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Saturday, 18 May 2013 7:00 pm
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Profit Editorials
letters to the business editor
The great divide between the rich and the poor is escalating day by day especially in the developing countries of South Asia. The figures are alarming in the region as a whole. We would have been able to make a better analysis of the situation, if the writer provided the figures of the poverty rate of all the South Asian countries. Also, the reference to the regional cooperation between the countries should have been given; for it is just a mere fabrication which is not working in any capacity to look into the matter of eradicating poverty and social inequalities, which by any means are one of the major problems existing in the region. Ahmed Mansoor karachi
A severe liquidity crunch
It is noted with deep concern that despite appeals from all quarters, the government is just unwilling step out of the money market, resulting in a severe liquidity crunch that continues to compromise all efforts at stimulating growth. At present, with central bank printing presses still in overdrive, and the rupee at its weakest, and exports nowhere near requisite levels to leverage currency depreciation, there is practically no way the easing monetary environment can have any positive effect save inducing increased central borrowing. It bears noting that Islamabad’s recent ‘no’ to the Fund raised hopes of focusing on indigenous growth, aimed at increased productivity, revenue collection and exports to move forward. Yet within weeks it is apparent that the government has no intention of freeing bank credit to induce private sector investment. Also, with reports of finance ministry officials visiting IMF offices again, it is becoming clear that tax revenues cannot be raised in time, nor exports enhanced enough to grow on our own. So long as liquidity is scarce, economic activity will remain stagnant. Inability to manage growth and ease employment, at a time when official policy is too weak to preempt food inflation, is a sure recipe for disaster. The last thing Pakistan needs is frustrated masses taking to the streets to make the government realise where its priorities should lie. Much of its borrowings fund non-productive expenditure. At a time when it should effectively be in election-mode, its disregard for people’s most basic concerns is startling. Now, there is hardly any time for policy turns anymore. It seems the fiscal’s end will bring the same scenario of budget targets falling horribly short. The people need change. If it will not be delivered at policy level, then it will be made to come at the government level.
When trade, not aid, matters
The FTA with Indonesia again signals the government’s inclination towards increased export revenues to offset aid bottlenecks, in keeping with the post-IMF posture of reducing dependence on non-trade exogenous inflows. Yet the FTA model should prompt the government to bolster industry and manufacturing urgently, since our miniscule export mix invariably tends towards more imports than exports, compromising the main purpose of preferential trade arrangements in the present market environment. Ironically, closing the chapter on foreign funding has not diminished the government’s appetite for cheap money, as its debt belly continues to swell from unprecedented borrowing from the money market. And since heavy government presence chokes credit markets and crowds out private sector investment, the subsequent scenario is a non-starter when it comes to enhancing production and incorporating value addition in exports. So, yet again we have a prudent policy, set in the right direction, but with flawed fundamentals that can end up doing more harm than good. The more accommodative monetary environment, the trade deals with eager partners, all fail to deliver when market specifics are not adjusted rightly. Failing necessary measures, we’re more likely to record increasing inflation and trade deficit rather than the contrary, hence a more restricted fiscal position for the centre, demanding a swift return to borrowing. Our able finance managers obviously realsie the centrality of trade enhancement to sustained growth necessary for snapping out of stagflation. They must ensure adequate investment and energy supply to manufacturing, so our production matures enough to positively exploit natural comparative advantages. Gyrations in the international financial system are prompting a radical overhaul of trade relationships across the world, with Asia’s emerging economies taking the lead in the bottoming out process. We must be part of this progressive change, or risk being counted among chronically low growth economies for a long time.
When checking cartelisation
Finally there is some official movement on checking the genesis of erratic urea price movements. And even though the same steps would have had much more value if relevant circles had pre-empted the commodity’s inflation, directly linked as it is to food affordability, certain factors need taking care of. It is true that fertiliser companies had warned against price increases when the announcement concerning imminent gas shortage was made. Yet the government waited till the companies unilaterally jacked up urea price, meaning whatever action they will take will materialise after cost push inflation feeds into the food market. Also, while joint market positions that pressure agri prices to the upside must register on the regulator’s radar, it must ensure that the government’s promise of providing the sector with uninterrupted gas supply is taken into account when deliberating over the case. There are definitely lapses on the official side, cramping the companies’ ability to meet pre-scheduled financial transactions. As things stand, regulatory authorities should investigate whether gas supply bottlenecks mandate coordinated price increases to the tune undertaken. The issue of cartelisation is also important because fertiliser companies occupy a position of considerable prominence on the bourse, and price-manipulation on their part can alter market movements, opening a new chapter in the investigation. It is also important to ensure both speed and transparency in this exercise, since it will set an important national precedent. Of late, the government has been slow to react to price distortions that ultimately pressure middle and low income groups with stagnant wages. At the risk of repetition, this is probably the worst time to ignore valid concerns of the people. In too many parts of the world, they are reacting violently to what they consider unfair and unlawful seizure of their rights. Food cannot be allowed to become expensive because the government cannot settle a gas supply deal with a particular sector. Or because a few heavyweights can gang up to influence the market. Again, transparency must be assured.
