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Thursday, 23 May 2013 4:49 pm
High 14 oC - Low 7 oC
Profit Column
Philip Morris – comedy of errors
I don’t get to see the dandy Marlboro men, riding a horse anymore - According to a popular survey, Philip Morris, formerly known as Lakson Tobacoo Company, spent an astounding $6.4 million on publicity in 1998, making itself the third largest business advertiser in Pakistan that year. Thanks to the good three minutes cigarette TV advertisements back in the 90s for giving us ‘the taste of adventure’. Come to think of it, I still cannot trace back to the time when my ears last heard a fast forward - shrill voiceover coming straight from an electronic advertisement saying, ‘Smoking is injurious to health - Ministry of Health’. Adding to my miseries, I don’t even get to see the dandy Marlboro men, finely suited; riding horses, driving jeeps, climbing mountain peaks and attractively sliding cigarettes from a cigarette pack. To top it off, my dilemma worsens when I can’t figure out a better ringtone that can replace the spell-binding background music of the famous cigarette advertisements of our times.
In the case of cigarette advertisements, the ban in Pakistan was imposed from approximately, the year 2002; since then the government of Pakistan outlawed open advertisement of cigarettes through both print and electronic media.
Even when cigarette advertisements were not banned in Pakistan, public service messages against smoking were regularly telecasted on electronic media. One very famous commercial, of 2 minutes, 17 seconds, pretty long to bear at this point in time, we all remember; ‘Wasim bhai, ap thaktay nahi hain? Jee nahi,mein cigarette nahi peeta.’ (Even though, I can bet, that out of all the good things that he does, he definitely is a good smoker.) Today, the same celebrity can be juxtaposed, with a voiceover warning about the dangers of smoking. Hail the excessive media exposure and advancement in time that have changed our perception towards things.
Just recently, as I was going through a print magazine, my eyes caught the full page view of my long lost ‘handsome hunk’, surfing through the sea on a graceful horse. Yes, it was none other than ‘The Marlboro Man’. I instantly wanted to thank the company for bringing back my childhood memories, but the Tobacco Control Cell of Pakistan apparently, did not like the dude’s presence on mass media. The cell lifted a ban on cigarette advertisements under the Prohibition of Smoking in Enclosed Places and Protection of Non-Smokers Health Ordinance, 2002, but Philip Morris did not even seem to research well before making such a major blunder. Good lord, Pakistan Tobacco Company - the major competitor of Philip Morris, did not follow their stars.
The Prohibition of Smoking in Enclosed Places and Protection of Non-Smokers Health Ordinance, 2002, governs multiple areas of tobacco control, including restrictions on public smoking, sales to minors, and tobacco advertising, promotion and sponsorship. According to the Presidential Ordinance, “Notwithstanding anything contained in any other law for the time being in force, no person/company shall advertise tobacco and tobacco products in any media, in any place and any public service vehicle.” This makes the recent promotional advertisement campaign by Philip Morris, a clear violation of these rules and regulation.
In another recent incident, the company evaded millions of rupees worth of taxes by short payment of federal excise duty and sales tax in their imported brand, Marlboro. For which Federal Board of Revenue (FBR) has issued show-cause notice to Phillip Morris, asking them to pay evaded tax amounting, Rs300 million.
Despite the aforesaid cases, the giant cigarette company keeps on beating out products across the Fast Moving Consumer Goods (FMCG) spectrum. The tobacco company is also involved in Corporate Social Responsibilities (CSR). CSR promotes the view that “firms should strive to make a profit, obey the law, be ethical, and be a good corporate citizen.” Ironic, how a cigarette manufacturing company rates environment, health and safety management as their top priorities. Whereas, tobacco is the only consumer product that kills one half of its users when used as directed. Let’s not get into the debate, the idea that tobacco companies can be ethical while promoting a disease-producing product is fundamentally contradictory.
The writer is Sub-Editor, Profit. She can be reached at syedmaheen@hotmail.com
The FDI prejudice
The years of 2005-2009 saw the largest amount of Foreign Direct Investment (FDI) routed into Pakistan in the last decade. However, a much talked about aspect is the notion that this ‘investment’ did not carry desired productive results. This stems from the eventual target industries where FDI made its way towards hardly into sectors where future economic benefit is thought to be derived from. Future economic benefit is a vague concept in itself; open to interpretation and dependent upon which angle it is perceived from. Proponents of allocative efficiency in a laissez-faire environment would treat all FDI the same, not differentiating between productive and unproductive inflows. There would not be a distinction between where investment is made, as gain is measured from the perspective of society as a whole. However, a very important drawback of this theory lies in its ignorance of inequality in terms of wealth accumulation that is created within the society – a shortcoming of the capitalist regime as a whole. In all honesty, I am not an advocate, as allocative efficiency; no matter how principally sound it may be is, but a theoretical concept which does not hold in entirety in practical life.
Foreign Direct Investment – which ever form it was in – is now a fleeting memory of the economically boom years gone by. Since the investment friendly period of 2005-2009, FDI has seen a consistent drop each year that has passed. FDI was at a peak during FY08 at USD 5,401mln, falling all the way down to USD 1,574mln in FY11. SBP released figures show that the start of the current year has been worse, with FDI dropping 58 per cent YoY for the 4MFY12. This should not come as a surprise to us, given that the country has been plagued by the nuisance of terrorism, is still actively playing a part in a dead end ‘war’, and has been economically weakened, owing to a myriad of both internal and external factors. But a fact remains, that whatever inflows that occurred during the aforementioned ‘boom period’, little made their way into sectors deemed critical for aiding development in the country and hence, being a sustainable source of income generation for society at large.
The top three sectors which saw the bulk of inflows in that period were Telecom (36 per cent), Financial Businesses (21 per cent), and Oil and Gas (13 per cent). Investment in the telecom sector saw the advent of a mobile purchase cacophony, where it is now very cheap to own and use a mobile connection. Yes, this may have made communicating considerably cheaper and may have provided employment opportunities, but apart from this, has led the nation into a consumer trap which is least bit productive. I fail to see how constructive activity, in turn, economic growth, can be achieved when everyone is busy texting or calling left right and center. Now, investment in this sector has dried up, in fact, is on the decline, owing to profit repatriation which is an inevitable consequence of money being put into short term projects without a long term vision. The investments made in Pakistan over the past few years carry their own benefit, but are these greater than if investment would have been made in sectors which today are victims of severe deficiencies such as power, infrastructure, and education?
