy can provide Pakistan an impetus to revive the ailing economy. We are at that juncture in economic history, where international economics and political relations are an important new way to integrate globally in a positive way. Shan Saeed is a financial market economist and commodity expert with 12 years of financial market experience. He is a graduate of University of Chicago and IBA. He can be reached at saeedshan@gmail.com and blogs at www.economistshan.blogspot.com

When rumours abound, Beware

The talk of the market revolved around the surprise exit of Zardari, was the heart reason true? Or is there more to it than meets the eye - When the bourses opened after a long weekend spanning four days on Wednesday the start-off was on a positive note and the KSE-100 benchmark at one point was even up by 90 points. That trajectory however could not be maintained and at the closing bell, exhibiting some edginess the market was down by 111 points. The talk at the market revolved around the same gossip that the political cognoscenti around the country and abroad were indulging in with such gusto. Why had President Asif Ali Zardari scooted off to Dubai? The market really was abuzz: Was the ‘heart’ reason being presented by the presidency accurate or was there something more to it than meets the eye? Is he gone for good or will he again pull a fast one on the unabashed pundits who have by now given so many dates of his impending departure without ever blushing on the egg left on their faces when el Presidente remained as firmly entrenched as ever? The mystery about whether this time round he has really bitten the dust or not would be cleared shortly, but the uncertainty created a situation that pegged the market down. Whatever the truth in the rumours about his ill health or even a resignation in the offing flying around with such increasing intensity, they may well start impacting on the already volatile local bourses. So beware this aspect with a capital ‘B’. Another reason for the bearish outlook, not just yesterday but overall, was the familiar one: this is the period of time around which activity mostly remain dormant. Mr Ali Malik, CEO of the First National Equities, that most clued in of analysts, believes that this investor indifference was likely to continue for some time – at least another couple of weeks or so. For those Average Joes who have cash to spare, and wanted to invest it for a quick buck, Mr Malik off hand suggested Fatima Fertiliser, at Rs22.40 not a costly deal. According to Mr Malik, it was likely to go back to its high of around Rs25 as soon as the market recovers. That translates into a capital gain of around 10 per cent by the month’s end or thereabouts. Mian Nusrat-ud-Din for his part thinks that the downward trend would not be sustained. “The performance of the fertiliser companies, a whole slew of banks and of the oil sector overall has been quite heartening. Three quarterly reports in most of these blue chip companies are already in the public domain. And these are so good that they are bound to attract buyers – both individual and institutional”, said MND. Regardless of MND’s bullish bent, it is always better for the Average Joe to err on the side of caution. And prudence demands that unless the prospects look exceptionally bright and the economy is really booming, which according to universal consensus is not the case at the moment, one must keep a vigilant eye on one’s inventory. The way to go about it is under-exposing oneself, and limiting the spread to only a few well-chosen scrips. This approach would not just save one from undue risk but also make the inventory more manageable in terms of retaining one’s focus on the performance of the companies involved, and taking timely action in case there were profits to be booked or selling right in time and getting out before a slide. The writer is sports and magazines Editor Pakistan Today

Hold your head high SBP

It seems that SBP put on its cap of wisdom this time around, quite a turnaround from the previous statement, if one may consider thankfully so. While inflation may always be monetary phenomenon, in the case of Pakistan, the last two years show that growth is not. The time now demands, a knock on Keynes’ grave and a plea of invocation. Very little would be possible otherwise. The Keynesian school of thought lays it simply; budget deficits are acceptable if the economy seeks revival. This implies that if the economy is trapped in a low growth slump, then the onus lies on the government to take broad leaps of “investment”. The irony of this proclamation has somehow made it binding on all governments across the global to run huge deficits and subsequently take on massive levels of debt without fulfilling the impending remaining condition; creation of capital. In the case of Pakistan, all fully realize that PSDP, synonymous with capital expenditure, is a residual variable. If it were not, then it would not be so conveniently revised down each year. For instance, expenditure to be incurred under the pretext of PSDP by the federal government initially amounted to Rs446 billion in FY10 to be subsequently revised down to Rs310 billion. Similarly, the designated amount for FY11 stood at an even lower Rs290 billion to finally arrive at Rs196 billion only. Adding to this predicament is the lack of transparency; who knows what ‘human’ road, bridge and hospital this amount is feeding. The SBP, in most monetary policy statements has gravely stressed upon the need to increase the tax to GDP ratio to reduce the need to borrow. What it does not list is that the government needs to thank its lucky stars that most of the money that it spends does not come from the average person’s pocket. Else no one would spare whips and blows on the government’s oversized pot belly for spending their money on adding more layers of unwanted fat. Today, out of a population of more than 170 million, only 1.7 million people pay taxes. Of this pinch of salt, more than 1.6 million belong to the lowest tax bracket, an insignificant lot especially in terms of demanding any sort of accountability from the government. Doing some basic calculations can build an interesting hypothesis; if there are about 168 million people who do not pay tax and about 111 million people (60 per cent of the population) who live below the poverty line, then there are about 57 million people who are evading taxes in some form or enjoy some sort of illegal privileges which somehow exempt them from contributing anything to the national exchequer. The tax to GDP ratio, has hovered in the around nine per cent since the last decade, implying that non-tax payers continue to enjoy impunity come what may. Narrowing the analysis to take into account demographics, labor force surveys indicate that the workforce numbers in Pakistan lie somewhere in between 5-6 million people. If 45 per cent of these people are employed in the undocumented agriculture sector, then about 3.3 million people are employed in the industrial and services sector. And half of them pay taxes! This could primarily mean that others earn so little that they do not even fall in the taxable category! One can only hope that this consumptive government realises that it would be able to extort, only if the people have something to offer. Thus the major incentive and a fun twist to corruption would be to give people something to start with. In all this, one can only empathise with SBP, the government’s most rebellious pawn, for trying to play its bit fairly, at times. The writer is an economic researcher and freelance financial journalist. She can be reached at sakina.husain@gmail.com

