At Business Recorder, our mission is to be the most credible and reliable information source particularly on matters of economics and finance. For more than 45 years this newspaper is known for its comprehensive coverage of economic policy making, corporate developments and market trends.
It has been considered the authority on business, finance and investment news in Pakistan. Don't forget, it also seeks to stress the links between politics and business. This newspaper has consistently supported all those efforts that seek to find the emergence of a system in the country that is profoundly characterised by a free market enterprise with a lot of emphasis on merit and fair play.
BR's Fiscal Review in your hands seeks to take a completely different and refreshing look at issues of economics and finance. In addition to BR's Research Team, a number of economic experts have contributed articles to this Fiscal Review. It also includes interviews of some known faces of world of economics and finance - Dr Hafeez Pasha, Shahid Kardar, Dr Ashfaque H Khan, Dr Ishrat Husain, Khalid Mirza, Sartaj Aziz and Dr Salman Shah. Conclusions, forecasts and projections have been presented on a variety of subjects in an intuitive manner with a view to enabling the decision makers to accurately assess the economic scenario, identify challenges and targets, create synergies wherever possible and link business strategies and actions that efficiently work for them. Enjoy!
======================================= BR RESEARCH TEAM ======================================= Ali Khizar Aslam Head of Research Sohaib Jamali Research Editor Zuhair Abbasi Research Analyst Haider Nawab Research Analyst Manal Iqbal Research Analyst Sijal Fawad Research Analyst Abdul Musawer Gulzar Graphic Designer Naseem Waheed Research Database Officer =======================================
Comments & feedback at: [email protected] www.brecorder.com
Where are those promised reforms?
ARTICLE: The outgoing fiscal year brought some measure of sanity in Pakistan's economy. To name a few key macroeconomic improvements, the country's current external account deficit narrowed, foreign reserves increased and industrial growth revived partially while inflation also eased relatively over the fiscal year 2008-09.
Last year would also be remembered for a successful agreement on the 7th NFC Award and the passage of the 18th Amendment -- two of the biggest achievements in the sphere of political economy, which are going to benefit the economy a long way down the road.
But the party-spoiling factor, which also threatens the global stimuli-led recovery with a double-dip recession, is the country's mounting fiscal deficit, and, in turn a debt bomb - booby trapped to set off if economic commanders make the wrong move.
The consolidated fiscal deficit that reduced from 7.6 percent in FY08 to 5.2 percent in FY09 after entering into the IMF programme in October-08, fiscal deficit was envisaged to be limited to 4.9 percent in fiscal year 2009-10.
Though official figures haven't been released at the time of writing this note (July 24), it can be safely deduced that the final fiscal gap numbers may have surpassed 6 percent, owing to revenue shortfall, higher expenditure, a serious lack of co-ordination and mistrust between the centre and the provinces.
Moreover, the falling aggregate investment is casting doubts on the future output growth.
With a bleak law and order situation and rampant corruption, foreign direct investment is hard to come by at desired levels. While the government's fiscally constrained hands are axing the development expenditure at one end; on the other, tight monetary regime and the onus of fiscal financing on domestic sources are doing no good to private credit revival.
Investment, as a percentage of GDP, declined from its decade peak of 22.5 to its trough at 16.6 percent in a span of just three years.
Lower investment levels have reduced the investment-to-national savings gap from 8.5 percent of GDP to just 2.8 percent in FY10, in a mere two years time. With national savings virtually staying at the same level, the decline is solely attributed to a fall in investments. This has resulted in an improved current account balance, from a deficit of 8.5 percent of GDP (FY08) to less than 2 percent in FY10.
But is it a desirable outcome? No, as it is going to badly affect the output growth in coming years. With labour force growing by an estimated 3.7 percent in FY09 and expected to grow at higher rates in coming years, higher unemployment amid lower output growth is inevitable.
The deadly combination of persistent inflation and mounting unemployment rate - stagflation -- is a nightmare for any policy maker. Dr Hafeez Shaikh, the country's finance minister, and his team ought to take stringent steps to curtail fiscal deficit, going forward.
The central focus should be on increasing the tax-to-GDP ratio from its abysmally low single-digit levels, while also achieving efficiencies in public sector entities that alone eat up 1.5-2 percent of the GDP. Given that debt growth in quasi-fiscal operations clogged liquidity in inefficient public sectors during the past two years is over Rs 500 billion, marginal gains can be achieved by curtailing such non-development government expenditures.
Fiscal sanity The potential benefits of gaining fiscal sanity are enormous. The government will get more room to spend on development that not will only create the much-needed employment but will also sow the seeds of sustainable economic growth in the times ahead.
Infrastructural spending can plug in the energy deficits at affordable rates; can provide adequate market access for timely transportation of agriculture goods by devising a system that encourages private entrepreneurs to invest in agriculture business; and many others.
Apart from development spending, fiscal discipline can pave way for debt servicing without piling up additional loans. That can potentially defuse the looming debt bomb.
Globally, the threatening debt trap is compelling the developed economies of the west to remove fiscal stimuli to curtail their budgetary deficits and lower debt growth despite the time tested theories that fiscal stimuli are necessary if recession must be prevented from turning into depression ie a period of deflation.
The importance of lower fiscal deficit cannot be undermined. But the ground realities in Pakistan are different. In spite of being under the IMF programme, tax reforms are being delayed; after taking an extension of a year, the government borrowed another quarter for homework before the implementation of VAT or reformed GST.
After incorporating tax refunds due for the fiscal year 2010, the government has likely missed the federal tax revenues target by around Rs 100 billion. This, when seen in the light of a rather ambitious tax collection target set this year, most seasoned economists cast serious doubts over FY11's targets.
Slippage on non-development expenditures target is also imminent. Since there isn't much room to curtail the already squeezed federal development expenditure, full-year fiscal deficit in FY11 is bound to miss its target of 4 percent of GDP by a significant margin.
Unless, some radical measures are taken in the expected mini-budget in October 2010, the onus of demand management will fall on the shoulders of monetary managers. Even the introduction of reformed GST in October may only help in documentation in the short to medium term as its benefits can only be reaped in the medium to long term.
Hence, to counter the inflationary impact of fiscal financing on domestic sources the chances of a hike in policy rates in coming reviews are high. This is akin to treating a wounded person by keeping him on tranquilizers; the doctors ought to treat a bad cold before it turns into pneumonia.
Nonetheless, the country's monetary managers may keep a combination of high policy rate while injecting adequate liquidity in the system at the same time through open market operations and providing concessional rates for long-term financing and export refinance schemes.
But knowing the poor governance structure of the economy, such measures might create distortions in the system by expropriation of resources.
Structural reforms
While targeted monetary easing may be the only way to move under the current circumstances in the short term, a strong political will is required to bring about the much-needed fiscal reforms. The federation and federating units have to come to a resolve on the implementation of reformed GST on services.
At the same time, the provinces must start taxing agriculture income. This will not only increase the tax base, but, more importantly, it will also check money laundering practices and increase documentation of the farming sector.
The array of services including corporate services and consulting services should also be brought in the tax net, whereas the collection of direct income taxes both from corporate and high net worth individuals must be streamlined by implementing tax administrative reforms.
If successfully implemented, these tax policy and administrative reforms can potentially add another 2.5-3 percent of revenues (as a percentage of GDP) in the coming years. Concurrently, the restructuring of inefficient public sector entities (PSEs) is imperative. Few of them need to be privatised with the government retaining good chunk of shares to reap dividends in medium to long term, like the case of HBL and PTCL privatisation.
However, a political will to do so is largely absent as current PPP government has re-inducted many PSE employees, who were laid off out a decade ago, with all the remunerations due in arrears. There is no clarity in the policy to restructure the many loss-making PSEs. Finance Minister Dr Hafeez Shaikh appears to be in favour of privatisation, while Labour Minister Khursheed Shah and Advisor on Provincial Co-ordination Raza Rabbani are ruling out the possibility of sell-off of while elephant.
As a consequence, Prime Minister Gilani is seeking Dr Sheikh's effort to midwife the restructuring of Pakistan Steel Mills, Pakistan Railways, Pepco and its distribution companies, PIA, Trading Corporation of Pakistan, Utility Stores Corporation, National Highway Authority and Passco.
These eight PSEs need to be removed from the line ministries and be handed over to all powerful independent board of directors with only one nominee director from the line ministry. The Chairman of the Board must neither be a Federal Minister nor a Federal Secretary but a person from the private sector who is widely known for his competence and integrity.
The BOD must be answerable to a holding company having the Finance Minister as Chairman and other relevant Federal Ministers and eminent private sector personalities.
All eight PSEs must be insulated against political interference and be empowered to appoint consultants to restructure them. The cost of this exercise can be borne by money from the available international funds. Without a legal structure and budget there is no possibility of turning these PSEs around and saving the pressure on the Federal Budget.
Another step that needs to be taken is the reduction in the size of the cabinet, while slashing the perks, and number of foreign visits of ministers to harmonise with the feelings of the common man.
Though these measures may be construed as merely symbolic, it is pertinent to note that countries that tend to have low expenditure on government machinery, have better social security networks and fall in category of developed countries; for instance the US which has 15 ministries, the UK 22, and France 19. These countries' ministries fare much better than those in India (48) and Pakistan (48).
Unless, efforts to reform the economy are continued with a broad-based political will, Pakistan will keep knocking the doors of IMF and other donor agencies, the government will keep elbowing out private borrowers and low investment coupled with high unemployment and debt trap will be the fate of this country.
============================================================================ KEY ECONOMIC DATA IN PER CAPITA TERMS ============================================================================ Rs FY07 FY08 FY09 FY10 ============================================================================ Total revenue 8,206 9,315 11,303 12,944 Tax revenue 5,625 6,527 8,013 9,569 Direct 2,134 2,432 2,688 3,397 Indirect 3,490 4,096 5,158 6,172 Non tax revenue 2,581 2,787 2,777 3,374 Total Expenditure 11,380 14,142 15,457 17,280 Current 8,695 11,512 12,466 13,577 Development 2,741 2,807 2,932 3,639 Cost of war* 2,282 3,007 4,140 5,819 Export 6,504 7,965 8,835 9,824 Import 11,701 16,709 17,224 17,592 Domestic Currency Debt 16,501 20,345 23,571 26,970 Foreign Currency Debt 13,530 16,804 20,866 22,033 Total debt 30,031 37,150 44,437 49,003 Annual per capita income (mp) 55,830 64,930 79,896 91,515 GDP per capita (mp) 54,833 63,633 77,791 88,088 Memorandum Population 158.17 160.97 163.76 166.52 Exchange rate (PKR-USD) 60.6 67.3 81 84.4 GNP (Rs in million) 8,830,638 10,451,715 13,083,827 15,239,043 GDP (Rs in million) 8,673,000 10,243,000 12,739,000 14,668,000 ============================================================================
-- Estimated loss to economy due to war on terror; FY10 numbers pertain to 9MFY10
Source: BR Research; based on Economic Survey 2009-10, FBS, SBP
(The writer is the Head of BR Research team. He can be reached at [email protected])
============================================================================= ANNUAL GROWTH OF MAJOR ECONOMIC GROUPS ============================================================================= % FY05 FY06 FY07 FY08 FY09 FY10 ============================================================================= Agriculture 6.5 6.3 4.1 1.0 4.0 2.0 Major crops 17.7 -3.9 7.7 -6.4 7.3 -0.2 Minor Crops 1.5 0.4 -1.0 10.9 -1.6 -1.2 Livestock 2.3 15.8 2.8 4.2 3.5 4.1 Industry 12.1 4.1 8.8 1.4 -1.9 4.9 Large scale 19.9 8.3 8.7 4.0 -8.2 4.4 Small scale 7.5 8.7 8.1 7.5 7.5 7.5 Mining & Quarrying 10 4.6 3.1 4.4 -0.2 -1.7 Services 8.5 6.5 7.0 6.0 1.6 4.6 Transport & Communication 3.4 4.0 4.7 3.8 2.8 4.5 Wholesale & Retail 12 -2.4 5.8 5.3 -1.4 5.1 Finance & Insurance 30.8 42.9 14.9 11.1 -7.0 -3.6 =============================================================================
========================================================================= REVENUE AND EXPENDITURE ========================================================================= Rs (bn) FY05 FY06 FY07 FY08 FY09 FY10 ========================================================================= Total Revenue 900 1,077 1,298 1,499 1851 2,155 Tax revenue 659 804 890 1,051 1,312 1,593 Direct 186 224 338 392 440 566 Indirect 473 580 552 659 845 1,028 Non-tax revenue 241 273 408 449 455 562 Total Expenditure 1,117 1,402 1,800 2,277 2,531 2,877 Current 865 1,035 1,375 1,853 2,042 2,261 Development 228 365 434 452 480 606 Net lending to PSEs 25 2 -9 -28 7 10 Overall deficit 217 325 378 777 680 722 External 120 149 147 151 150 332 Domestic 97 176 230 626 530 390 =========================================================================
===============================================================================
STRUCTURE OF SAVINGS & INVESTMENT
===============================================================================
FY05 FY06 FY07 FY08 FY09 FY10
===============================================================================
Growth in Total Investment (%) 32.6 36.1 15.7 15.6 6.9 0.7
Fixed Investment 34.3 38 15.9 15.4 5.5 -0.6
Public Investment 23.7 30.3 30.9 18.6 3.9 7.2
Private Investment 38.3 40.5 11.5 15.3 5.3 -3.5
As % of Total Investment
National Savings 91.6 82.4 77.3 61.5 70 83.1
Foreign Savings 8.4 20.4 22.7 38.5 30 16.9
As % of GDP (Current MP)
Total Investment 19.1 22.1 22.5 22.1 19.0 16.6
Fixed Investment 17.5 20.5 20.9 20.5 17.4 15
Public Investment 4.3 4.8 5.6 5.4 4.6 4.3
Private Investment 13.1 15.7 15.4 15 12.7 10.7
National Savings 17.5 18.2 17.4 13.6 13.3 13.8
Foreign Savings 1.6 4.5 5.1 8.5 5.7 2.8
Domestic Savings 15.4 16.3 15.6 11.6 10.6 9.9
===============================================================================
========================================================================== KEYTRADE FIGURES ========================================================================== $(mn) FY05 FY06 FY07 FY08 FY09 FY10 ========================================================================== Exports 14,391 16,451 16,976 19,052 17,862 19,569 Textile and Garments 9,099 10,211 10,782 10,530 9,577 10,294 Rice 932 1,158 1,126 1,836 1,982 2,175 Petroleum products 476 826 858 1,259 771 1,041 Imports 20,598 28,581 30,540 39,965 34,823 33,914 Machinery 5,918 8,323 9,005 9,604 6,613 5,369 Crude Petroleum 2,149 3,794 3,601 5,222 3,994 3,172 Petroleum products 1,851 2,881 3,734 6,241 5,511 6,913 Iron & Steel 890 1.367 1.192 1.330 1.417 1.290 ==========================================================================
================================================= ENERGY CONSUMPTION BY MAJOR SECTORS* ================================================= % Oil Gas Electricity Coal ================================================= Households 0.49 19 45 N.A Industry 5 26 27 N.A Commercial 0 3 8 N.A Power 45 28 N.A 1.5 Transport 47 7.4 N.A N.A OtherGovt 2 N.A 6 N.A Brick kilns N.A NA N.A 59 Cement NA N.A N A 40 =================================================
-- Based on provisional FY10 dat
======================================================================== PUBLIC DEBT ======================================================================== Rs (bn) FY05 FY06 FY07 FY08 FY09 FY10 ======================================================================== Domestic Currency Debt 2,178 2,337 2,610 3,275 3,860 4,491 Foreign Currency Debt 1,856 1,973 2,140 2,705 3,417 3,669 Total 4,034 4,310 4,750 5,980 7,277 8,160 As a % of GDP Domestic Currency Debt 34 31 30 32 30 31 Foreign Currency Debt 29 26 25 26 27 25 Total Public Debt 62 57 55 58 57 56 As a % of revenue Domestic Currency Debt 242 217 201 218 209 208 Foreign Currency Debt 206 183 165 180 185 170 Total Public Debt 448 400 366 399 393 379 ========================================================================
STATUS OF EMPLOYMENT
============================================================================
(millions) FY08 FY09
Total Urban Rural Total Urban Rural
============================================================================
Employers 0.46 0.34 0.12 0.47 0.34 0.13
Self employed 16.77 4.51 12.26 17.06 4.59 12.47
Unpaid family helpers 14.2 1.72 12.48 14.45 1.75 12.7
Employees 17.66 8.04 9.62 17.96 8.18 9.78
Total 49.09 14.6 34.48 49.94 14.86 35.08
Total Male Female Total Male Female
Employers 0.9 1.2 N.A 1.2 1.5 0.1
Self employed 34.2 39.6 12.8 33.3 38.7 13.1
Unpaid family helpers 28.9 19.1 65 29.7 20.2 65
Employees 36 39.5 22.2 35.8 39.6 21.8
============================================================================
===========================================================
CRUDE HEALTH INDICATORS: A REGIONAL COMPARISON
===========================================================
Infant
Life mortality Mortality Population
Expectancy rate* rate* growth
===========================================================
Pakistan 66.5 65.1 95.2 2.1
India 63.7 30.1 78.6 1.55
Sri Lanka 74.1 18.5 12.9 0.94
Bangladesh 66.1 59 69.3 1.29
China 73.1 20.2 29.4 0.66
Nepal 66.7 47.5 71.6 1.28
Thailand 68.9 17 15.1 0.62
Philippines 71.1 20.5 27.2 1.96
Malaysia 74.4 15.8 11.3 1.72
*per 1000
===========================================================
Source: Economic Survey 2009-1 0, unless otherwise specified. FY10 numbers are provisional.
