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Thursday, 23 May 2013 4:34 pm
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Profit Editorials
Diminishing exports
The October slowdown in textile exports is not really alarming once you explore its underlying reasons – chronic energy shortage to industry and inability to expand owing to an un-accommodative monetary environment. The surprise at the slowdown is quite alarming, though, especially when it registers with government functionaries. Immediately following the budget announcement, we repeatedly pressed for increased patronage to both manufacturing and industry, and the underlying need to incorporate value addition into the export mix. Yet little changed despite the finance ministry’s ambitious budgetary projections, and near-criminal power shortage continued to compromise production savagely. If things weren’t bad enough, the tight monetary stance ruled out whatever little hope of stimulating investment and expansion remained. And even with the phased central bank rate cuts, the government is overwhelmingly present in the borrowing market, still crowding out the private sector. With the government’s other main revenue generation arm, tax collection, still shy of crucial reforms, Islamabad’s fiscal condition is about to change from bad to much worse. It’s not just that fiscal authorities have hit a road-block half way through the fiscal. There were signs right from the beginning that the time-buying bandwagon the government had decided to step on was running on borrowed time. So once again important targets will be missed, and no matter what authorities say, there will again be painful cuts in the development budget. And since the gloomy picture owes to the government’s inability to even protect its small export basket, one thing Islamabad cannot claim presently is a prudent, medium-to-long-term outlook. Six months of continuous reminders have had little affect on the government. It is hoped that the export shock will at least push it into a more proactive posture. Failing that, nothing short of the ballot box will bring some sense where it is needed.
SBP cut – a double-edged sword
The stock market has been understandably edgy the past couple of days as the state bank mulls another rate cut, mimicking the regional growth-first mantra, even as critics warn of added pressure on the fiscal deficit. It’s hard to disagree with stakeholders stressing the futility of such exercises so long as the government is unable to cure its addiction to daily debt, crowding out the private sector from the money market and compromising a promising opportunity to stimulate investment, employment and consumer activity. Also, what might suit Thai, Malaysian and Australian economies might not necessarily prove the elixir of life for ours. In none of these economies is the centre’s fiscal position so unnecessarily compromised as ours. In none does incorporating an easier monetary outlook fail to impress the private sector. In not one of these examples is the government’s position so ridiculously large in the money market. And no other capital lets the government willingly feed hemorrhaging state enterprises and make up by borrowing from banks. The interest rate is not just a boardroom decision. It turns the tap, either way, on a host of inter-related factors, and no part of the cycle functions in isolation. Those with sound memory will remember how ineffective monetary policy proved all the while the number was jacked up, resulting in an inability to control inflation even as private sector participation nearly ground to a halt. Disrespecting market dynamics on the way down will only exacerbate the problem. If increased liquidity is not quickly channeled into productive investment that engineers the second-round multiplier, it will feed into cost push inflation, choking middle and lower income groups already squeezed by rigid wages and an inhospitable jobs market. The central bank is playing a dangerous game. It’s far more prudent to create the environment where toggling the interest rate is likely to have on-ground results.
The CNG ban
The proposed ban on CNG kits is yet another example of unplanned, ad hoc policy making, reflecting a disturbing gap between on ground reality and the government’s understanding of some of the people’s most basic concerns. Simply banning CNG kits, in the absence of a viable alternate public transport system, will immediately distort market prices, encourage corruption and smuggling, and bite into people’s budgets in times of already high inflation, rigid wages and depressed employment. According to our news report, consumers have invested a combined Rs70 billion just on CNG conversion since the process gathered steam in the mid ‘90s. And with this particular head only accounting for 10 per cent of available gas supply, which is further diminished because of controlled availability, the difference on the overall supply equation stands to be negligible once the ban is enforced. In real terms, such steps will only compound problems for the middle and lower income groups, whose earning power has progressively diminished in the three-and-a-half years of the present government. The decision is all the more surprising since it comes without any alternative means of addressing people’s problems. Simply enforcing such bans will only add to overall problems, while adding to the government’s unpopularity. Granted, industry is severely compromised due to energy shortage. But measures that add to people’s misery while doing little beneficial for industry or the economy are self-defeating. It behooves the government to ensure energy shortage is dealt with in a proactive manner, rather than squeezing the productive segment of society. With elections not very far, Islamabad seems scrambling to posture towards an energy efficient outlook. Not addressing power problems at the right time was bad enough. But groping in the dark and presenting half-cut solutions will just not wash with the people anymore. Concerned quarters are advised to reconsider such steps.