Luxury of increasing product prices

Gas curtailment can certainly be in the running for the most hated word of the year, if there ever was one. Amongst those who have a particular disliking for the phrase, fertiliser manufacturers must be at the top, facing a cumulative 55 per cent curtailment YTD in 2011. Like some other facets of Pakistani life, news flows of gas being restored is met with ironic joy and relief – albeit short lived. Everyone seems to complain; from industrialists to CNG stations to household consumers. With all pun intended, give them gas man! But I often ask myself why should fertiliser manufacturers complain so much? Fine, gas is the primary feed for urea production, but compared to others, they seem to be at a vantage point in so far mitigation from supply shortages is concerned. This is because fertiliser manufacturers have the real business luxury of increasing product prices as soon as their off-take drops owing to production constrains. This emanates from considerable demand inelasticity and a decent gap between local and international urea prices – the result being that the bottom line effect is a protection of margins. We have seen this over the past year where the industry has been subject to this phenomenon. What would be very interesting is to value this ‘real option’; just a side consideration for the more financially inclined of you. But anyway, this advantage exists and is expected to be a feature for the imminent future unless our gas supplies are replenished somehow or the authorities decide to eliminate the CNG fad that keeps gripping the country. The latter is not a bad idea but that’s talking on a different tangent altogether. Back talking about urea price increases, another, perhaps somewhat less talked about question springs to mind. Fertiliser prices for all companies move in tandem; possibly defying the stereotype dynamics of a competitive structure. The fertiliser sector can be categorised in two: (i) those who are supplied gas from the SNGPL network and (ii) those plants which are on the SSGC network. The two gas providers have different curtailment schedules and so their user companies have been subject to different levels of supply shortages. But whenever one company increases prices owing to additional curtailment, other companies replicate the move in the pursuit of higher prices. What happened to the economic principle of lower price would result in higher demand? Or does this not apply in this case? First of all, the fertiliser sector is hardly a competitive industry. The industry constitutes seven producers with the top three (FFC, ENGRO, FFBL) holding 80 per cent market share of urea capacity. The HHI for the industry comes out to be around 2,500 and if we factor in cross-holdings amongst certain manufacturers, concentration may in reality be higher. Urea may seem to be a homogenous product but this does not provide reason for prices to move together in the wake of shortage instigated price hikes. That’s because an important aspect of product differentiation is easy access to substitutes. This is a feature that farmers cannot enjoy as it remains costly to purchase from other manufacturers owing to transport costs rather than purchase from close proximity distributors even if a price differential exists. But let’s suppose for argument sake that these transport costs are eliminated. Does it seem that cartelisation in present in the fertiliser sector or is there still a case for similar price movement across the board? The answer may lie in competition behaviour for which a little bit of game theory needs to be examined. Assuming that one company increases its price and the other does not, then theoretically the latter should capture the former’s client base. However, factoring in the current setup of distribution implying limited access to substitutes, the benefit from keeping prices low diminishes. Therefore, the more profitable thing to do is to increase your price as well. When this is applied across the board, theory suggests that all manufacturers should be following suit whenever one company increases its price as the benefit of improving margins outweighs the prospect of captured demand in a supply shortage environment. But this does not imply that the opposite should be true nor should all urea prices be at the same level. This is what we have observed over the past year; upward price movements have been in tandem while manufacturers maintain different urea price levels, bound by the maximum difference that can be kept till it is feasible for the customer to shift to other suppliers. Rivalry between fertiliser manufacturers does exist but it does not manifest itself due to the dynamics of the industry itself; what is the point of engaging in competitive activity where there is no economic reason to do so? Other factors, such as barriers to entry and bargaining power of buyers, also play roles which are indeed real influencers. Often the action of increasing prices is confused with collusion but surely the maxim of guilty till proven innocent does not apply here. The writer is a financial analyst with Pakistan Credit Rating Agency (PACRA)

