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Tuesday, 18 Jun 2013 12:12 pm
High 14 oC - Low 7 oC
Profit Column
The case of exploding railways
We Pakistanis are a funny little nation. While the entire world blows their trivial problems out of proportion, we have been accustomed to burying the most gargantuan problems into the depths of obscurity. While the royal family of Louis the XIV was accused of not being privy to the misery of the masses, with one of their queens rendering the infamous statement, ‘well if they don’t have bread, they can eat cake instead’, the Pakistani figures that have infested the corridors of power are often heard making similar statements. “If you don’t have railways, use buses instead,” or something similar was echoed by Pakistan’s Railway Minister Haji Ghulam Ahmed Bilour, who ironically is a transporter by profession. Now if any self interested businessmen are reading this, they will understand that capitalism is all about maximising profits. It really doesn’t need a rocket scientist to decipher the link between the shut down of Railways and profit maximisation of the private transporters, our honourable minister being one of them. It needs a death to shake our worthy government from its deep slumber. Therefore, we pay salaries when someone dies, we repair hospitals when someone dies, we make alternative VIP routes when a kid is born in a rickshaw – at least someone isn’t dying in this case – we make laws when someone dies, we break laws when someone dies and if the death doesn’t cause enough chorus, then we simply don’t make an effort to change. It is almost like this big black blob of alien lethargy has engulfed policy makers and people alike. I never really fell for those zombie movies. They were too gory for my liking, and I never really believed it was possible for thousands of people to walk around like robots uttering the occasional ‘YAP’. The gods it seemed were listening, for they have proved me wrong yet again. All those zombie movies apparently had taken their inspiration from the Pakistanis. We are the walking dead. We just cannot bother. While many self-proclaimed ‘models’ will want to execute me for treading the ‘blasphemous’ path of daring to call them ugly, what else would you call a dead, empty and hollow nation that cannot join in the cause of its fellow citizens or protest against the decimation of national institutions, Railways being one of them. We all love to speak and be heard no matter how unpleasant we sound. It is our favourite past-time. So, what exactly is wrong with Pakistan Railways? Is it an inherent problem with public institutions that they simply cannot sustain efficiency. I wasn’t born back then, but I have read a lot about PIA in the 1960’s. PIA made Emirates what Emirates is today. Public institutions are not inherently rotten, it takes sustained levels of mismanagement and corruption to bring them to the levels they are at today. So, Pakistan Railways has 520 locomotives, a handsome number, more than what it needs really. However, the problem is not the number of locomotives but rather how many of them are really operational. Any guesses? Only 87. Yes, out of 520 locomotives only 87 are operational, but that’s not where the story ends. Intriguingly, Pakistan Railways does not have money to purchase fuel for the 87 locomotives that are operational. Talk about rotten luck. The writer is News Editor, Profit What do the powers to be propose when things get out of hand? Privatisation. This seems to be the new ‘in’ thing, after those rubber strap swatch watches that our worthy rulers, adorned on their precious wrists. Once upon a time, we did try to privatise PTCL. Right now, we’re desperately trying to get Etisalat to pay $800 million it owes to the government for PTCL. Then we have the KESC, another success case, or so we make it out to be. Just yesterday, KESC’s outstanding payments to SSGC stood at Rs32 billion. Privatisation, isn’t a utopian world with fairies and glitter. It sometimes has the ability to emanate the putrid smell of the wasteland that has evolved in terms of our state owned institutions. The answer, to all our dilemma’s is simply honesty, and the will to inculcate efficiency by making the right decisions. The question is, are we up for the challenge? The writer is News Editor, Profit. He can be reached at ali.rizvi7957@gmail.com
Negligence in the agri-sector
It is ironic that the agriculture sector – the economy’s backbone and the largest national employer – continues to receive unplanned and ad hoc patronage from the government. Often official policy has reflected frantic juggling in relevant ministries. However, whenever there have been planned injections and thought out initiatives, results have spoken for themselves. For example, when the present dispensation took over in ’08 and raised wheat price from Rs625 to Rs950 per 40 kg, it has led to reserve availability of six million tonnes today.
And, we will still have a residue carryover of stock of three million tones when the new crop comes in. The policy fulfilled the planned criterion of providing a fillip to the farmer economy, whose additional incomes were designed to stimulate area and crop enhancement. But this year, the basic input cost of production has risen dramatically resulting in per acre cost of wheat to rise to almost Rs1075 per kg. If the government does not announce support price within a week or so the farmers may shift to other more viable crops. As a matter of calculation minimum profit which a farmer expects is around Rs1200 per 40 kg .In an environment when energy is scarce and there are daily increases in the price of electricity, the end price of wheat is bound to register a quantum increase, and subsequently harm the urban sector with no fault of the farmer.
It goes without saying that it is the government’s prime responsibility to protect people from unnecessary and unjustifiable bouts of food inflation. But with prices of crucial inputs going through the roof, the farming sector has no choice but to pass the price burden onto the next link in the chain. In such circumstances, it is not really fair to blame farmers for price hike in the end product.
The most prudent policy posture for the government to adopt presently is to make subsidies more targeted, for immediate positive impact both on commodity prices and the centre’s cramped fiscal space. Of the 32 odd per cent of the population that lives in urban centres, a surprising 80-85 per cent chunk survives below subsistence level. If staple food continues to become unaffordable for this segment, undesirable economic, social and political results are bound to follow. There can be no other way. Food must be made affordable, especially for the middle and lower income groups. India’s is a good example to follow. Like most progressive economies, they ensure food price stability for the lower classes by provisioning food stamps, cards, etc.
Also, there are numerous instances of cartelisation across industries. In the textile sector, primarily, manufacturers and ginners have combined to dictate market trends, allowing cotton buying only when they desire. Therefore, the government also needs to adopt a proactive policy of intervention. The government must also shift focus from a primarily input strategy to an output strategy. Price trends in the market are kept under far better check if the end product is subsidised, ensuring sales at right prices and appropriate timing.