On the same team?
News reports highlighting the communication breakdown between ministries of commerce and textile, that too regarding the crucial MFN debate, are worrying. And it’s no less unsettling that the initiative with India is cause for confusion at the highest levels to this day. Usually, we’d expect landmark decisions involving the eastern neighbour to have the highest level sanction from Islamabad, and as such vigorously debated with all relevant ministries and stakeholders. Also, since the MFN argument revolves around trade, and textile is our prime export earner, the ‘solo flight’ charge leveled against the commerce ministry defies explanation. The division betrays something far more serious than ad hoc decision making at the top. It shows that not only is there no credible long-term policy, but more surprisingly, there seems little regard for the government’s earning capacity. At the risk of repetition, with textile important enough to have its own ministry, leaving it out of crucial trade talks is akin to maneuvering for political leverage even at the cost of loss of revenue. Already, there has been increasing talk of too many negative spill-overs of the MFN initiative for the win-win hype to be accepted. Considering the government’s precarious fiscal situation, it ought to have postured towards bolstering manufacturing and industry with the specific purpose of incorporation value addition in the export mix. Not only has no particular patronage been accorded to improving the export base, it is becoming abundantly clear that there are far too many division within the government machinery for trade and revenue generation to be given the attention it deserves anytime soon. And with the other main earner, tax collection, also badly compromised, the middle and lower income groups can look forward to yet more austerity as the bigger boys play politics. While settling this argument, those at the helm should remind all parties that they are on the same team, and should work accordingly.
Politics and markets
It is common knowledge in the complicated world of capital markets that while fundamentals do matter, the marketplace acts primarily on sentiment. Seen in this backdrop, periodic ‘talk up’ of market sentiment by prominent figures in advanced economies makes sense, especially when they are without viable options to turn things around. As a result, while the market eventually reverts to fundamentals, it gets breather-windows, when investment picks up and signs of recovery provide hope of better times around the corner. Across Europe and the United States, even in the bleakest of times, central figures have postured towards optimism, bidding up the market to ensure solvency. That such windows have become few and far between is less a fire-fighting failure and more an indication of how deep the current downturn is, but that’s another matter. In Pakistan, if political agitation and cross-party rivalry were not bad enough, we have yet another potential existential dilemma for the government as pieces from the memogate disaster fall where they may. And regardless whether the presidency, sources in the government, the ambassador’s seat in Washington, or more shady characters have been at play, two things are assured. One, heads will roll, one way or another. Two, and more importantly, the drama will deal another tragic and unnecessary blow to our weak and strained financial markets, already suffering from investors fleeing for safer pastures. The norms of democracy dictate that whenever political uncertainty reaches a critical threshold, all parties should proactively calm matters, as well as public sentiment, or risk compromising their own political and social habitat. Unfortunately, such understanding is missing in even our most astute politicians. In some bizarre cases, self-perceived notions of party loyalty run counter to the country’s bigger interests. We must inculcate an understanding of the strong correlation between politics and the marketplace. Not only will it provide some manner of support to the economy, it will also make our politicians more aware, of their own duties as well as the greater national interest.
Anti-capitalism mobilisation
There are a number of ironies in the discontent exhibited in the Occupy Wall Street movement and similar protests around the developed world. Sure, it is a glaring public rebuke of the free market neoliberal model that has governed mainstream international finance, growing in popularity and application ever since the fateful collapse of the communist alternative. But at a deeper level, the mobilisation betrays growing public frustration with the basic ethos of democracy. Increasingly with time, traditional distinctions between different parties and ideologies, that used to be final deciding factors in general elections, have become blurred. Be it America or established democracies in Europe, whichever party comes to power is seen toeing the same neoliberal line, despite tall promises of change during campaigns. This phenomenon has increased since the ’08 financial crash that began with the collapse of Lehman Brothers. Politicians on either side of the Atlantic are seemingly more concerned about hemorrhaging financial institutions than the effect their fire-fighting is having on middle and lower income groups. Seemingly, whoever people vote to power turn their attention to banks and financial institutions. It is also this frustration, and the fact that Wall Street embodies the financial system breeding an ever widening rich-poor gap, that has led people to revolt. Apparently, one of the biggest flaws in modern western democracy is the need for contestants to bankroll expensive campaigns, with economic cover invariably coming from financial powerhouses. Once in power, returning the favour is inevitable. Only, in times of recession, this exercise becomes self-defeating, since incumbents are visibly seen ditching the people that voted them to power in favour of their own financial patrons. Now, with this charade having gone on for three years, people have realised the insincerity of those in charge of their fate. Even as popular western media ignores the thousands protesting Wall Street excesses in America, and unfair austerity across Europe’s periphery, public mobilisation is set to change the world. For this shift to be soft and controlled, those at the helm of affairs must realise their folly, and ensure safeguarding interests of the working class.