Key here is the distinction between near term gains and long term benefits. An investment in the financial context is defined as money being put into something with the expectation of gain within a period of time. It is natural and reasonable that profit repatriation would be the prime goal of a foreign investor. But from a local perspective, this should be in return for long-term boon that the country expects to take advantage from. Given Pakistan’s current status as a developing state, these should be in areas which would assist in the development of other local industries, provide ample employment opportunity, and self-generate other streams of income. In simpler words, help build a sustainable comparative advantage which can be utilised in future on a recurring basis. Taking the example of India, FDI inflow rose by 50 per cent to USD 20,760mln during FY11 alone. But the key aspect of this is the eventual destination where investment has landed; sectors such as services, housing, real estate, construction, and power. These are mostly infrastructural developments where other industries are going to be taking much benefit from in the coming years.
The idea is to invest in areas which offer a comparative advantage; or at the very least invest in areas which provide required support to the key sectors. India’s advantage may not lie in the power sector, or services sector, but surely these are protecting and nurturing the real key industries from where India derives its might. As an optimist and very much a patriot, I do believe in the potential our country harbours and see brighter prospects in future. But to learn from the past and our next door neighbour, it might be wise to think about incentivising the ‘right’ kind of investment in the aim to achieve long-term prosperity as a nation in whole.
The writer is a financial analyst with Pakistan Credit Rating Agency (PACRA)
Revisiting govt borrowing
There suddenly seem to have emerged a plethora of variables for the layman to understand the direction that the fiscal deficit funded by government borrowing is taking. Since time and beyond, analysis has been silent with respect to tallying the government’s accounts, reported in the celebrated budget, with what happens each quarter. How can one, many would argue, take an independent view when there is no transparency? The tax collection break-up and consolidated numbers last updated on FBR’s website belong to the third quarter of last fiscal year. Why must one rely on government announcements, ever changing as they are, if there is to be any ‘just’ accountability of sorts?
Diverging from this lament briefly, the ongoing quarter’s T-Bills’ borrowing trends seem to obfuscate the viewer; has Denice turned a new leaf or is he plotting a larger menace? While enlisting the ongoing quarter’s T-Bill targets, SBP had announced that the government intended to borrow Rs63b in addition to the rolling over maturing amount. Lo and behold! It turns out that our dear government suddenly wants reduce its outstanding stock of T-bills, Rs125b in the auction on 19th Oct while taking up less than a hundred billion of additional debt in later auctions. In the meanwhile, our risk-disliking financial system continues to vigorously participate in these auctions hoping the government will abide by its pre-announced targets.
An obvious, allegation hurling explanation would be that the government seeks to shift its borrowing bulk into a lower interest rate pitch, an expected move that will be verified next week. With no substantive foreign inflows in the purview, one would not expect that an additional (approximate) Rs100b in the ongoing quarter would embolden the government return about half of the amount to the financial sector.
Then come aboard other developments. Earlier this month, half of the debt held by banks under the pretext of circular debt, approximately Rs200b, has been converted in to 12mo T-Bills. This indirectly implies that the net increase government’s stock of T-Bills would arrive at twice the target amount announced for the ongoing quarter. The remaining amount has been conveniently shifted to 5-year PIBs. Who knows whose hands the fiscal machinery would have landed in by then!
The resolution of the circular debt issue invokes a great deal of interest on its own. While it would relieve the government of intense political pressure, songs of joy would be easy to listen to on the banking square; risk weighted assets would decline as TFCs converted into PIBs would be shifted into the investments book basically accorded with zero risk. Currently, risk weighted assets stand at Rs4,724b and can be provisionally expected to decline by at least Rs100b. Some respite will be thus also be realised on the capital adequacy ratios (CAR) of banks exposed to the power sector, in addition to the paltry benefit of annulled NPLs in the power category standing at about PKR 22bln in Mar-11.
In the way of some more government bashing (and reverting to the original lament), all conjectures and estimates such as those listed in this column would be much aided, if for once, some transparency and public inclusion would be exercised by those sitting in the finance division. The only corroborated evidence available to analysts in form of what was said by whom. If the current government is the people’s only well-wisher since times and beyond then on the eve of re-election it should provide a clear and legible account of all that it has done for the people, if it has done any thing.
After all, their proud proclamation of democracy should imply a little more than just grave problems for the people and by the people.