na. Not applicable
============================================================ SOURCES OF FEDERAL REVENUE ============================================================ Rs (bn) FY10-B FY10-P FY11 ============================================================ Direct tax 565.6 540.4 657.7 Income tax 544.5 520.4 633.0 Capital Value tax 7.2 4.4 4.7 Indirect tax 927.9 942.6 1121.0 Customs 162.0 164.9 180.8 Sales tax 499.4 540.3 674.9 Federal Excise duty 152.8 134.4 153.6 Petroleum levy 112.0 101.5 110.0 Non tax revenue...of which 513.6 568.8 632.2 SBP profits 150.0 213.0 185.0 Defence 128.2 121.5 133.4 Gas development surcharge 29.9 30.0 30.0 Total Revenue * 1351.9 1396.5 1377.3 ============================================================
-- Net off provincial share
====================================================== CAPITAL RECEIPTS ====================================================== Rs (bn) FYI 10-B FY10-P FY11 ====================================================== Recovery of loans 38 47 47 Permanent Debt 0.3 42.8 61.4 Pakistan Investment Bond 5 25 30 Ijara Sukuk Bonds 0 20.4 40 Floating Debt 11 94.7 55 Prize bonds 10 34.8 35 Treasury Bills 1 60 20 Public Account 234.9 190.7 216.1 Saving Schemes 231.4 186.8 213 Total 190.5 260.2 325.3 ======================================================
====================================================== EXTERNAL RESOURCES Rs(bn) FY10-B FY10-P FY11 ====================================================== A-Loans...of which 444.9 450.2 286.9 Project loans 77 91 65 Programme loans 140 172 80 Euro Bonds 41 - 43 Tokyo Pledges 145 66 55 Islamic Development Bank 41 27 43 IMF 0 94 - B - Grants ...of which 65.4 127.7 99.7 Project grants 9 16 14 Tokyo pledges 46 30 27 Other aid - 68 - Kerry Lugar - - 52 Total (A+B) 510.4 577.9 386.6 ======================================================
======================================================= SHARE OF PROVINCES IN FEDERAL REVENUE RECEIPTS ======================================================= Rs(bn) FY10-P FY11 ======================================================= Income Tax 220.1 352.6 Sales Tax & GST 143.8 328.6 Federal Excise (net of gas) 54.7 82.3 Customs Duties 68.9 99.5 GST on Services 5.9 89.2 Royalty on crude oil 13.9 15 Royalty on gas 25.7 29.4 Surcharge on gas 29.3 27 Total 655.7 1033.6 As a % of gross federal receipts 31.9 42.8 =======================================================
================================================================ CURRENT EXPENDITURE Rs(bn) FY10-B FY10-P FY11 ================================================================ General Public Services 1,189.0 1,471.7 1,387.6 Defence Affairs & Services 342.9 378.1 442.2 Public Order and Safety Affair 34.6 37.3 51.3 Economic Affairs 84.9 80.6 66.9 Education Affairs & Services 31 .6 31 .5 34.5 Environment protection 0.42 0.42 0.45 Housing & amenities 1.5 1.8 1.8 Health affairs & services 6.5 6.7 7.3 Recreation, culture & religion 3.7 4.5 4.4 Social protection 3.9 4.4 1.5 Total 1,699 2,017 1,998 ================================================================
======================================================================= MAJOR SUBSIDIES Rs(bn) FY10-B FY10-P FY11 ======================================================================= Wapda 62.9 147 34 Inter-Disco Tariff differentia 10 77 30 FATA 10 16.7 10 Interest on TFCs 30 40 40 KESC 3.8 32.5 3.3 KESC on account of tariff differentia 2 31.7 2 Trading Corporation of Pakistan 30 30 17 on sugar imports 4 4 4 on wheat imports 25.5 25.5 12 Utility Stores Corp 4.2 4.2 4.2 Others 19 15 18 Import of urea fertiliser 10 unknown* 0 Total Subsidies 119.9 228.9 126.6 =======================================================================
-- Budget documents for FY11 do not mention the actual allocation
================================================================
AVENUES OF DEVELOPMENT SPENDING As a % of total federal PSDP
================================================================
FY10-B FY10-P FY11
Cabinet division 1.1 1.1 1.2
Defence division 1.7 1.6 1.3
Education 1.8 1.8 1.7
Higher Education Commission 5.0 6.0 5.4
Food & Agriculture 4.0 3.9 3.7
Health 5.2 6.0 5.8
Planning & Development 4.2 2.7 3.2
Railways 2.8 4.5 4.7
Textile 0.1 0.1 0.1
Water & Power 10.5 9.2 9.8
================================================================
===========================================================
STRUCTURE OF EXPENDITURE
===========================================================
As a % of total expenditure
Current Debt
operations Development Defence servicing
===========================================================
2004-05 77.4 20.4 19 26.2
2005-06 73.8 26 17.2 24.4
2006-07 76.4 24.1 13.9 25.4
2007-08 81.4 19.9 12.2 25.4
2008-09 80.4 19 20.5 34.8
2009-10 78 20 15 26
2010-11 72 24 16 25
===========================================================
FY10 0-B: Budgeted number for fiscal year 2010
-- FY10-P: Provisional number for fiscal year 2010
-- FY11: Budgeted number for fiscal year 2011
Source: Budget documents 2010-11; Economic Survey 2009-10
Reforms: Pasha cautiously optimistic
TEXT: An interview with Dr Hafiz A. Pasha - Dean Social Sciences Beaconhouse National University & Chairman of the Advisory Panel of Economists to the Planning Commission
Soon after the budget, BR Research sat with Dr Hafiz Pasha at his Lahore residence and discussed how the economy will likely fare this year, and how a change ought to come in Pakistan. In this interview, while discussing the ways and means to increase tax revenues, Pasha warns of budgetary slippages, roaring inflation and how a failure to roll out tax reforms could possibly lead to a state of anarchy in the country.
The following are excerpts from the interview:
BR Research: Why didn't you join the government?
Hafiz Pasha: Primarily for health reasons; I cannot take the stress of a high pressure job. Therefore, as part of national service, I offered to advise from the outside. I am doing this by sitting on a number of advisory bodies for the government.
We have a strong economic team today with Dr Hafeez Sheikh in Finance and Dr Nadeemul Haq in Planning. I am confident that they will lead the economy to the path of recovery.
But the problem is you have to take tough decisions, I don't see that happening just yet.
BRR: So what are your plans?
HP: I am currently associated with Beaconhouse National University as Dean of School of Social Sciences, I was keen to move from economics to broader social sciences, and focus on liberal arts. I am also writing a book on the Public Finances of Pakistan.
BRR: Do you think the government would be able to freeze its expenditure, knowing that the cabinet's size was increased by three ministers on the very day the budget was announced, which soon followed by a bailout package for PSM?
HP: The government's current expenditure numbers were off, the day the budget was announced, and the reason for it was the 50 percent increase in basic salaries and increase in other allowances and pensions. The budget was framed on the assumption of maximum of 25 percent increase in salaries; a higher increase means an extra Rs 100 billion of cost including that of the provincial governments.
As far as freezing is concerned, a look at the demands for grants and appropriations reveals that this is not the case. So those numbers need to be revised downwards.
In last year's budget, the supplementary grants were disproportionately large. They represented excess expenditure of 15-20 percent. The point is that when you have large supplementary grants, the cabinet's approval ought to be taken, if not the parliament's.
BRR: What's your take on the revenue side?
HP: Tax revenue might only go up to Rs 1,535 billion against the target of Rs 1,667 billion in 2010-11, considering normal growth, including inflation and real GDP growth, in tax base from current year's estimates of Rs 1340-50 billion. The proposed increase in GST from 16 to 17 percent and other taxation proposals in the budget will add about Rs 80 billion.
So, there is a very well defined gap of a minimum of Rs 50 billion -- which means if VAT or GST reforms aren't implemented by October as planned, we will have to come up with a mini-budget.
BRR: What is the way out then, and how do you think the IMF will view this?
HP: The government has limited options, especially if they want the (IMF) programme to continue in an uninterrupted fashion. If the projected deficit for 2010-11 turns out to be higher than 4 percent of GDP, the government will be compelled to go in for draconian measures, which would be ill-advised at this time.
The Fund may ask for a comprehensive VAT or GST reform across the board, but at 17 percent instead of 15 percent. So we may get both the rate hike and a broader base.
BRR: What would be the impact on inflation?
HP: The impact on inflation is automatic, as you would have increased the standard GST rate by 2 percent. The government may have made a mistake of going from 16 to 17 percent on GST because when you lock into a rate it's difficult to bring it down, especially when you are dealing with international agencies. They should have removed some of the exemptions on the VAT on goods so that the rate would have remained at 16 percent.
If, in fact, we end up with higher deficit that is even a bigger worry, because, at a margin, where would extra financing come from? Most likely, by borrowing from SBP like this year.
The third big inflationary factor is the rise in power tariffs in the process of removing subsidies. Already we have committed to increasing it by six percent, but according to calculations of ADB and World Bank, we may have to do more.
BRR: What will be the impact of public sector salary increase on inflation?
HP: There is the demand-pull factor of increasing purchasing power by Rs 200 billion (cost of salary increase) to almost three million government employees' households. My own assessment is that inflation will remain double digits in 2010-11.
BRR: Since you are part of the central bank's monetary policy committee, how will inflationary expectations influence the policy rate decision?
HP: There does not appear too much scope for rate reduction in the short run, especially when there is pressure of government borrowing from the banking system.
BRR: What is there for private sector, given that monetary policy's marginal impact on demand contraction decreases with more tightening?
HP: The problem with investment by private sector is due more to other risk factors than to interest rates. This includes political instability, governance issues and of course, on top of all, the continuing War on Terror.
Even if we decrease the interest rates, say by 1-2 percentage points, this may not stimulate private investment in the presence of these risk factors.
BRR: How to resolve the energy problem; is rental power the right solution?
HP: Rental power is not the right solution because it raises another issue of affordability; the marginal cost of power generation becomes very high.
They have the solutions; I don't know why they are not fully implementing them. They need to refurbish some of the old Wapda plants and they need to divert gas to these and other plants. All these issues are written about and known to everyone. The basic problem is implementation, implementation and implementation.
BRR: How do you suggest we tackle the problem of large losses of public sector enterprises?
HP: The only way to tackle this is to do what IMF does to Pakistan; you should have an agreement with each PSE, with well-defined performance criteria and benchmarks, and link releases to the fulfilment and certification of acts.
But that requires a certain quality of governance both within those enterprises and in the monitoring entity. It also requires doing away with rent seeking which appears to be rampant in Pakistan currently.
BRR: There are lots of ministries in Pakistan with lack of co-ordination among them; often the Prime Minister has to come to rescue them - take for instance the fight of upstream and downstream textile players. How do you look at it?
HP: Yes, we have to have better co-ordination among ministries, through the various Cabinet Committees.
I would have dealt with the textile issue very differently. I would not have imposed the regulatory duty on yarn exports. Rather than shifting the demand curve for yarn down, I would have shifted it up for the value added sector so that they pay a higher price.
I would have adopted a more liberal definition of duty drawback and compensated the value added sector with full reversion of local taxes paid. This incentive to the value added sector would have enhanced their profitability, so they could compete more effectively for yarn. This would have been a win-win situation at a relatively low cost to government. Also, exports would have been higher.
The quality of policy making through a proper process of objective analysis and discussion is missing in Pakistan, owing primarily to strong lobbies.
BRR: How can we increase the tax-to-GDP ratio to 15 percent?
HP: I am not sure of the target of 15 percent unless there is rapid growth in the economy. We have to cut down the fiscal deficit by not only increasing taxes but also by reducing unproductive expenditure.
Sooner or later, Islamabad will have to cut down on costs of administration following the 18th Amendment and abolition of the Concurrent List. Hopefully, the War on Terror will begin to ebb away and we can then start cutting defence expenditure.
I would target a 3 percent increase in tax-to-GDP ratio for the next five years. As far as income tax is concerned, most of the reforms have to be in tax administration. We have to re-establish a proper auditing system. We have to identify under-filers and non-filers and check evasion.
You will be amazed that two-thirds of the companies don't even file a return, and among those who file it only one-third declare profits. That means you end up getting revenue from 1/9th of the tax base.
People usually highlight the personal income tax side, but very few highlight the corporate income tax evasion. I think that improved tax administration and removal of exemptions will definitely give us extra one percent of GDP in direct taxes.
On the indirect side, obviously the tax which is growing is the sales tax and the dying taxes are the customs duty and excise duty. Basically, Pakistan is moving towards a dual tax system ie income and consumption (sales) taxes. On the sales tax side you have to effectively broaden it towards services. We have broadened the tax base, especially to the telecom sector, but there are a whole bunch of services that we have not taxed yet.
BRR: How many and which services are out of the tax ambit?
HP: This is a long list. To name a few, most financial services and business services are out of the tax ambit. Private security services are bigger in Pakistan today than the police force. That sector alone can give us Rs 2 billion of revenues in sales tax.
Authorised automobile dealers could yield another Rs 2 billion. Management, engineering, accounting and other consulting services could also yield significant revenue, especially since they deal mostly with government or corporate entities. In India, 100 services are subject to the Service Tax which yields over 1 percent of the GDP.
My approach is to focus on corporate services, instead of going after say the corner grocery stores.
In three years time we can pick up 1.5 percent of GDP (in taxes) by broad basing the general sales tax and by removal of exemptions from some of the goods. There are a number of SROs promulgated by the previous government which need to be withdrawn.
So the income and sales tax reforms can generate collectively 2.5 percent of the GDP. More revenues can be generated by checking Afghan Transit Trade. Then there are provincial taxes, like agriculture income tax, taxes on real estate, etc. We have a law (since 1997) to collect Agri Income Tax (AIT) but the collection is extremely low. This year Punjab targeted a mere Rs 1 billion in revenues from AIT. The tax is only about Rs 100 to 150 per acre. A proper AIT could yield at least Rs 20-25 billion.
BRR: And how do you garner political will for taxation, whether it's a military dictator or a democratic set-up?
HP: The military dictator has a different problem; it's a problem of legitimacy. Democratic governments have to deal with lobbies. Either way you have a problem.
The only time when difficult reforms get implemented in most developing countries is when we are on the verge of or in deep financial crises. Seldom are reforms undertaken in a planned fashion.
BRR: Do you see that crises coming in Pakistan?
HP: If current trends continue then as our external debt repayments peak in the next two to three years, we may find ourselves on the verge of another financial crisis like 2008. The problem is that every time we go through a crisis, it becomes more difficult to get out. This time it's compounded by all kinds of problems. We have problems of infrastructure bottlenecks, militancy and ethnic nationalism.
In the 60s, a book called, Asian Drama, was written by a very famous Swedish economist, Gunnar Myrdal. According to him, South Asia is a classic case of the 'soft state' which fumbles from one crisis to the other. While it is unable to prevent crises, it nevertheless has the ability to manage and contain the crisis. That's why these crises do not lead to failed states like you have in Africa.
So we will probably continue to muddle along. But there is a danger that successive crises will become deeper and deeper and make it more difficult to emerge. This is what worries most of us today.
BRR: Do you see any sort of revolution somewhere down the line?
HP: The problem with the revolution thing is that you need a leader. We don't have a Chairman Mao. There is more likelihood of a state of near anarchy and loss of the writ of the state.
"If the projected deficit for 2010-11 turns out to be higher than 4 percent of GDP, the government will be compelled to go in for draconian measures ...the IMF may ask for a comprehensive VAT at 17 percent instead of 15 percent"
"Inflation will remain double digits in 2010-11.......there does not appear too much scope for rate reduction in the short run."
"We don't have a Chairman Mao....there is more likelihood of a state of near anarchy and loss of the writ of the state."
Implementation issues of VAT-mode taxation
ARTICLE: Indirect tax, in the form of consumption tax, is prevalent throughout the world in one way or the other. In addition to direct taxes, it represents a major contribution in the total tax mix of any country.
The present world is effectively divided into two segments. There are countries such as the US and India where provincial consumption tax is levied on single stage basis. The rate for the same is on average below 7.5 percent.