A viable system
Even if the senate standing committee on finance hasn’t exactly figured out which particular economic system it wants for the country, it is no longer in the dark about what it doesn’t want. So “anti-consumer” laissez faire will no longer do, and preferably regulated market mechanism should be revived for effective price control. There is a ring of truth in rejecting the free market economy mantra. Suddenly, elected representative around the world are facing stiff public resistance to what is perhaps rightly dubbed exploitative capitalism, its fissures progressively ominous since the giant collapse of ’08. There is also considerable truth in the committee chairman’s landmark finding that the current model allows a privileged few to hold many hostage, influencing market forces and fluctuating prices at whim. But his suggestion of reviving the magistracy system to check profiteering seems betraying opposition politicking more than genuine concern for the system. For, considering our own example, it is not the system that is so much to blame as those toggling it. Corruption, top to bottom, compromises more resources and funds than market inefficiencies or even spill over of natural calamities. Simply resorting to another form of checks and balances will not do, especially if there isn’t a more important system in place, one that checks and punishes corruption and wrongdoing. Plus, it’s just too obvious to ask the able chairman why such measures were not incorporated during his own watch as finance minister. There will be no satisfactory answer, and that’s where it’ll end. It bears noting that while the last decade or so has seen the rich-poor gap widen in even the most advanced economies, ours no longer has the cushion where government patronage and subsidies can keep masses quiet much longer. With the poor on the brink of no longer affording subsistence, the winds of change sweeping our part of the world will alter a lot more than just the market’s supply-demand mechanism. Those at the helm should take this very seriously. Yes, prices must be controlled. But it’s far more important to check inefficiencies that skew the entire system.
Trade politics
Pakistan and India seem to have finally come to appreciate the underpinning of 21st century advances in realpolitik – trade benefits and economic interests dictate political alliances. This is truer since the epic ’08 collapse that choked credit markets and bankrupted even the strongest economic structures in the west, reorienting trade priorities across the globe. Both Islamabad and New Delhi have let political differences of a by-gone era interfere with fundamental financial demands of the present for far too long. Hence the unprecedented anticipation and attention accorded to the MFN debate. Perhaps in focusing on “core” political issues before binding both countries in long-term economic initiatives, both sides misread landmark evolution in international political economy. As it turns out, indulging traditional rivals in mutually beneficial economic programs, which neither would want to derail, actually stimulates ironing out of political differences. Therefore, the “normalisation roadmap”, with trade at its heart, might actually have what it takes to turn a new chapter in not just Pak-India history, but the entire Asian region. That such progress has been achieved in the three short years since 26/11 also shows the strong realiastion in both establishments of the need to move forward. Relevant authorities must now be both quick and thorough in identifying core irritants, and ensure removal of unnecessary bottlenecks. Arguably the biggest nuisance in the present setup is the brutal visa regime. So far, ever since the confidence-building-measures of the previous government, businesses have been deterred by hostile visa regulations enough to abandon otherwise feasible initiatives. Both sides apparently realise the enormity of this particular problem, and have promised visible progress, which is appreciated. It also needs to be noted that these latest developments, impressive as they are, are still vulnerable to numerous shocks. Elements in both establishments will vehemently resist opening up to the traditional enemy. And far too often militant activity originating from our borders, though without knowledge of authorities, has driven a spanner in the works with regard to Pak-India normalisation. So both sides will need understanding and patience to match the eagerness they betray for formal mutual advancement.