We are not pushing for unfair advantages for the agriculture sector. Rather, our focus is making the government realise that ensuring fair advantages, and subsequently fair profits to farmers, especially the 85 per cent lot with holdings below 25 acres, is in the interest of all parties concerned. But first the government must shift from its present fire-fighting strategy for the sector. Farmers must be freed from the squeeze that prevents progressive expansion, and brings numerous subsequent price distortions in the wider economy. And while we’ll wait for the agriculture tax debate till the next column, it is pertinent to mention that measures like GST, excise tax, etc, also make inputs far more expensive than previously. In the resulting scenario, farmers can hardly jack up prices to a certain extent, allowing for their own subsistence while registering no extra profits, and end consumers end up paying much more for the same quantity. This must change. The sooner the better.
The writer is President, Farmers Associates Pakistan
Road to Islamic banking
With the success of almost full and successful conversion of National Commercial Bank (NCB) of Saudi Arabia, and relatively smaller but equally successful conversions of Middle East Bank into Emirates Islamic Bank, Sharjah National Bank into Sharjah Islamic Bank, and relatively slow (but important in a Pakistani context) and yet to be completed conversion of Khyber Bank into an Islamic bank, we do not observe any further full conversions of conventional banks into fully-fledged Islamic banks. Many industry observers would have expected to see full conversion of the likes of Muslim Commercial Bank and Habib Bank, but despite Islamic windows of these banks full fledged conversion does not seem to be on the horizon. Why?
A number of new Islamic banks have been set up in different parts of the world in the last few years. This means that a new breed of shareholders is entering the Islamic financial services industry. Also, the incumbent players in Islamic banking & finance are opening new banks in new jurisdictions. Five Islamic banks in UK, for example, have shareholdings from the Middle Eastern investors. The likes of Dubai Islamic Bank, Kuwait Finance House and Al Rajhi Bank have gone to new countries in their attempts to internationalise their businesses. It may be argued that this is not the reason for lack of conversion, as the article should attempt to answer why this is happening and not the conversion of conventional banks.
There are a number of reasons for this lack of conversion, firstly, it appears as if the governments in most of the countries where Islamic banking exists do not believe in Islamic banking. Apart from Malaysia where promotion of Islamic banking is part of the government policy, no other government is fully committed to Islamic banking and finance. Pakistan is not an exception to this trend. While State Bank of Pakistan has supported Islamic banking for some time now, but other government authorities in Islamabad are at best indifferent to this phenomenon.
Secondly, the subsidiary model has worked against the full conversion of conventional banks. In the UAE, for example, all the major players in the market have Islamic subsidiaries (in the form of investment companies and specialised consumer finance companies). In Pakistan, now almost all the big players have limited Islamic operations, and it appears as if the shareholders are not interested to further develop Islamic banking.
Thirdly, shari'a requirements in terms of irreversibility of the process of Islamisation may in fact be a hindrance to full conversion of conventional banks. While, it is acceptable in shari'a for a conventional bank to get involved in Islamic banking and finance (as long as they observe segregation of Islamic business for the conventional), shari'a does not allow Islamic banks to do any shari'a repugnant business. This means that being a conventional bank with some Shari'a compliant business is considered as the optimum form of business. This is consistent with other economic phenomena. For example, the firms facing a choice between debt and equity would almost always adopt a mixed debt-equity capital structure. This means that in an environment where there is a choice between Islamic and conventional banking, it will always be the case that conventional bank would like to offer Islamic financial products to the extent of demand for such products. Conventional banking, being less restrictive, will always remain a choice, even if it is not a preferred one.
Unless governments in the Muslim countries start supporting and promoting Islamic banking and ensure that there is a level playing field for Islamic banks, conventional banks will continue to operate as they have traditionally been for a long period. In the current political environment, it is a window of opportunity for a major political party to adopt Islamic banking as a part of its election manifesto to appeal to an increasing number of shari'a sensitive people. If the likes of Pakistan Muslim League and Pakistan Peoples Party fail to capitalise on this opportunity, is it time for Pakistan Tehrik-e-Insaf to start patronising Islamic banking?
The writer is a Shari’a advisor to a number of banks and financial institutions and can be contacted at humayon@humayondar.com
Useless work
A global downturn, when a large number of people are either unemployed or fear losing their job, is not the best time to talk about useless work. But since I’m a kind of specialist in useless-ness I think the case has to be made nevertheless. The only point of working nowadays, or so we’re lead to believe, is to make money. That’s what makes work ‘useful’ and to believe otherwise is to entertain the most delusional of pre-modern fantasies about work and fulfillment somehow meshing together. Everyone knows that work is a form of drudgery (even the word ‘labour’ is related to pain, suffering, and toil and is a kind of Biblical curse). Apart from politicians and a few creative people most of us are wage-slaves.
And if you ask an economist they’d confirm this since in their view you have to renege on your freedom to earn a wage. Your salary “compensates” you for not doing something more interesting like reading a book or spending time with the family. That’s also why economists have a very narrow view of ‘incentives’: if no-one can monitor what you’re doing, why should you put in the effort without adequate compensation.
So, there are two arguments in favour of ‘useless work’. According to the first, it allows one to get away from the perspective of those who identify themselves too closely with their jobs and the incomes they derive from them. To say that all work is truly useless is to acknowledge that you have a life over and beyond material pursuits. You learn to laugh at ‘productivity targets’, time management, quantitative measures of performance, and the whole Protestant idea that a good work-ethic, discipline, and perfection are signs of good character. You clearly see all that currying for favour with the managers is laughable and petty and that the whole language surrounding work is meaningless drivel: ‘work shall set you free’, ‘work hard and play hard’, ‘think out of the box’, contribute to the ‘knowledge economy’ and so on.
Everyone who knows me will testify to what an absolute and shameless slacker I am. ‘Slack’ comes from an old word meaning loose, careless. Today it means indifferent, blasé, someone who avoids or evades work. I would love to say I’m a slacker because I'm such an anarchic, counter-culture, hip revolutionary, but the sad truth is that it's really plain old Kashmiri laziness! And no, not the kind of deep and quiet idleness that leads you to self-reflection and profound insights into what life's all about but, rather, the kind of idleness that means that for large parts of the day you're sleeping or thinking about sleeping.