The writer is an economic researcher and freelance financial journalist. She can be reached at sakina.husain@gmail.com
The water bomb
For those of us who feel that the piling up of nuclear arsenal in itself threatens the future of South Asia, are blatantly mistaken. The policy makers, the intermediaries and the stakeholders are all convinced that peace will be sustainable only when the Kashmir issue between Pakistan and India is addressed, however the problem has now escalated beyond merely the Kashmir dispute. According to a World Bank report, water scarcity in South Asia, is expected to reach unprecedented levels in the coming years. It explained that as demand rises, with the 1.5 billion strong population growing almost by 1.7 per cent each year, it is almost like dropping the entire population of North Korea on the region every year. Add this to the long list of woes of Pakistan that is combating terrorism, radicalisation, political uncertainty, economic crisis, power shortage, fiscal mismanagement, and any other predicament humanly imaginable. As the economies of South Asia, grow every year the growth comes at the cost of feeding the rising demand of food. Industries, require water, agriculture requires water, food requires water, and power generation requires water. Pakistan’s storage capacity of water presently stands at approximately 9 per cent of average annual flows, compared with the average world capacity of 40 per cent. Add this to the fact that by 2030, Pakistan will be the 5th largest populous country of the world and you find yourself in dire straits. To top it off, India’s construction of Baglihar dam that Pakistan alleges is being built with gated spillways in violation of the provisions of the Indus Water Treaty, will give the neighbouring regional rival greater control over Pakistani waters. Former water expert of the World Bank, John Briscoe who advises Pakistan on water issues said, “The Baglihar decision allowed a reservoir on a river coming into Pakistan, and now a precedent is set.” The water bomb in Pakistan is ticking with every passing second, as the water reserves are fast depleting. According to estimates, water availability is expected to decrease to 800 cubic meters by 2020, from 5000 cubic meters in 1947. Intriguingly the per MW cost of electricity produced from the Baglihar project is much higher than the average per MW cost elsewhere in India. Moreover, studies estimate that for the Baglihar dam to produce 900 MW of electricity, it would require 860 cumecs of water, however flows of Chenab reduce considerably in winters, so much so that flow in winters reduces to up to 50 cumecs. Reports indicate that India has built 14 hydropower plants on Chenab and is in the process of building more projects that will eventually enable it to completely block water of the Chenab river for almost a month. According to a report published by the US Senate in February this year, the cumulative effect of the 33 plus projects of India, at various stages of completion on the rivers that affect this region, ‘could give India the ability to store enough water to limit the supply to Pakistan at crucial moments in the growing season.’ The latest row between the two countries is over the Kishanganga hydropower project, where the complicated design entails India diverting waters of Neelum, some 22 km down a mountain tunnel to turbines, clearly in violation of the IWT. There are almost 5000 dams in India, whereas Pakistan boasts of a figure that barely exceeds 20 dams. As far as India is concerned, in the case of controversial dams, it seems that the arch rival will get away happy in the end, as the international arbitration that took place in Hague permitted Indian design, despite ordering suspension of its construction for certain assessments. Regardless, India will most probably finish the dam before Pakistan constructs the Neelum project downstream. While many drone about the need for cultural exchange to promote harmony between the neighbouring countries, such harmony cannot be fostered in the presence of an existential threat to the survival of the people of the region. Pakistan’s concerns over water are habitually dismissed in the International media, claiming that these are merely excuses to pick a fight with India, but the water bomb of region has the potential to set the spark for a localised conflict with far reaching repercussions. The writer is News Editor, Profit. He can be reached at ali.rizvi7957@gmail.com
Planning and economic growth
There are instructive elements in the so called anti capitalism movements across the west. They reflect public anger over the increasing rich-poor disparity that was exposed in the wake of the 2008 recession. The main reason is that while the rich did suffer during the downturn, they also rebounded very strongly. And despite losing large sums through investments in commodity, bond and equity markets, they have recollected well enough for most to record impressive increases in their net worth. However, the same can’t be said of the middle and lower income groups, who have seen their incomes and purchasing power suffer, while employment generation has not nearly been strong enough.
Significantly, those protesting this uneven income distribution also realise that the very system whose excesses they are mobilising against has the capacity to restore economic balance if used in the right manner. While the economic pendulum has been allowed to swing sharply to the right, the system has an inbuilt self-correcting mechanism that can remedy such income disparities. Our problems, while also revolving around a constantly widening have-have not cleavage, are a strikingly different mix. We are without a credible planning process that can provide a viable blueprint for progress. Even constitutionally mandated institutions like the planning commission have been destroyed.
Without an institutional planning mechanism, were continue to tread along without a credible long-term vision, which invariably means short-term decision-making is reactionary and ad hoc, failing to address structural weaknesses. Therefore our economic, social and security outlook remains compromised. It bears noting that even during our recent decade of growth, disparities were seen sharply increasing with the rich getting phenomenally richer while poverty could not be addressed meaningfully.
Going forward, we need to channel debate towards adopting a near and long term vision in keeping with our particular economic demographics. Yet relevant quarters are without necessary capacity to identify and pursue planned goals. Our mainstream political parties no longer develop think tanks and strategic structures within themselves. They continue to be dominated by individuals and there seems little effort to alter a status quo that has survived and thrived over the years.
Our present dilemma is that not only does the political system not address the economy’s most pressing issues, there is also no political will at the highest level. And without proactive institutional planning, our performance will remain haphazard. Already we have lagged far behind regional economies as Asia’s higher-yielding emerging markets lead the international effort to bottom out of the recession.
Not only have we failed to posture towards addressing our structural problems as a nation, there is also no individual will, be it at the social or political level. In such circumstances, we cannot possibly hope to grow beyond a sub-optimal 3-4 per cent of GDP annually, which is not nearly enough to arrest our unemployment levels. This means the economy cannot accommodate the six odd million entrants in the job market every year. This will bring its own negative social spillover, wasting the population dividend due to lack of proper planning.
Without achieving higher growth, we will be left even further behind in the comity of nations. According to recent research, our per capita income is projected to grow to $8,500 by the year 2050, while India’s is expected to balloon to $42,000, magnifying the importance of setting our house in order. With such abysmal growth while contemporaries leapfrog ahead, our economy, social structure, and especially the strategic security position will come under immense strain. Not only will we be caught in a low growth cycle, our immediate security will also be compromised.
Like those demanding a fairer distribution of resources and income in the west, we must also demand our power centres to develop a planning mechanism that will deliver greater fruits to the middle and lower income groups. When their participation in the economic process increases, investment, saving, spending and job creation also benefit.
The writer is a former finance minister
Debt, corruption and Islamic banking
In last week’s column, I suggested that a political party like Pakistan Tehrik-e-Insaf should adopt the promotion and implementation of Islamic banking as part of its election manifesto. While Imran Khan may not seem like someone interested in Islamic banking and finance, it (Islamic banking and finance) at times attracts interest from the least expected individuals and institutions. Until recently, I used to deliver a one-day training course in Islamic banking and finance at the London-based Chartered Institute of Securities and Investment. On one such training, I met two individuals from the London Metropolitan Police. On my inquiring, they informed me that they belonged to the financial crime branch and were interested to learn about Islamic banking and finance to see if it was linked to financing of terrorism or any other financial crime such as money laundering. Prior to this I didn't expect police to be interested in Islamic banking and finance. Today, Islamic banking practitioners come from all ethnic backgrounds (from Americans to the Chinese), nationalities (from Ethiopian to South Korean), and from all faith groups (from Jews to Hindus).