Food inflation begins
It seems the government dose not subscribe to the ‘prevention is better than cure’ doctrine, at least not with regard to energy concerns. Despite repeated warnings, relevant authorities have been unable, rather unwilling, to forestall imminent gas shortage even as fertiliser companies cried hoarse about shortage and subsequent hike in food prices. So as winter sets in, we can expect savage gas cuts to domestic and commercial concerns, compromising agriculture production and stoking food inflation. Coming at the heels of severe electricity shortage that dilapidated industry, production and households, continued power shortage, in this case embodied by unaffordable food, has serious implications for the ruling elite. One, it simply reflects poor planning and poorer governance. Two, it calls the role of market regulators into question. As observed earlier in this space, if the urea price debate centred around official concerns of market manipulation and cartelisation by fertiliser companies, then the regulator should have undertaken serious investigation and subsequent action prior to winter setting in. Three, it doesn’t reflect too well on the government’s political acumen, with the landed aristocracy comprising its largest support base now increasingly agitated due to official neglect of the agri-sector. Four, agriculture has not received due attention since the 18th amendment devolved decision-making and revenue collection to the provinces, leaving the entire sector in limbo. Five, and most importantly, despite the centrality of the energy narrative, there is still no concrete action plan to ensure adequate supplies in future. Strangely, Islamabad also seems isolated from global social currents. Popular frustration embodied in the so-called Arab Spring was actually triggered by people’s marginalisation, with respective official machineries more interested in running governments than countries. At the heart of Tahrir Square was ag-flation, the phenomenon of unwarranted increase in food prices. Once popular discontent snowballs into mass mobilisation, governments find even their staunchest aid-dispensing patrons reluctant to continue interaction. For its own sake, as much as the people’s, Islamabad would do well to heed people’s concerns.
MFN concerns
Farmers Associates Pakistan (FAP) has raised valid objections over the MFN debate, even if its voice all but drowned in the recent “win-win” euphoria. It’s a good thing that the commerce ministry noticed Indian intransigence immediately following the celebrated Fahim-Sharma summit in Delhi, and halted the grant. No doubt GoP was eager to push the deal through once the Indians agreed to barter it for removing objections to Pakistan’s special trade package in the European Union. But with the promise proving hollow, as usual, the deal has lost its rationale, especially since the EU concern is time-bound. The bottle-neck also gives the government time to do its homework properly. Apparently, India heavily subsidises its agriculture sector, much in contrast to the fortunes of our largest national employer. And free access to Indian produce, while New Delhi sticks to its non-tariff barriers, seriously risks compromising our own production, diluting long term benefits of even EU-like initiatives. FAP’s argument also raises concern about other important factors concerning agriculture. While the 18th amendment was a step in the right direction, it has little face value, and must be followed by properly transferring the operational mechanism to provinces. Currently, a void exists in the agriculture domain, along with other heads transferred to provinces, with decision-making practically paralysed. And the FAP’s threat of physically limiting Indian agri-imports indicates the level of their frustration with relevant official bodies. The government is reminded that while increased EU access is rightly pursued, the country’s agri-fortunes should not be used as a bargaining chip, especially not when subsequent trade interaction can upset our subsistence calculus. With hindsight, it seems the Fahim-Sharma affair was just another rushed job. If it hadn’t caved in on its own, we would’ve come perilously close to hurting the most crucial employment and export sector. Trade liberalisation does stand to benefit both countries, but not when its essential dynamics are skewed.
To the Fund again?
