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Thursday, 20 Jun 2013 7:16 am
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Profit Editorials
PREJUDICE AGAINST INDIA
This is with regards to the article “Lawn-ing with the most favoured neighbour” published on Monday, 05/03/2012. The fact that the writer linked up the MFN debate with lawn exhibitions makes the article an entertaining read. And the way the writer showcased our mentality, as to how we customarily go head over heels over all things Indian, but still scrutinise everything coming from the East is another important case in point over the entire debate. No one has pointed this out in the entire MFN debate. It is funny, if nothing else, that it’s the textile industry that has been whining the most, while lawn brands use Bollywood actresses to endorse their brands. We need to come out of our prejudice against India and think about the long term future of our country. India is zooming ahead of us economically, and we would need to cooperate with them if we don’t want ourselves to lack further behind. The MFN debate has been blown out of proportion by the industrialists who realise that our products can not stand shoulder to shoulder with their Indian counterparts. It’s better to face competition – no matter how still it might be – than to run away from it. WALI Lahore
Liberalisation pitfalls
Granted, the local press is right in appreciating the pace of progress of Pak-India trade liberalisation set in motion by the Fahim-Sharma summit some months back. Nor can there be any denying that the present regime of redressing trade barriers is unprecedented, and ultimately complete liberalisation is in the best interests of both countries, as well as greater South Asia. Yet it is prudent to be mindful of pitfalls such processes invariably entail. So far, the government has been rightly cautious, revising its negative list after giving another ear to some industries that stand to lose comparative advantage in case of opening up too soon. Pros and cons cannot only be weighed technically, with market forces dictating eventual readjustment. Shifting posture too soon in a stagnant economy is rife with complications – imports from the neighbour increasing just when traditional production advantage is compromised, for example. Rather than mark year-end for phasing out the negative list, both Islamabad and New Delhi must reconsider gains against the original project scope. Much has been accomplished. Both governments have been able to restrain rightist tendencies and convince trade lobbies of the urgency of forward march. Interestingly, this movement has rubbished the previous mutual position of settling political disputes before engaging more purposefully in commerce. Now, the technical more-trade transition needs very fine management. Both sides must ensure their trump cards are not caught off guard, and some will require more time than the remainder of the year to prepare for stiffer competition. Should haste prevail, no matter how well intentioned, neither economy can currently withstand production and earning shocks, and both will suffer.
Making oil affordable
Oil remains uncomfortably and unjustifiably bid in the international market. Libyan production is back online earlier than expected and Iraqi, Russian and Mexican crude is flushing markets just as India’s industry and China’s growth powerhouse begin to slow. This is bad news for Pakistan where authorities have just cited erratic international price levels as cause for yet another petrol price hike. And since oil (and related products) are inputs in almost all processes, the public is about to be treated to higher inflation and more belt-tightening, with related spill over effect on overall consumerism and economic expansion. The more things change, the more they remain the same. The reason for the abnormal spike in brent crude is growing possibility of war in the Persian gulf, and subsequent closure of the strategic Strait of Hormuz, despite clearly bearish fundamentals in the oil market. The situation has become all the more delicate with the return of slight economic stability in the US, and slim chances of weathering the sovereign debt in Europe. Should saber rattling in the Gulf now turn into real war, oil will climb to the $180-200 range in minutes, rubbishing the club med bailout in continental Europe and sending America back into recession. So much for the international consolidated bottoming out finally materialising. The prospect of rapidly rising prices will surely reignite the ongoing debate between the petroleum and finance ministries in Islamabad. It seems the latter will be forced to revise its position on the CNG-petrol price parity after all, especially since every passing day brings the election that much closer. Instead of incorporating unaffordable increases in gas price, decision-makers might just find it politic, and prudent, to reduce taxes on the final petrol price, increasing eventual demand and earning. Failing to check consistent energy price rise, whatever the reason, will make political survival increasingly difficult at a time when the phenomenon has already triggered mob violence.