I would not be surprised if tomorrow Imran Khan decided to embrace Islamic banking and finance, perhaps not for his love for Islam or Islamists but certainly because of the potential contribution that Islamic banking and finance can make to the cause of national debt strategy and elimination of corruption from the Pakistani economy. Islamic banking and finance, being asset-based, should in principle be less prone to financial crime, but it would be fair to assert that it is no more or less vulnerable to abuse by those who look for weaknesses in a financial system to exploit in their favour. However, because Islamic financing is always provided for doing business or trading, it is relatively difficult for the recipients of Islamic funds to "run away" with the money. In international transactions, if equity-based tools of Islamic finance are used to bring foreign capital into Pakistan, technically the new injection of foreign capital into the country will not lead to an increase in national debt. Even in the case of the government using sukuk for raising debt-based shari'a compliant capital, the financing will always be tightly linked to an already exiting asset or will be used for creating new assets.
This close proximity with the assets being financed makes Islamic banking and finance less prone to corruption. For large transactions, almost always there exists a double due diligence phenomenon (as part of regular banking practices but also an oversight function by the Shari'a supervisory board).
There are some industry observers who argue that Islamic financial transactions are more prone to abuse, given that they are more complex. For example, sukuk (a Shari'a compliant equivalent of a bond) structures normally rely on a number of offshore companies (called special purpose vehicles or SPVs), which can potentially be used for tax evasion and similar kinds of financial crime. After all, the famous Enron debacle resulted from a complex nexus of SPVs that the company used before it eventually collapsed. While it is true that sukuk-type structures tend to be more complex than conventional bonds, it is primarily because of the lack of legal infrastructure in a number of countries where sukuk have in the past been issued. Malaysia provides a good example of a country that has developed a comprehensive framework for the issuance of sukuk. Therefore, there sukuk structures tend to be less complicated and consequently less prone to dispute, corruption and fraud. There is a need to study that model for the further development of an Islamic capital market in Pakistan. Once a transparent Islamic capital market is developed, fears of misuse and abuse of Islamic financial structures will diminish. It is important that the government develops a comprehensive plan to privatise the existing banks and financial institutions only through their conversion to Islamic financial institutions. The likes of Abu Dhabi Islamic Bank and many Qatari banks and financial institutions are looking for shopping opportunities out of their respective jurisdictions. Creating an upbeat environment in favour of Islamic banking in Pakistan will certainly attract their attention. Bringing an international class of new investors into Islamic banking in Pakistan will also ease out corrupt practices in the banking sector, by making such institutions less exposed.
The writer is a Shari’a advisor to banks and financial institutions and can be contacted at humayon@humayondar.com
Dissecting economic paradigms
With the global economic recession taking a toll on developed countries there is a growing sense of uncertainty that is gripping the majority in the west. Just like the calm before the storm, the uncertainty has lent itself a sound that is almost palpable and rightly so. People are worried not only about their future, but are also considerably perturbed over the future of their children, that they fear might end up worse off than them. Unfortunately, like mentioned earlier, this is merely the calm before the storm.
The US is having a tough time, trying to pave way for its economy to return to the path of high growth coupled with vigorous job creation. As a result of this meltdown, thousands of people have taken to the streets of the US, with the clamour for a just economic order growing with every passing day. As things stand, the winds of change have already begun with protests against the financial imbroglio, claiming two governments and simultaneously replacing elected representatives with technocrats who are expected to get things in order. As fears rise, so does the concern of the institutional integrity of the euro zone.
What is now being witnessed is that this uncertainty is not regional, but extends well beyond the realms of countries and states. All the changes taking place today, point out blatantly towards paradigm changes that are shaping the global economy and more importantly towards the anxiety that is resulting from the loss of faith in what were once thought to be dependable economic, financial, social or political anchors.
It will take time, to restore faith in these anchors and there seems to be no clear roadmap on what needs to be done, and certainly history at this crucial juncture in time, provides little inspiration. But what mostly stands out is the fact, that different countries have realised that their destinies can never be in harmony with the rest and hence seek different outcomes out of necessity, while the challenge the global system as a whole faces is how best to reconcile the challenges.
In predicting the future of these states, one that precariously hangs in balance, we can employ a simple analytical framework to comprehend what can be expected and how these countries can best adapt to the troubling times that are headed their way. Using this simple analytical framework it may be prudent to observe that the future of the global economy will be shaped by the ability of different countries to manage financial, social and political dynamics.
The first ability relates to balance sheets. What many western economies are now struggling with, is a severe debt crisis that has been fueled over the years by excessive borrowings, especially when the governments could not sustain them with economic growth. Faced with this reality, countries will now be faced with a multitude of de-leveraging options. On this account, differentiation is in fact more than evident.
De leveraging is then closely linked to economic growth. Those countries that have a stronger ability to generate additional national income have a greater ability to meet debt obligations while at the same time maintaining a certain standard of living for its citizens. The final variable is the role of politicians and policy makers. The longer the policy makers fail to adjust, the greater the risks they will be exposed to. As far as those on the receiving end of the spectrum are concerned, ordinary people, the proletariat, they need not be paralysed with anxiety. Instead they should use the simple framework to monitor developments, imbibe from them and most importantly learn to adapt. Most significantly a global paradigm shift, one that is being drafted at present does not merely present risks but implies a change in opportunities as well.
The writer is a professional banker and financial commentator
Drafting our own misfortune
Post 2007 period for Pakistan’s economy has been quite tough. Until 2011, the cost of the War on Terror on our indigenous economy has been a whopping $67 billion. As a consequence, Pakistan’s investment to GDP ratio has declined from 22.5 per cent in 2006/07 to 13.4 per cent in 2010/11. Hence the pool of unemployed workforce has grown exponentially and poverty levels have deteriorated. The middle class has shrunk phenomenally and has been struggling to make ends meet. Socio-economic disparities are on the rise and this is further amplifying the growing divide between the rich and the poor.
Increasing incidents of suicide bombings, worsening of power crisis, poor economic governance, continuing unrest in Karachi and other parts of the country, flight of capital and increasing inflation have caught the economy in a severe low-growth rut. However, all these problems have taken root due to our own follies, and cannot be attributed to anyone else. We are indeed the authors of our misfortunes.
What should be fixed first then? Well among other indicators, economic governance perhaps is one of the most significant indicators that we should scrutinise first. It reflects how economic decisions are made. Good and timely decisions can turn the economy around. On the other hand, bad decisions with narrow political considerations and short term political gains can push the economy off the cliff and produce deep cracks which later become hard to repair.