I've got a grudging respect for people who work hard, but mostly they make me slightly sick and dizzy. When I was unemployed I found it hugely comforting doing something like getting dressed and posting a letter at the local post office. Now I realise that universities are amongst the best places for useless people like me. They're like a retirement home for the middle-aged and badly dressed.
A second way of thinking of useless work is more positive though. Perhaps we should try to imagine how work could serve purposes beyond the ‘useful’ one of subsistence? Work would then be ‘useless’ in the sense that it transcends our immediate concerns and embodies a sense of hope. Hope in the possibility of our playing a part in producing a world in which we can derive worthwhile pleasures and satisfactions, including aesthetic ones. And the hope that we find the joy of creative and free work, that we can be engaged in activities that are themselves meaningful and that can lead to a sense of belonging, place, solidarity, and equality. If we look to teachers, doctors, nurses in the public sector who are often driven by the desire to help other people; or to soldiers, judges, and policeman who should act out of a professional sense of duty; or if we think of craftsmen or artists with their commitment to giving practical shape to their ideals, we’d recognise that we can have intelligent interests and not just material ones.
If we start to think of work in terms of ends and purposes, what we’re working towards, in terms of its ability as a frame of reference to sustain a good life-for everyone – then we’d probably move away from the current system that is often associated with exploitation, inequalities, soul-numbing routines, and anxieties about our skills becoming redundant. We’d then be more concerned about creating jobs and lifestyles that lead to something more durable, beautiful, a type of work that engages more of our faculties and that connects us with other people, rather than leading to alienation.
The writer is a professor of economics at LUMS
All quiet on the KSE front
Apart from a minor dip or some rise here or there, the country’s leading benchmark, the KSE-100, this past week mainly remained consistent, trading in the vicinity of 12,000 points. The volumes, the real indicator of investor interest and enthusiasm, mostly remained in the placid zone.
And this period of quiet is likely to extend itself for a while, with investors visiting their brokers probably more often with renewed vigour and energy some time after mid-December with the intent to chase the scrips that close their books at the year-end. The Average Joe among them must then be looking for lower-end shares that offer around 20 per cent or thereabouts in a couple of months. Essentially there is no harm in going for big-ticket buys, but the long-term uncertain both locally and globally, it is advisable to keep oneself in check, and limit risk by staying to the lower-end purchases. Last week one had mentioned Bank Alfalah as a possibility. At under Rs12 apiece, riding at the back of good financial reports spread over three quarters, this is likely to appreciate and go up anywhere between Rs14-16 around the last week of February 2012. If it all remains constant, and it actually does, those taking a risk at this entity may get a smart return.
The problem with Bank Alfalah is that in the good old days it traded between the Rs40-50 band and when it hit rock bottom mostly owing to poor management, it never came back enough to go beyond its base price. The management has since changed but perceptions persist. This year if it offers a decent return, through dividend or capital gain, it may well get to move upwards over the next few years. In other words, it could be good as a short or long term investment.
Though one had a setback with this particular share in 2007, selling it way short a year later, one would want to take a wager on Bank Alfalah. Here I must mention that I had then taken a jump on this particular one against the advice of my stock consultant, Mian Nusrat-ud-Din, who had surmised that the only direction this particular stock can go is down. So there was only myself to blame for the consequences of not heeding the calculations of a past master.
One has tried to insist on this before, and it merits repeating, that all investments should be made on research based on profitability – and an Average Joe must still verify the facts before committing his cash to it.
MND still is not really hot on Bank Alfalah. If you ask him, he has his eyes on three other banks, one slightly higher rated, in the above Rs100 apiece zone, the next in the middle in Rs60 range, and the last at half that at around Rs30 – meaning thereby that you have plenty of varied choice that you could opt for in accordance with how deep your pocket is lined up. These three are, in descending order, Habib Bank Limited, Allied Bank Limited and Bank Al-Habib. All three are quoted way lower at this point in time than they were at their high last February 2011 (HBL then at Rs142 compared to Rs119 now, ABL at Rs74 then, now Rs63, Bank Al-Habib Rs39.49 then, Rs30 now). Another benchmark, earning per share after three quarters last year and now also reflect positively in case of all three. Which means that unless something crazy happens between now and February 2012, profit in the vicinity of 20 per cent is more or less assured.
Next week one would take a look at other December-closing sectors, in particular the otherwise hot fertilizer sector that is threatened by the chronic shortage of gas that becomes acute to the point of crippling for the industries in the winter months.
The writer is Sports and Magazines Editor, Pakistan Today
Crisis of governance
There is no denying the fact that we are confronted with an uproar in the public sphere about putting the economy on track. The size of the economy has naturally grown to a point where the issues of governance need to be taken seriously. Any decision taken today would continue to reverberate in the socio-political territory of economy for a long time to come. The coming elections in the history of Pakistan bear an urgency whose importance probably cannot be expressed in words. Prior to partition, the 1945 elections determined the future of the map of the sub-continent. The 1970 elections again resulted in proving themselves as a watershed of events; bringing massive alterations in the mode of governance.
In the last forty years, every kind of political and administrative model has been followed and tried, with results that are there for all to examine. The contours of a public policy are not difficult to define but they are the mechanisms that implement effective economic policies. It is not just Pakistan Steel, PIA, Pakistan Railways or other institutions that are on the brink of disaster. These entities can be turned around in a matter of few months, if not days. The real concern about the national economy is its ability to perform many other very important functions that it has failed to do so. Take the example of Mr Berlusconi and his mishandling of the national economy during the last ten years of his rein. The Italian economy arrived at this extremely difficult stage due to the policy of political expediency that stopped him from bringing the necessary economic reforms that should have been introduced years ago. The parliament had to finally put through the much needed economic austerity measures leading to the resignation of Silvio Berlusconi.
The upsurge of political activity here is sure to sharpen the issues that the national economy is facing. With political players of different credentials and experiences, the concerns about the national economy are going to matter the most. With all the noises or political rant of throwing blames or mudslinging; the economic issues are going to stay right in the forefront of all politicking. The information revolution is bringing in a silent transference and a sort of maturity in the electorate that was not witnessed before. We are living in an inter-dependent world and to avoid a traumatic entry into the international economy, it is necessary to streamline the economy. As we go closer to the election time, the choices that are made now would no doubt affect the outcome of the elections whenever they are held. The mode of politicking is very gradually giving space to a modern consciousness of economic issues that matter most to the people of Pakistan.