To Russia with love
Whether or not the foreign minister’s surprise Moscow visit primarily focused on generating requisite funding for the Iran-Pakistan gas pipeline, as speculated in sections of the press, remains to be seen. But there can be little doubt that Islamabad has finally requested friends in Russia to place energy at the centre of the ‘enhanced bilateral and trade ties’ posture. The timing is important. Both Pakistan and Russia have incorporated a pronounced disregard for western sanctions as their respective equations with the US have worsened, the latter much more so. Islamabad has been more outspoken of its rejection of the ridiculous TAPI alternative to accommodate US apprehensions since the check-post attack that resulted in halting nato supplies into Afghanistan. Russia has been extremely critical of America’s influence near Moscow’s comfort zones ever since Putin chose politics of confrontation at the height of America’s Iraq misadventure. Now, with US-led pressure on the verge of cracking its crucial Iran-Syria alliance in the Levant-Persia sphere, the Kremlin seems again positioning to facilitate its falling allies where it can, and Iran’s business with Pakistan is mission critical for Tehran’s ayatollahs to make up, at least in part, for the sanctions choke-hold. So the rumours may well be true for once. Interestingly, with the magnitude of spill-over costs of partnering with America becoming more evident with time, the government’s sudden tilt towards Russia is reminiscent of an old debate, one that featured intellectuals and workers of the then new Islamic Republic making a passionate case for siding with Russia just when the cold war was heating. Fast-forward half a century, and there’s still much to gain for both sides, albeit in a dramatically changed environment. Pakistan needs energy to forestall crippling economic collapse. Russia has just spent the last decade flexing its energy muscle to regain lost influence in Europe and beyond. It’s very likely that a resurgent Putin, bitter at western actors for fanning discontent in his hinterland, will round off his Andropovian gambit – play Russia’s energy card – in a show of defiance marked by his return to the presidency. Pakistan stands to benefit in both energy and business terms. Surely the calculus with America is not reverting to widely accepted norms. To Russia then, with love?
New middle class
It’s interesting that the most senior government functionaries should visibly posture towards a creating a ‘new middle class’ as elections draw near. And while the waseela-e-haq program that the president inaugurated relates to one province for the time being, the focus on providing self-employment opportunities to unemployed persons between ages 19 and 35 is arguably the best medicine for Pakistan’s suffering middle class in present times, and should be extended to other provinces sooner rather than later. Granted, safeguarding the future is imperative. But often in times of imminent collapse relevant authorities tilt more towards creating environments that avoid repeat downtrends, while doing little to avert immediate bust. So while protecting the development budget, making education policy more realistic and spending more on vocational training are all essential to keep Pakistan from joining sub-Saharan nations in terms of economic profile, they do little to address the crisis building today – the insufficiently skilled millions adding to the unemployment burden with each passing year. Bolstering the middle class is also essential to protect democratic institutions. By its very nature, democracy needs a vibrant middle class, one that is most responsive to perspective policy toggling. Simply put, the more people the self-employment program touches, and improves, the more votes for the incumbent administration from an otherwise disinterested chunk of the electorate. The initiative will not only ease the strain on employment, it will also stimulate essential consumer spending, and engineer the subsequent multiplier in the economy. It is a semi-isolated gain at best presently, but we have just gone from bad to better.
Borrowing binge
The borrowing binge of the government of Pakistan seems to be never ending. The authorities have relied greatly on the SBP to fulfill its burgeoning appetite for budgetary lending one that has had devastating repercussions for the economy. And thus, with the borrowing binge, the private sector crowding out has stifled investment in the economy that has dropped to all time lows in over a decade. In only the first half of 2012, the government borrowed in excess of Rs818.91 billion from the banks, against Rs285.951 billion in the corresponding period last year. The increase in government borrowings from banks has also been accompanied by a decline in Net Foreign Assets that is having a debilitating effect on the local currency. While the current regime has focused on expanding trade horizons, a welcome initiative one must realise that increased trade cannot be sustainable when the local industry is being choked with the export competitiveness of products being compromised. The weakening rupee certainly will render the exports cheaper however it will also increase the import bill. With the vast bulk of necessities being imported, and imports in-elastic Pakistan will have to rely on increasing exports. Given the worsening power shortfall where industrialists are now exploring opportunities in neighbouring countries and setting up their plants there due to a conducive business environment, increasing the exports does seem a hurculean task at present. The government must focus on broadening the tax base to satisfy its thirst for budgetary spending, while at the same time take steps to encourage the industries, not through subsidies but through an appropriate incentive mechanism.