Are we an apathetic nation

Earlier in 2011, the whole world stood amazed as protests shook various countries from North Africa to the Middle East. The revolution, that ousted Tunisian ruler Zine al Abeddine Ben Ali from Tunisia after 23 years of authoritarian rule, spread like wild fire. Mass protests brought about revolutionary change in Egypt and Libya, and caused political unrest in several other countries. The riots in Tunisia are believed to have been sparked by the suicide of a young man who could not find a job, and was barred from selling fruit without a permit. 10 months later, an incident redolent of the one in Egypt, took place in Islamabad and bystanders waited for history to repeat itself. Raja Khan - a father of two - set himself on fire in front of the parliament, because he was fed up with his financial troubles. However, his self immolation went rather unnoticed because he belonged to a country where poverty, unemployment and social disparity are a norm rather than an exception. He belonged to a country which continues to be a silent bystander as foreign forces kill its people, or rather “suspected militants”, under the façade of fighting terrorism. Revolts were not just restricted to the Arab or African world but also made an appearance in the developed world. Americans expressed their frustration in the form of “Occupy” movements all over USA, starting with “Occupy Wall Street”. The protests were against social and economic disparity, high unemployment, corporate greed, and corruption. All of these issues and many more, are prevalent in the Pakistani society. To make matters worse, Pakistan has had its share of natural disasters. IFRC president Tataderu Konoe predicted, in the beginning of 2011, that there might be political unrest in areas devastated by floods the year before. We clearly proved him wrong. Pakistani people have consistently endured food shortages, load shedding, sharp inflation, rising unemployment and wide scale corruption. Yet, other than occasionally chanting slogans and burning flags, there have been no major revolts. Are Pakistanis simply apathetic or have we lost all kinds of hope? The point here is not to suggest all Pakistanis should get out on the streets and start a political upheaval. The point is to try to understand why we are so numb that nothing seems to concern us anymore. The only time I saw consciousness and uprising at a national level was when Pervaiz Musharraf ousted Chief Justice Iftikhar Muhammad Chaudhary in 2007. I was studying at the Lahore University of Management Sciences at that time and I could feel the vibe of restlessness and anger, along with faith and hope, in the air. I remember putting tapes on our mouth as a remonstration against the crackdown on media, holding a protest demonstration outside the Chief Justice’s house for days, and putting up videos and pictures of hundreds of students marching on the roads of Lahore online. That one decision, to fire the Chief Justice, acted as a catalyst to get millions of people out on the streets. Maybe we again need a thrust, just one shove, to push us off the cliff. The media played a colossal role in motivating the public at that time. Even now, the power of media cannot be undermined. A song “Aaloo Anday” recently went viral in Pakistan with tens of thousands of hits within a few days of being released on YouTube. BBC called it “one of the most biting and daring satires the country has seen in years”. This song provokes the need to understand current political discourse in Pakistan, laments the screwed up politics of our country, and at the same time, its wit forces a smile upon your face. Hopefully, it played a small, but significant, role in instigating the people of Pakistan to rise and, at the very least, acknowledge all things wrong with the country. The writer is Johns Hopkins graduate. She is currently working with Bloomberg and can be reached at iqrashukr@gmail.com

Fiscal and monetary interdependance

As a rule, monetary policy must be complemented by a prudent fiscal policy. If the interest rate regime and money supply are left to control inflation and monetary expansion, they lose significance over time, as is presently the case in Pakistan. Not only is the fiscal side not taking basic steps to improve revenue generation, it has also failed to cut costs and check unnecessary leakages. The government’s fiscal space continues to be strained by billions lost through inefficient public sector enterprises and an improper subsidy structure. Until the government completes the process of identifying those most in need of subsidies, and then initiating a program of carefully targetted subsidies, its burden will not lessen. It must also ensure rapid turnaround and strategic privatisation of all loss making public sector entities. The burden of sustaining these trends is simply too large for the national exchequer. Similarly, tax reforms must focus on netting groups with the ability to pay, ultimately freeing more fiscal elbow room for the government to maneuver, with multiple spill-over benefits. On the one hand, greater fiscal strength frees the government from borrowing, leaving monetary policy to stimulate private sector investment. Being more efficient, the private sector invariably leads in job creation and ultimate overall growth. On the other hand, the government subsequently has increased funds to allocate to public sector development, with its own impact on eventual GDP growth. At the end of the day, the main focus should be on achieving equitable and sustainable growth. In order to posture towards a long-term growth trajectory, and keep feeding the ever expanding job market of approximately six million annually, Pakistan needs a growth rate of 8-10 per cent over 15-20 years. For this, the starting point must be a prudent revamping of the fiscal policy as the monetary sector paves the way for increased private sector participation. Unfortunately, in the absence of a realistic fiscal policy, the monetary sector has been left to shoulder the burden on its own, consistently losing in relevance. Now, numbers show currency in circulation has risen over the last 12 to 13 years, a trend contrary to regional economies like India, Bangladesh and Korea, all of whom have recorded reductions in currency in circulation. Also, there is disintermediation in the banking sector. Pakistan’s banking-GDP ratio has shrunk from 35 per cent in ’99 to 32 per cent now. In the same time-frame, the same ratio for India and Bangladesh increased from 38-65pc and 25-51pc respectively. Whenever fiscal policy is divorced from monetary policy, crucial economic indicators are skewed. Relevant authorities must restore balance between the two policy arms. That is why the monetary board has representation from the federal government, so both policies can move in tandem. The way things currently stand, the fiscal side must urgently reorient crucial revenue generation avenues so it is in a position to effectively complement monetary policy. Already, the exercise of toggling the interest rate regime to first control inflation and then engineer private sector investment has been pretty much wasted due to the government’s compromised fiscal outlook. Again, the aim must be equitable and sustainable long term growth. For that, the private sector must be facilitated. When it expands, and foreign investment is also attracted, unemployment will ease, consumerism will be triggered and an eventual fillip will be provided to the growth curve. The writer is a former finance minister