All the protagonists and players in the political economy are aware of the significance of tackling the crisis of governing an economy that has been subjected to jolts and shaking. The confidence of the marketplace to continue to perform and perform well is a sine qua non for all efforts leading to govern the same. A repeated enhancement in energy tariffs under the pressure of IMF is definitely no solution to put the economy on track; a far greater imagination and will are required to think of solutions. There is no dearth of think tanks in the country that do give honest opinions of running an economy in a more effective style of governance.
The writer has served as consultant to the United Nations and other developing economies on the issues of trade and development and can be reached at amjadriazzz@yahoo.com
Sugar industry misfortunes
There is a reason Pakistan’s sugar industry is constantly riddled with crises. Startling as it may seem, ours is still an industry where price is not set in accordance with product quality. Rather, the government continues to stick to its novelty of deciding sugar cane price based on weight. That this arrangement often pushes farmers to opt for obsolete varieties, lower in quality yet of higher weightage, ought to surprise few familiar with intricacies of the unforgiving market mechanism. In this way, quality is compromised right at the outset, feeding into the entire product cycle, deliberately compromising efficiency and giving rise to bottlenecks that cramp production, consumption as well as exports.
Presently, Pakistan has a production capacity of approximately seven million tones annually, while total requirement of the domestic market is around 4.5 million tones, leaving an excess capacity of 2.5 million tones that should be judiciously utilised to prop up exports. Of course, that such an exercise can chip in an extra $2-3 billion in forex earnings, in addition to putting downward pressure on sugar price in the local market, should be a win-win situation. Also, Pakistan is ranked at number five among sugar growers in terms of cultivated area, yet yield wise we are at the bottom of the table, at number 15. The discrepancy speaks volumes about official misreading of sugar industry dynamics, turning a potential goldmine into an inefficient industry always avoiding pitfalls.
Despite hectic efforts spanning nearly a decade to convince those at the helm of the damage present policy is doing to the sugar industry, and subsequently the overall economy, I fail to see any shift in perception in Islamabad at least in the near future. And even after cabinet approval for proposed reforms, the official position continues to revolve around provincial governments announcing sugar cane price, leaving end sugar price to the mercy of market forces. Since mostly sugar is extracted from inferior quality cane, supply-demand forces are always shifting, toggling the sugar price that sometimes leaves mills winning at the cost of farmers, and sometimes the other way round.
The Shaukat Aziz government’s decision to install 13 new mills epitomised how Islamabad’s policy is akin to groping in the dark. When told that there was no need for new mills, since the present setup had enough production capacity for 40 years, and the funds were better spent on power plants to meet energy requirement for the industrial sector as a whole, no notice was taken of the advice. More than half a decade on, neither sugar nor power are worth writing home about.
In fact, the sugar industry is a classic example of natural endowment and comparative advantage being deliberately wasted at a time when the entire international financial order is reorienting with particular focus on trade earnings. The hangover of the great recession, and Asia’s emerging economies performing better than others, is leading to reprioritisation of trade agreements. Already our export base is minimal, and along with slow growth, stands at the heart of the economy’s inability to snap out of the painful cycle of stagflation. In sugar, we have a potential national winner. We boast enough growth and production capacity to feed our markets and earn valuable revenue. With the economy now in a desperate state, I find myself hopeful once again that neglect will make way to proactive posturing, removing unnecessary bottlenecks and improving efficiency. If we fail to tap this winner, we will have only our own official circles to blame, while the people on the street continue to suffer.
The writer is Group Director,
Priemer Group and former Chairman,
Pakistan Sugar Mills Association
Debt, Berlusconi and pepperoni
Any ardent follower of the Italian cuisine would let you know whether the topping atop any given pizza has deserved its right to be there or not. The quintessential pepperoni pizza has its meat topping blending seamlessly with the layer of cheese beneath it. Even if it is slightly overcooked, the pepperoni loses its shape and the pizza becomes a tasteless serving of unfulfilled promises. However, only a deluded chef would continue to try and have another go at the same recipe, without giving much thought to the fact that the same ingredients could not possibly result in a rejuvenated taste, especially when the oven simmers to unprecedented temperatures. Italy’s political arena is one such sweltering oven, and Silvio Berlusconi proved himself to be that pepperoni that fails to fulfill the collaborative demands of the cheese below it and succumbs to increase in temperatures.
As the Italian market continues to plunge into obscurity, the groundbreaking debt numbers being posted have obvious repercussions for the rest of Europe as well. The FTSE has been disturbed owing to the Italian predicament while the Dax in Germany and the Cac-40 in France have had their applecarts upset at varying scales. Italy, being the third largest country in the euro domain would, without a shadow of doubt, encompass most of the zone as far as after effects are concerned. Also, while the massive Italian debt encumbers the neighbourhood, its sheer volume connotes that that it is too big to bailout, unlike Greece, Ireland and Portugal.
As the focus shifts from the Greek Apáki to the Italian Pizza, there is a myriad of reasons to destroy the European appetite. Italy is the eighth largest economy in the world, with a GDP of $2 trillion, and debts exceeding the $2.2 trillion mark – or 120 per cent of the total GDP, it would be an understatement to say that the chef slightly overcooked this pizza. Rates on Italian bonds have escalated to over 7 per cent – while the numbers are haunting, the precipitous increase is even more daunting. Amidst such earth shattering crises, the tasteless pepperoni is only exacerbating the situation.
Berlusconi’s idea to tackle the matter was manifested via his reform policy, which was met with scrutinising glares and sceptical noises – the businessmen were perturbed and the politicians were downright offended. It seems as if the Italian crisis is at a point where recovery seems like a Herculean task – and not just your Average Joe Hercules; someone with unprecedented savoir faire and drive.