WAPDA travails
The Water and Power Development Authority has come down hard on the government for not being able to implement the crucial power sector reforms that are vital for overcoming the power shortfall of the country. As it is, the present government has faced a tough time, addressing the power crisis and adding to the bag of woes are the burgeoning circular debt liabilities that are crippling the power sector entities. What stands out is the fact that despite the government taking steps to increase the power tariff by almost a 100 per cent, they have not been able to narrow the gap between the revenue and cost of PEPCO, which is not the only example of gross mismanagement. Other such DISCO’s have also severely underperformed, with HESCO, PESCO, QESCO, and MEPCO compositely losing a gargantuan amount of Rs90 billion per annum in the distribution system. With the government bent upon borrowing from the SBP to fulfill its budgetary needs and the crowding out of the private sector, the inefficiency of these distribution companies is like the final nail in the coffin, one that could severely compromise the standing of the democratically elected powers that be, if it hasn’t already been compromised. The inefficient utilisation of fuel worth Rs11 billion will inevitably add to the import bill and with the rupee steadily declining, this situation definitely does not bode well for the economic managers as it will further stress an already strained current account. While losses in government owned enterprises has now become a norm, there is an urgent need to address the crisis by installing competent people at the helm of these entities without which, all efforts at power sector reforms will inevitably fall short of addressing the real problem at hand.
The UAEPAP initiative
At a time of increasing international financial isolation for Islamabad, the UAE Pakistan Assistance Program continues to provide crucial and appreciated assistance from a time-tested, all-weather friend. Already with the coalition support fund caught in official logjam, the IMF program abandoned and other multi- and bi-lateral donors shying away because they take cue from the Fund, Pakistan’s fiscal position has come under immense strain. And considering our troubles with natural and manmade disasters over the last few years, the financial choke could not have come at a worse time for the government of Pakistan. The UAEPAP is all the more appreciated because in addition to helping contain negative fallout of the mammoth human catastrophe created in the wake of the floods, the program caters to social and infrastructure projects with significant positive spill-over. Education and health projects in some of the areas where they are most needed will not only empower a new generation entering the competitive job market in the future, they will also slowly but effectively negate influences of extremism so rampant in the periphery. But of far greater immediate intrinsic value are projects pertaining to the water sector and social overhead capital – roads, buildings, etc. The good thing about the latter is that while more roads, bridges and purification plants are always welcome, their initiation creates valuable job opportunities and stimulate consumerism, two of the most basic features of any coordinated attempt to snap out of persistent stagflation. Islamabad would do well to emulate the UAE model when undertaking targeted fiscal expansion of its own. Interestingly, while foreign grants are known to be politically motivated and sector specific, the one in question clearly addresses the people of Pakistan – from displaced sufferers ravaged by hellish floods to innocent, deprived children growing up in extremist, merciless surroundings to the army of unemployed, unable to subsist. A friend in need is indeed a friend in deed.
Revenue trends
The deficit continues to be nudged at from both sides as improved remittances partially offset dismal year-end export numbers, implying the fiscal deficit will continue to be pressured to the downside while the rupee’s fall continues. Unfortunately the cycle is self-perpetuating. Currency weakening will further aggravate the trade deficit, with the obvious negative spill-over on Islamabad’s fiscal posture, not to mention other important economic indicators. While most measures aimed at expanding revenue are medium to long term initiatives at best, there is still al lot that can be done to inch out of persistent stagflation. For starters, the banking system needs to be stimulated to enhance productive outflow from credit markets. Presently, government borrowing coupled with collective banking sector hesitation to increase private sector lending is compromising much needed investment. And while such arrangements are made and filtered through the system, industry and manufacturing must overcome excess capacity, failing which the engineered credit flow will have little value. For industry to function, though, relevant authorities must put an end to the energy give-and-take among sectors. Financial prudence dictates that in times of crunch, every possible unit of energy input should be directed towards avenues that generate at least a trifle more in return, while the resulting subsidy toggling can benefit sectors adversely impacted by rerouting energy units. In today’s Pakistan, that implies reorientation of focus for the benefit of industry. The importance of industry functioning at this time has direct implications for overall growth, employment and per capita income. Domestic consumers taking a temporary hit in such a scenario will ultimately benefit more when credit flows to right impact targets and the overall economic situation improves. Right now, there should be no bigger policy concern than stabilising growth and stimulating manufacturing and subsequently growth and employment.