Given the government performance in the last many years, the economy has plunged into the depths of oblivion. However, it can recover as long as the government has a will to make tough decisions.
Ironically, many incompetent people are peddling the wheels of the economy that too in the wrong direction. The heads of key public institutions, I guess, are topping the list of our misfortunes. It is hard to disagree with the claim that many such public institutions are facing the rot, due to mismanagement, corruption, incompetence and nepotism.
Pakistan Steel Mills, PSO, SNGC, SSGC, PASSCO, TCP, PIA, WAPDA, Railways, PEPCO, Port Qasim, USC, etc., are no doubt rotten-eggs riddled with corruption and victims of blatant neglect on the part of policy makers. Politically backed strong union-mafia seems to be in total control of PSEs and have proven over time to be the major hurdle in the performance of such State owned entities. Overstaffing and political appointees in the PSEs are causing serious damages to the productivity of these organisations and are the main source of increasing losses.
The Railways, PIA and Pakistan Steel Mills are classic case studies in this regard where incompetent captains have sunk the ship. Unfortunately no one seems to accept the blame. Instead of improving the performance of these PSEs and cutting losses, more money is being demanded to pay for the losses. Sadly speaking, over Rs300 billion of tax-payers money is being spent every year to keep them afloat.
Unfortunately, the nation is caught in an unending cycle of deprivation, negativity, and frustration. Ideally speaking the country’s economy should be run by professionals who have a deeper understanding about the complex economic issues and are capable of not only suggesting but implementing the solutions to improve the economy. This is only possible if the economy is set free from political influence. Time has come to take tough economic decisions if economic recovery is desired. However, unfortunately, under the current democratic setup, politics not economics wins most of the time.
The writer is Director Szabist Institute Islamabad. He can be reached at syed311@hotmail.com
Europe and the bitter Beijing pill
Legend has it that the pied piper of Hamelin was hired by a town to purge their locality from rat infestation in 1284. The pied piper duly ensnared the rats with the tune of his piper and lured them all away into the Weser River. However the sting in the tale came when the inhabitants refused to pay back the promised sum to the piper and in turn invoked his fury-laden antagonism which eventually culminated in the pied piper baiting away the children of the town. With Eurozone bordering on a rat-plagued dominion, a south-east Asian piping giant has all the rhythmic force to drive away the rats. But is the panic-ridden Europe ready for the payback?
There are quite a few pipers that are being touted as Europe’s saviours. In fact if one were to traverse time dilations and move back in time, Europe has proven itself to be the battle ground for all sorts of piping rivalries. Although Uncle Sam has been piping all over the globe for the last hundred years or so, 1930’s Young Plan or 1947’s Truman Doctrine are a couple of melodies that bear an uncanny resemblance to the modern day scenario in Europe. Truman Doctrine, in particular, aided European cause after World War II’s aftereffects had taken their toll; and it proved to be a metaphoric stick used to ward off any communist penetration within Uncle Sam’s musically influenced realms. Now, just as the US flexed its economic muscle to enhance its hegemony over global matters back then, the gauntlet has been thrown towards China in 2011.
There are quite a few versions of the ‘Pied piper of Hamelin’ tale. One of them suggests that the piper amplified his demands, from those that were settled prior rat cleansing. Another version narrates the fact that it was actually the town residents who refused to pay after the pied piper had dug them out of their quagmire. Either way, Europeans should be wary of the repercussions that accompany any salvage act.
Beijing has been parrying away suggestions that it is willing to be Europe’s liberator-in-chief. But with Chinese stake in the global economic order and the fact that China itself has been the major beneficiary of such an order; Beijing might have to rethink its reluctance. China’s foreign exchange reserves tower above the rest, and hence their fortunes are intermingled with the rest of the world. Eurozone being Beijing’s most significant trading partner – with 20 per cent of the country’s total exports – connotes that its stability is of paramount importance to Chinese hierarchy. Chinese growth could drop by seven per cent and real GDP growth by one per cent, owing to a one per cent GDP decline in the European Union, according to estimates.
There’s no denying the fact that China has the wherewithal to conjure up a bailout package. But the real opportunity lies in investing in EU and enhancing domestic consumption of European products. The Asian pied piper has quite a few harmonies up its sleeve that might prove to be Europe’s lifeline. It can aid Europe bilaterally by back-stopping the stability facility. It could even purchase bonds from countries like Italy and Spain at generous rates or supply finance via IMF. In return China could reign supreme in financial matters, especially by augmenting its influence over IMF and its governance. However, what might pinch the Europeans is if the rescue act has a political tradeoff.
With China’s financial sway, the European payback was never going to be a strictly monetary matter – China’s European investment would inevitably have a pecuniary advantage, with or without Europe’s intent. However influencing political matters – like asking France to not invite Dalai Lama, or countering U.S decision-making in Italy – could be too big a price for Europe to pay. Salvation has a price tag, the people of Hamelin learned it the hard way; Europe wouldn’t want to follow suit.
The writer is Sub-Editor, Profit. He can be reached at khulduneshahid@gmail.com
Social media for business
Social media has come of age overtime and now it provides a powerful means to reach out and engage with online population in an extremely cost effective and efficient way. Even as social platforms shift in popularity or come and go, businesses can introduce themselves and
interact with those who share the same interests. Savvy businesses are already using Facebook, twitter, YouTube and so many other platforms to engage their audience. Now they have one more; Google+ your business. Google, a search engine we are so familiar with, released its social network in June this year and was asking enterprises and organisations to wait for using the site for business purposes. Last Monday (October 7, 2011), Google rolled out Google+ pages for businesses to create a presence on the social networking platform for connecting with their users locally and worldwide in a big way. Google+ is google’s answer to Facebook. Like Facebook pages, at Google + pages, businesses can share content - text, photos and video - to not only a network of contacts but to anyone using Google services. Like Facebook, individuals can have a personal profile at Google+ and a Page for local business, place, product or brand, company, institution or organisation. The page can also support arts, entertainment, sports and much more. Overall, it is a social site to post information in different formats for a cause. So, what is the difference? Why businesses should create pages at Google+ for what they are already achieving at Facebook? A simple answer is the penetration of the search results.