Stardom of reinventing

How strange this might sound to one’s ears, the truth remains that the world we live in has become perplexed and competitive. Masses have become impatient and appreciative of only the finished goods and products. The irony is that no one remembers or cares about the poor guy who came up with the idea in the first place. In the end, it’s all about perfecting the final product. So what is the image that comes to your mind when you read the word ‘inventor’? Let me tell you what I think of an inventor; a petite skinny nerd wearing glasses, messy hair dressed up in a lab coat, playing with a computer or some gadget. As sad as this picture might sound, it’s the hard-line truth. Interestingly enough, this hasn’t always been the case for there have been times when inventors too were in the limelight and mattered. They were revered and regarded as towering, romantic figure geniuses such as Leonardo Da Vinci, Alexander Bell or Thomas Edison. But sadly, with the passage of time dynamics have changed and it seems like the inventors have lost their aura. If you ask me how this all happened and how the inventors lost their charm, then I’d blame the modern day marketers who with their linguistic charm and skills to market and present an idea, stole the show; analogous to someone stealing a candy from a baby. The most recent and significant example that comes to my mind is that of Steve Jobs and I do not mean to discredit or take anything away from him. He was a true genius in every way who went on to revolutionise at least four different industries. Jobs had a natural gift which was to perfect other people’s inventions; he would optimise them and had the nag to buff and polish other people’s ideas in such a manner that they would turn into gold mines and simply irresistible commodities. In a way you could say that Steve was sort of a con artist or a remix artist. Take for instance the case of the spectacular graphical user interface of the Machintosh computer; the idea which Jobs very conveniently borrowed from Xerox PARC. Have you ever thought about or wondered who in the world invented the first digital music player or for that matter, the smart phone? I don’t know and I am sure you don’t either. These people never saw any fame come their way or were never on the cover page of Forbes or Time magazine. But we all know who came up with the iPad and the iPhone, just because he has been on the cover page over a dozen times. I mean, Jobs was a true visionary and when he looked at a smart phone, he saw a better smart phone. To be a visionary, you have to be different and think out of the box. A creative thinker is someone who would use electricity to put out fires rather than start them, who would look at an ordinary light bulb and see a wireless data transmitter that could replace Wi-Fi? These aren’t ordinary thoughts; they’re not even different, rather they’re downright weird. Jobs had the talent to seek out and see through things what they were actually supposed to do. Take for instance, the digital music player – In 1979, a British engineer named Kane Krammer demonstrated the IXI, a digital audio player. He wasn’t able to turn it into a commercial product, but Apple has acknowledged the importance of Kramer’s work and came up with iPod. The world we live in today is such that it has given a downright cheap outlook to the inventors. They have become a necessary evil, but let’s not even for a second forget how crucial they are to the world and how much we need them. A lot of things we see around us aren’t pretty and a rough draft of the future is waiting for someone, like Jobs to handpick them and refine them into something that will change the world. The writer is Texas A&M University graduate who is currently employed with Telenor in the Products - Commercial Division. He can be reached at syed.jan@gmail.com