How do news reports of our able finance managers knocking at the IMF’s door again sound, especially in light of their recent boast of moving beyond the Fund, focusing instead on home-grown growth? And strangely, whenever we revert to the begging bowl, our stance assumes a certain audacity that invariably demands rolling back strict austerity conditions that derailed the preceding interaction. But now that we’re talking again, and apparently a follow-up meeting has been set for Dubai, there will a deal of one kind or another, and strict austerity is practically assured. So what are we to make of the government’s present position? Is the growth drive, promised while parting with the Fund, compromised? Will revenue generation again falter, leaving serious steps like FBR restructuring that were the cornerstone of self-reliance for another fiscal year? Is blocking Rs400b worth of annual leakages from PSEs no longer on the cards? Sometimes, it is important to scratch the surface. Recent initiatives like interest rate reduction, finally facilitating private sector investment, etc, will bring intrinsic benefits only if the government withdraws its mammoth self from the money market. With hindsight, especially since the government has failed to honour its promise of reduced local borrowing, it’s a safe bet that the central bank is actually facilitating government borrowing with the rate cut. So long as leakages are not checked, and available avenues of raising revenue not streamlined, need for borrowing to finance non-development expenditure will continue. Hence another blatant about turn on yet another tall promise. With such posturing, it is not surprising that the national debt has doubled in the few years of the present dispensation. But the more the government borrows to stay afloat, the more it puts its fortunes on borrowed time. Falling short of budgetary targets again will seriously wrongfoot its electioneering by the time the present fiscal comes to an end. It must at least be seen trying to restore fiscal balance, instead of unashamedly distorting it.
The liquidity trap
Analysts rightly worry when the financial press laments over government borrowing-induced liquidity trap, while quoting SBP officials regarding another impending rate cut on the same day. Though credit easing was urgently needed to trigger private sector investment, the manner of the sudden, and ambitious, 150 bp cut raised eyebrows because of already double digit inflation, a rupee nosedive and erratic oil prices in the international market. Criticism coming the new governor’s way, of the cut benefiting the government even as the economy flirted with runaway inflation, seems to hold weight now that the government’s addiction to debt has been confirmed. Despite the risk of compromising the risky monetary easing, Islamabad could not overcome its dependence on easy money. And now we have the classic liquidity trap. The official argument is self-defeating. While shifting from central bank borrowing to advances from commercial banks is the lesser evil, it is not so in this particular case. Catering to official demands again crowds out private sector participation, defeating the very purpose of the cut. What another reduction will achieve is not clear, other than further reducing the government’s burden. Also, whatever little percentage points the exercise shaves off the inflation number, oil fluctuation in the international market can easily trigger agflation by upsetting input prices across the board. It is yet more unnerving that while inflation trends and liquidity traps have economic remedies, they cannot be effective till the central bank has complete autonomy. Machinations at play so far reveal a disturbing erosion of that independence. Going by the trend so far, we can expect a generally loose monetary stance, with private investment continuously ruled out, and the government adding to the debt burden, at least till continuous rupee weakening and rising inflation necessitate yet another embarrassing, and painful, u-turn.
The tax debate
Improved tax collection numbers for FY11 only reinforce the centrality of the FBR to any meaningful initiative at raising revenue, especially since the 18th amendment enhanced provincial share and responsibility. Since the current budget’s ambitious growth target centres predominantly on sizeable increases in tax revenue, especially when provinces have yet to record meaningful collection, the bureau should be mandated with providing institutional and infrastructural support to the provincial mechanism, without which inflows will be nowhere near necessary levels to meet the growth target. However, it bears noting that as the FBR tutors the provinces, it must also undergo a necessary overhaul itself, for which institutions not directly involved with revenue generation and collection will also figure prominently. Despite the technicalities involved, the principal matter is one of political will. If Islamabad cannot muster the resolve to tackle the tax problem once and for all, the centre’s fiscal space will remain constrained, keeping growth low and unemployment high. At the provincial level, too, a paradigm shift in conventional political thinking will have to give way to legislature necessitating reorientation of crucial taxes, especially agriculture. The present economic situation demands proactive expansionary posturing from fiscal authorities, which will not be possible without significant improvement in revenue collection. While blocking leakages will go hand-in-hand, both tax and export receipts will have to grow phenomenally for the economy to snap out of stagflation and position to exploit advances in regional and global trade dynamics. Strangely, even as the west retards and Asia slows, Pakistan has remained immune from global downtrends, its economic mess being its own creation. Even low growth in traditional export markets has only remotely affected earnings. But that owes to a miniscule export base as opposed to strong fundamentals. We must immediately reorient our growth mix. But, at the risk of repetition, such an initiative is not possible so long as the tax structure, the government’s prime earning avenue, is compromised by political impasse.