According to estimates if Italy’s borrowing continues to mount, the Italian hierarchy would have to raise around $880 billion in the next three years. The devil is becoming more menacing day by day and the deep blue see has reached an unparalleled depth, so to speak. And now with the pepperoni, out of colour, out of shape and out of demand which topping would the cuisine doctor order? The first option is a dose of ‘endive’ straight from the Sicilian recipe – Angelino Alfano. Often labeled as the fixer ingredient and fresh in taste and spirit, this particular brand of endive has stuck loyally to the pepperoni and enhanced its taste in the past – but is it time for him to become ‘the’ topping? The second option is the plum tomato from up north – Mario Monti. Hardly anything could be more contrasting to the ferocity of the would-be supplanted pepperoni. A banking connoisseur, Monti is a technocratic tomato and might just have enough sauce to whet the appetite of the Italians.
Nevertheless, it is clear that Italy is in a sweltering pot and it would take a lot of courage and prudence for the nation – and indeed Europe as a whole to – dig itself out. There are a lot of key players in the game and one could hope for the Europeans sake that too many cooks do not spoil the broth.
The writer is sub-editor, Profit and can be reached at khulduneshahid@gmail.com
The political economy of trade blocs
Time has come for Pakistan to seriously consider just how long it can let security concerns overshadow commercial and economic interests. For over 60 years, the establishment has reacted to safety concerns by increasingly assuming a security-state posture, often at considerable financial and trade revenue cost. There can be no denying that security issues must take precedence, but unprecedented international economic developments mandate shifting focus to an economic welfare state for the greater benefit of the people as well as the government. The emergence of trading blocs, and subsequent spill-over advantages to member states provide both examples and opportunities for countries like Pakistan.
Presently, proximity and cost-effectiveness has led to the establishment of three giant international trading blocs – Asean, EU and Nafta – reducing the cost of doing business and increasing mutual revenues. Pakistan, too, is part of two major trade associations, ECO and Saarc, a $3 trillion economy even if China is excluded. Even though Pakistan’s current share is less than five per cent either way, it remains the only country with representation in both bodies. And considering our geographic location, by acting as a trade-bridge between the two and opening crucial trade routes connecting them, we can attract major revenue by simply managing the traffic. We can be the bridge through which Central Asian States, Iran, Turkey and Afghanistan can trade with India, Bangladesh and Nepal, materialising unprecedented gains for all concerned, while benefiting Islamabad in the form of transit fees.
Again, such decisions can only be the consequence of bigger concerns that invariably include politics and security. Pakistan’s trade issues with India also incorporate just such matters. But it needs to be noted that engineering a more relaxed trade environment can prove mutually beneficial, and to no small extent. As an example, cement needs in Delhi are better addressed by imports from Lahore than Andhra Pradesh. Similarly, agriculture and commodity prices in Pakistan can be rationalised to a great extent in case of unhindered trade with the eastern neighbour, highlighting the positive impact of increased trade on price rationalisation.
It is also important to understand how India’s large corporations give it added muscle in the international trade environment. The likes of Tata and Reliance can leverage large amounts of capital essential for ambitious investments, hence India’s increasing footprint in the African continent. There is a way to use this advantage for Pakistan’s advantage also, provided political and security concerns are cleared amicably. Pakistan is naturally endowed with huge Thar coal reserves, sitting right next to India. If a mutually beneficial agreement can be reached and targeted investments channeled towards their proper exploitation, both Pakistan and India can share subsequent power generation, marking a new chapter in the political and economic history of the sub continent.
Similarly, Gwadar is another potential goldmine for Pakistan if taken advantage of judiciously. Given the right circumstances, we can invite participation from India, China, Japan and even Turkey to exploit this strategic corridor between the Middle East, Iran, Central Asian Republics and Pakistan, raising it to a position of centrality in international maritime trading.
The benefits of softening the traditional security-centric posture in favour of increased economic, financial and commercial linkages are enormous. But arriving at such an arrangement requires political will in all parties concerned. The proposed shift involves risks, but also brings unprecedented rewards. The deciding factor will be the criteria these states set to define their standing as the international financial system undergoes serious overall transformation. If we remain committed to safeguarding the present position with security issues dictating overall direction, numerous avenues of mutual cooperation will go waste. But if public and official benefit is put at the centre of a new, integrated strategy, chances of graduating into the economic welfare state model are encouraging.
The writer is a former finance minister
The investment argument
As debate about the loosening monetary environment’s impact on private sector investment continues, it is important to note that the interest rate regime ensures provision of necessary working capital, but meaningful investment will be stimulated once aggregate demand rises and capacity is fully utilised. Presently, excess capacity is observed across sectors. In the cement industry, for example, present capacity is approximately 40 million tonnes, yet production languishes around the 32-33 million tonne mark. Similarly, in car manufacturing industry, production at 100,870 units falls well short of total capacity of 275,000.
So, till the excess capacity gap is bridged, fixed investment will not materialise, with monetary easing, or otherwise, and private sector demand for credit will remain elusive . And with GDP growth stuck in the low 2-3 per cent range, the market is simply not generating enough aggregate demand to induce substantive investment. Also, the government’s continued borrowing in the money market makes for the ideal marriage of convenience between the centre and the banking sector. Banks eye this as a risk-free asset, requiring no capital to back up advances. Sovereign debt is, of course, also more reliable considering rising incidences of non-performing loans. The exercise also cuts down on marketing expenses in an otherwise stagnant environment.
Before embarking on an investment-induced growth trajectory, relevant authorities must first streamline the fiscal environment. Issues of commodity pricing, subsidies, public sector enterprises and circular debt need to be addressed to attract serious investors. For now, monetary incentives will not have the desired impact on employment, poverty, investment and infrastructure. Also, the present market environment is too uncertain to attract serious investors. Parties willing to commit funds eye medium to long-term predictability and returns which, unfortunately, cannot be guaranteed for now. Therefore, with banks reluctant to reach out and the government’s borrowing binge continuing, interest rate reduction is just likely to feed into speculative activities stimulating cost-push inflation rather than proactive generation of investment, employment and consumerism.
Again, fiscal policy must take centre stage, not just the government’s budgetary expenses, but public spending in totality. With Rs400 billion odd hemorrhaging annually from public sector enterprises, and Rs351 of circular debt impeding on absorption capacity of financial institutions, the fiscal outlook is unattractive. In the stock market too, while a few blue-chips dictate market direction, there is no meaningful capital formation, no IPOs and no new debt issues. It is little surprise then that even local investors are fleeing to the relative safety of regional economies. To bank on inducing fresh investment in such circumstances would amount to misreading present market conditions.