Islamic interbank benchmark rate

On November 22, 2011, Thomson Reuters launched what it claims to be the world's first Islamic finance benchmark rate, designed to provide an objective and dedicated indicator for the average expected return on shari’a-compliant short-term interbank funding. The Islamic Interbank Benchmark Rate (IIBR), as Thomson Reuters would like to call it, uses the contributed rates of 16 Islamic banks and the Islamic sections of conventional banks to provide a reliable and much-needed alternative for pricing Islamic instruments to the conventional interest-based benchmarks used for mainstream finance. This is an interesting development that needs scrutiny from a shari’a and economic perspective. Interbank lending and borrowing between conventional banks creates interest-based debt. In the case of Islamic banks, however, interbank deposits are based on, by and large, what is known as commodity murabaha. Although commodity murabaha has for some time been recognised as a shari’a compliant product, subject to some strict shari’a guidelines, the fact remains that such commodity murabaha based transactions and products are either priced in terms of LIBOR or a local interest-based benchmark. The question then arises: how will the newly launched IIBR be different from conventional interest rate benchmarks? My feeling is that the financial behaviour of IIBR will be positively correlated with the benchmarks used for the participating banks' existing products. My suspicion is that the IIBR will be only marginally different from the respective local interest-based benchmarks and the LIBOR. However, if the proposed IIBR is used by a sufficient number of participating banks, the individual banks' portfolios will gradually change in favour of the IIBR-linked products. This in due time will create an Islamic benchmark different from the interest-based benchmarks. This will, however, happen only if Islamic banks "borrow" only from within the Islamic financial services industry. In other words, if segregation of Islamic funds is maintained on a systemic level and not on just institutional level, an Islamic benchmark like IIBR will be useful. This basically means that the countries where Islamic banks exist, conventional banks should not be allowed to offer Islamic financial services (similar to what Qatar has done recently). My own view is that the practice of commodity murabaha should be disallowed to "borrow" from or "lend" to conventional banks. Once, Islamic banks start conducting commodity murabaha amongst themselves only, a distinct Islamic market will emerge, which would maintain a separate benchmark for Islamic banks. This "valve" between Islamic banks and conventional banks would decrease the threat of arbitrage, which otherwise will always emerge if a separate and different Islamic benchmark is introduced in a market where an interest-based benchmark already prevails. It is interesting to note that the IIBR uses data from16 participating banks, which also include some conventional banks offering Islamic financial services through Islamic windows. Inclusion of the conventional banks in the list of the founding participating banks, in my opinion, is the basic flaw of the newly launched benchmark. Involvement of the conventional banks in determining IIBR will necessarily retain conventional thinking on pricing of Islamic financial products. After all, very short term lending and borrowing by conventional banks is driven by making money from money, as short-term lending (e.g., overnight deposits) does not lead to any real investments, and the lenders get a return on purely financial investments. A simpler solution is based on qard hasan (or interest-free loans) to borrow and lend on a short-term basis between Islamic banks. In a cooperative environment, Islamic banks with excess liquidity may decide to lend to other Islamic banks in need of short-term liquidity. Central banks must make it compulsory for Islamic banks to offer a certain percentage of their excess liquidity in an Islamic money market that would allow liquidity-deficit Islamic banks to borrow that money on an interest-free basis. In case of Pakistan, for example, the State Bank of Pakistan can decide to issue a sukuk on its own buildings by way of selling the real estate assets to an independent fund, which would securitise these assets. The Islamic banks wishing to manage their excess liquidity should be allowed to buy such a sukuk to receive rental income. The trade in such a sukuk may also take place on the Karachi Stock Exchange allowing Islamic banks to invest or divest at their discretion. This will also allow Islamic banks to earn any capital gain arising from the secondary market trading. Alternatively, the Islamic banks may like to keep the sukuk either to maturity (which could be 30 to 90 days) or/and any intermediate redemption days, pre-announced by the central bank. In this context, the sukuk issued by the governments of Sudan and Bahrain should be studied to develop a comprehensive framework for development of a government-supported Islamic money market in Pakistan. The writer is a Shari’a advisor to a number of banks and financial institutions and can be contacted at humayon@humayondar.com

Awaiting the fortune cookie in Feb

After a week’s sabbatical abroad, which really was not a time off for one was working, yours truly is back in harness. Meanwhile, with the regional situation tense and volatile as it is, especially after some gung-ho NATO helicopter gunship fliers by design or by accident (the uppermost feeling in these parts is that it was more of a case of the former than the latter) the market was inevitably likely to take a plunge in the week that one was away; and it did. However, it didn’t quite plumb the depths – the KSE-100 benchmark lost about 600 points, most of them in only one particularly bad session. Business as usual, or rather unusual! The investors, both of the institutional and the individual variety, were not just wary, they were jittery. And this little bout of nerves was quite justified. In such troubled times as these, you don’t venture out flashing your pocketbook. But with some reconciliatory noises emerging from Washington, the slide down the slippery slope not only stopped, some recovery was already witnessed on Tuesday and a bit further by Wednesday, and the KSE-100 had already topped well over 11,500 by noon. Still, one’s activity as far as buying and selling is concerned has obviously mostly been in the dormant zone these last few weeks. Perhaps, the reason is that having parked one’s little stash in the right scrips one is now waiting patiently till the dividend-paying time around February. But one has to watch out for the goings-on with keen interest. Maybe something quite attractive out of the blue would catch one’s attention these days. Or probably better still waiting for a windfall from somewhere (like every Average Joe Investor, this writer’s dream too) that would provide the wherewithal and the vim and vigour to embark on a buying binge. Meanwhile, it makes one happy that the December-closing scrips that one had projected as decent buys have not done too badly despite the overall bearish trend. The reason why these survived and held their own despite the prevalent investor indifference towards the market in general that reflected in low volumes, was because the assessment was based on their balance sheets. The capital gain may not have been there as yet, but that too shall be dangled before one once we are well into January 2012 – close to the payout time when investors come back in droves to pick up with a focus on a handful of good prospects. Getting to the specifics, there is further information that reaffirms one’s faith in these scrips. For one, the third quarter reports are out and only a month remains before the close of the ongoing year. These are quite healthy and heartening. We knew that profitability in the fertiliser sector was high. The reports on the brace of Fauji companies, the FFC and FFBQ reconfirm the fact that earning per share after three quarters year on year has been far higher. The FFC’s EPS after three quarters this year has been Rs16, while it was exactly half at Rs8 last year. And it is already in the business of sharing its profit with an interim dividend of 55 per cent – or Rs5.50 per share. In case of FFBQ the EPS is even better than hundred per cent: Rs7.68 this year, against Rs3.14 last year. In terms of steep profits, not quite similar is the scenario in the three banks that were mentioned: Bank Al-Habib, Allied Bank and Habib Bank Limited. But in the case of all three, the gain over last year has been around 40 per cent. Not as good as the fertiliser sector, but definitely better considering that the banking sector had taken a hammering in recent years. The writer is Sports and Magazine Editor, Pakistan Today