Pak-Korea initiative
A probable Pak-Korea FTA initiative is just the blueprint trade authorities need to work on to squeeze fiscal leverage in an election season marked by bloating deficits and pressure on the BoP. Korea’s proactive shift, too, highlights posturing typical of the post-recession scenario, as the slowdown in western economies is hastening regional alliances. That Islamabad is seriously considering establishing a special economic zone for Korea is even better. It shows seriousness in official circles just when analysts had written off increased exports to offset the dangerously weakening rupee. Yet such efforts are just breathers till the export act is got together. The FTA is designed to increase Pak-Korea trade from present $1.36 billion to $2-3 odd billion. The increase and intent, though appreciated, will need to be replicated far and wide to fill our current fiscal gap. In terms of trade outlook, relevant authorities must look for ways to incorporate value addition in the export mix. Pakistan’s basic sellers continue to revolve around agri and textile products, not market winners in today’s environment. If the government has seriously decided to turn its attention to enhancing trade, we should see manufacturing and industry facilitated in ways not seen before. As things stand, official apathy combines with crippling energy shortage to limit output to well below optimal production. Meanwhile, FTAs will bring spill-over benefits as well, like FDI. Already, Seoul is considering taking up Islamabad’s offer of joint ventures in energy and engineering. While the commerce ministry considers potential capitals for similar enterprises, it is advised to make visible arrangements to facilitate improved intra-saarc trade. It’s unfortunate that trade among the bloc amounts to an unimpressive seven per cent. With Asia beginning to follow cross-Atlantic slowdown currents, all economies will need improved financial interaction to stay afloat.
PPP and gas load shedding
How does it reflect on a presiding administration that it promises a ‘roadmap’ to tackle one of the economy’s most pressing issues, but only by the time of the general election marking its term’s end? Despite obvious implications, for the sake of both households and industry, it is at least hoped that this will not be one of those promises that guarantee uninterrupted power every now and then, only to be blatantly dishonoured. And considering how power shortages have consistently intensified throughout the PPP administration’s tenure, what is it about this particular promise, coming just when electioneering is picking pace? Either it’s the cursed, seemingly insurmountable problem of circular debt, or an either/or between domestic consumers and value-addition, export revenue earning industry. Or it’s the perpetual squabbling between the petroleum and finance ministries, the former pushing for fuel price reduction to parity with CNG, the latter unrelenting. For some reason, Dr Sheikh’s boys just don’t buy into the argument that with CNG and petrol similarly priced, people will have obvious incentive to shift to black gold, easing natural gas strain enough to divert to industry. That they push for CNG prices to be jacked up to fuel oil levels, for similar results, says a lot about the model of economics pursued at the finance ministry. Strangely, it seems to have passed all relevant ministries that forward planning of all important commodities is based on the simple, text book procedure of calculating demand and supply. The democratically elected government, reflecting the will of the people, was well aware of demand trends and supply bottlenecks when it took office. That precious little has been done to ease the strain on limited supply, with promises only now of some ‘roadmap’, that too when the government prepares to bow out, is just plain unsatisfactory.
SBP and the finance ministry
The pretty wide gap between the SBP and finance ministry’s projection of the fiscal deficit – arguably the most concerning statistic at present – epitomises the dysfunctional, distorted state of the latter. Not that the former is in its finest shape. The difference owes not to a breakdown in some econometric model, but ministry optimism regarding projected inflows, pretty sizeable ones we might add, due in the second half of the current fiscal. The central bank’s estimate is more likely not just because exports are down, rupee is depreciating, PSEs are a continuing burden and tax reforms are nowhere in sight, but also because once promised funds are no longer in the offing, both civil and military. And the IMF program is long abandoned, also taking away other multi- and bi-lateral donors that take cue from the Fund. We don’t expect the finance ministry not to play politics in election year, which is why the central bank must step in. It has leverage, provided it can assert independence and revert to its text-book role of price stability before partaking in other adventures. That it can simultaneously stimulate investment and spending, impacting employment and consumerism, can still help salvage the situation. Again, it will have to draw a clear line in the money market that the government must not be allowed to cross. That, of course, is easier said than done, especially when campaigning is effectively underway and the government’s borrowing binge is not very likely to cease. Fortunately, whatever the deficit, employment and growth outlook, much good can still be done by unlocking credit markets. Should the SBP put a lid on government borrowing, and flex its muscles as overseer of the banking sector, it can channel substantial liquidity to productive initiatives. How significantly, and how quickly, such measures can bolster growth might surprise many in the finance ministry.
Forward looking monetary policy?