Immediate fillip in revenue generation should come from fine-tuning the tax administration machinery, which requires greater capacity within FBR along with full political support to take punitive actions against evaders, concealments or understatement of incomes or sales, broadening tax net at both the Federal and the provincial levels. There has not been an encouraging response from provincial authorities since the 18th amendment devolved tax collection to their domain. By simply streamlining collection of property tax in Lahore and Karachi, tax authorities in Punjab and Sindh can help contribute 1-2 per cent to overall GDP growth. But with local government completely paralysed, and provinces unable to move forward on the tax issue, present collection is just a fraction of what it should be. The sooner those in charge reconfigure their priority list, the sooner local and central governments will have necessary fiscal space to initiate targeted expansionary fiscal policies that will unlock immediate growth, prop up employment, and engineer the second round multiplier.
The writer is former Governor, State Bank of Pakistan and Dean and Director, IBA
Pak-Iran trade in perspective
The time-honoured and window-seeking allegations of the west towards resource bearing economies, especially in the Middle East, have been the subject of several empathetic discussions. Wars were initiated through use of armed forces on the soils of Afghanistan and Iraq at the behest of covert whims when the west believed that it was sitting on mountains of money; incidentally the amount that will be spent during war on ‘terror’ in Afghanistan up till FY12 (approximately $500b) matches quite brilliantly with the euro debt figures revealed (more than $450b).
Conversely, in the line of bloody wars, Iran has had to suffer a rather subtle treatment for daring to flirt with a nuclear journey, whereby sanctions imposed prohibit development of trade relations, financial market expansion and progress on the petroleum resource aspect. Notwithstanding that the US, EU and UN are aligned in their understanding of these sanctions, Iran continues to export petroleum products, comprising about 90 per cent of the 25 billion euros worth of trade that takes place between Iran and the EU.
Against this backdrop when Pakistan is made an offer of gas, it faces a conundrum in terms of which way to go and whose side to take. During Fy11, Pak-Iran trade amounted to approximately $454 million [EX: $154m; IM: $302m] where as Pak-US trade arrived at about $5.2b [EX: 4.1b; IM: $1.1b]. Thus, the ostensible stakes seem high and the opportunity costs are obvious.
On the other hand, research from the invincible multilaterals indicates that power shortages have caused the economy to lose about two per cent of the GDP (value of domestic output) during the preceding fiscal year, which in dollar terms implies that Pakistani entrepreneurs could make $4.2 billion worth of more output had they received uninterrupted power supply. Currently, about 34 per cent of electricity is produced through gas, so the immediate benefit of the pipeline would amount to about $1.4 billion. Further, the complaints from the textile industry, (comprising about eight per cent of the GDP) link gas shortages with a 45 per cent decline in productivity. By extremely conservative estimates this could amount to about $5-6b during FY11. Additionally, one must not forget that about $2 billion worth of investment has been made by the CNG sector in infrastructure and equipment. This will have to be classified as sunk costs if corrective measures are not undertaken.
Additionally, in a utopian situation where there were no sanctions, Pakistan could, for the first time in history, make in roads into financial sector development of its neighbour, which could guarantee structured and predictable returns over the next century much needed by the choking economy. Such is the power of wishful thinking!
And thus my friend, the time to break free could not be more opportune. While the euro zone stands waist deep in bubble splinters, and the US is ready to swim across seven seas to save its dear friend, Pakistan could very well carve expeditiously a maneuverable space to enter into an energy sharing agreement with its neighbour. The grounds for explanation can not be simpler; the US needs to be convinced that if anybody’s nuclear assets and potential to fuel strategic wars (read: terrorism) needs to be feared, they should be its own. If the entire developed world, India and Pakistan possess nuclear arms, why can’t Iran? And considering the fact that Pakistan is always worrying about safeguarding its nuclear assets, physically and politically, from the US, the same can hold true for its neighbour.
And if it’s not nuclear assets, but lets say human rights abuses, the index is now extremely tired of being endlessly used as a pointer!
The writer is an economic researcher and freelance financial journalist. She can be contacted at sakina.husain@gmail.com
Giving quality education a chance
Unfortunately, even in the 21st century where excessive media exposure and massive level of globalisation have entirely metamorphosed the concept of change and development for many of us; the government of our country remains indifferent with only a tiny bit of its budget being allocated for the education sector. The figures and literacy rate of Pakistan, however, show the brighter side of the picture. This is mainly because the definition of a ‘literate person’ in Pakistan does not really describe a literate person. Ironic, isn’t it?
According to the definition of literacy that has been drafted by the United Nations Educational, Scientific and Cultural Organisation (UNESCO); literacy is the ability to identify, understand, interpret, create, communicate, compute and use printed and written materials associated with varying contexts. It involves a continuum of learning in enabling individuals to achieve their goals, to develop their knowledge and potential, and to participate fully in their community and wider society.
Surprisingly, someone who can read and write a simple letter, in any language happens to be a literate person in Pakistan! This definition is in stark contrast to many developed as well as developing countries where the definition is more qualitative.
So technically, what explains a ‘simple’ letter? Does this refer to a written element of an alphabet that represents a single phoneme or ….? The definition also fails to specify the language of the letter and the newspaper. So that means if I am able to read a newspaper in Hebrew and also write a simple letter in the same language; this would earn me the title of a literate person, irrespective of the fact that I am a part of a South Asian country whose national language is Urdu?
So are we blinded by ignorance or what? Talking in the same context, if we skim through the pages of the past or even consider the current efforts being made by the government for the improvement of the educator sector, we analyse the lack of political commitment, low quality education, lack of stress on primary education, improper checks and balance, etc.
I got a chance to teach at a local government school in Punjab and was baffled to see the number of mistakes in the text books provided by the government under the education promotion schemes. It was indeed appalling because the students would not believe me over the book. ‘A book is always true and authentic,’ they said.