Oil discovery
OGDCL’s discovery of “significant reserves” of hydrocarbons in KP comes at a good time for Pakistan’s stressed reserve-position. Not only has oil’s erratic rise in the international market played havoc with predominantly commodity-import economies, it has also fed into healthy remittances coming Pakistan’s way. More importantly, the landmark discovery will position Islamabad to bolster savings and become more self-reliant. It is important to note that oil industry dynamics and pricing patterns have departed from traditional norms in the current, strained situation among swing producers. Usually, Saudi Arabia, the market-dubbed central bank of black gold, pushes for lower prices than its more hawkish counterparts in opec (read Venezuela and Iran). The reasoning is simple. Higher prices push down demand in strong western economies, undermining oil earning in the long run. But with the Saudi’s having to float $138b to grease appropriate palms in the eastern provinces, Riyadh’s breakeven price has jumped to the $90-95 mark, opening a brand new chapter in international oil pricing politics. Absent a game changer, oil is unlikely to mimic the dramatic ’08-’09 hundred-dollar drop. These developments make indigenous extraction, refining and production that much more important. Any hike in oil prices translates into inflation across the board, since the commodity makes for the chief input cost in all industries. Pakistan’s abnormally large oil import bill has kept it hostage to cross currents in international political economy for far too long. It is heartening that testing of four more potential reserves is being undertaken, with expectation of similar results. Now, Islamabad must quickly position to translate these gains to the wider economy, where high input costs, along with acute power shortage, are retarding production and growth. This discovery should play a significant role in easing the centre’s fiscal crunch.
Drainage through patronage
Lo they have not been able to shed their diapers these many years, observed renowned economist Professor Samuelson regarding inability of various industries/sectors to grow out of government protection. Contrary to what the economic orthodoxy once held sacred, official patronage invariably ends up doing more harm than good, turning entire sectors into complacent producers at best, addicted to unending injections to stay afloat. Yet the subsidy/protection phenomenon remains central to our economic model, despite obvious wastage. The centre’s position is understandable to an extent. Resource and energy bottlenecks continue to undermine central pillars of our growth, with no immediate sign of improvement. Also, there is a blatant lack of capacity in both government structures and industry setups to engineer economic growth. The development budget is a prime example. Despite devolution of crucial powers to provinces, we observe a disturbing inability to implement policy, resulting in economic retardation. In industry, we observe resistance to progressive change primarily because of government patronage bailing out sick enterprises, in effect discouraging necessary upgradation without which competitiveness will forever be compromised. Little surprise, then, that our industry manages little value addition in the export market. The government is advised to channel subsidy funds into capacity building where most needed, so dedicated sums become targeted investments, enabling recipients to stand on their own feet sooner rather than later. The international financial environment is undergoing a phenomenal change in the aftermath of the great recession, with countries turning to their comparative advantages to fine-tune new trade regimes. For Pakistan to partake in this paradigm shift, we will need industry to produce at its maximum. And for that, capacity building must replace subsidy dispersal. In the present system, patronage, essential though it seems, is actually adding to resource drainage. This trend must reverse immediately.
Value for land
While it is not clear what will become of Pakistan Railway’s idea of leasing its land to ease fiscal constraints, the idea is sound, and should be taken further. Senior executives in the planning commission have long advocated turning inefficient government landholdings into profitable enterprises. Railways presents the most fitting example. It owns large areas of land, almost all injudiciously utilised. Pretty much the same is true for other government organisations. And considering prevailing circumstances, such land is best sold to private sector and corporate use, especially if it is close to commercial centres. Not only does such an arrangement stand to increase fiscal elbow room, but will also cut down on needless fixed cost, freeing the land for more profitable enterprise. Such measures are essential to add marketable density to city centres. Presently, our main urban centres, while flush with individuals driven from the periphery, are short of adequate commercial activity, which can be achieved by targeted reforms. Following these patterns played an effective role in establishing regional commercial hubs like Singapore, Dubai and Hong Kong. In Pakistan’s big cities, we have ample space that can be turned into viable commercial centres. Yet the official position continues to patronise the wasteful system that hinders meaningful progress. In principle, all available avenues of enhancing revenue should be exhausted before reaching out for aid to finance economic activity. In the Pakistani context, far too many potential avenues for raising serious revenue remain locked in passive government control. This position is not only contrary to the economic model we follow, but also counter productive considering our immediate needs. Sick enterprises like Railways should no longer be bailed out by the government. They should first cut large holdings so their dependence on bailouts lessens, then the lands should be used for meaningful commercial activity.