In principle, the central bank governor embodies everything capital markets hold as intrinsic truth when he says consumer expectation surveys will facilitate forward-looking monetary policy. There can be no arguments with the other assertion at SBP’s centre for survey research either, that such exercises help gauge inflation expectations and economic confidence of households, in addition to popular reaction to policy formulation and subsequent economic implications. But coming to the factual, public feedback, though important, accounts for precious little when central bank autonomy is compromised. Perhaps the good Dr Ishrat Husain, himself a former SBP governor and Director IBA, the support institution for the CSR initiative, should have made a point of this, considering how central bank printing presses continued to undermine its core price-stability function even as he praised the initiative. For, as things stand, monetary policy is haphazard at best, and not because the public feedback loop hasn’t existed so far. We, along with numerous stakeholders, have endlessly debated the erosion of monetary policy due to the government’s borrowing excesses. First, when rates were jacked up, the government didn’t stop borrowing, diluting the anti-inflationary impact of the hawkish policy stance, leaving nothing to show for sidelining private sector investment in crunch time. Then, when rates dropped dramatically, the government still kept borrowing, crowding out crucial private sector investment critical to snapping out of chronic stagflation. Expecting public opinion to influence interest rate and money market decisions in such circumstances amounts to ridiculing the very people consulted for the exercise. Mr Anwar’s initiative is appreciated, though it should have been preceded by a visible show of safeguarding the bank’s autonomy, so much of the work now being done is not just another waste of time and resources.
Inflation drop
The inflation surprise to the downside, and subsequent market rally, ought to be self-explanatory. Yet there are deeper issues that must be calculated, which explain why the following trading day brought bears back to the floor. CPI easing most likely owes to one of the rare bright spots in the year just ended – the government curtailed its borrowing binge in part, even retiring some of the monies taken from the central bank. However, it would be naïve of the market to expect the correction to continue in election year, hence the quick disappointment. Markets have clearly priced in continued pressure on the reserve position and external account. Temporary government prudence on the debt matter may have pulled inflation down momentarily, but the growing fiscal deficit, fast depreciating rupee and widening trade losses mean prices are set to rise again sooner rather than later. And since only the foolish expected huge PSE losses to be checked with campaigning underway for all intents and purposes, the government’s fiscal space will remain uncomfortably tight. Yet the current administration is in a dilemma. It might cite election compulsions for unpopular decisions. But since the present economic situation dictates that some such decisions will have a more pronounced impact on ordinary citizens than before, the exercise is more than likely to be self-defeating. In times of persistent low growth and high unemployment, official mismanagement of crucial sectors like energy has added tens of thousands to the jobless list. Already, with earning compromised and prices still high, people’s agitation is beginning to find expression on the streets. If the present state is not checked, and official apathy continues, this distress will resonate even more loudly at the ballot. The government may not have employed the best strategy at its disposal. The country needs bold leadership. There’s a hint there for top guys in Islamabad.
Gas management
There is more than a grain of truth in aptma’s argument that a better form of gas rationing can be adopted than the one employed by the petroleum ministry. True, domestic consumers must not be deprived of the precious commodity. But when 10,000 jobs have already been lost to industry suffering from gas closure, and many thousands more likely if urgent measures are not taking, problems of domestic consumers do dwarf in comparison. As things stand, household and CNG concerns have shut all supply to industry, despite promises to the contrary from the concerned ministry. The Chinese example is fitting. Caught between freezing consumers and debilitated production, Beijing chose to save the latter. The result is obvious. Most of those provided gas three decade ago, a good many of whom could not afford it, now have a much better (than before) infrastructure, and salaries to afford it. Had they let industry collapse, the resulting wave of unemployment and discontent would have negated most advantages reaped by households. The proposed solution is perhaps the best mix among possible alternatives. Rather than continue ridiculously subsidising the world’s largest fleet of CNG dependant vehicles, authorities can better transfer the financial cushion to same consumers shifting to oil, channeling resulting gas to industry, propping up employment and setting the more-growth, more-spending train in motion. It is only when households have employment that they can benefit from availability of essential commodities. The gas question of the day is the oldest ‘optimal utilisation of limited resources’ debate in economics. It is apparent that a more focused form of diversification is possible than presently employed. Instead of defending a position that is no longer sustainable, authorities should immediately gather all stakeholders and arrive at an agreed solution. Cost of failure to do so is immense. No government should need lessons on what can happen when popular discontent pushes people on to the streets.
Profit Editorials
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