Where the Fund stands
The IMF’s disappointment with Pakistan’s fiscal indicators raises some important questions that concern both growth and employment. One, fiscal deficit projected at 6.5 per cent GDP, though less than the eight per cent for Middle East, North Africa, Afghanistan, Pakistan (MENAP) grouping, indicates unsustainable subsidies and leakages, hence the downward growth target revision to 2.6 per cent. Two, reduced fiscal space has ruled out expansionary fiscal policy, making the 4.2 per cent growth target impossible. Three, a static market is pressuring employment to the downside which, coupled with inadequate investment in human capital, threatens triggering extremely high jobless rates. Four, inflation is still expected to overshoot the 12 per cent target, and if recent monetary relaxation fails to stimulate investment and employment, loose money will induce further cost push inflation. Of course, the Fund swung no surprises by urging improvement in the tax-to-GDP ratio, among the lowest in the world. But the fact that our business environment is now ranked alongside Libya’s speaks volumes about the difficulty of approaching the Pakistani market. Already the security situation, war-on-terror drain, flood response, falling exports and international commodity price crash, and slowing demand in traditional trade markets have compromised crucial earnings. Discouraging investment amid high inflation and mounting unemployment amounts to hastening total collapse, something the finance ministry is no doubt well aware of. In the MENA region, too, disorder prevails as the spring-euphoria gives way to yet more chronic economic problems. Investors fled at the first signs of agitation, and dwindling exports and tourism earnings, along with raised political tension, have diverted immediate attention from essential reforms. The whole region urgently needs to get its act together, or risk descending into unending chaos as the wider world reconfigures priorities in keeping with new, post-recession financial realities. In addition to noting their deficiencies, the Fund would do well to propose a program of integration, where increased mutual cooperation can enable affected countries to use this moment has a jumping pad into a more coordinated era. Failing a unified stance, it is unlikely that any country in this grouping will emerge from these problems unscarred.
Just what the doctor ordered
The initiative of the ministry of industries to collaborate with Japanese institutions to impart technical training to skilled and unskilled labour is just what the doctor ordered to revive our stalled industrial sector. That the training will cover workforce in manufacturing, energy, environment, agriculture, etc, indicates that the need to incorporate value addition in production and export diversification has finally made its way to the top-most finance managers. There is a lot we can learn from the Japanese, in addition to technical upgradation. They faced similar financial bottlenecks some decades ago, when the post war stimulus dried and a largely unskilled labour force pressured employment to the downside. Tokyo responded by investing heavily in human resource development, bolstering the critical small and medium enterprise sector that led the way in production and value addition. Malaysia, too, upgraded its human resource so subsequent expansion was not limited to a narrow band of options. Therefore, the ministry’s suggestion that the Japanese explore the possibility of upgrading our training facilities holds even more value than immediate financial and vocational help. These are essential input-steps in a necessary restructuring of the economy. For far too long we have ignored industry, production, and mechaniastion of agriculture, the result being low export earnings, persistent reliance on imports and a cramped fiscal position for the government. Relevant authorities must explore more such avenues since slowing growth in the economic north is prompting reorientation of trade relations, especially in emerging Asia, which can no longer rely on the west’s ability to keep up spending on imports. Japan’s advantage in this particular deal would be improved market outreach as it struggles to shrug off a tsunami hangover and a stronger yen reducing its export earnings. The post ’08 crash environment has given rise to a new kind of globalisation, redefining national endowments and comparative advantage. The Pak-Japan program is a perfect example of the kind of partnerships that will be forged.
Food security
The breakdown in food security monitoring following devolution at the ministry of food and agriculture is just another example of simple government neglect compromising national security. Transferring agriculture to provincial jurisdiction has so far been an abject failure, with no apparent mechanism streamlining coordination between different departments – planning commission, ministry of science and technology, ministry of commerce, etc. It bears noting that agriculture is not the only concern since the 18th amendment empowered provinces, a process that failed to generate a reciprocal show of responsibility from peripheral authorities. Tax authorities’ ambitious targets, too, banked on increased efficiency on part of provincial governments which, unfortunately, has not been forthcoming. But while lack of adequate tax revenues restricts the centre’s fiscal space and compromises necessary financial expansion, agriculture troubles have a much more direct bearing on food prices. In times of already uncomfortable inflation levels, imminent agflation can quickly become cause for unnerving mob revolts, something the government should keep a very serious eye on. It is unacceptable that relevant authorities have failed to set a support price for wheat so far. And with urea prices skyrocketing 133 per cent in the last year, gas shortage is pressuring already low inventories, clearly signaling further food price rises around the corner. The way this problem has grown makes it difficult to ascertain whether feedstock gas shortage has made the problem worse or gross government neglect. Still, the matter has yet to be taken up at the federal level, reflecting disturbing indifference towards national food self-sufficiency, even as we drift back to food importing status. At the risk of repetition, it is stressed that if the highest authorities do not take notice of deteriorating food security immediately, they will soon have to cave in to the inevitable – angry rioting featuring austerity-paralysed middle and lower income groups unable to afford food.