People search on Google billions of times a day. Having Google+ pages can help people transform their queries into meaningful connections because Google is bringing Google+ pages into its search results. Google has integrated + into its World Wide Web dominating search engine. In addition, with Google+ direct connect, searchers can insert a “+” before their query and jump directly to a business’s Google+ page. Type “+YouTube” into a Google search box, for instance, and Google will take you straight to YouTube’s Plus page. This is where Google will have an advantage over Facebook or any other social media platform. This ability alone gives Google+ an edge over other more familiar social networks. This interesting and innovative feature can be a welcome mat for eager marketeers and is likely to put them into motion to claim their own brand pages.
Another difference lies in counting Facebook likes and Google +1 that are considered as public endorsements. Presently, Facebook has more than 800 million active users (Google+ so far has only 40 million in less than six months), 50% of them log on to Facebook in any given day and an average Facebook user has 130 friends. It will not be an exaggeration to add that almost everyone online has a Google account. For people that already use features like Gmail, Google Docs and Google Calendar, the inevitable integration between these tools and Google Plus is useful. But let me hasten to add that counting number of likes or +1 is not a measure. Instead, businesses that want to track how well their page are doing can simply use Google+ search to look for keywords for their products or services. Businesses can also use Google Analytics to measure the popularity of their page. Facebook is for people (family and friends) you already know and Google+ is for netizens who are trying to find relevant information online. Marketeers need to pay very close attention because Google+ pages are likely to change users’ search experience and web masters’ search engine optimisation forever. Instead of being an aggregator or a medium to find relevant information about your products and services, Google+ is poised to be both the platform and means of distribution for content.
While everyone in the tech space is exploring Google+ and weighing its potentials, one thing is sure, it is better to claim your own business space with Google+ pages and have a presence on it for the back link to Google. That will make your business more available on Google. Not only that, it is more in line with engagement marketing.
The writer is Deputy Controller of Examinations at Lahore School of Economics. He blogs at http://logicisvariable.blogspot.com/ and can be reached at sajshirazi@gmail.com
Devil wears Prada
‘Pakistan is on the verge of an economic crisis and collapse’, read the headlines of newspapers, nationally as well as internationally. While skimming through these daily headlines, it dawned upon me that I live in a crisis-ridden country wherein, lately there has been more economic recession than growth, more inflation than deflation and more horror than happiness. The fiscal deficit is high and growing, inflation seems to be rising at an unprecedented rate, investment is low, poverty has grown over the years and industries are facing huge losses. However, remarkably, the country’s ‘fashion industry’ remains noticeably unaffected by the general depression of trade along with the austerity of these harsh realities.
It is truly incredible how people are capable of finding happiness and harmony under the shadows of crisis and with the heritage of unbearable losses. Likewise, for many people, blindly following fashion and compulsive shopping offer a state of happiness and contentment. Can we see this phenomenon as a means to forget stress and an escape from harsh realities? It seems like this is one of the reasons for the flourishing fashion industry of Pakistan. Come to think of it, the fashion industry is perhaps the only industry that remains unaffected by the economic conditions of Pakistan which principally makes the niche of high value fashion products to be elites; who are not affected by recession or inflation. Is the fashion industry further increasing the gap between the rich and the poor?
Most Pakistani people would admit to owning at least a good quantity of items from branded fashion stores. Pakistani women especially, continue to spend hundreds of thousands on fashion products every day. Probably, for them, this might to be their way of contributing towards the economy of Pakistan: I cannot afford the price hike in fuel, gas or electricity, but what I definitely can afford is an expensive branded bag whose name I cannot even correctly pronounce. I will also refuse to wear the clothes ever again or preferably bury them stealthily; pretending I never owned one, if I see some other woman standing next to me at the crosswalk, wearing the exact same dress. Funny, how the serious loathing for the mass-produced fashion items would still not stop the ‘economy concerned’ lady from spending hundreds and thousands on a fashion item that she will most likely see another other woman carrying and that also in almost 100 times less price than what she had paid. Thank the phenomenon of globalisation shall I, or the grey markets and cheap labour?
Fashion trends change so drastically that they rival the changing weather. These fashion industrialists know exactly what they’re doing, and are doing it really smart. The dictum of the age is to draw the audience towards the new fashion trends where any gimmick would sell! Nowadays we come across a prodigious number of advertisements of fashion items. Also, every other advertisement in Pakistan bears resemblance to fashion in some way or the other. ‘Fashion’ is being used as an appeal by other industries as well just in hope that may be things for them can change too. They must be playing safe because Pakistani fashion industry is successfully maintaining itself as an attractive and the safest industry to exploit.
If we take it to a next level, the fashion industry can play a big role in current economic situation of Pakistan to spread our culture and traditions to other civilisations across the border, according to many economic analysts. They believe that the dying film industry of Pakistan took away the investors from Lollywood, but the flourishing fashion industry is bringing them back as Indian, Arab and other foreign designers flock to hold shows in Pakistan. Can fashion be an image merchant for Pakistan?
The writer is sub editor, Profit. She can be reached at syedmaheen@hotmail.com
Scenario of inter regional collaboration
For peace to ultimately prevail in Afghanistan so that economic development can happen is an issue and task to deal with by the people of that very country alone. The recent crisis in the euro zone has also focused the thinking towards these themes. By forging a single market EU was confident of handling the economic problems in a collective manner but the application of one set of economic principles did not help to assuage the woes of other economies in the common market. The question of governance and taking decisions by the different capitals themselves in the region has assumed a different kind of significance now.
Edmund Burke very aptly described the setting up of the institution of a government as “a contrivance of human wisdom to provide for human wants”. The significance of appropriate actions by the state at the right time and at the right place is undeniable for many reasons. If we take the question of steering the economy in the direction where it is required to fulfill the desired objectives of provision for human wants the concomitant question of provisions of resources to meet those demands props up for the state to deal with also. In the academic circles the role of the state and that of the private individual is a matter that is continually discussed. The balance has changed with variations not only in political economy but also around the key question as to the use of available resources in social and economic terms.