The other group of countries includes the likes of UK, almost all of the EU, Bangladesh and others where a countrywide consumption tax on the value-added mode is applicable both on consumption of goods and rendering of services.
This tax is generally termed as VAT or Goods and Services Tax [GST]. The rate in that situation ranges between 10 and 15 percent as the same is under value-added mode. Effective incidence is almost the same in both cases.
Pakistan, historically, fell within the ambit of first group where sales tax was levied as a single stage tax under Sales Tax Act, 1951. However in 1996, a policy decision was taken to introduce multiple stage sales tax under the value-added mode. Historically, services were outside the net, and collection of consumption tax on services was made under the name of Federal Excise Duty.
When sales tax was extended to services, in order to overcome the constitutional issues, Provincial Sales Tax Acts were promulgated whereby provinces devolved their right of collection to the centre on the condition that proportionate amount so collected by the federal government would be distributed to the respective provinces.
This is the system prevalent at this stage. However, recently some provinces have shown intentions to collect consumption tax on their own.
The Sales Tax Act, 1990, which replaced Sales Tax Act, 1951 after the relevant amendment in 1996 in principle, is based on UK VAT system. That act when read with relevant provincial legislations and the Federal Excise Duty laws relating to services, constitutes the framework for the sales tax laws in Pakistan. In principle the act is on value-added tax mode.
This framework is compatible to any other good and reasonable legislation on the subject. Nevertheless, it should be accepted that there are serious problems in its implementation. These implementation problems have led to aberrations in law and distortions in principles.
The first problem that could not be solved is the extension of sales tax on wholesale and retail traders. Notwithstanding the clear provisions of the law, there has been a constant challenge of the writ of the government and almost the whole sector is still outside the ambit of the sales tax regime.
Thus, effectively, sales tax is only being recovered from the manufacturing sector. To overcome the shortfall in revenue arising on account of the implementation, distortions in the VAT system were made and recovery of tax is now being made from the manufacturers at the retail prices for various commodities, according to Third Schedule of the Sales Tax Act.
This is a very serious issue. The resistance from wholesalers and traders arises for two reasons namely; (a) to avoid income tax liability, which could only be done if trade remains out of books, and (b) to continue dealing in products available through unorganised and undocumented manufacturers, such as goods made available through the abuse of Afghan Transit Trade and other under invoiced or smuggled goods.
Furthermore, there are political interests that undermine the government's efforts as certain political parties' vote bank is represented by such trading groups.
The second problem arose in releasing and managing the refunds especially for the export sectors. Since exports are zero-rated, therefore whole amounts collected at various stages is to be refunded once the goods are exported. From 1996 to 2005 there were two-fold problems in the issue of refunds.
Genuine taxpayer's funds were held up due to delays in issue of refunds whereas non-genuine refunds paralysed the government system. Resultantly, in 2005 a bitter pill was swallowed and one of the biggest distortions was created, when instead of exports, export oriented sectors were zero-rated.
This meant that Pakistan's textile, leather, sport goods, surgical and carpet industry became non-taxable from start to end. But it also meant that domestic sales of these goods, the production of which forms major industrial components of the country, also became non-taxable.
These distortions are so fundamental that no meaningful implementation of VAT can be undertaken unless these are removed and an equitable practical solution for refunds is implemented. There are two solutions namely; (a) an expeditious and transparent refund mechanism or (b) introduction of a reduced rate for such sector.
The ideal solution is the first one; however, whilst deciding the strategy and the future course of action it has to be taken into account that the whole trail is undocumented. It would require time to bring things in order. Thus, the introduction of a reduced rate for such zero-rated sectors could be an option, though not an ideal strategy.
The third problem is the extension of consumption tax on services. There are two impediments in this sector. Major revenue earners in this field like telecommunication, banking, travelling and insurance are already subject to such a tax by way of Federal Excise Duty, whereas the constitutional validity of such a levy is highly questionable.
The second aspect is the collection of tax from services like transport, hotels, restaurants, and other such sectors. There are serious issues of implementation, including documentation, within these sectors as well.
The underlying reasons for distortions and aberrations are legacies of incorrect policies of the past, lack of administrative will to implement the law, and introduction of a consumption tax on value-added mode could emanate our inherent desire to avoid income tax.
The final issue is exemptions. There is a widely-held perception that distortions have been created by exempting certain goods and services from the ambit of the consumption tax. This presumption is, in principle, incorrect.
By and large, exemptions have been given after taking into account the economic considerations in the country. The underlying objective is not to tax goods and services of common use - things which are necessities like food, health, medicines and education services and which nearly consume the whole of disposable income of poor households. In our local circumstances, this exemption would have to be retained for such items.
The introduction of a broad-based consumption tax is the need of this country if a respectable tax-to-GDP ratio is to be achieved. This is not necessarily an IMF prescription; it is our own need and requirement. There is no fundamental defect in the present law. The problem lies in implementation and that too on the policy side and the will of the government.
The general public is not aware of the issues involved and it perceives the same as a measure to increase their tax burden, and this is where the idea needs to be explained properly.
The beneficial aspects of broadening the base, availability of funds to the government for infrastructure and public utilities and resultant increase in direct tax collection are intentionally camouflaged at the moment by those with a vested interest. The masses, therefore, are being misguided by the people and lobbies having political or economic conflict of interests.
The utility, necessity and the need to introduce this tax must be examined independently by independent, non-partisan economists who have comprehensive understanding of the policy issues in the taxation system of Pakistan.
At the same time, a national political and economic consensus is required to explain and implement the broad based consumption tax in the country, whether it is termed as Value Added Tax or Reformed Goods and Services Tax. Failure to do so, will keep Pakistan struggling forever more.
The writer is a chartered accountant and tax expert, who is currently working as an advisor to the government on taxation affairs. He can be reached at [email protected]
The underlying reasons for distortions and aberrations in VAT are legacies of incorrect policies of the past, lack of administrative will to implement the law, and inherent desire to avoid income tax that could emanate if a consumption tax on value-added mode is introduced.
Money bill, taxman and the individual
ARTICLE: In this essay, Iqbal spells out areas that are wanting in the rule of taxation law, while highlighting the structural weaknesses in the prevailing legislative processes. The rule of law does not have a precise definition, and its meaning can vary between different nations and legal traditions.
Generally, however, it can be understood as a legal-political regime under which the law restrains the government by promoting certain liberties and creating order and predictability regarding how the country functions. In the most basic sense, the rule of law is a system that attempts to protect the rights of citizens from arbitrary and abusive use of government power.
In his book The Morality of Law, American legal scholar Lon Fuller identifies eight elements of law which have been recognised as necessary for a society aspiring to institute the rule of law. These are Laws must exist and those laws should be obeyed by all, including government officials.
Laws must be published.Laws must be prospective in nature so that the effect of the law may only take place after the law has been passed. For example, the court cannot convict a person of a crime committed before a criminal statute prohibiting the conduct was passed.
Laws should be written with responsible clarity to avoid unfair enforcement. Laws must avoid contradiction. Let's try to scrutinise Pakistan's tax laws from Fuller's standpoint. The budget FY11 emphasises a number of measures. First, revenue generation; second, tightening compliance requirements; third, introduction of more regulatory controls for taxpayers; and last but not the least, expanding the base of presumptive taxes even at the cost of injuring the constitutional rights and intruding on contractual transactions by violating the mutual rights of the parties.
Pakistan is, therefore, much in line with the general directions being followed in developing countries by approaching a tax policy on an ad hoc basis. That is why our system seems to lack a rational base, because conflicting objectives are being pursued at random, and even particular objectives are being pursued in contradictory ways.
Resultantly, we propose incoherent and piecemeal changes rather than following a strategic design. We are, in fact struggling to adapt to profound changes in the economy and the social institutions in which we are operating. Azeem Zafar, author of Competing Choices, argues that the policy tool that requires a serious consideration is the fiscal policy. The idea is to ensure a 'manageable size' of fiscal deficit, simply because fiscal deficits cannot continue indefinitely without severely weakening the economy.
We find that in the current budget, fiscal deficit remains large; government forecasts a budgetary gap of 5.1 percent, but over the years it is expected to increase to unmanageable levels, according to various estimates. One may keep in mind that economic growth is dependent on savings and investments, the more the savings and investment in an economy, more the growth. Unfortunately, one does not find directives for savings and investments in the money bill.
Pakistan's Economic Survey 2009-10 proposes a growth rate of 4.1 percent in the economy, whereas our population is growing at a rate of more than 2 percent. This means that for maintaining the existing standards and quality of life, we are supposed to maintain a constant growth rate of at least 5 percent.
The proposed fiscal measures are also not in harmony with the requirements of the economy. With the proposed measures, the economy will further slow down, and the slow rate of economic growth will affect the quality of life, decrease living standards and will lead to unemployment, increasing crime and violence.
The changes proposed in direct taxes can be termed as cosmetic, and these proposals will not bring any real benefit to the economy. Neither has any serious effort been made to increase the tax-to-GDP ratio, nor has the tax base been widened. For example, the proposed measure to increase the exemption limit of direct taxes will decrease the number of tax payers.
Banking Instruments and Services Further, no step has been proposed to arrest the ballooning size of the undocumented, and often black economy, which will likely continue to increase. Take for instance, the decision to bring into the tax net, various banking instruments and services. Though the proposition is disputed, there is enough literature to suggest that it might discourage people to use banking services, as the user may prefer to opt for cash transactions defeating both the object of documentation and limiting the unrecorded black economy.
For example, in the current scenario, if a bank account holder deposits Rs 50,000 in his account and wants to withdraw the same later on, he will not be able to get back his full amount, rather he will only get Rs 49,500 -- the rest will be withheld as presumptive taxes.
This is tantamount to becoming immoral - immoral because we are not honouring the terms of the bank and account payee. Since, the government is responsible for functions such as the formation of contracts, protection of property rights and enforcement of law, taxing bank transactions in the manner proposed by the Finance Bill 2010 may amount to confiscation of citizen's money by the state, and the same is against the elements of the rule of law.
The concept of withholding taxes is usually restricted to businesses and government agencies. Individuals in their capacity as employees and consumers are usually excluded since they are too numerous and not sufficiently capable as a class to be suitable agents.
We are however experiencing an ever larger application of withholding taxes in our country. The operational system for implementing withholding taxes is not only faulty but cumbersome as well. And such practices lead to a slowdown of the economy, affecting businesses, industries and individual households.
The question then arises whether tax collection remains an act of state by levying taxation or amounting to confiscation of the depositors' money. If it is confiscation, then the act of state will be in violation of fundamental rights. Mind you, that the legislature does not have the power to tax to a point, where the act of taxation becomes an act of confiscation.
GATT Code of Valuation Another structural defect in law is that the administration is cleverly defeating the spirit of GATT Code of Valuation, which provides the methods for determination of customs value in sequential order of application. Instead, indexed and fixed prices are being applied for assessment purposes, and trading groups are being mischievously allowed to use fixed prices for group under-invoicing, thereby seriously hurting the principles of equity.
The concept of minimum values being practised by member countries of WTO, has in Pakistan been declared to be in violation of the GATT Code of valuation, in line with a recent decision by the WTO dispute settlement commission.
Common Man's Apathy Taxes - have always been opposed by the common man as being a coercive act of the state. Unfortunately, developing countries have been experiencing continuous authoritarian regimes for a long time. These regimes have blurred the idea of democracy and rule of law to an extent that civilian rulers are finding it difficult to revert back to a civilian regime. The existing machinery, engaged in distribution of services to the masses, is not aware how to run a civilian democratic rule.
Resultantly, their failure is apparent from the defective law making initiated by them. The proposition gains support from the growing litigation between the common man and the state. The legal maxim that 'state is a noble litigant', is looking blurred nowadays. It will be interesting to note here that rise and fall of empires has among many things primarily been dependent on the attitude and treatment of the taxman.
In his best seller "The Rise and Fall of Empires", Paul Kennedy, a well known historian singled out the tax policy as being the sole factor for the downfall of empires. Gibbon, in his renowned book: Rise and Fall of Roman Empire also terms taxation as the most relevant factor behind the downfall of the empires. And herein, lies the message for Pakistan's rulers.
-- Panama vs. Columbia: WTO: DSC: Case against Columbia: Dispute Settlement Commission Report: April 2009. The writer is a graduate of University of Southern California, and is currently working as Managing Partner Azim-ud-Din Law Associates Karachi. He can be reached at [email protected]. The legislature does not have the power to tax to a point, where the act of taxation becomes an act of confiscation. Historians have singled out tax policy as the sole factor for the downfall of empires. Indexed and fixed prices are being applied for assessment purposes, and trading groups are being mischievously allowed to use fixed prices for under-invoicing.
'Not an austere budget'
An interview with Sartaj Aziz - former foreign minister and finance minister
ALI KHIZAR ASLAM
TEXT: Sharing his views on budget FY11, Aziz warns of fiscal slippages owing to both revenue shortfall and failure to contain expenditure within budgetary limits, which can lead to 'serious and chronic structural problems'.
Aziz, who calls for job-inclusive growth, also demands agricultural reforms by means increased water availability, solar power, and use of technology for better crop yields.
The following are excerpts from the interview:
BR Research: Do you think it's an austere budget as the government claims?
Sartaj Aziz: Not an austere budget. This budget not only shows a lot of uncovered caps, but also shows a number of structural weaknesses. Our previous budget had a fiscal deficit target of 4.9 percent of GDP which the IMF relaxed to 5.1 percent. However, our deficit this year will be 6 percent.
And there are two things that are not included in this fiscal deficit; one, losses of public sector corporations, called quasi fiscal deficits around Rs 250-300 billion, second is the circular debt, that too is somewhere around Rs 250 billion.
As of now, public sector corporations have borrowed from banks, with government guarantees. Unless they can earn profits and pay back these loans, this amount falls in the government's lap too.
Then there is circular debt which has been accumulating since 2008, when oil prices went up to $140 per barrel. They haven't repaid the full amount yet. Taking all that into account, the actual fiscal deficit is larger than 6 percent of GDP.
In this background, the chances of achieving this year's fiscal deficit target of 4 percent are slim.
BRR: Do you think the tax target is achievable?
SA: Last year's tax target was Rs 1,370 billion and the amount realised was around Rs 1,315 billion. But that's without taking into account the Rs 50 billion worth of refunds whose payment has been delayed.
So essentially, the actual shortfall was over Rs 100 billion, which means actual collection was about Rs 1,275 billion in FY10. Now, taking tax collection from this level to the target of Rs 1,670 billion is over ambitious and is based on the assumption of full implementation of the VAT, which has its own problems. So we are not likely to achieve that target.
In our taxation, the ratio of indirect taxation is increasing and that of direct taxation is decreasing, which means its balance is not right since the burden of indirect taxes falls on the common man. These qualitative problems of the tax system also require attention.
BRR: Can expenditure be contained, if circular debt and corporation losses are reduced?
SA: Not likely. Defence expenditure has increased by Rs 100 billion, and there are no signs of that amount being reduced. Then, debt servicing is also increasing because of previous budget deficits.
Total budgetary expenditures are Rs 3,200 billion this year but revenues are estimated at Rs 2,500 billion - Rs 1,700 billion as tax revenue, Rs 800 billion as non-tax revenue. This deficit will be higher if the tax targets are not met. So the crisis is clear; to cover this Rs 700 billion or Rs 800 billion, we have to borrow more.
If we borrow locally we have to pay 12-15 percent, if we borrow from abroad in foreign exchange, we have to pay some 6-7 percent. So of course debt servicing has become the largest item of the budget - around Rs 780-800 billion. Therefore, our budgetary situation is pacing towards a very serious and chronic structural problem.
BRR: Do you think the government is running out of solutions?
SA: Not really. The finance minister has acknowledged a number of these problems in his budget speech. The government is aware that they have to reduce the corporate losses, circular debt and increase direct taxation. The real question is: to what extent does the government have the political will and the strength to implement the kind of strategy that the finance ministry has recommended.
BRR: Are support prices inflationary, keeping in mind the recent increases in wheat support price?
SA: A gradual increase in the support price that gives an incentive to farmers but does not enhance the price to the consumer by a rate higher than inflation is not inflationary but the 50 percent increase in the support price of wheat in 2009 was inflationary. But the government has tried to moderate the inflationary impact by subsidising the sale of wheat to consumers.
Another complicating factor is our cost of production of wheat. This has also increased in the past 10-12 years. And the reason is that when we had the Green Revolution in 1967, the whole focus of the new high yielding technology was on additional use of fertiliser.
The new high yielding seeds needed more water and more fertiliser. That increased the yield but back then, the price of oil was $10 a barrel, and a bag of fertiliser was less than Rs 100. Now a bag of fertiliser is around Rs 800-850, and oil is $80-85 a barrel.