The evolution of cinema

It was in the mid-1800s, a little after photographic equipment was invented, that the concept of ‘moving pictures’ began. Photographs and drawings were placed in specially designed motion devices whose revolving apparatus gave the viewer an illusion of motion. The phenomenal inventions and discoveries during the same century, such as sound recording, electric light, the Kinetoscope, a ‘peep show’ viewing device and ultimately, the world’s first film projector called the cinematograph, helped pave the way for modern day cinema. The early 1900s saw the development of coloured movies and cartoon animations, the onset of commercial radio broadcasting, the advent of ‘talkies’: movies with integrated sound and dialogue, the establishment of ‘Hollywood’ and the invention of the world’s first television. By the mid 1900s, movie theatres were abundant in most parts of the world and cinema-going became a favourite pastime of both the old and young. Cinema technology was pretty straightforward and basic up till then. Movies were shot using cameras that incorporated a standard 35mm celluloid film. Upon completion, multiple reels of such film would be spliced together by a projectionist, and through a complicated shutter-and-light sequence in an analogue projector, the movie would be displayed onto a projection screen at a cinema. It is worth noting here that traditional film distribution meant that the movie had to be printed onto several reels which were then physically transported to various cinemas worldwide. It wasn’t until the 1990s, with the proliferation of computer engineering, broadband telecommunication and the bounties these offered, that the concept of ‘digital cinema’ came to into being. Digital cinema technology works in a simple and efficient manner. Movies are initially stored onto computers, an increasingly simple task if the movie is shot using a digital camera to begin with. This soft copy is then distributed to cinemas, through satellite transmission and high-speed broadband connections, directly to a digital projector which then processes the file and displays it on digital projection screen. Compared to this, traditional analogue technology seems like an arduous and unnecessary process. In layperson terms, digital cinema projection basically means that the traditional 35mm film containing the movie is replaced by an electronic copy, contained on a storage device, such as a high-capacity external digital drive. It also means that a digital projector is used instead of a conventional film projector. There are currently two types of digital projectors, according to an international specification standard set by Digital Cinema Initiatives LLC, a joint venture of Disney, Fox, Paramount, Sony Pictures Entertainment, Universal and Warner Brothers Studios. First is the digital light processing projector and the second type is the digital projector. Cinemas all over the globe are making the gradual shift from film to digital projection, since the latter, with its unique advanced technology, guarantees unparalleled picture quality. Electronic or digitised movies are not at risk of fading or getting scratched, they provide high definition, stable, non-grainy images and offer a sound quality that won’t deteriorate over time. In addition, digital cinema brings with it various other benefits that far outweigh the extremely high initial investment that’s required to install digital projectors, most importantly the significantly lower distribution costs, faster and greater market penetration, increased control over piracy, and finally, increased flexibility in terms of programming by providing the ability to show alternative content, such as live streaming of sports events and musical concerts. We are living in what has been officially labelled ‘the digital age’, with the concept of ‘digitising’ infiltrating all aspects of our existence. For cinema and movie buffs, this means a completely immersive experience – digital cinema has in turn given rise to 3D projection technologies that far eclipse those from the days of yore. Remember the green and red glasses? The move has begun moving towards an increasingly ‘real’ experience – who knows, in a few years, we may enter a world of ‘holographic’ cinema. Until then, lie back, grab some popcorn and enjoy the show! The writer is manager of Royal Palm Golf and Country Club’s new AudiPlex private cinema. He can be reached at imran@rpgcc.com