Derailing ‘win-win’ trade diplomacy
Recent findings that Indian trade authorities might be deliberately delaying Pakistan’s EU concessions, especially after the win-win fanfare, is symptomatic of regressive tendencies in the Indian establishment responsible for repeatedly derailing sincere confidence building initiatives. The Fahim-Sharma summit, despite the accompanying hype, delivered an official joint statement that made no mention of New Delhi removing objections to the Pak-EU special trade deal, Pakistan’s core demand in return for the MFN status. The dilly-dallying indicates that India probably gambled on extracting the MFN concession, while ensuring just enough friction on the EU front for the time-bound opportunity to go begging. If these allegations prove true, it wouldn’t be the first time Islamabad’s diplomatic initiatives met with an undiplomatic snub from Delhi. Gen Musharraf’s Agra visit a decade ago, when the Vajpayee government appeared helpless in preventing hard-line elements in the government setup from wasting the summit, exposed increasing hold of conservative, anti-Pakistan elements on India’s top decision making machine. And despite recurring confidence building measures, India’s stiff stance has ruled out meaningful progress on core issues, especially trade and Kashmir, despite Pakistan clearly breaking off from the traditional status-quo and reaching out. The present problem – of the EU trade deal – is more worrying because India’s position is clearly wrong. European Union concessions were warranted in return for Pakistan’s proactive participation in the war against terror, in addition to unprecedented losses in last year’s floods. It is bad enough that India has long postured to foil the arrangement. But it is another thing altogether to make promises on a diplomatic, governmental level, then appear changing stance without warning. Both governments must settle this matter urgently. Sharma promised before the world that India would now facilitate Pakistan’s position. Someone in Delhi must clarify its position.
On debt, deficits and portfolio investment
Recent reports indicating widening deficits, imminent debt repayment and reversing portfolio investment make for sobering reading and vindicate our position that the government must proactively check fiscal drains or risk total collapse. Rupee weakening, too, exacerbates the balance of payments position, especially after the ambitious SBP rate cut. And with the currency’s fall paring gains registered at the beginning of the year, especially when double-dip fears have cut trade earnings from traditional export markets, the easy monetary policy must begin stimulating investment sooner rather than later to avoid a cumulative negative impact on the overall economy. Now that the windfall from unexpected improvement in the current account, robust remittance inflow bidding up the rupee and cotton price hike in the international commodity market are petering out, we are back to widening trade and current account deficits, mounting debt repayment requirements with additional inflow jammed, and a low value-addition export mix that cannot extract maximum leverage from weak rupee dynamics. The present situation does not suit the government’s post-IMF policy direction stressing higher growth and improved corporate earnings to attract foreign investment. With FDI inflows declining 28.4 per cent y-o-y in the first quarter, and portfolio investment flows in equities and securities actually reversing ($46.5m outflow), it is difficult to see finance authorities juggling available options to engineer increasing GDP growth. Unfortunately, official aid flows remain the largest contributor to the financial account. And while rumors of govt-IMF talks for a new aid program do the rounds, it is of critical importance for authorities to press for release of stalled funds under the pervious program, in addition to suspended coalition support fund payments, easing the immediate burden on the current account. At the risk of repetition, absent improved exports and less leakages, the growth recovery will not materialise.
How to fly right
And again PIA requests bailout assistance, and again the cabinet committee on restructuring cites failure to incorporate appropriate management changes for dismissal, with a repeat performance scheduled for the next meeting. While the committee is right in stressing the recommended restructuring, it is reminded that the problem is much more deep-seeded than the flag carrier, and failing a comprehensive strategy encompassing all loss-making public sector enterprises, such episodes will recur endlessly. As we have repeatedly noted during debates involving our panel of experts, arguably the most prudent way forward is the holding company initiative, one mandated with incorporating private sector expertise to engineer restructuring and strategic privatisation of all sick enterprises. While this idea seems to have found weight in official circles, it needs to be broad-based and all encompassing. The economy stands at a point where further unnecessary public leakages will seriously undermine the government’s limited fiscal space, making the growth turnaround virtually impossible. The present situation demands targeted expansionary fiscal injections from the finance ministry, necessary to complement the sudden shift in monetary policy. But such essential policy options are seriously compromised so long as the centre remains paralysed due to hemorrhaging institutions. The problem is made worse since most public companies have long been used for political leverage by successive governments, their ranks filled with incompetent political appointees. The current policy mix seems paradoxical when recent steps to stimulate investment and subsequently employment are not supplemented by checking bottlenecks that retard productive enterprise. PIA is but one part of a much larger problem. Fortunately, the solution is comprehensive, and one strategy fits all elements of the problem. Restructuring and ensuring strategic sale of PIA and all other losing entities is the only way to fly right.
Profit Editorials
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