The volume of water from the canals has decreased, so farmers are using tube-wells that require diesel or electricity, the price of which has also risen. So in the long term we need to reduce the energy intensity of our agriculture by using solar wells, organic manure and different cropping patterns, thus shifting energy requirements to more renewable sources which will considerably reduce the cost of production.
This is a long-term solution, not an immediate solution. But this is something that cannot be ignored, because the cost of imported fertiliser is even higher - Rs 1,200 per bag. The utilisation of gas, which is also becoming expensive, should give priority to fertiliser production rather than as power resource. For this we need a pro-agriculture policy because it is the backbone of our economy.
BRR: So you are saying solar energy is the way forward?
SA: There is a lot of work being done on solar energy. Both China and India are planning to meet 20 percent of their energy needs by concentrated solar energy.
The new technology is concentrated around solar energy, and although it is expensive now, research is being conducted to make it cheap. It is clean too, and it will reduce your dependence on imported energy. And for a country like ours where the sunshine is good, we should definitely be able to use it. It is good that the Punjab government has decided to provide a subsidy on solar tube-wells.
BRR: When do you see renewable energy being used in Pakistan's agriculture sector?
SA: In 10 years it can become significant. It is important from an environmental point of view. Also if we increase local production of all the equipment, it will greatly help our agriculture.
BRR: How can we ensure that GDP growth generates broad-based employment?
SA: Our average growth rate has fallen to 2 - 2.5 percent in the past four years but the annual addition to the labour force is over 3 percent. The World Bank estimates that one percent of GDP growth means half a percent increase in employment.
To absorb 3.3 percent of additional labour force, an average GDP growth of 6.6 percent is required. This is just to take care of the addition to the workforce. If you want to take care of the backlog, then 7 percent plus is required. If the economy is growing at 4-5 percent, the backlog will keep increasing.
This is a very explosive situation at a time when inflation has also been rising. There is a desperate urgency for the economy to grow at 6 - 6.5 percent so that at least there is no addition to the backlog of unemployment.
India, for example, has started to grow at 8-9 percent for the past so many years they have not only taken care of their back log, they are now facing labour shortages in some sectors. This is necessary to combat poverty. And when production increases, inflation also goes down. Unemployment and inflation are the two critical problems facing this country.
BRR: How bad is the inflation scenario?
SA: This year inflation is 11.7 percent. Last year it was 20.8 percent. The cumulative average in the last six years is 70 percent. This is as far as your CPI inflation is concerned, which is based on selected products.
Food inflation is even higher - 90 percent in 6 years. This is what affects the common man. Even core inflation, which does not include food and energy, has gone up by 60 percent over 6 years.
The reason behind this is two fold, our monetary and fiscal expansion, borrowing has a big role in this, and two, commodity prices have increased.
BRR: Given the present situation, can we contain inflation?
SA: You need to reduce fiscal deficit, non-developmental expenditure and reduce the losses of corporations.
BRR: Do you think it is being done right now?
SA: You cannot reduce these losses in the short run, nor can you reduce circular debt in the short run, because price of electricity cannot be increased by much. Security related expenses are rising too, debt servicing has also increased, other non-development expenditures can however be reduced.
BRR: Does that mean you are for tight monetary policy?
SA: Of course you have to keep a tight monetary policy. The biggest problem however is the interest rate. With such high inflation the IMF will not let us reduce it. The two are inter-related. But you can reduce it selectivity. For instance, you can get export financing at a cheaper rate. But to reduce interest rates in the long run we have to reduce inflation.
BRR: Indirect taxes are quite regressive and VAT will further aggravate it. Why aren't we targeting direct taxes and what avenues can we tap for direct taxes?
SA: When we (PML-N) took over the government in 1990, the ratio of direct taxes was around 14-15 percent. Dr Hafeez Pasha was then the Secretary of the tax mobilisation committee. He suggested that to increase 'your direct taxes why don't you introduce a system of withholding taxes'.
To start with, importers paid 2 percent withholding taxes, contractors 3 percent and exporters 1 percent. This saves the businessmen the hassle of filing income tax returns too. Later, policy makers in other government increased the rates but overall today 70 percent of all direct taxes are through withholding taxes.
The purpose of this improvisation was that gradually the system will improve. To improve it, we made a Pakistan Revenues Automation Limited (PRAL), so the purpose was to document so that we can collect taxes for every major transaction at the time of transaction. But the progress towards documentation has been limited. And the problem with VAT is same that it requires documentation.
With documentation you will also get more direct taxes. People are naturally trying to avoid that because they know this is where they will get caught. There is no doubt that our GST is VAT, but it is only applicable on wholesale and manufacturing, not retail level and on services.
So we should clean the system first, expand the tax net and then increase revenue. This increase in revenue is what the opposition is against. Similarly, non-tax revenue is all indirect. Almost one-third of direct taxes are withholding taxes, which in essence, is indirect taxation. It has a bad effect on income distribution. The reason is that most money making sectors are tax exempt like the real estate sector.
BRR: Turning this problem around requires a mammoth sized political will; do you think the existing set-up has that?
SA: For this reform, merit is very important. If you wish to reduce losses, we need to appoint directors and heads of corporations on merit. If we don't follow a merit system, incentive is lost and qualified people don't come up. So, for political will, you need to see what your principles for good governance are.
And this has been a problem of the PPP since the beginning. I have also mentioned that in my memoirs published last year. They suffer from a culture of excessive political patronage. And when this affects the functioning of the institutions, the good governance cannot be ensured.
The second dimension with political will is the overall targets we want to achieve. The current growth targets are 4-5, and we want to go to an average of 6-7 percent. What do we need for it? Firstly, we need infrastructure, especially energy at reasonable prices. That in turn depends on the efficiency of utility companies. Now, this government has shown little ability to deal with these problems. Part of it is due to the absence of a merit-based system.
BRR: What is your view on local bodies?
SA: Decentralisation is necessary for every system. An overly centralised system cannot deliver, whereas a decentralised system of governance and elected governments can. The unfortunate thing, however, here is that every local body system has been introduced and sustained by a military ruler in Pakistan.
Military rulers love local bodies because without transferring real power they give a semblance of democracy since they brought democracy at the local level. General Zia initiated a system in 1979 and three elections were held in the 1980s and 1990s. Under Zia, 50 percent of the people elected to provincial assemblies in 1985 were those elected to union councils previously.
General Musharraf had the same game plan that these people will support and help him win the next election for his supporters. The system thus becomes politically one sided. And with the change of government efforts are made to change this system.
BRR: Why do democratic governments look at local bodies with contempt scorn? Why not remove its faults and weaknesses and keep the institution?
SA: I agree. In fact even in 2001, the original 1979 system should have been improved rather than replaced. In fact a lot of work has been done so that gradually the status of chairman district council is raised to provincial minister.
Give him an additional chief secretary for development. Give them additional resources and taxation powers - and it would have gradually improved. In the meanwhile police and magistracy can be kept out.
Development and service delivery function are an essential part of the local government system. Basically there will be devolution of service requirement. They know the peoples' requirements and needs so they function properly. Devolution of law and order is not right because it can be politically misused.
BRR: What's your take on Pakistan's foreign policy with India vis-à-vis economic relations?
SA: Any long-term trade relations with India will take place within the context of SAARC. We are three years away from the target date 2013 for duty free trade. The chances of meeting that deadline, because of the political issues, have now diminished. India has a greater stake in this, because no country can survive in isolation now.
This is why trade between regional blocs is on the rise because proximity is an advantage. Intra EEC trade is 60 percent. 40 percent of NAFTA's trade is inter-regional. Even ASEAN has gone up to 25 percent whereas SAARC is only 6 percent.
With the kind of tension between India and Pakistan this looks bleak. If India understands its stakes and resumes talks, co-operation within the SAARC may also enhance. Both countries will benefit from it.
We have to expose our industry to competition from India. If we can compete with China, why not with India. But of course there are political obstacles. Energy co-operation can be even greater, because Central Asia and Middle East are energy rich and South Asia is energy deficient. Without better relations with Pakistan, that energy cannot reach India.
"In the long term we need to reduce the energy intensity of our agriculture by using solar wells, organic manure and different cropping patterns". "Our budgetary situation is pacing towards a very serious and chronic structural problem" "We have to expose our industry to competition from India. If we can compete with China, why not with India."
Education and human development: budget FY11 & beyond
DR. FAISAL BARI
ARTICLE: For the last 20 odd years that I have been following budget speeches and other government plan documents, I have not come across a document that did not declare that human development was a very high government priority.
Nearly all papers said that human development was one of the most important ways of addressing the developmental issues of the country, that it was the most important end of development and that the government was going to, despite difficult conditions, increase the pace of human development.
But the outcome is all too evident. Our human development indicators rank amongst some of the poorest nations in the world, way behind nations with comparable incomes and other characteristics, and way behind even some of our neighbours.
Our pace of progress in the field has also remained dismally slow. Just to quote a few statistics: more than six million primary age children are still out of school, more than 15-17 million children aged 5-16 are out of schools, our literacy rate is not much above 50 percent and most important health indicators, such as infant & maternal mortality and malnutrition in children, have not moved much in many years.
Not surprisingly, the story is the same on the input side as well.
Despite the rhetoric, the government has not been able to raise funding for education and health - core areas within human development - up to international norms or even norms in comparable developing economies.
Expenditure on education and health is currently way below the levels we would need if we are to make up for the neglect of the last six decades. But the rhetoric continues. To give just one example, here is what the executive summary of the Economic Survey 2009-10 says about the overall 'tough' conditions:
"A combination of limited fiscal space and rising spending, debt, and inflationary pressures, significantly reduce the government's ability to spend in order to stimulate the economy. Under the circumstances, the prudent course for policy in the near term remains the pursuit of greater fiscal consolidation through domestic resource mobilisation, in conjunction with reducing the size of government, and improving the efficiency of public sector spending."
We know what the reduction in size of government will mean for social sectors as these sectors depend a lot on government spending. But as argued above, the Economic Survey's chapter on education goes on to say exactly what I have said has been happening for the last many decades:
"It is widely acknowledged that education is amongst the single most important factor contributing to poverty alleviation. Education plays an overarching role and has a cross cutting impact on all aspects of human life. It is a vital investment for human and economic development."
And then the classic: "Given this dismal state of affairs, Human Capital Development has been accorded amongst the highest priorities in the government's Nine Point Plan of 2008." And yet, this federal as well as the provincial budgets that have been announced - have done nothing to address human development issues. Overall spending on education and health stays roughly where it was and there was no effort to even think innovatively about questions concerning the topics. It was the usual exercise of 'status quo'.
In the budget the Federal Minister made a big deal out of the Benazir Income Support Programme (BISP). It is certainly true that BISP is an important and interesting effort, but it is much more of a safety net, for the very poor and vulnerable, right now.
It is definitely capable of being developed and used as a much broader social sector platform, but it is far from that at this point. In its present state and form, the BISP will not do much for human development.
That said, it is not as if nothing has changed in the human development area and the rhetoric about it; over the last year or so at least three important changes have occurred. First, the new education policy that the government had approved called on the government to raise education sector financing, by 2015, to 7.5 percent of GDP (it hovers around 2% currently).
Second, the 18th Amendment to the Constitution has added the right to education, for children between ages of 5-16 years, as a basic right and now the Constitution says all 5-16 year olds should have free and compulsory education. Third, the 18th Amendment has, in devolving more power to the provinces, also devolved most social sector areas, including both health and education, to the provinces.
The government, despite the recommendation coming from its own policy, has not started increasing funding for education. And there was also no move, in the federal or provincial budgets, to really address the implications of making education a basic right (some Pakistanis should take the government to court soon). In fact, using the 7th NFC award and 18th Amendment, while referring to education and health areas, the Federal Finance Minister found reason to just say:
"The additional transfer of financial resources to the provinces means more money for law and order, education, health, drinking water and municipal services. Correspondingly, this means reduced fiscal space for the federal government and an incentive for better management of its diminishing resources. It also means that federal government spending on social sectors would be limited generally to tertiary levels of education and health with major responsibility for these sectors shifted to the provinces," Dr Hafeez Shaikh told the parliament in his budget speech.
But what was missing in the federal budget or the provincial ones were details about how the changes envisaged by the 18th Amendment would be implemented or when and where one could see these details. What is really worrisome is not the fact that these details were absent in the budget, as it is still early days after the passage of the Amendment and government cannot just work out everything right away, but it is the lack of reference to even any serious efforts to address the issue which is a cause for concern.
One gets a strong feeling that neither the federal government nor the provincial ones have really started addressing this issue just yet. But this just means that the status quo is likely to continue and nothing significant has happened on the human development front.
On the provincial side, it is true that most provincial governments have raised the allocation on education and health, but the addition does not seem significant and though it will take a lot of work to figure this out in detail from figures quoted so far as it seems that state educational spending, compared to last year, might actually just hold steady or may decrease slightly.
Even if it goes up insignificantly, clearly that is no way to address the human development deficit or the implications of the 18th Amendment. Where is the preparation to implement the amendment in spirit? And doesn't the lack of preparation indicate how empty government rhetoric is?
In fact, the policies being followed by the federal and provincial governments, in the area of education at least, clearly indicate that not only are the governments not serious about fulfilling their promises or their constitutional obligations in the area, they actually do not have much of a clue as to what is going on in the area and what should they be focusing on.
On one hand, the state has made education free and compulsory for 5-16 year olds, at the same time it has been allowing the public sector education system to fall in ruins, encouraging the private sector directly and through public-private-partnerships (PPPs), sometimes even using public money to improve private sector education, Punjab Education Foundation is an example. How does the right to education coexist with multiple providers is a question that has not even been asked yet.
At the same time provincial governments, instead of trying to provide a minimum quality education to all children, are doing things that can be popular from a marketing perspective but will not address the basic issues of the education sector.
The government of Punjab, through Danish Schools, wanted to create Aitchisons for the poor, it had started a scholarship scheme, meant for children from poorer backgrounds that discriminated against poor children going to low fee private schools, it recently decided to convert to English as the medium of instruction for all public schools when we do not even have enough teachers to teach English as a second language. All of the above just shows how weak the preparation of the government is when it comes to what is needed to seriously tackle the problems in the human development area.
In countries that are serious about human development, a change like the 18th Amendment would have been an occasion to start a large number of very serious and far reaching debates about how the goals set in the constitution are going to be achieved, commissions would have been established, working groups formed, research commissioned and implementation plans drawn up.
In Pakistan, however, we have seen nothing of the sort both in the wake of the passage of the 18th Amendment and in the budgets that followed. So the story continues: the rhetoric of government is about the importance of human development while their actions continue to belie their words. And this budget was no different. Faisal Bari, on leave from the economics department at LUMS, is currently working with an international NGO. His work is focused on economic/social development, especially with reference to education. He can be reached at [email protected]
In its present state and form, the BISP will not do much for human development. The rhetoric of government is about the importance of human development while their actions continue to belie their words. And this budget was no different. There was no move in the federal or provincial budgets, to really address the implications of making education a basic right.
The sorry state of development in Pakistan
ARTICLE: The budget 2010-11 has been tabled with the same promise of pro-people development and poverty alleviation one hears every year. Each government claims to be more sincere than the previous one and highlights the enhanced share for development expenditures. Yet, their performance is inevitably found wanting at the end of the year.
The embarrassment is countered the next year by making new promises and presenting the next budget as a paradigm shifter. These pronouncements are little more than political gimmicks. Pakistan suffers from the twin-problem of lack of resources coupled with implementation failures; these combined, result in suboptimal performance year after year and thus both have to be fixed before one can genuinely expect a game changing performance from any government.
While development outlays are increased every year, they are still not commensurate with the requirements - the task is simply too daunting. Moreover, Pakistani governments have lacked the political will and the capacity to turn around the implementation problems, as they involve politically unpopular decisions. The present government's outlook seems no different; numbers look good on paper but are unlikely to do the trick. Focusing on social sector poverty alleviation goals - the focus of this discussion - the government has pointed towards increased outlays. Development spending allocation of Rs 663 billion is 6 percent more than last year's outlays.
The Benazir Income Support Program (BISP), the mainstay of the government's poverty alleviation strategy will receive Rs 50 billion, Rs 20 billion less than last year's. It is expected to benefit 4 million families by extending a cash grant of Rs 1,000 per month.
A fresh health insurance scheme, the Waseela-e-Sehet has been introduced on a pilot basis to provide health insurance cover of Rs 25,000/year per family for hospitalisation.
Also in the mix are Waseela-e-Haqi, a self-employment scheme, provision for vocational training to one person of a beneficiary family, two phases of a People's Works Programme, a Rs 2 billion allocation to the Bait-ul-Mal and an increase in the minimum wage from Rs 6,000 to Rs 7,000.
On the face of it, these steps are commendable. Given the current economic crunch and government's knee-jerk responses to first slash poverty spending, this administration has made a conscious effort to protect these expenditures. However, they seem much less impressive when matched up to the magnitude of the challenges facing Pakistan's social sector.