Be it the ‘Benazir Income Support’ programme or the ‘Parha Likha Punjab’ programme; each has proved yet another futile effort that has failed to do any good; the major reason being lack of stress on quality education. This makes us come to the conclusion that even if a higher per cent of the budget is allocated for this sector, there would still not be enough of good news because of the many loop holes and grey areas associated with the allocation.
The proper solution lies in the standard and quality of education that need to be focused upon. Efforts should be made to replace the out-dated curriculum with international standards of quality education, which has little relevance to the present day. In this way, standardisation in the education system can also be ensured, when both the private and public schools will be following the same system of education and text books. Similarly, proper quality training should be given to the teachers.
Finally, economic and social change should be understood as a concept that has to take place through the existing social system and the networks of social institutions. The need to realise the role of education, in this respect, as an agent or instrument of social change and economic development has to be widely recognised. Mainly because youth is the backbone of any country and it is expected to play a constructive role towards change and a better tomorrow. Let the change, and revolution, be through quality education!
The writer is sub editor, Profit
Indian dichotomy and MFN
The Government of Pakistan has agreed in principle to accord the Most Favoured Nation (MFN) status to India. This decision has created debate in Pakistan – some are favouring while others are expressing concerns. Before I share my views on the subject, it is pertinent to dispel some misunderstanding about the MFN status.
What is MFN status? The MFN status is a clause in international trade treaty under which the signatories promise to extend each other any favourable terms offered in agreement with third parties. For example, if country A negotiated a tariff cut with Country B, and subsequently B negotiated an even more favourable cut with Country C, then the tariff rate applying in the second case will also be extended to country A. Furthermore, if commodity A is imported and x-per cent duty is charged then the same per cent of duty must be charged irrespective of the origin of imports of commodity A. in other words, MFN status simply means prohibiting discriminatory treatment among trading partners with respect to tariffs, border charges, as well as other taxes.
As a signatory to the WTO, Pakistan is obliged to extend MFN status to all WTO member states including India. In other words, Pakistan cannot discriminate India in international trade. India has already provided MFN status to Pakistan in 1996.
While India granted Pakistan the MFN status in 1996, one wonders why Pakistan did not reciprocate the favour. The primary reason is that Pakistan believes in a fair trade regime. With India according us the MFN almost 15 years ago, trade volumes from Pakistan to India have not improved. The balance of trade remained in favour of the former, while exports from Pakistan were negligible owing to a plethora of Non Tariff and Para-Tariff Barriers. Therefore, Pakistan’s point of contention has been the fact that there exists an unnerving dichotomy in Indian policy that on the one hand presses for trade liberalisation and on the other suppresses a fair trade regime through NTB’s.
In 2010, owing to the devastative floods that struck Pakistan, the European Union (EU) decided to extend special trade concessions that may enable Pakistan to earn extra foreign exchange for a limited period of two years. In particular, the EU decided to offer unilateral trade concession on 75 items to Pakistan allowing duty free access to the European markets. However, these trade concessions by the EU required a waiver from the WTO before it could be implemented.
What was most striking that India was the only country who objected to the EU offer to Pakistan in the WTO, other than Bangladesh. Interestingly, India at no stage claimed that it would be at a disadvantageous position by this trade deal. The uncompromising stance of our neighbour has resulted in the trade deal being delayed to date as the WTO works by consensus and EU required all WTO members to consent to its proposal.
India linked the grant of the MFN status to removing objections from the Pakistan – EU trade deal. Such intransigence compels one to wonder whether Pakistan is seeking trade liberalisation with Europe or India. Is Pakistan giving Europe the MFN status? Is this about seeking fair trade with the Eurozone?
To deal with the Indian opposition to WTO, the Government of Pakistan has agreed in principle to accord the MFN status to India. India will soon be granted the MFN – its cherished goal, in return for supporting EU trade concessions to Pakistan. Ironically, they have yet to address Pakistan’s concern about the non-tariff barriers (NTBs) which have restricted trade between the two countries thus far.
It has been the principle stand of Pakistan that to strengthen SAARC as a regional organisation, India and Pakistan should pursue a fair trade regime. If Pakistan and India expand their trade relations it would encourage other member countries of the SAARC to enhance their trade within the region. Such a regime between India and Pakistan can only be instituted if the former removes all the NTBs and allow level playing field to Pakistani exporters. Many countries in the world including Pakistan have expressed extreme reservations about India’s continued use of NTBs to trade. Pakistani businessmen feel that there are some NTBs which are Pakistan specific.
What the government of Pakistan needs to explain to its people is how can trade between India and Pakistan flourish in the presence of NTBs? It is indeed intriguing that Pakistan moved in haste without protecting its own interests and those of the SAARC region.
In the recent meeting of WTO Committee for Trade in Goods, although India did not object to the trade package but surprisingly Bangladesh who now raised objection to the said deal which has delayed the concessions once again.
The EU concession issue is not likely to be resolved soon even if Bangladesh raises no objection at the WTO. There are other countries, namely Brazil and Peru who could oppose EU concessions to Pakistan. Their argument is that like Pakistan they also suffered heavily on account of massive flooding and if the EU wants to assist Pakistan then they should be extended the same treatment. Who knows, some other countries might raise their concern in the next meeting of the WTO.
Pakistan has decided in principle to accord MFN status to India in return to a temporary (two year) deal. It has compromised on its principle stand that trade between the two countries must be enhanced in a fair trade regime environment. By according MFN status to India, are we promoting trade between India and Pakistan or between Pakistan and European Union?
For meaningful progress that will result in mutual trade and economic gains, India must finally move beyond the dichotomy that has defined its posture towards Pakistan for far too long. It can no longer make trade advances while incorporating regressive Non Tariff Barriers at the same time, defeating the very purpose of the exercise. As the recent episode regarding the MFN status and Pakistan’s EU concessions shows, there is an inherent insincerity in the Indian establishment with regard to Pakistan. If it expects Pakistan to open its trade borders to New Delhi, India must first prove its commitment to progressive change that both capitals have been trumpeting.
The writer is a prominent economist and principal, NUST business school. He can be reached at ahkhan@nbs.edu.pkbank.