Urea again
We must keep addressing the urea issue so long as the government’s handling of it leaves a little something to be desired, especially since the commodity’s shortfall has a direct bearing on food prices. And now that gas shortage has already bid up prices, translating quickly into ag-flation, it behooves the government to ensure farmers’ complaints of miss-pricing the subsidy and hoarding are addressed urgently. Already, despite the subsidy, the price per bag has increased a good 53 per cent. And to make matters worse, there’s yet no mechanism to check hoarding typical of the sector, pushing up prices unrealistically and burdening the end consumer. Since much of the periphery already survives on mere subsistence, thanks to the long high-inflation trend, lack of proper official attention might just push marginalised groups into revolt, by no means a novelty in the present international environment. The official position is surprising since handling some of these issues is not very difficult. Once handling gas-shortage was mistimed, relevant authorities should have moved quickly to ensure compliance with proper price structures to keep an already uncomfortable situation from turning volatile. Should the situation turn still worse, there will be no prizes for guessing where inefficiency is rooted.
Now Bangladesh
Pakistan’s trade concession at the EU seems an inherent non-starter. Suddenly it seems all the effort behind cajoling New Delhi into a more compromising posture, even throwing in the MFN concession for good measure, apparently risks going waste. Whether or not there have been behind-the-scenes discussions between Delhi and Dhaka, especially since the deal in no way impedes upon the latter’s trade position, is better taken up elsewhere in the press. But it bears noting that the EU gambit is time bound, and the more our neighbours delay progress, the more Pakistan loses out, with India perhaps the biggest winner, MFN and all. The pitfalls on the trade road ought to have taught some valuable lessons to our policymakers. Far from the ‘win-win’ euphoria of the Sharma-Fahim summit, we seem to have played into India’s hands yet again. This ‘one step forward, two steps back’ position is symptomatic of our relations with India of late. Ever since the Musharraf days, when CBMs were all the rage, there was always reluctance on India’s side to reciprocate. Even the coveted MFN status, which India accorded Pakistan way back in ’96, was blunted by Delhi’s carefully crafted non-tariff barriers. As regards trade, we will move away from puerile concerns once our export basket is no longer miniscule. We continue to rely on agriculture and related industry to comprise the bulk of our revenue base. As the world moves into production and value addition, we are already left far behind in the overall trade narrative. Instead of falling on time-barred concessions, we must become proactive in enhancing export earnings. And the way to that is through increased production and manufacturing. And for that, the most pressing concern is energy shortfall, which is already largely responsible for underutilisation of capacity. Once we are self-sufficient, India and Bangladesh will be unable to exert downward pressure on our trade earnings.
Gas losses
It is hoped that Sui Southern Gas Company’s (SSGC) impressive performance last year, adequately reflected in shareholder appreciation, will push more proactive measures as another winter of inadequate gas supply sets in. All eyes will be on the $200 million natural gas efficiency project with the world bank, designed to bring about a phased reduction in unaccounted for gas losses over a five year period by rehabilitating approximately 5,000 kms of ‘aging pipelines’. In the gas sector, like others where supply-demand dynamics are upset, it is extremely important to cut unnecessary line losses in conjunction with acquiring fresh supply sources and routes to limit downside pressure on industry and households. With the summer crippling industry, manufacturing and individuals alike due to inefficient electricity management, gas shortage over the winter is set to further retard far too many once-productive growth engines. The SSGC has embarked on the right course with the world bank program, along with fast track LNG import through a third-party regime, netting 1.4 billion cubic feet gas by ’12. These are prime examples that with necessary political will present, supply bottlenecks can be overcome in time to protect the economy’s lifeline in the near to medium term. Such steps are important not just from the economic point of view. They also have a direct bearing on the ruling party’s political fortunes. As noted often in this space, electioneering will gain momentum hereon. The gas shortage issue has been gathering pace for some time now, actually since electricity was still the prime concern, with imminent gas shortage further upsetting producers and households. Yet the world on the street is that Islamabad has been usually slow in reacting. While it is understood that there will be considerable time lags between announcement of adequate measures and on-ground results, those at the helm must be seen proactively posturing against unfair shortages instead of lazily reacting to emergencies.
The MFN coin
I really liked the coin analogy that the writer brought into his article to express the various sides of the MFN debate. Both the pros and the cons have their weight, and I for one believe in a positive way of thinking. Increasing commercial ties could eventually result in the ease of tension between India and Pakistan, but of course India needs to make a positive statement themselves after we have taken a strong initiative. Also, we need to appreciate India’s growing economy and hence enhancing trade is the way forward for us, for India and for South Asia as a whole. Usman Butt lahore
Profit Editorials
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