The enlargement of corporate economy around the globe has benefited through expansion of international trade and investment. The economic preference of seeking profitable markets and regions for trade or investment is making the international economy strong. But at the same time the level of risk for a big business to falter or for a sizable economy to weaken has also grown manifold. Monitoring by international institutions like IMF or the European central bank considerably falls short of pinpointing the weak and vulnerable areas of concern; both at the state and private enterprise level. These institutions were once developed on models of economy that were not faced with the diverse challenges of tackling the economic issues in varied regions. These other areas are now centers of strong economic growth. The world economy has now a diversity which was unimaginable only a few decades ago. The solutions found in one region or in one particular set of economic activity may not necessarily apply to other regions or other types of economic activity. The international competitiveness in economic terms has an upward trend in many areas of economy that were once a sole concern of just one country or a few business enterprises.
The ongoing talks on the inter-regional trade in the subcontinent have taken an importance which no one can afford or allow to be derailed on some whimsical grounds or the other. Indo-Pak trade is an important part of such developments. The international players must be watching closely the outcome of these negotiations but it is essentially the responsibility of these two very countries to realise the prominence attached with these issues. They must assiduously work out the nuances involved to these very difficult economic and social questions. The future map of economic cooperation in the region shall have a lot to do with the serious thinking that must go in resolving these issues now. There are large number of public and private concerns as to how the outcome must benefit all and sundry. The economic future of the people of this region should be the prime concern for everyone on both sides of the border. The mutual understanding needs to develop on the principle of economic cooperation for the benefit of businesses and enterprises on all the sides. A serious and sincere approach towards taking up each issue in a congenial atmosphere which must be devoid of repetition of throwing blames will help settle the problems more efficiently. The efforts put in by the different players will determine the economic future of nearly one third population of this globe. The role of the state in assuming and taking up its prime role of looking after the specific economic demands of the economy has never been more important than in these times of international competition.
The write has served has consultant to the United Nations and other developing economies on the issues of trade and development and can be reached at amjadriazzz@yahoo.com
Leveraging indigenous economic potential
According to the State bank of Pakistan, SME refers to an entity, ideally not a public limited company, which does not employ more than 250 persons in case of manufacturing, or 50 persons if it is catering to the services sector. Across the world, SMEs are considered an engine of economic growth, both in the developed regions and the emerging economies. This is mainly due to the fact that these small and medium enterprises provide low-cost employment since they utilise indigenous home-based resources for production. The development of small and medium enterprises is of extreme importance mainly because they accelerate the rate of rural industrialisation and simultaneously work towards integration of the rural sector with the urban sector.
In the case of Pakistan, not only have SMEs provided employment to hundreds of thousands over the years, they have also served to promote the country’s cultural heritage in terms of skills and crafts. They support families and even bolster the weak export industry, reasons enough for the government to patronise them. SMEDA, along with SME bank, has been working towards facilitating craftsmen/women for the purpose of setting up their own businesses in this regard.
During a recent trip to Multan, my native hometown, I was overwhelmed by the sheer talent of our craftsmen/women who had created products that require great attention to detail and are loved by foreigners that visit Pakistan. Walking through one of the old bazaars of the city, I came across blue tile work, or kashi gari as it is known, which made me realise the richness of our culture and how we can tap into it to promote not only the industry but also our image in this fast globalising world.
Arts and crafts from Multan date back to the medieval period, and kashi work or blue pottery has earned the city international acclaim for its intricate designs and beautiful art work. This art work has survived centuries with each generation of craftsmen/women passing their skills on to the next. Such has been the universal appeal of this craft that it is also displayed at the British Museum in London, among other places. And surely, this is not the only indigenous craft that has survived generation after generation in Pakistan, but what we need to understand is the fact that such small and medium industries need to be cherished and protected. The range of ceramics is not the only industry that requires our attention, and there are many others hand-made carpet industry of Pakistan being one of them.
By tapping into the rich culture that defines us, in terms of the local skills of our talented crafts people, we can engage a vast market. According to the economic census of Pakistan 2005, 3.2 million business enterprises were functional in the economy out of which, 99 per cent of all enterprises were SME’s. The share of small and medium enterprises in industrial employment according to some estimates stand at over 75 per cent.
What the SME sector of Pakistan increasingly needs is support in terms of resources such as capital and finance, but more than that it needs support in terms of how to manage their businesses effectively, and how to sustain growth in the long term. Most significantly over time, the importance and contribution to the economy of SMEs has been enormous, which goes on to suggest that even today there remains huge untapped potential in the SME sector that can be tapped into through appropriate support and promotion. As SMEs grow over time, they require greater integration to the international export markets with capacities that are in accordance with internationally acceptable standards.
To sum it up, there is vast potential but all that is required for sustainable SME development in Pakistan is for all the concerned stakeholders to make collective effort to buttress this sector. In this regard, Business Development Services are also required to ensure the internal capacity of these enterprises are improved.
The writer is Chief Manager, SME Bank
Rise of NPLs
What I find astonishing is the surprise itself caused by news flows regarding the ‘alarming’ rise in NPLs. People seemed astounded by the fact that defaults continue to rise given credit being extended to the private sector has virtually come to a standstill. Still, this should not come as a surprise at all; defaults are emanating from already extended credit. This is because core issues of the economy are still intact resulting in a poor business environment, where the scarcity of opportunities impedes debt repayment capacity. It should be common sense to see that problems are eventually going to be reflected in numbers as they have done so now.
According to recent data released by the SBP, with an increase of six per cent, non-performing loans of banks and DFIs rose to a new high level of Rs629 billion at the end of September 2011. The increase was much higher than second quarter of CY11, as an increment of Rs5.54 billion was registered in NPLs in the second quarter of CY11. This translates to a net NPL to Advances ratio of 6.53 per cent as compared to 5.48 per cent for the previous quarter. The increase in bad loans has been seen across the board – albeit not proportionately – as public sector banks have been hit by defaults the most. Not to say much about the already known poor asset quality of public banks, it is still depositor money in these banks which is being impacted. But despite much hue and cry these vehicles still have leaks in terms of risk management systems which have existed for long and very little willingness to plug them up. Keep in mind this is excluding the situation of the Bank of Punjab as it has not released its accounts for about two years now. Add this to the mix, the figures would most probably be thrown back a bit more.