Even by official estimates, 23 percent of Pakistani population is below the poverty line; this translates into 37.5 million poor. Moreover, one-third of the country is either chronically poor or vulnerable to chronic poverty.
An additional 24 percent of households are estimated to be transitorily poor. Unemployment has increased to 5.5 percent. Not to mention, the downturn in the economy since 2007 has been coupled with a rise in food inflation to a peak of 24 percent; food inflation is the worst of all taxes, since it hurts the poor disproportionately.
Simply put, no less than a miracle is required to turn the situation around. Were all resources for the BISP, Pakistan Bait-ul-Mal and Zakat (the three largest national programs in terms of financial allocations and coverage) to be efficiently spent, a total of less than 6 million families would receive coverage. Granted that individuals would also benefit from the Peoples Work Programme, health insurance and vocational training schemes, but their coverage is very minor.
Adding to the conundrum is the fact that a large proportion of these funds will never reach the intended recipients. This should further dampen any excitement about substantial progress in the poverty alleviation realm in Pakistan in the upcoming fiscal year.
First, resource utilisation, not allocation has traditionally been the bigger concern in social sector spending. While government after government has been blamed for low social sector allocations in proportional terms, the fact is that the state machinery has had trouble even spending the outlays.
The present government's own experience in the last year is indicative in this regard. During 2009-10, Rs 70 billion was allocated by the BISP to target 5 million vulnerable families. In the first three quarters, expenditures amounting to only Rs 17.8 billion were incurred. In FY 2008/09, a total of Rs 14 billion was disbursed to 1.76 million beneficiaries (against an allocation of Rs 34 billion and a target of 3.4 million families to be reached!).
And this is nothing new. Throughout the 1990s, Social Action Programmes saw expenditures being listed and disbursements made, despite the fact that several projects were never implemented to begin with.
The World Bank's 2004 Public Expenditure Review amongst other such assessments have repeatedly made the point that the ineffectiveness of spending in the development sector is to blame for lack of positive impact from development projects.
There is little to indicate that the performance would be any better for the reasons of the failure to spend the allocated amount lie in structural governance and planning anomalies, which the government has struggled to address.
Resource utilisation capacity is extremely weak, more so in provinces, which have greater planning and executing responsibilities now. Correction here is a long-term proposition even if the government were to get serious about eliminating the root causes, ie politically motivated, ad-hoc decision making and priority setting within programmes.
Moreover, leakages and rent seeking levels are astounding and compound the problem of incapacity to spend, even the money disbursed does not reach its intended targets.
Moreover, inadequate monitoring and evaluation distorts incentives for service-providers and leads to misplaced targeting of beneficiaries (this is a technical flaw as opposed to politically motivated decisions which deliberately benefit the undeserving); the result is that benefits earmarked for the poor are instead captured by the rich.
Much of these distortions are undertaken at the behest of the politically influential people who are otherwise supposed to prevent such transgressions. A change requires a strong political will on the part of the government which has been missing to date.
There are also design and implementation problems specific to social safety net programmes. Pakistan's experience with these initiatives suggests that they often end up being duplicative.
The absence of a dedicated social protection agency or department with a mandate to co-ordinate and oversee all social security and safety net programs is a major organisational shortcoming. Lack of consolidation is the natural outcome and in turn results duplication of efforts, identical beneficiaries on recipient lists of multiple programs, jurisdictional concerns, etc.
There is recognition of this flaw and documents like the National Social Protection Strategy 2007 advocate the establishment of a separate Social Department but no significant efforts have been made on this front. Any such development, even if it were to take place, is unlikely to have any positive impact in the upcoming fiscal year.
Pakistan's social sector woes are set to remain as acute in the next fiscal year. The intention to bring about path breaking changes may well be present among the official enclave but the combination of lack of resources and gross organisational and implementation inefficiencies will ensure that results leave critics dissatisfied.
-- The writer is the Director of the Strategic and Economic Policy Research in Islamabad. She can be reached at [email protected]
-- No less than a miracle is required to turn Pakistan's situation around.....leakages and rent seeking levels are astounding and compound the problem of incapacity to spend
-- The absence of a dedicated social protection agency or department with a mandate to co-ordinate and oversee all social security and safety net programs is a major organisational shortcoming
Resource utilisation, not allocation has traditionally been the bigger concern in social sector spending.
'Education is the best tool against poverty'
An interview with Dr Ishrat Husain - Dean & Director of the IBA; former State Bank Governor
ALI KHIZAR ASLAM & SIJAL FAWAD
TEXT: In this interview, Dr Hussain sheds light on better governance and continuity of reforms for sustainable economic growth in the country. As a central-banker-turned-academician, Husain talks about how education can help eradicate poverty in the country.
The following are excerpts from the interview:
BR Research: There has been a lot of talk on the need to reform, but nothing concrete has been put into action so far. What kind of medium term policies must Pakistan pursue for sustainable growth?
Ishrat Husain: It's not that we have a dearth of ideas; it's not that we're groping in the dark, we have proper action plans.
The report of the National Commission for Government Reforms on reforming the government in Pakistan written in 2008 has laid down the road map for restructuring of the Government; creation of national executive service, creation of district service, devolution to provinces and local governments, proposals for transfer, privatisation, winding up, liquidation, it has everything, but who will implement it?
I myself have written several papers on the implementation of governance reforms, drawing upon the Commission's work. They also contain action plans as to how institutional reforms should take place, how structures should be organised, what will the basic services delivery mechanism be like, etc. There's a whole agenda that has to be implemented, but who is going to bell the cat?
BRR: How can the bureaucracy be reformed?
IH: It is simple; recruitment should be on merit, compensation should be based on performance, everyone should be trained for newer roles, and the training marks should count towards promotions.
Only the best among the best should be promoted; there should be open competition for senior management positions, such that any qualified professional can join the government irrespective of family ties or connections. There should be no discrimination between generalists and specialists.
BRR: But structural reforms tend to be painful; do you think Pakistan has the requisite resilience to withstand the gestation pains?
IH: Yes, I think we have great resilience. There are few countries in the world that had a growth rate of 5 percent for 50 years. From per capita income of $100 we have gone to $1000.
Today, we are exporting 4 million tones of rice. It is a wrong perception that we are going backwards, the resilience of the economy is very strong despite many adverse shocks from time to time and self inflicted wounds. The time for reforms is now so that the political governments can reap the dividends.
BRR: How can we turn around the white elephant especially the energy sector organisations to the likes of Pepco?
IH: I think Shaukat Tarin was doing the right thing. He had selected seven or eight public sector companies which had been creating most of the problems, and called for the restructuring and privatisation of those companies. This is something we should press on.
Essentially, we have to appoint the right persons, let the private sector professionals handle the job - like we did in the banking industry.
Earlier, Habib Bank and United Bank were costing the government Rs 40 billion per year. But then we decided to sever the linkage between the government and the banking sector. Today, these banks are not only giving dividends, but also paying taxes to the government.
Back then, the governments used to appoint their cronies to the banks and when they took charge, they'd start giving loans to their cronies. Those banks are no longer giving dud loans to anyone related to the government or under political pressure.
Our banking sector has withstood the recent downturn quite well. Trillions of dollars have been spent in the West in order to salvage the banking sector, whereas our banks are making profits and paying taxes. And that's because they have a strong regulator; the banks dare not falter because the regulator will take serious action against them.
BRR: To whom would you give credit for the privatisation reforms?
IH: It was Nawaz Sharif who started the economic reforms in this country in 1991. I was not in the country at that time.
Foreign exchange liberalisation was initiated by his government; trade liberalization was promoted; easing of restrictions on foreign currency deposits was done and banking privatisation by allowing private banks to enter the market was started at that time.
Then Benazir Bhutto came and she did initiate the IPPs in the private sector which proved to be a boon to the country. These reforms were continued and consolidated by Pervez Musharraf. He had more time to implement the reforms. So you see, there is a consensus on the direction of policy reforms.
But you should never personalise the whole episode; it should be looked from an institutional point of view. If you don't look at it in an institutional manner, we will have a personality cult. We need to allow the institutions to carry out the reforms even when the person who initiated them is no longer at the helm of the affairs.
BRR: What message can we take from the Chinese success?
IH: That you have sincere, honest leadership, which gives a direction which is not interrupted. You have hardworking, disciplined people who are preoccupied with their own work and not minding in others' business.
BRR: You are a proponent of reforming the bureaucracy and also a proponent of devolution; do you think that both of these are conflicting systems given that the 2001 devolution plan was a blow to the civil services system?
IH: The 2001 plan was problematic in the context that they eliminated the deputy commissioner. The deputy commissioner is responsible for revenue records, disaster management, law and order, grievances of the public, etc.
If you are the Nazim and I place the police under you, then there will never be a case registered against your supporters. This way the impartiality and neutrality of administration is compromised and people's faith in government is eroded.
I went to Azad Kashmir and Mansehra when the earthquake took place in 2005. The people of the union and district council were giving relief funds and goods to their supporters. In Thatta, the revenue records were being transferred at the instance of the Nazim as he was the custodian of land records. That was a flaw of the system.
Therefore, you need impartial, neutral administrators and you need to remove some of these powers of the district Nazim. But there are other areas where the Nazim should have the powers and control.
Agriculture, education, health, community, IT, all the departments which had been devolved from the provinces to the district government, should be allowed to function autonomously with the provincial government exercising oversight and holding them accountable.
For example, a teacher in Jacobabad has to travel all the way to Karachi for his posting. What is this! Then they use their sources. Those belonging to Jacobabad, on the other hand, should be allowed to teach there. If you bring a merit-based system run by the district government, there will be people to hold them accountable.
So decentralise, devolve, give them power and then hold them accountable. Catch them if they engage in wrongdoings. Our population has gone from 30 million to 170 million; some of the districts are larger than the provinces. You have to give them the tools to carry out good governance.
BRR: What's your view on the 7th NFC Award?
IH: I am a huge supporter of the 18th Amendment and the NFC award. But I think the NFC award is still incomplete. Provincial Finance Commissions should be set up to divide the resources between the Province and the Districts. Unless adequate resources are available at the grass-roots level the life of ordinary citizens will not improve.
The 18th Amendment has also taken powers from the federal ministries and given them to the provinces, which is good. But the power has to be devolved to the district governments because otherwise the provincial governments will centralise the authority.
We have 110 districts and every district has to be given sufficient resources to carry out its designated devolved functions. We have to end the distinction between advanced and backward districts, because this creates a sense of deprivation.
BRR: How can we reduce this sense of deprivation?
IH: Education is the best tool to eliminate this.
The IBA has a national talent hunt program and a Sindh talent hunt program. We bring in talented students from the most backward districts - people who have never seen Karachi.
We provide training and orientation to them for two months. Some of them get admitted, some don't, but when they go back, they go back with self-confidence, their entire life is changed. This is what education does to you. Imagine what can happen if they stay for a year.
Let me share another example; we had started merit-based recruitment in banks ten years ago. I went to the graduating ceremony, where a student from Wana had been hired by Bank Alfalah. He was weeping; and upon inquiring he said, "My father had sold all his assets to finance my studies, but he didn't have much left for my siblings' studies. Now that I have a job, my siblings will also be able to study". So, look at the transformation in a family.
BRR: So how exactly you can you make devolution work, given the dearth of adequate manpower?
IH: A good system has three components: appointment of the right man for the right job, operational autonomy and resource accountability. Combine these, and your system will be good to go.
But the system won't work if the law is applied differently for cronies and relatives of some people. The system should be uniform across the board.
As for human resource; there are scores of good people of integrity and competence who are retired from different public and private organisations and are now settled in their hometown. They will be willing to work as members of district education boards, district health board, etc; make use of them; they have never done anything wrong.
Why do you think the army is so strong as an institution? All the recruitment is based on merit and children from the lower and middle-class have as much chance to enter the armed forces as any one else; children of non-commissioned officers have risen to top levels. Why...because their system is purely based on merit.
Why can't we learn from them? If the army has survived under this kind of socio-political milieu, why can't the others do that? Learn from their experience for developing human resources. They take mediocre men and transform them into first rate professionals. We in the civil services attract the best and the brightest and after a while make them cynic and de-motivated. 500,000 people are following the right way. Why can't other 2.5 million in the civil administration follow that?
BRR: Do you think Pakistan should have a porous border with India?
IH: That is totally right. The whole country will benefit from better economic relations with India. They have a middle class of 300 million people; we have a middle class of 30 million people. Who is going to benefit if you open the borders? We will.
Our market will also grow tremendously. For example, machineries, coal, and iron ore can be imported directly from India rather than from Australia or Brazil and that can reduce unit costs for our steel mills. The automobile industry and construction industry will become competitive. It's a win-win game.
BRR: Why isn't it happening?
IH: This is because there is a wrong perception in India that all the terrorist activities taking place in India are being conducted by Pakistan. Their policies towards Pakistan are centred on this premise.
They think that Lashkar-e-Jhangvi, etc, are being supported by the ISI and Pakistan government; if you have that kind of mistrust, how can you foster trade. First the trust deficit has to be removed; people to people trust has to be restored.
BRR: Let's talk about the latest budget; do you think that provincial governments have become irresponsible regarding their fiscal policies? Most of the post-NFC budgets that we have seen are in huge deficits.
IH: Initially, they will not show a positive outcome. The federal government was like a lion that had held everything, so you can't expect the provinces to start behaving responsibly overnight, because they (the provinces) have just found their freedom.
But eventually the provinces will show a positive performance. This is just a temporary transition phase, and it doesn't mean that these powers should be taken away from the provinces. The money should go to the provinces and the district governments - otherwise, the common man will suffer as the federal government is too remote.
BRR: But what about revenue mobilisation on part of the provinces?
IH: They will do it. If you give them an incentive that they will get a grant matching the internal revenue they generate, you'll see it will happen. It will take some time because you are moving from a highly centralised system and it won't happen overnight.
BRR: Do you think the tax revenue target is achievable?
IH: The World Bank report on the potential for tax revenues in Pakistan says we have a gap of Rs 700 billion, on the basis of tax collected. We should be collecting Rs 2,000 billion rather than Rs 1,300 billion.
If you look in the context of our stagnant economy, the taxes to be collected are not very low. With a forecast growth rate of 4.5 percent, and inflation expected at 10 percent, a 15 percent increase in taxes should be possible.
BRR: What kind of structural changes are required to increase overall revenues as well as widen the tax net?
IH: We have 53 percent GDP originating from services sector. If you even keep the threshold of Rs 300,000 for the services sector, then a large number of persons engaged in services are not being taxed at all. That is a huge potential that can be tapped.
The second is that even though I favour the self-assessment system, there must be a strong independent audit in which you do a 5 percent or 10 percent random check, and whoever is caught should be penalised.
Thirdly, the customs department, which is ridden with under invoicing, mis-declaration, etc, has to be revamped. You might not get Rs 700 billion out of these three, but you can get Rs 300 billion out of these reforms.
BRR: What about tax on agriculture?
IH: May be we can generate Rs 4-5 billion at the most from the farming sector. We carried out an exercise in 2001 on agriculture taxes and we found that 95 percent of the landholdings are below 12.5 acres, which is not an economic level. Out of the remaining 5 percent, you can never get more than Rs 4-5 billion.
BRR: So you're saying that all the talk of taxing farming income is more of a populist rhetoric?
IH: No, it does serve a purpose. To elaborate my point, just as in sectors such as manufacturing, services, or education, anybody who earns more than Rs 300,000 is taxed, similarly, in agriculture any one earning the same should be taxed.
The equitable principle of taxation demands that any one earning a certain minimum threshold income should be taxed irrespective of the source from which income has been earned - manufacturing, agriculture, services, etc.
Secondly, a lot of tax evasion is taking place in the name of agriculture. For example, people who own a factory as well as a farm are showing their factory income under the head of agricultural income. But because they're exempted, they're evading taxes. So that's why I am in favour of agriculture taxation, and inclusion of agriculture incomes in the total income earned.
But the bulk of money will come from services. Hairdressing salons, boutiques, doctors, lawyers, accountants, consultancy firms, etc are all doing roaring businesses, but none of them pay taxes. Taxing them will yield a lot of tax revenue.
BRR: Perhaps the central issue in all this is documentation; how can VAT resolve this problem?
IH: VAT, if properly implemented, will bring about documentation. Why do you think everyone is against VAT? Everybody will be documented through VAT.
BRR: Do you support the notion that provinces should collect service taxes?
IH: I don't think they have at present the capability or capacity to do that. The centre should collect it and give it back to the provinces. In the medium term the provinces should strengthen the capacity of their revenue authorities.
BRR: Do you think that development spending budgeted for FY11 is enough?
IH: They have to increase development expenditure if they want to stimulate growth; Rs 280 billion is not enough. When the private sector is not investing, you need public sector to make up the slack.
BRR: But the government doesn't have enough finances...
IH: They should tap the revenue side, control the leakages of around Rs 300 billion on the expenditure side, reduce fiscal deficit and thus borrowing. Debt servicing costs have to be brought down.