Trade-with-India argument

While fine-tuning such arrangements, it is of the utmost importance to safeguard interests of local industry, agriculture and the services sector - Considering Pak-Indian complexity, progress on trade and investment should move in tandem with progress on political and security issues. Yet there is no denying the potential in increased bilateral trade, which is why both governments should move towards enhancing the overall volume. Interestingly, prior to partition, a good 95 per cent of the subcontinent’s trade comprised activity within its borders, and since the fateful divide, the number has dropped to as low as five per cent, an indicator of how much both countries can gain from opening up. In case of fair and sincere advances in trade, Pakistan stands to gain more. There is a good reason the world is making a beeline to tap and exploit India’s rapidly growing, vast market. Therefore, Pakistan’s recent trade diplomacy, culminating in granting India the MFN status, is understandable. It’s just how the exercise was undertaken that left a little to be desired. In effect, Islamabad ended up acceding to India’s MFN demand in return for removal of the latter’s objections in the WTO to Pakistan’s special trade concession by the European Union – a one time, time barred window offered to help in the devastation caused by floods. Of course, MFN or no, we’ve been trading with India for a long time, primarily around the two thousand odd positive list items Pakistan permits. But despite the fact that India granted Pakistan the MFN status in 1996 and Pakistan didn't, the overall trade balance is tilted heavily in New Delhi’s favour. Of the total trade volume of approximately $1.5 billion, Pakistan’s share is a paltry $275 million. Primarily, we’re unable to export to our potential due to excessive Non-Tariff Barriers (NTBs) erected by India. I would have approached this issue by seeking a comprehensive bilateral trade deal going beyond WTO and Safta. Falling back on our respective comparative advantages, I would have sought trade preferences for products capable of significant market penetration in India, like textiles, value-added textile products, food items, etc. In return, I would have directed the government to offer India preferences on raw material, machinery, IT products, etc. While fine-tuning such arrangements, it is of the utmost importance to safeguard interests of local industry, agriculture and the services sector, hence the stress on gradual opening up. The removal of NTBs has to be central to any such negotiations. India cannot demand trade liberalisation and enforce restrictive barriers at the same time. It is with regard to these issues – protecting indigenous strength and unwinding NTBs – that the recent initiative has been off the mark. We came close to establishing fresh trade parameters when I was the government's chief trade negotiator, as Pakistan's commerce minister for five years, but lack of appropriate movement on political and security issues often checked progress. That we are finally on the road to trade is encouraging, however the need to proceed with caution cannot be stressed enough. I would also caution against aggressive posturing on opening transit routes. It is extremely important to note the incongruity between Saarc access via India and route to Afghanistan and Central Asia through Pakistan. Plus, Afghan transit is one of the biggest, most menacing avenues of smuggling into Pakistan. Granting India access will only exacerbate the problem. Specifics of granting transit rights are outside the ambit of the WTO and should be taken up under relevant multilateral transit conventions, not bartered away for deals like the EU concession. It also bears noting that so long as the other arm of revenue generation – the tax machinery – is compromised, the export sector must be made that much more proactive to keep the wheels of the economy running. For years, Pakistan and India have let political differences interfere with mutual socio-economic uplift, possible through increased trade. We must ensure more trade while protecting our interests, which requires prudence and care, not fanfare. The writer is a former Federal Minister

Rage against the machine

At the end of the day it is the fiscal side of things that govern most global matters and none more so than the issues between Pakistan and USA - The airstrikes on Saturday imply that the Pak-US bond is fast approaching its breaking point. The recurring breach of Pakistan’s sovereignty has had temperatures soaring in the country and the military is under escalating pressure to terminate its cooperation with US; especially after ,what has been, an unceremonious year for the relationship. The unprovoked act of innocent killings has brought about unparalleled rage against the US/NATO machine. 2011 has been tumultuous year as far as US and Pakistan’s enigmatic bond is concerned. The oft-touted military allies, combating the war against terror have witnessed an exchange of mistrust, skepticism and anger. The Raymond Davis affair set the ball rolling earlier in the year, and rewrote the term ‘diplomacy’ for the Average Joe in our part of the world. Then the US breached every law in inter-dominion codes and ethics and penetrated into Abbottabad, where they found Osama Bin Laden and then disposed him off. Pakistan-US bond has been like that marriage, where both the concerned parties have grown sick of each other’s antics, their expectations soar and the reciprocation is not up to the mark, have at one time or the other tried to woo other partners and have even cheated on each other. But now owing to recent events with the sword of divorce hanging over the relationship; is breakup a viable solution for either party? The two countries and their altercations are the political illustration of U2’s chartbuster “with or without you”; they can’t seem to be able to live with each other, but they sure as hell can’t live without each other. At the end of the day it is the fiscal side of things that govern most global matters and none more so than the issues between Pakistan and USA. With Pakistan reliant on Western aid for its own sustenance, it cannot stretch out the situation beyond repair. If the political ties completely go kaput, it is detrimental to Pakistan’s future in the long run; especially in the present scenario where we are shrouded by the menace of susceptibility. US on the other hand, might be playing the domineering husband to Pakistan’s dependant wife, but with its war going haywire in Pakistan’s western vicinity, Washington is as reliant on Islamabad – even if not in the same obviously hypersensitive way. US needs the NATO supply routes to be kept open for its troops in Afghanistan; and in an apt riposte to NATO’s attack on Saturday, this is exactly what we have targeted. US also needs Pakistan to keep a check on Al-Qaeda and Taliban’s expansion. They can point fingers, they can impugn us, but they just cannot do without us. And hence if the US fails to recognise our contributions and continues to breach our sovereignty for its self-seeking purposes we could refuse to play ball. However, there is only so much that we can do, owing to their monetary stranglehold. Granted that when juxtaposed with American disbursements in Iraq and Afghanistan, its aid to Pakistan is significantly small, the way international dynamics work we cannot afford a complete breakdown in ties. As things stand an average American does not look upon Pakistan as an ally, and the average Pakistani does not look upon US as a friend; but nonetheless the two countries need each other. We’ll show our displeasure for some time but eventually we would be back on the negotiation table. We can expound our anger against the status quo, and our rage against the machine but we can’t do without the US. Not yet anyway. The writer is Sub-Editor, Profit. He can be reached at khulduneshahid@gmail.com