The flat tax debate
There is a rising crescendo in the US regarding a flat tax system – a policy of income tax which in principle assesses a single rate of tax for all – where pundits are criticising this exercise for its apparent flaw that it increases tax on the less privileged to reduce tax on the relatively wealthy. However, what we should analyse is that if flat tax was really a bad idea, then why is it that so many nations across the globe have worked to embrace it?
When studied in detail, most countries that have managed the flat tax regime mainly in post communist countries of Eastern Europe, along with micro states across the globe, suggest that there are three fundamental reasons for their success. Firstly some states are relatively poor with negligible domestic capital, therefore they choose to drop rates mostly as a tool to attract foreign investors. Other countries are small and inefficient at raising revenue, therefore they cannot afford to employ a progressive tax regime. Lastly, some countries have battled with corruption and therefore give the rich a rate cut to induce them to pay any taxes at all.
None of these conditions exist for the United States, therefore it is not clear why a flat tax rate is really needed. Those countries from the post communist era that adopted the flat tax regime including Estonia, Latvia, Lithuania, Macedonia, Ukraine amongst others, were lacking in investment capital. In these countries that are competing rigorously for foreign investment, a flat tax regime is a signal to investors that they are welcome, that they will be allowed to retain their wealth and earnings.
According to an IMF report, flat tax is consequently less effective in countries that have a record of inward investment and abundance of capital. Therefore, when making an analysis of developed countries that we use as comparison, the flat tax regime has not been adopted by any and China is no exception in this case either.
Other countries that have adopted the flat tax regime are micro states, including Seychelles, Jamaica, Tuvalu, Mauritius and others. The only exception to the micro states in this aspect is the state of Paraguay which adopted a flat tax system last year. Therefore, the analysis one can make from these cases is that in places where an effective progressive tax system cannot evolve owing to administrative limitations, as is the case with these micro states, a flat tax regime might actually make sense. Countries and states that are larger in size have the ability to design more equitable ways of raising tax revenues.
Lastly, as mentioned before, if public institutions of a particular country are suffering the rot where oligarchs have made a habit of stealing with impunity, then a good way for the government to induce the rich to pay taxes would be to introduce the flat tax regime. Therefore in the year 2001, the Russians became the first nation to induce the flat tax system to overcome the crises of corruption and tax evasion.
What can be understood when studied in detail is that almost in all countries that have adopted the flat tax, government revenues from income tax have relatively decreased. That is why the adoption of the flat tax is simultaneously coupled with an increase in value added tax rates, something that was implemented by Eastern European countries.
Most importantly, it needs to be understood that republican presidential candidate Herman Cain’s “9-9-9” plan is demanding the implementation of a nine per cent rate of personal and corporate tax, along with nine per cent national sales tax. What we can decipher from this is – something the gods have suspected for a long time now while hoping it was not true – that America is now like a school boy who has run out of luck and pocket money, broke, struggling for inward investment, ill governed, and run by a bunch of self interested oligarchic bourgeoisie.
The writer is a seasoned banker with more than 30 years of experience and is currently chief manager SME bank.
Leasing in Islam
The baseline rule in shari'a is that only those assets that have an inherent usufruct can be leased with the condition that the leased asset is used only for shari’a compliant activities. According to jurists, the lessor and lessee must agree on the lessee benefiting from the usufruct and that the leased asset must have that usufruct. According to the Shafi'i school of thought, it is not sufficient to agree upon benefiting from the inherent usufruct of the asset, rather they require further specifications as to what extent and what manner the lessee may benefit.
Imam Abu Yousuf and some later Hanafis are more liberal when it comes to the conditions of a lease. According to them, the two parties can lease an asset as long as it has a usufruct, without having to specify in detail its exact usage. There are two leasing-based contracts under use in contemporary Islamic banking & finance: ijara and ijara wa iqtina'.
It is preferred that the lessor must have the asset to be leased at the time of entering into the lease contract. However, this is only a preference and not a strict requirement, as it is acceptable for someone to enter into a lease agreement with another party before it acquires the asset to be leased. However, it is required of the lessor to acquire the asset before the actual lease period starts and make it available to the lessee.
The issue of possession may follow from ownership but it is possible for someone to legitimately possess an asset. For example, an agent may hold an asset on behalf of a principal who has instructed him to lease the asset to a third party. The baseline rule is that the lessor must possess the asset to be leased before the actual lease period starts, whether as a principal or an agent or even in some other cases.
There are many Western-educated Muslim economists who argue that interest is nothing but rent for renting money to someone for a specified period. As leasing or renting is acceptable in Islam, so should be the lending of money for a return. This reasoning is based on a lack of understanding of the treatment of leasing in Islam.
Applications of leasing in modern Islamic banking and finance are abound. On a retail level, some Islamic banks offer auto financing on the basis of leasing. There are some leasing-based home financing products as well. The most widely practiced use of leasing in capital markets is that of a leasing-based sukuk.
While all these products broadly follow shari'a requirements, there is one area that needs re-thinking and improvement, i.e. with regards to the responsibility of on-going maintenance of the leased asset. In order to understand this point more adequately, we may use an example.
A bank buys a car from the market for the price of £50,000 and leases it to a client for a period of five years for a monthly rental of £1,000. If this lease is part of a hire purchase deal, then the bank must undertakes to sell the leased asset to the lessee for an agreed price once the lease period has lapsed and the lessee has fulfilled all its obligations. The lessee in turn undertakes to purchase the car for a price, from the lessor if the former is in breach of the lease contract during the lease period. The price is normally determined by a formula based on the amount outstanding in favour of the lessor pursuant to the lease agreement and a profit margin.
During the lease period and before the leased asset is sold to the lessee, the responsibility of maintenance remains with the owner. However, in practice this is given to the lessee by way of a service agreement between the lessor and the lessee. The estimated maintenance charges are included in the rental agreed in the lease agreement.
It appears as if the use of ijara wa iqtina' as a financial lease is problematic from a shari'a viewpoint. It is indeed a complicated structure but the way it is practiced by Islamic banks by and large fulfils the generally acceptable shari’a requirements.
The writer, PhD (Cambridge), is a Shari'a Advisor and Chairman of Edbiz Consulting Limited. He can be contacted at hdar@edbizconsulting.com
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