The reasons cited are nothing new; slow economic activity and high interest rates. When these two things are put together, it usually spells squeezing of debt repayment capacity. Borrowers are finding it difficult to execute the business activity they had acquired these loans for, engaging in a fight for survival and so not being able to afford financial costs. The key word here is affordability as interest rates where they are now are definitely not affordable. Not to say that effort has not been made to resolve this, reflected by SBPs slashing of the policy rate by a big 150bps which has definitely provided some comfort to entities. Notwithstanding, more needs to be done and further drops need to be seen both in the interest of the corporate borrower and bank alike. However, this is only one aspect. The structural problems of the economy still exist in the form of power outages, namesake law and order, and tax policy issues. They need to be sorted if the ‘environment’ is to be improved.
A hint of the problems faced by the banks have also been self orchestrated. Stringent contingencies and tough conditions have proved to be restrictive in nature more than protective. Given the requirements banks put on borrowing, it is easy to see why companies feel stifled when paying up. On the other hand some blame should also be thrown at those ‘willful defaulters’ who carry an element of sinister intent at the time of repayment. Key here is that both the borrower and lender need to work together in a tit-for-tat arrangement which is the original essence of a borrowing arrangement.
This is exactly where the solution to arresting rising NPLs lies. Where corporate entities should not be disdainful towards public funds, banks should be more accommodating in nature as well. Where genuine problems exist, these financial institutions should not turn a blind eye towards them but actually make an effort to sort problems out. A real-life example comes to mind where an entity, struggling for business opportunities, was pushed to close its operations. In line with the spirit of corporate behaviour, the entity repeatedly requested the bank for renegotiation of its lines – a plea which the bank took to ignore. The funds are stuck and the pains of legal suits are being borne now. Both ended the loser which would not have been the case if proactive action was displayed in a timely manner. Similar examples are not uncommon and if taken care of would probably shave 100bps off overall toxic ratios. This is while other issues are slowly resolved. Unless this attitude is adopted, little can be expected other than the disappointment of another data supplement showing a further increase in NPLs.
The writer is a financial analyst with Pakistan Credit Rating Agency (PACRA)
America should turn to Reaganomics again
The financial bazooka has created havoc for the US economy. Confidence is lacking in the US economy which is the main driver. There is a very nice article written by my friend Lynn Forester De Rothschild in Huffington Post titled Restoring capitalism on November 10, 2011, sharing important insight. She stated: President Obama has broken trust with the American people. Not only has he left the Americans more bitterly divided than ever imaginable, but since the beginning of his presidency, 1.3 million more Americans are unemployed, 913,000 private sector jobs have been destroyed, 13 million people have been added to food stamp dependency and over six million have lost their homes. While USA economy needs 90,000 new jobs each month just to keep up with the national birth rate, it has reached that threshold only nine times since February 2009.
All that is bad enough, but at the same time US government has increased the debt burden from $5.8 trillion in 2008 [40.3 per cent of GDP] to over $9 trillion in 2011 [67 per cent of GDP]. And, US annual federal government budget deficit has grown from $458 billion in 2008 to $1.7 trillion in 2011. Only 19 per cent of Americans "always" or "mostly" trust the government to do what is right, down from 75 per cent in 1958. Millions are fed up and are opting to "starve the beast". That is not crazy.
Mr President, if you can follow Milton Friedman's economic insights [Nobel Laureate of 1976 from University of Chicago, USA], you will surely see through this crisis with ease. You have taught at University of Chicago Law School and you have great regard for the school.
The only way President Barack Obama and his economic team can solve the US economic woes is to adopt “common-sense” Reaganomics, the policy. Reaganomics would fix any economy that’s in the doldrums. It’s not a magic sauce, it’s common sense. How can Obama do it?...Follow these five simple steps adopted during Reagan era in 1980's. Step 1: The US has got to get rid of all federal taxes in the extreme and replace them with a low-rate flat tax on business net sales, and on personal unadjusted gross income. Step 2: The US will have to have spending restraints. Government spending causes unemployment, it does not cure unemployment. Government spending has never raised the GDP. It’s the tax cut that enhances the GDP growth. Empirically proven.
Step 3: US needs sound money. Fed Chairman Ben Bernanke is running the least sound monetary policy I’ve ever heard of. Markets don’t like uncertainty and chaotic moves. The US has increased it money supply by 138.6 per cent from Sept-2008 from $851 billion to Dec-2010 by $2.03 trillion. Price inflation can be decreased through monetary deflation. This was advocated by Late Nobel Laureate Milton Friedman in his book Money Mischief-Episode in monetary history. I openly admit that I follow Milton Friedman – the greatest Nobel Laureate in Economics of modern epoch along with Prof Gary Becker at Uni. of Chicago, Booth School. Step 4: The US need regulations, but they don’t need those regulations to go beyond the purpose at hand and create collateral damage. The regulatory policies are really way off here.
Step 5: Lastly, the US needs free trade. Foreigners produce some things better than Americans do and US produce some things better than foreigners. It would be foolish in the extreme if America didn’t sell them those things US produce better than they do in exchange for those things they produce better than US do.
I think that the USA can win its top rating back, but only when economic policies are completely turned around. However, President Barack Obama’s administration’s only economic plan seemed to be to expand government ownership of the means of production.
Washington has nationalised the health care industry pretty extensively and is doing it with home building as well. Obama tried it with the auto industry as well. So Obama administration has moved very, very deliberately and purposefully toward extending government ownership of the means of production. That to me, if you read the tea leaves, is what they are doing. It is not what they are saying they are doing, but that is what they actually are doing. People don’t work to pay taxes, people work to get what they can after taxes. It’s that very private incentive that motivates them to work. If you pay people not to work and tax them if they do work, don’t be surprised if you find a lot of people not working.” Current economic woes started to form under President George W Bush, but have been made worse by Obama’s policies. There’s a wedge driven between wages paid and wages received and that wedge is the tax/government spending wedge. That wedge has grown dramatically in the last 4 ½ years…under W and a Republican administration and…under Obama. Bipartisan ignorance has led America to this very disastrously desolate state.
Shan Saeed is a graduate from Booth School of Business, University of Chicago, and IBA Karachi with 12 years of financial market. He Blogs at www.economistshan.blogspot.com
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