BRR: So will we overrun the deficit target?
IH: If it's an IMF program target, we should not overrun it. They must do whatever they have to do to meet the IMF target. But as an economist I'm telling you that if you have to kick-start the economy from the current 4-5 percent, you have to increase public sector expenditures.
BRR: How will the budget deficit be financed?
IH: They are expecting a substantial amount of funding from external sources. There is also non-bank borrowing, through National Saving Certificates; they have done a good job with the NSC although the costs in terms of debt servicing are high.
BRR: Do you see any inflation tax due to high-powered money creation?
IH: The powers of the State Bank have been significantly increased. There should be no high-powered money creation, as they have imposed a limit on government borrowing.
BRR: Where do see inflation in FY11?
IH: 10 percent
BRR: Is there room for monetary easing in FY11?
IH: I don't think so. It shouldn't be, because inflation has to come down to a single digit to quell the inflationary expectations of the economy before rates can be cut.
"The equitable principle of taxation demands that any one earning a certain minimum threshold income should be taxed irrespective of the source from which income has been earned - manufacturing, agriculture, services, etc."
Company Brief
Tranding Corporation of Pakistan
ARTICLE: Trading Corporation of Pakistan (TCP) is a public sector trade house incorporated under Companies Act 1913 (now Companies Ordinance, 1984) in July, 1967. It is the trading arm of the Government and intervenes in the domestic market to stabilise the prices of the essential commodities on specific directives of the ECC of the Cabinet/Government Strictly adhering to the PPRA Rules-2004 in order to ensure complete transparency in all its operational activities.
TCP has successfully assisted Government in providing relief to common man by importing essential commodities like sugar, urea and wheat to over come the shortage of these commodities. It also intervenes in the domestic market to support the Growers. The overall turn over during 2008-09 was Rs 134.936 billion. Whereas, profit before tax was recorded at Rs 2.278 billion and an amount of Rs 3.015 billion was contributed to the national exchequer in the form of taxes.
IMPORT OF SUGAR: 2009-2010
Under the directive of the ECC of Cabinet to import 1.2 million metric tons of sugar, TCP floated "12" tenders for the import of sugar from world wide sources in accordance with PPRA Rules-2004 and awarded contracts for 825,000 MT Sugar. A quantity of 230,923 MT sugar has arrived.
The sugar imported by TCP is being sold out at USC outlets to the general public @ Rs 45/- per kg against the weighted average landed cost of Rs 55/- per kg, on the directives of Government to provide relief to common man. A quantity of 1,34,761 MT sugar is available in the stock. However, before the advent of Holy month of Ramazan, a quantity of 234,716 MT sugar would be available in the country to meet the augmented requirement of sugar during the month of Ramazan to contain the prices of sugar to the affordable level in the domestic market.
IMPORT OF UREA: 2009-2010
TCP imported a quantity of 312,665 M.T. urea from Saudi Arabia under credit agreement of US $100 million signed between Government of Pakistan and Saudi Arabia. Further, under ECC of the Cabinet decision, TCP imported 102,234.141 MT urea and supplied to the farmers through NFML according to their needs at the door step of the growers in all the four provinces.
ECC of the Cabinet also directed TCP to import further quantity of 0.4 million MT urea for Kharif crop 2010. TCP issued two tenders each for 200,000 M.T. and purchased 250,000 MT urea. A tender for balance quantity of 150,000 MT has been issued.
DEVELOPMENT OF GWADAR PORT:
TCP has been playing a significant role for making Gwadar Port functional by importing urea through this port in order to ensure economic development of the people of Balochistan. This has created jobs and economic activity in the area resulting in betterment/prosperity for the people of Balochistan.
Confidence building and tax reforms
DR ASAD ZAMAN
ARTICLE: Pakistan's tax potential is estimated at Rs 4 trillion, according to Huzaima and Ikram*, when the actual realisation is far less. Pitifully small amounts are spent on social welfare and long run development, which reflects in the country's miserable performance in poverty alleviation, education, health, and other vital indices.
Our recent record is especially frustrating when compared with countries like India, China, Bangladesh and East Asia, which often had far less in the way of natural resources and other advantages.
However, cures are not easy, because the roots of our ailment are deep and complex, and not easily remedied. In this essay, I will deal with only one of these problems and suggest a possible solution.
The root cause of our problems is the continuation of colonial political, administrative and economic structures post independence. These hierarchical structures were single mindedly designed for efficient extraction of revenues from the colonies.
Efficient command and control from top down was built into them, but representation and participation of the public in the government was not (something which was the reason for the revolt of the American colonies in the 18th century).
It is important to note that these structures were manned by personnel educated to be "Indian in blood and colour, but English in taste, in opinions, in morals, and in intellect" - indeed this was a crucial part of the governance structure of the colonies.
It would have been impossible for the 1,000 odd Englishmen in the Indian civil service to govern a country of India's size without co-opting a sizable number of natives into sharing the burden of ruling and taxing the populace.
After a brief interlude of sincere leadership, reins of the newly partitioned nation fell into the hands of political parties who found themselves at the head of a functional and efficient machine for revenue extraction.
Our education system continues the colonial policies of creating love and affinity for the West, and contempt for both our heritage and the "Urdu-medium" native populace. Thus, the English educated elite class in power had no difficulty in continuing the colonial policies, and exploiting fellow countrymen for self-enrichment.
To this day, politics in Pakistan is more about sharing revenues amongst those who rule Pakistan, than about providing growth, development and social services to the populace. The idea of a government of the people, by the people and for the people remains a distant dream.
How can we act to bring this dream closer to realisation? Several elements in the changing dynamics give us room for hope and potential for action.
As the power base has expanded beyond a narrow and tightly knit elite upper-class, many people with genuine love for their country and the desire and capability to make sacrifices for the benefit of the populace have also been inducted into the power structures.
The moral bankruptcy of world leadership, which is spending trillions of dollars on death and destruction at a time when the bottom billion of the world's population are in desperate need, has become obvious for all to see. More and more among those in power are coming to see that their interests are common with the general public, and not tied to the fortunes of treacherous alien powers.
Foreign experts with no knowledge of local conditions try to distract us by stale and tired mantras of privatisation, liberalisation, free market reforms and fiscal austerity, which have been tried and found wanting all over the globe. If we decide to think for ourselves, we can easily see that the way forward lies in building coalitions, joining hearts and working together for a common purpose.
In every dimension, there is an urgent need for fresh, out of the box thinking. In the realm of taxation, good solutions can be found along the lines of 'local public finance'. The idea is to fund public projects by raising revenue from those who will benefit from them, directly or indirectly.
With this localisation, it may be possible to raise money, when it is seen to be going directly to the benefit of the public. This will also generate confidence that the government is interested in providing benefits to the public instead of carrying out foreign agendas to harm the public. I will illustrate the idea with one example; parallels can be found in many others.
Consider financing, or supplementing the finances, of a local police station by revenues generated from local taxes on the neighbourhood covered. At the very first stage, one needs to make a conceptual change, the equivalent of going from colonisation to self-government.
Is the police station an agent of alien powers designed to enforce government authority over reluctant natives? Or is it a local institution designed to keep the neighbourhood secure, and to help solve local legal and criminal problems of people?
It is the former concept which is reinforced by the fortifications recently made to police stations. But it is only in the latter case that the public will be willing, even happy, to contribute to the upkeep of the station. It is the shift in conceptualisation and attitude from the colonial model to the self-government model which is crucial to any efforts for change.
Since police stations are central to current power structures, sharing authority with citizens may be too radical to contemplate at an early stage. Confidence building needs to be done in small and simple steps, at least in the initial stages. One key is to devolve authority, as much as possible to small communities.
But devolution has been tried often, and failed just as often. The reason is that the concept of participatory government, and the accompanying feeling of empowerment, has been forgotten in the long period of colonial rule.
Habits of hierarchy, with arrogant and authoritarian leaders and subservient followers have become deeply ingrained. Channels for creating change by peaceful participatory means don't exist; the only ones that remain are demonstrations, protests, strikes and violence.
To change this state of affairs requires work along the lines of the Orangi Pilot Project of the late Akhtar Hameed Khan. Build communities, empower them and enable them to take collective action, and facilitate this via government or non-government means.
The task facing us is difficult. The key to success is to take matters in our own hands. If we do what is possible for us to do, we can bring about great changes. The biggest obstacle in the way of change is the 'spectator' attitude widespread in society, where we watch and wait for good things to happen, without making any efforts to be part of the process for change. Instead we must become the agents of change.
I am reminded of an Urdu poem we learnt in grade school, regarding rain clouds and the dry earth. Each raindrop thought itself insignificant in face of the vast need and hesitated to sacrifice its all for only a miniscule impact. However, when a few courageous ones took the lead, the clouds proved adequate to provide amply for all the needs.
-- (Huzaima and Ikram - Business Recorder May 14th, 2010)
The writer is a professor of economics at International Islamic University, Islamabad. He can be reached at [email protected]
The root cause of our problems is the continuation of colonial political, administrative and economic structures post independence efficient command and control from top down was built into them, but representation and participation of the public in the government was not
In the realm of taxation, good solutions can be found along the lines of 'local public finance'. The idea is to fund public projects by raising revenue from those who will benefit from them, directly or indirectly.
Taxing the masses
ADNAN MUFTI
ARTICLE: Since the last many years, the common man of this country has been hearing the ongoing stories on tax reforms project. A lot was written in favour of such reforms and the nation was made to believe every time that the economic and tax managers of the country desire to develop policies based on facilitation rather than harassment of the existing taxpayers.
Admittedly, this was also witnessed during past 3-4 years when we saw business community of the country standing by the tax machinery in support of tax reforms introduced in the country's complex tax system. We started to believe the approach of the tax machinery is being shifted from mere meeting budgetary targets and revenue generation to facilitation and accommodation through flexible, practicable and confidence building tax framework.
However, for the reasons best known to the fiscal managers, this time the government has again resorted to old revenue generation based tactics in the Tax Laws. The path of confidence building, self-assessment and accommodation seems to have lost its way very quickly and amendments, purely focused on revenue collection and undermining various benefits awarded to taxpayers by the Superior Courts, are being proposed in the tax laws.
The underlying idea could be anything; the ever threatening current account deficit, the trade deficit, the alarming decrease in export market, etc. But one thing is sure - a reverse gear has been taken again.
The sudden but anticipated U-Turn in introduction of a broad based Value Added Tax (VAT) with a 'Reformed GST' is a classic example of such inconsistency in our fiscal policies. Here, we would endeavour to highlight some of the key tax issues primarily in the Indirect Tax Laws emanating out of Finance Bill 2010 which need to be taken care of if we really want to create an effective tax culture in the country.
Value Added Tax
With all the major political parties and business community not on board for introduction of Value Added Tax (VAT) effective 01 July 2010, the Government has deferred the replacement of Sales Tax with VAT for 3 months time till 30 September 2010. This deferment is aimed to bring consensus among the stakeholders especially the provinces and to introduce VAT with harmony and with necessary amendments to the satisfaction of the all segments of the society.
On the other hand, we understand that the Sindh Assembly has passed the Sindh Revenue Board Act 2010 which will administer and collect VAT on taxable services in the Province of Sindh.
Further, an agreement is reportedly in the offing between the Federal Government and Sindh Government whereby a list of services to be brought under the VAT Regime along with a mechanism for collection, allocation and adjustment of related input taxes would need to be worked out. Accordingly, the Provincial Governments would become empowered to make necessary legislation in this regard.
We are mindful that serious suspicion and doubts were not removed by the Government regarding imposition of a broad based VAT on goods and services. This was the reason that a technical matter was converted into a political issue leading to suspension of VAT program.
Now, the government has still two months to mobilise the public at large and it is necessitated that all stakeholders especially retail and services sector may be taken into confidence about documentation of economy, tax laws are made easy for understanding and compliance purposes and reported harassment by tax machinery may be eliminated to remove the grave trust deficit between the state and the masses.
Rate of Sales Tax Enhanced @ 17 percent
Till VAT in adopted and enforced as planned and to bridge the anticipated revenue loss on account of such deferment of VAT, the government has enhanced rate of sales tax to 17 percent w.e.f. 01 July 2010 from existing 16 percent for 3 months' time till VAT is introduced @ 15 percent across the board. Accordingly, the goods presently charged to sales tax @ 18.5 percent, 21 percent and 25 percent would also be taxed @ 19.5 percent, 22 percent and 26 percent respectively.
Under the FED Act, certain services are taxed on VAT Mode @ different rate of duty. No change has been made in duty structure of such services. Therefore, advertising on CCTV / Cable TV / Hoarding Boards / Pole Signs / Domestic Air Travel / Inland Carriage of Goods by Air / Shipping Agents / Insurance / Banking / Stock Brokers / Port & Terminal Operators will continue to be taxed @ 16 percent while telecommunication services being taxed @ 19.5 percent. The other taxable services governed under provincial Sales Tax Laws shall continue to be taxed @ 16 percent.
Higher incidence of tax stimulates evasion of tax. Even otherwise, it has a direct nexus with inflation. With 1 percent Special Excise Duty already imposed on almost all imports and locally manufactured goods, the effective rates of combined indirect tax on such goods would now be 18 percent, 20.5 percent, and 23 percent.
Refunds
The biggest problem being faced by exporters is piling up and unwarranted delays in getting sales tax refunds. Unfortunately, except for cosmetic changes, no substantial effort is being made to lessen this liquidity burden upon our export industry. Consequently, our exports are likely to suffer till the government ensures speedy and hassle free refunds to the export oriented sectors.
Tax Audits
Presently, the power to call for records for audit purposes lies with the Officer of Inland Revenue. A change has been made whereby only the Commissioner will be empowered for selection of audit of a registered person.
Further, the previous requirement of finalising and issuing an audit observation and related audit report to the taxpayer has been withdrawn. Such requirement of issuance of an audit observation was an effective tool to cater and resolve audit queries without jumping directly into the cumbersome and tedious judicial process. By virtue of the changed law, even any minor departmental query may directly ignite show cause notice and initiation of legal proceedings against the taxpayer.
A new section has been inserted in the sales tax and excise duty laws to provide due legal cover to audit through computer ballot. This amendment is apparently brought to counter the cases filed before superior courts on account of Board's powers to select audits through computer ballot.
According to the proposition, the Board may select persons or classes of persons for audit of tax through computer balloting which may be random or parametric.
However, such audit would be conducted in terms of the time lines prescribed in section 25 of the ST Act and section 46 of FED Act whereby audit may only conducted only once in a year except for cases where the Commissioner has information or sufficient evidence of a tax fraud or evasion of tax.
The proposed computer balloting may also cover cases earlier audited by the office of the Auditor General of Pakistan. However, a re-audit of this kind is only permissible under the ST Act. Accordingly, we understand the Board is not empowered to select cases under FED Act which were earlier audited by the office of the Auditor General of Pakistan or the DRRA. Recently, the apex court has also endorsed this viewpoint.
Transactions between associates
In respect of any transaction between associated persons, the tax department is now may empowered to determine the transfer price of taxable supplies between them as is necessary to reflect the fair market value of supplies in an arm's length transaction.
We understand the aforesaid transactions are already catered under section 2(46)(a)(ii) of Sales Tax Act 1990. However, it is pertinent to note that as against the definition of 'open market price' defined under the law, the term 'fair market value' is a new term introduced under the Ordinance for which no definition exists either under the Sales Tax Act 1990 or under the Ordinance. On this account, the law needs to be amended to carry a distinction, if any, between the terms 'open market price' and 'fair market value' to avoid likely disputes and litigation on the matter.
Access to Premises, Stocks, Accounts & Records
Prior to Finance Act 2009, taxpayers' factory, office premises, stocks, accounts and other records were accessible by any officer authorised by the Board or the Commissioner in any inquiry or investigation conducted by the revenue authorities for tax fraud. In view of the complaints of misuse of such powers by field formations, such powers were restricted only for the Board in Finance Act 2009. However, within 1 year of the amendment, the Finance Bill 2010 again seeks to empower the Commissioner to have free access at the taxpayers' offices and records.
Excessive and unwarranted powers should not vest with the tax officers. The proposed amendment is likely to attract a lot of criticism from the business community and may again be withdrawn by the Government at any later stage.
Change in Duty Structure
The duty structure under the Federal Excise Duty Regime has been revised on Natural Gas from Rs 5.09 per MBTu to Rs 10 per MBTu, on locally produced Cigarettes, on cigarettes filter rod enhanced @ Rs 1 per rod. Besides duty has been levied @ 10 percent on electricity intensive home appliances namely air conditioners and deep freezers. It is hoped all such measures result in curbing our reliance on imports and luxury consumption.
Smuggled gold and precious items
On the Customs side, the Finance Bill 2010 proposes increase in the limit of cognisance effect of the smuggled goods relating gold and other precious items from Rs 50,000 to Rs 150,000. This is enhanced in view of the increase in the exchange rate of US $to PKR. Further, this is also necessitated in the wake of increased prices of gold, etc.