The double-dip dilemma

What Pakistan needs is growth that is job oriented - The economy expanded remarkably during 2001-07. The government in power back then, claimed several macroeconomic achievements. It doubled in size with annual GDP growth rate peaking at 7.5 per cent in 2003/04, incredibly inflation was well under control, the debt burden reduced to one-half, foreign exchange reserves were sufficient to cover up to 6 months import, Pakistani stock market ranked among the top performers in the emerging markets and total investment peaked at 36.1 per cent of the GDP in 2005/06. Pakistan successfully launched sovereign bonds of maturity ranging from 5-30 years and these were oversubscribed in the international capital market which reflected strong confidence of foreign investors. Nonetheless, the boom period lasted for a short period of time. Series of economic and political shocks shook Pakistan’s economy from 2007-11. Indeed when the current government shouldered the burden of responsibility in 2008, found itself in dire straits and has since been struggling. The GDP growth rate which peaked in 2005 at 9.0 per cent has fallen flat in 2010/11. Interestingly, the rate of unemployment fell from 7.7 per cent (2005) to 5.6 per cent (2010/11). It is, however, believed that the unemployment rate is running in double digit as against the figure reported in the government’s statistics. Total investment growth figure shrank from a peak of 36.1 per cent (2006) to a mere 6.2 per cent (2010/11) surprising having no significant impact on the unemployment rate. It is interesting to note that the GDP growth and the unemployment rates peaked together at 9 per cent and 7.7 per cent, respectively in 2005. In other words the accelerated economic growth (expansion in output) instead of creating new jobs made more people redundant in 2005. Perhaps growth was only demand driven and not job lead growth. In 2009/10, when the GDP growth increased to 3.8 per cent from a low of 1.7 per cent (2008/09), unemployment rate increased from 5.2 per cent to 5.5 per cent. And adding to the funny tail of the double dip dilemma, when the GDP growth rate winced to 1.7 per cent (2009/10), from 3.7 per cent (2007/08), unemployment rate remained stagnant. Theory says there is an inverse relationship between the GDP growth rate and unemployment rate i.e. increase in the GDP would tend to push down the unemployment rate and vice versa. However, the data presented here has failed to confirm this theory. Hence relationship between the GDP growth and unemployment rate has remained somewhat of a mystery. Even if the time lag is taken into consideration, there can be no correlation found. This may lead us to conclude if there is something wrong the way these indices are complied by the respective departments of the government. One possible explanation for this distortion that comes to mind is that over 45 per cent of the country’s total labor force is employed in the agriculture sector and 62 per cent of population live in the rural areas and directly and indirectly linked with agriculture for their livelihoods. Put together 55.4 per cent are employed in manufacturing, construction, transport, and services sectors. Let’s try to see if facts can help confirm the above explanation. The agriculture sector growth peaked at 6.5 per cent (2004/05) and slipped to the bottom 1.2 per cent (2010/11) of business cycle. So again looking at the growth figures of agriculture sector, the relationship between the unemployment rate and the growth rate has no resemblance. Despite a lackluster performance of agriculture sector and the overall slowdown in the economy the unemployment rate has remained subdued during the period. To conclude the discussion, it can be said that any swings in the GDP growth seems to be having no significant impact on the unemployment rate. Also there is a dire need to revamp the statistics department of the government to provide us more accurate and reliable data on major economic indicators. To regain macroeconomic stability, Pakistan needs to expand its economy 5-7 per cent per annum over the next 5 years period, create adequate number of jobs, improve income distribution, liberalise the economy, and set gear for transparent privatisation of sick PSEs. What Pakistan needs now is growth which is not only demand driven but job oriented which will help increase consumers’ incomes and standards of living of average Pakistanis. The author is director Szabist Islamabad. He can be reached at syed311@hotmail.com