Provisional assessment
In order to address delay in finalisation of provisional assessments by the customs authorities, the time limit for finalising a provisional assessment has been proposed to reduce from 6 to 3 months. However, such 3 months' period will not include the period where the proceedings are adjourned on account of stay order or for clarification sought from FBR or time requested by the importer through adjournment. The Customs is also required to issue an order for adjustment, refund or recovery of amount on completion of such final assessment.
The writer is FCA and a practising chartered accountant. He is also Honorary Advisor to Karachi Chamber of Commerce & Industry on Sales Tax Matters. He can be reached at [email protected]
Stakeholders especially retail and services sector should be taken into confidence about documentation of economy reported harassment by tax machinery must be eliminated to remove the grave trust deficit between the state and the masses.
The biggest problem being faced by exporters is piling up and unwarranted delays in getting sales tax refunds. Unfortunately, except for cosmetic changes, no substantial effort is being made to lessen this liquidity burden upon our export industry.
'Country to go bankrupt by November-December if VAT not implemented'
An interview with Dr Ashfaque H. Khan - Director General and Dean NUST Business School, National University of Sciences & Technology, Islamabad
ALI KHIZAR ASLAM & SOHAIB JAMALI
TEXT: In this interview, Dr Hasan explains in detail the risks to fiscal deficit in FY11, how it will keep pressure on the interest rates, and how the country might have to have to back to the IMF by December.
Critical of what he terms the fiscal indiscipline displayed by the provinces, the former Director General Debt Office talks about how the 7th NFC Award has sown the seeds of perpetual macroeconomic crisis in the country.
The following are excerpts from the interview:
BR Research: Let's start off with inflation; how do you see inflation in the future?
Ashfaque Hasan: Aside from budgetary risks, which I see as a major risk, inflation depends on three factors.
One our exchange rate depreciation - that is even if the price of oil has fallen in the international market, we have been unable to reap any benefit from it, because our exchange rate has significantly depreciated.
The second is the criminal increase in the support price of wheat from Rs 450 per 40-kg to Rs 625 and then to Rs 950. As a result of this, now Pakistani wheat costs $280 per ton compared to international price of $190 per ton.
Empirical evidence in Pakistan says that a 10 percent increase in the support price of wheat increases the overall CPI inflation by 3 percent.
Amartya Sen, the Nobel laureate economist wrote an article which said that 'support price is the implicit mass murder of the Indian farmers', and the same is true for Pakistan. Wheat consumption of the common man of the country, whose staple diet is wheat, has fallen by some 20 percent in Pakistan, according to the FAO report.
BRR: So what was the benefit of this support price, don't you think that poor farmer benefits from the support price?
AH: No, the support price has always benefited the rich farmer at the cost of the small farmer. This is the view of Amartya Sen as well. And that's because no one even goes to the poor farmer to buy their wheat. The poor farmer sells it to the middle man, who buys it for Rs 800 - Rs 825 per 40kg as against the support price of Rs 950 per 40kg. So essentially, we are providing an opportunity to middlemen; 88 percent of all farmers are small farmers, only 12 percent are big farmers who control hundreds of thousands of acres of land.
BRR: What's your view on the budget 2010-11?
AH: The objectives of this budget seem to be in the right direction. There were two possibilities- they could have either made it a growth-oriented budget, by pumping money into the economy; or tried to concentrate on consolidating the budget first, and this restoring macroeconomic stability and then growth would follow. The government took the second path, which is an absolutely right decision. Secondly, the government has tried to reduce the budget deficit and limit it to 4 percent of GDP, which is again, the right approach.
BRR: What are the risks?
AH: There are a number of risks involved in the budget. Our provincial governments have played a major role in causing these risks as they have shown the height of fiscal indiscipline. Unfortunately, our provincial governments have no realisation of what is going on in the country. This new budget has been formulated under the new NFC Award. Half a trillion extra rupees will be going to the provincial governments, yet the budgets that they have presented, are in deficit.
That means that additional spending will be more than half a trillion. The government had targeted the budget deficit to be 4 percent of GDP. The federal government's deficit was to be 5 percent of GDP, but it was expecting that the provincial budgets would be in surplus to the tune of 1 percent of GDP, or in other words a surplus of Rs 167 billion.
Federal government's deficit is Rs 853 billion. Had the provinces posted a surplus, it would have been down to Rs 685 billion, which is 4 percent of GDP. Instead, the provincial governments posted a deficit of Rs 70 billion, so now we have started our new fiscal year with a target budget deficit of 5.4 percent, or Rs 923 billion.
BRR: Is it because of lack of co-ordination between the provinces and the federal government?
AH: No, the provinces assured the centre that they would generate surplus to the tune of 1 percent of GDP. But when the budget was announced, they said, 'we will do what we want'.
BRR: What's your assessment of tax revenue targets?
AH: In order to generate the budgeted target of Rs 1,667 billion, FBR will have to increase its revenue by 26 percent over last year's collection of around Rs 1,325 billion. That's an impossible task to achieve. According to my calculation, tax collection will be somewhere around Rs 1,550-1,560 billion in FY11, thus giving a shortfall of Rs 100-110 billion.
By adding this shortfall to Rs 923 billion budget deficit, the overall fiscal deficit increases to Rs 1,023-1,033 billion, considering that the government does not have the capacity to cut Rs 100-110 billion expenditure.
BRR: Are there more risks to fiscal deficit?
AH: Yes. Rs 50 billion have been added to non-tax revenue under the assumption of selling 3G licenses. If it is a transparent transaction, then we may get the money. But like what happened in the LNG case, if there is slightest non-transparency, I am afraid we may land in the Supreme Court.
BRR: What about the expenditure side?
AH: The subsidies are highly under budgeted. We have budgeted Rs 30 billion for inter-discos tariff differential, against the requirement of Rs 190 billion. Now, there are two options; one is that we will increase the price of electricity by some 35-40 percent, and if we can't, the required subsidies amount will be Rs 190 billion.
This means the additional gap will be Rs 160 billion. Even conservatively speaking, there is still a shortfall of Rs 100 billion under this head, and that takes the total deficit to Rs 1,183 billion.
BRR: How can we finance this?
AH: The financing that we have identified for Rs 685 billion include Rs 499 billion from domestic sources and Rs 186 billion from external sources. There are serious risks involved in the materialisation of external financing. Included in this Rs 186 billion, Friends of Pakistan are supposed to give us Rs 82 billion, but we all know how uncertain that is.
Other than that, we plan to float a Rs 43 billion Eurobond. But I am certain that we would not be able to float it, given the global financial conditions. Another Rs 52 billion is expected from the Kerry-Lugar Bill, which is also risky. The biggest risk, therefore, is the financing of Rs 1,183 billion. The government will be a desperate borrower.
BRR: Can this be plugged by printing money?
AH: No, the government cannot. We are under an IMF programme; we cannot borrow from the central bank.
BRR: But the IMF programme is only till December?
AH: No by October or November we will start negotiating another 3-year programme with the IMF.
BRR: Why would we need to go for another IMF programme when our balance of payments has improved?
AH: But how are we going to finance our current account deficit and repay for debt servicing?
BRR: But we will be getting budgetary support in the next two instalments...of the $3.3 billion that is left, the IMF will give us $900 million to $1 billion.
AH: There is a risk here too. If tax reforms, call it VAT or reformed GST, are not implemented from October 2010, you will not get IMF funding. And if you don't get IMF funding, you won't get World Bank and ADB funding. If we are off the programme, all inflows will be stopped. How will you fill the gap between your revenues and expenditures, if all inflows are stopped? Pakistan will become a bankrupt country by November/December if VAT is not implemented.
BRR: What other options does the government have to plug the fiscal gap?
AH: Very limited. Because the government will have to borrow more, the State Bank will have to provide a sweetener to commercial banks to participate in Treasury Bills.
What will be that sweetener? I can expect discount rate going upwards. Discount rate has to go up. There will be crowding out, the private sector will not get money and it will have an impact on investment, and growth and so on.
BRR: Do you think VAT will help improve revenues?
AH: Revenues may not improve, but at least there will be documentation of the economy. That is the whole purpose. And it will automatically increase your revenue. It has been implemented in 114 countries around the world, poor and rich countries alike, so why not here.
The opposition to VAT is political in nature. The PML-N is opposing it, because it is actively involved in the politics of the Lahore Chamber of Commerce. The traders and businessmen of Lahore are their voters, and that is why they are raising their voice against it. The ANP is opposing it (VAT) because the Bilour family is actively involved in the Sarhad Chamber of Commerce. The Karachi Chamber opposed it, so did the MQM.
Similarly, PPP thinks that if they implement VAT, they would be viewed as anti-trader, anti-business, so they have asked Sindh to stand against it.
BRR: Are you saying that the federal government is using the Sindh government for its own purpose?
AH: I think, knowing how powerful President Zardari is, being the party leader, if he tells Qaim Ali Shah (Sindh's Chief Minister) to implement the VAT, do you even remotely believe that Qaim Ali Shah could say no? The point is that the PPP realises that its coalition partners are not in favour of VAT, and fears that if yet they go ahead and implement it, the PPP will be viewed as anti-trader and anti-business party.
So, now if there is no political support for VAT, I can see a disaster, because this was the only condition that was imposed on Pakistan under the current IMF programme. This is a problem of moral hazard. Pakistan thinks that the US will come forward and bail us out, but there is a limit to this political support.
BRR: So if we have to go to the IMF again, will it tighten its noose?
AH: Yes, absolutely. It will be a PIGS (Poland, Iceland, Greece, Spain) model programme for us too.
We will face a tightening programme. So far we have seen a very benign face of the IMF. I have seen the other face of IMF for 11 years. We did a stand-by programme for ten months, January to October 2000, with the IMF. That was the toughest programme given to any country by the IMF in which we implemented 32 conditionalities.
BRR: What's the way out then?
AH: The way out is an austerity program. We will have to ask provincial government to behave in a fiscally responsible manner. They need to cut their expenditures which have been raised unrealistically in the budget. The federal government will have to cut down their expenditure too by trimming the size of the cabinet to 20-25 ministers, rationalise allocation to BISP and IDPs, and cut down unnecessary travelling abroad. In other words, we need to implement austerity programs at all levels of government.
We also need to mobilise resources; implement VAT, improve the withholding tax regime and bring agriculture income under tax net. For instance, when you go out to a restaurant to eat, you pay 16 percent GST. The 16 percent that he collects, does he submit it to the FBR? If I am the chairman of the FBR, I will put my resources to bridge this gap. It's about commitment.
Tax evasion in Pakistan totals almost Rs 350 billion, and that's a missing link here. We should put all the resources to bridge this gap.
BRR: So does this mean there is a lot of corruption here?
AH: It goes without saying.
BRR: And how do we tackle corruption?
AH: By improving governance and by being transparent. The leadership at the top should set an example.
BRR: Is there any other way out, aside from resource mobilisation?
AH: Yes, put an end to these 100 ministers. There needs to be legislation that there would not be more than 20-25 ministers. Furthermore, accelerate the pace of privatisation by selling eight bleeding Public Sector Enterprises (PSEs).
BRR: Do you think provincial autonomy through the NFC Award will improve this situation?
AH: This NFC award has in fact sowed the seeds for perpetual macroeconomic crisis in the country.
First the provinces were dealing with Rs 100, 150, 200 billion, now they are dealing with Rs 400 billion. But they lack financial discipline. What will happen as a result is that Pakistan's budget deficit will now be determined by these provincial governments.
In the next IMF programme, I expect some conditions for the provinces, because the federal government does not even have control over the budget deficit now.
BRR: Where do you see growth in the future?
AH: Any country in the world with such a high debt burden has not seen a respectable rate of growth. It is against a basic principle of economics. If things remain the same, the growth will remain around 2-3 percent over the next 3 to 4 years.
"Discount rate has to go up. There will be crowding out, the private sector will not get money" "Pakistan thinks that the US will come forward and bail us out, but there is a limit to this political support." "The NFC award has sowed the seeds for perpetual macroeconomic crisis in the country."
Pakistan's equity market... it's time to move on!
TARIQ CHOUDHRY
ARTICLE: Pakistan's capital markets have come a long way from being an open outcry market in the 90s, physical and broker driven to a reformed automated emerging capital market. Both the trading platform and shares are now in the electronic form. Moreover, we have state of the art systems that now monitor the stock market clearing system that also ensures that risk is mitigated.
The National Clearing House and the KSE clearing system have been modified and the introduction of client unique identification and Institutional Delivery System (IDS) have all resulted in moving towards a transparent, vibrant and an international standard-based market that induces confidence.
This is all due to the hard work put in by the KSE management, directors and stakeholders, including stockbrokers and the regulator, SECP. However, the transition has not been an easy one.
Pakistan's equity market is now competing with global players with foreign institutional investors (FII's) holding a reasonable chunk of the available free float (in case of OGDC FII's hold approximately 70% of the available free float) despite been relegated to the frontier market category after the disastrous decision to put a price floor in 2008. The less said about this decision, the better.
We continue to witness foreign interest in line with other emerging markets, albeit volumes may have shrunk, particularly from the local perspective. This is primarily because of the liquidity constraints faced by the equity market due to the absence of a leverage product that was withdrawn on the premise that it lacked transparency and was risk prone.
Another reason behind drying liquidity from the equity market has been the country's precarious economic situation that has seen rising inflation, forcing the central bank to adopt a tight monetary policy stance.
Unfortunately, measures required to keep the economic situation stable have had a negative impact on local equities with investors seeking other safe havens for their investments. However, in my view and despite all the impediments, the capital market must move on.
NEED TO ORGANISE!
First of all, the market needs to get its own house in order. With volumes dwindling and brokerage margins shrinking, desperate measures need to be taken. If such low activity continues for another few months, one will see unfortunate decisions being made by the market participants to reduce costs, resulting in downsizing as seen in the past.
Pakistan has approximately 200 stock members registered at the Karachi Stock Exchange (KSE) alone and about the same number in Lahore (LSE) and Islamabad (ISE). A move towards a National Stock Exchange (NSE) and integration has become imperative. The capital market broking sector needs to consolidate along the lines of that seen in the banking sector in recent years.
Once the stock exchange is demutualized, which is the first step towards consolidation, brokers will get liquidity by virtue of sale of a percentage of their assets, KSE or NSE will emerge as a listed company, requiring it to follow all requirements that all other listed companies do.
Once the NSE has been formed, the KSE, LSE and ISE members will need to consolidate through acquisition and mergers. In my view, as it stands today, the market is over brokered; post consolidation fewer yet stronger and more vibrant stockbrokers will be left; that will cater to the local as well as foreign investors' needs. It will create an institution that will be far more transparent rather than being controlled by a few with a vested interest.
Moreover, it is also essential that the stock market regulator SECP is beefed up as per international standards; the institution has representation from the private sector with persons who are honest, with highest integrity and most important of all, without any political interference.
Once the SECP has the full support of all stakeholders that include the stockbrokers, listed companies and the investors at large, it can perform its duties in a transparent way.
EQUITY MARKET OUTLOOK
Lately, the stock market has gone through a bear spell in the midst of despair surrounding the introduction of capital gains tax (CGT). It is not the introduction but the mechanism, such as advance tax filing and the human nature to be reluctant to any change, which has weakened the investors' sentiment.
Overall, the stock market has lost 9 percent to-date after hitting its 2010 high of 10,677 points on 15th April, while volumes have also dried up.
However, on a positive note, foreign funds remain active with foreign inflows recorded every month this year. At current levels, the market appears to be fairly attractive, trading at 2010E P/E of 8x and offering dividend yields close to 7% (one of the highest in the region).
Oil and gas, fertiliser and power sectors remain the top sectors, given strong earnings growth profile of these sectors and low sensitivity to economic variables.
Economic risks persist since inflation remains sticky, and the government is struggling to restrain the budget deficit due to increased defence expenditure due to the war on terror. Furthermore, the most important infrastructure issues such as power shortages continue to hamper business activity, hurting the country's economic growth prospects.
As the charts illustrate, despite continuously witnessing decent inflows from FIIs, overall volumes have shrunk drastically. On price-to-earnings multiple, Pakistan's stock market is one of the cheapest and also provides one of the highest dividend yields.
If the government can tackle the security situation, ensure good governance and the margin financing/leverage product is introduced, market participation from retail investors will improve -- resulting in higher volumes.
Commercial businesses will also be encouraged to seek financing from the capital market, ensuring more listings and enhancing depth in our market.
Therefore, one feels if the capital market can get itself aloof to issues such as CGT and can look to the future by consolidating and becoming an NSE, volumes and confidence will come back in a big way.
Demutualization will ensure that the stock market is governed by professionals and the institution becomes strong. This all looks good on paper, but without sheer hard work, dedication and honesty, these goals might be hard to achieve.
The writer is the CEO of brokerage firm Elixir Securities. He can be reached at [email protected]
Economic risks persist since inflation remains sticky, and the government is struggling to restrain the budget deficit due to increased defence expenditure due to the war on terror
If the government can tackle the security situation, ensure good governance and the margin financing/leverage product is introduced, market participation from retail investors will improve.
'Regional empowerment is the solution'
An interview with Dr Salman Shah - former finance minister
ALI KHIZAR ASLAM
TEXT: In this interview, Dr Shah shares his views over the budget for FY11, while shedding light on the role and responsibilities of the centre and the federating units.
Shah also talks about how devolution vis-à-vis the political and economic empowerment of regional hubs can put Pakistan on the path of long term sustainable growth.
The following are the excerpts from the interview:
BR Research: Do you think the budget 2010-2011 is a step towards achieving fiscal austerity?
Salman Shah: Nothing seems to have been done about austerity. The government wants its business enterprises to run as usual with no meaningful privatisation, the white elephant will continue to bleed the government budget.
The provincial budgets are not going to yield a cash surplus of Rs 160 billion, instead they will also be running deficits. The federal government will have to substantially slash its operations yet we don't see any major programmes to cut expenditure and no reduction in cabinet size as well.
I think there will be immense pressure on the expenditure side of the budget. Though, we have forecast deficit at 4 percent, according to the arrangement with IMF, it will be a daunting task to achieve it.
At the end of the day, development spending will take a hit. But with not much room to cut from the federal side of a mere Rs 280 billion allocation, chances of a higher deficit are visible. I think, the deficit will be around 6.5 to 7.5 percent of the GDP.
BRR: Is the revenue generation target achievable?
SS: This budget shows a lot of anomalies. If you look at revenues, almost all the focus is on FBR to collect around Rs 1.7 trillion, which is roughly Rs 400 billion above what FBR would have collected in FY10. This means new taxes, including imposition of VAT or reformed GST, have to be a great success.
The other aspect is that all the other tax measures have to be on target. But at a time when the economy is stagnating, I don't think such huge jumps are achievable. I feel if they collect Rs 1.5 trillion, it would be a great achievement.
Projections of non-tax revenues, including the dividends from SBP, are very high. The government's ability to raise Rs 50 billion from the issuance of 3G licenses to telecom operators is also questionable. There is a risk of Rs 300-350 billion shortfall in overall revenues.
BRR: Can the expenditures be contained?
SS: Despite a 50 percent increase in salaries, the government has frozen current expenditures -- that is marginally lower than last year's revised numbers.
But there is no clear execution plan. So by considering just 10 percent inflation, current expenditure would soar from Rs 1,400 billion by Rs 140 billion. Then again there is a big question over reduction in expenses, when you have not reduced manpower at the federal level, in line with the 18th Amendment and the 7th NFC Award.
After the passage of the 18th Amendment, the government should have shed some of the manpower and it should have shifted the same resources to the provinces. But that didn't happen. I am sceptical on the fulfilment of their tall claims. So, I think current expenditure can slip by Rs 100-150 billion.
BRR: Will higher deficit stem mainly from the shortfall in revenues or increase in expenditure?
SS: I think its 50-50 from both sides. The risks are as high as Rs 600-700 billion, if they materialise fully, then the deficit will be much higher. But I think, the government will have to take some emergency measures under the arrangement with IMF.
BRR: What about quasi fiscal operations?
SS: Well, I have not incorporated those in my calculation. As you have seen the government has announced a Rs 25 billion bailout package for Pakistan Steel Mills. Then there are other corporations to follow including PIA and Pepco.
BRR: How will the federal government manage its resources in the post NFC Award scenario?
SS: Yes, you have highlighted the right issue. After disbursing Rs 1 trillion to provinces, the federal government will not even be able to meet current expenditure through its revenues. So the only way to do it is through a massive strategy of devolution and its effective implementation. The first step is to reduce the head count at the federal level.
There should have been a mega body constituted by now that should have been busy shifting entire ministries and organisations along with human resources to the respective provinces where the actual work is to be done.
BRR: What is the role of federal planning division with transferring more development expenditure to the provinces?
SS: I think it should have been closed down already, as only Rs 280 billion is left to their disposal, materialisation of which is doubtful. I think that should also be passed to provinces. Without the funds, the Planning Commission cannot really function.
BRR: What kinds of projects are better suited to provinces and what should be left for the centre?
SS: We need to manage Pakistan as a common market as envisaged in the 1973 constitution. There are many projects in Pakistan which should be run by federal government. They include defence projects, dams, national highways and even the development of the education curriculum and its focus should be a federal subject.
Then inter-provincial trade related issues should be federal, so there is no friction on matters of inter-provincial trade and capital.
I think we should be cautious with our approach in the 18th Amendment as it should not lead to three or four independent economies in Pakistan.
We should maintain an integrated economy to attain economies of scale. Ultimately, there should be as much integration as we can afford; that way businesses will flourish by exploiting every competitive advantage that a large market offers. The biggest threat to the common market is to allow provinces to impose taxes that are a hindrance to market integration.
BRR: But taxes are still predominant collected from the centre?
SS: Yes, but if services tax is effectively going to be collected by provinces, there is a fair chance of dispute amongst provinces on the origination of services. For instance, a bank has its head office in Karachi but a transaction takes place in Peshawar, will that tax be allocated to Sindh or Khyber-Pakhtunkhwa? So there will be issues.
BRR: India has also been trying to deal with integration of VAT for over a decade. Can Pakistan learn some lessons from their experience?
SS: India is facing huge issues of integration and it has much more economic disparity amongst its states. For instance, Bihar's economy is vastly different from Maharashtra's, as the latter is growing by leaps and bounds, while the former is almost stagnant.
Now, some say that similar differences exist in Pakistan as well, but no, that's not the case.
If you look at the difference in GDP per capita between Bihar and Maharashtra, it's around 400-500 percent. While looking at Pakistan's provinces the differences between the richest province Sindh and poorest NWFP in terms of GDP per capita is merely 30 percent.
I think this goes to our favour as India is trying to integrate VAT for last 10-15 years but has been unable to make it happen as yet. So we have a much better system and we should avoid moving towards a system similar to India. Instead we need to take development to the local level.
Unfortunately, our political parties do not allow the local government system to run in Pakistan. However, if you devolve just to the provincial level there will be difficulties because provinces are still very large and there is a tendency in provincial governments and bureaucracy to check resources from reaching the common man.
BRR: What is hindering the devolution process?
SS: The next step is to financially empower the local governments and this would reduce the role of the provincial governments.
The objective is that people should reap fruits from development. You can't have a model which is more urban oriented ie that you keep on developing big cities like Karachi and Lahore, while rest of the country is deprived of facilities.
BRR: At one point you talk on strong federal government and at the other you are a strong proponent of local bodies?
SS: The role of the federal government is to develop the infrastructure of the common market of Pakistan. The role of the local government is to develop the capacity of the local areas to participate in the common market.
The role of the provinces is to co-ordinate with the districts and can be made more effective by reducing the size of provinces. They have to be at manageable levels. Like in Punjab, there should be a separate province for southern part, for Bahawalpur, for central Punjab, Northern Punjab and for Potohar etc.
I think these are genuine and reasonable demands emanating from various regions because with new smaller provinces you can develop each new province in a better way, through the funds available from the NFC awards and local taxes.
As you see the services provided by provinces are those which affect your day to day life for instance, basic education, college education, skills development, health facilities, irrigation, local infrastructure, farm to market roads and so on and so forth. All these services have to be provided at the local level.
BRR: But you have said that federal PSDP is low this year and more allocation should be at federal level and that system should be centralised. Aren't you taking a U-turn?
SS: Those goods and services linked to develop the common market ought to be centralised; for instance, making a highway connecting one part of the country to another has to be centralised. However, if you have to make or line a canal in a district or build a road connecting a village to a market, these are the local government's job.
BRR: As you illustrated economies of scale at central level; the same holds true with the current provincial structure.
SS: The economies of scale at the federal level relates to economic activities of the private sector, it does not apply to government bureaucracy. You really don't need a very large scale administrative structure at the provincial level as the province has to cater for co-ordination rather than provision of direct services.
BRR: But it would be even lower at local bodies' level?
SS: At local bodies' level you need implementation! You would need teachers, doctors, engineers and so on and so forth to manage your local system. For instance, in a ten-district Bahawalpur, the co-ordination of a district with its neighbouring districts is not efficient when it comes from Lahore.
The end result is what will bode well for the future. Will increase in the number of provinces reduce friction and result in more development? We have to redesign our structures to achieve these goals. However, if we refrain from such changes, the restlessness keeps on increasing in backward regions.
So considering the globalisation effect on the economy and Pakistan's large population that is increasingly going to be urbanised we should create magnets of growth all over the country rather than letting development confined to a few large metropolises where all the people are trying to settle.
We have to select 20 urban cities in Pakistan and zones of development should surround them so that small economic hubs emerge and help to halt migration to Karachi and Lahore. Hence, these realignments should be subject to how we want to see economy in the next fifty years.
BRR: How should we go about it then?
SS: Local services should be provided at the district level but to ensure that inter-district co-ordination is not cumbersome, you need to have regional empowerment.
What I want to emphasise is that in addition to the federal level, provincial level and local level we should also focus on regional empowerment. And these regional governments should really replace the current provinces to become new provinces.
In the next fifty years to have development in each and every area of the country we need to have 20 economic growth node points, I think, regional empowerment is the solution. Each region shall have its own urban centre.
And these 20 urban centres will be the focal point of future industrial development and services growth. Otherwise migration from rural to urban areas in Pakistan will continue. Almost 100 million people will migrate from the villages to urban areas over the next few decades. This will be a major disaster if we do not create economic growth nodes all over the country.
BRR: But 18-20 administrative units also means same number of high courts, chief secretaries and so and so forth, wont that lead to higher cost of administration?
SS: Devolution does not mean that manpower would increase proportionately. Naturally some costs would escalate but it would not be a linear relationship.
We have to make sure that the cost is less than the existing cost. For that you need to flatten the bureaucratic hierarchy. We would also require fewer provincial legislators. The size of the establishment needs to be distributed to each entity according to the population they are catering to.
The new establishment is not an issue that can't be dealt with. But it has numerous advantages ie you will extract a competitive advantage for each and every area, you will have economic development plan for every region and resource allocation will be according to the needs of that area. This will result in regional infrastructure development and employment generation.
These new regional hubs will need to create new urban industrial zones and have commercial areas surrounding them. We need to create new cities having universities, hospitals, etc. Fortunately, Pakistan is a very compact country so such goals can be achieved.
Along these lines, we had initiated the national trade corridor project comprising of logistics infrastructure of Ports, motorway and railways, the plan was to connect all the surrounding regions to it and then generate economic activity. Like you see in the developed world there is no one centre, rather each and every area is well developed.
I think we have to do it whether we like it or not! I think by 2050, our population would have swelled to around 250-300 million, and a workforce of around 185-200 million. We have to plan for them today.
BRR: So wouldn't the empowering of regional inhabitants take us two steps backwards rather a step forward?
SS: By the grace of God, Pakistan is endowed with outstanding human potential. It will be an evolutionary process. Unless we give backward people the opportunity, they won't come up and then there will be a transition period to come with a support plan from the federal government to develop skills of backward areas.
BRR: But if we go for a referendum, as suggested by you, the masses will make decision based on ethnic and linguistic preferences.
SS: Yes, let that happen, let's go with the natural flow. I believe if each former division was given a choice to become a province, majority of the people living in these divisions would vote for the division becoming a province.
BRR: Will regional empowerment improve law and order in the country?
SS: Naturally, law and order will improve as every province will have more manageable problem of law and order to tackle.
BRR: The objective of your ideology is to have regional economic prosperity and to reduce the pace of rural migration. It will take years, perhaps decades, how would you incentivise the masses to stay in their homeland?
SS: It's simple, if you ignite economic development in a certain area, the primary beneficiary will be the inhabitants. Why would people go hundreds of miles from their homeland when they have jobs at their doorstep?
BRR: Where would be the focus of tax collection - federal level or regional level?
SS: I think the current set-up is fine. As agriculture tax is a provincial subject, it should go to the new provinces.
BRR: But we are not collecting anything substantial on agriculture income. Are we?
SS: That is due to the strong feudal lobby. However, if the masses know that their tax will be spent on them, then it can break this lobby. The smaller the unit, the easier it is to collect.
BRR: How can we increase our tax-to-GDP ratio?
SS: First we need to look at the fact that we have increased tax collection from mere Rs 300 billion in 2000 to over Rs 1.5 trillion targeted in 2010. So it has increased five times in the last ten years.
But there should be more coverage of taxes. In my view there are two ways to it: a) sales tax should reach the retail level, the way it is in most of the world and the issue is that we are not ready for it but we can be ready for it in a year or two. I don't see as many hurdles impeding it against the general expectation.
The second area is agriculture income tax, or agriculture tax as a whole. My suggestion would be to pass on this tax to local government to strengthen the local bodies; agriculture tax would become the lifeline for local bodies.
BRR: How can this be implemented?
SS: Look, we have passed 18th Amendment in just two hours, so anything can be done in this country.
The size of the agriculture economy in Pakistan is roughly $40 billion; by collecting one to two percent on it is a big number. Hence, if we do take sales tax at retail level and collect agriculture tax at local levels, we can work towards taking the tax-to-GDP to 15 percent.
We should bring the corporate income tax close to 20 percent, as it is at 20 percent in an emerging economy like Malaysia.
I think we should exploit more public-private partnerships as that is another way of financing the infrastructure, but outside the budget 4-5 percent of GDP can be done through public private partnership.
So if you increase your tax-to-GDP ratio to even 12 percent and another 5 percent through public private partnership, I think you are all set to grow.
In this regard we had made a company called Infrastructure Project Development Facility,(IPDF) but that has been wrapped up more or less. Like in South Korea, all road networks are formed on the basis of public private partnership; I think we can do the same over here.
BRR: One of the criticisms your government faced is that you guys didn't foresee the energy demand picking up. Even the circular debt problem is due to the subsidy overrun by your government at a time when crude prices were shooting. What do you say?
SS: Just look at this year's Economic Survey, it has the signatures of Hafeez Sheikh and Sakib Sherani. This document narrates that commercial energy supplies (table 13.2) in 1999 installed capacity was 15,000 MW and in 2008 it was 19,650 MW. So the point is that energy supply didn't increase in our tenure is a misconception.
Power generation in 2008 was 98 billion GWH, and now it has reduced to 91 billion GWH ie almost 10 percent reduction in just two years.
So do you really think it's a capacity issue? It is actually a governance issue.
BRR: But don't you think that decrease in generation is due to the circular debt problem?
SS: Oil prices in our time reached $80 per barrel. But during the tenure of the new government, prices went up to $150 a barrel. Therefore the issue of circular debt became unmanageable during the tenure of the present government and they are responsible for it. It's an administrative issue.
BRR: What is your take on the monetary policy in such an inflationary environment?
SS: I give you the example of India. I went to India and asked their central bank officials, that your inflation is close to ours but how can you keep discount rate at as low as six percent. He said that we don't count food inflation while making the decision on the policy rate and keep it low from a growth perspective.
And they have given special concessional rates to the construction industry, auto industry and electronics industry. There is no significant meltdown impact on India as they have portrayed the image that they are immune to crises.
While we destroyed our brand image of being a highly investment friendly destination...investment-to-GDP ratio has collapsed owing to the way we have portrayed our image when our finance minister Ishaq Dar propagated in early 2008 that Pakistan was a bankrupt country it ignited capital flight and disruption of local and foreign investment.
The only way to come out of this shamble is through a revival of investment by both local and foreign investor. We have to provide a much higher level of governance and transparency in decision making and we have to curtail the business activities of the government.
We have exhausted our debt capacity. What will be our line of action for the next oil shock? I think if oil crosses $100 per barrel again we will be in serious trouble.
BRR: What is the solution of energy problem?
SS: Simple, it is to focus on cheap indigenous energy solutions including hydel power generation via building of Kalabagh and Basha dams and energy production from coal.
BRR: But even you, under the rule of a military dictator couldn't construct a single dam.
SS: Last major (Tarbela) dam was constructed in 1974. You can cut your energy import bill of $10 billion by 40 percent by constructing Kalabagh Dam and even more by constructing Basha Dam. So these dams are crucial for our energy solution as well as balance of payment and our food crisis.
The debate in the provinces as well as national assembly is not on the merit of dams rather it is on ethnicity. How can a country resolve its problem when its most competitive advantage point is a bone of contention?
BRR: Since building dams is more of a political issue as just explained by you; won't the problem aggravate if we make more provinces as you suggest?
SS: I don't think so. The point is that construction of a dam has economic benefits higher than all foreign aid given to us. This one project can remove poverty in Pakistan. You have to start thinking; it's a win win situation, let's make it... millions of people will come out of poverty if we do it.
Maybe we need to bypass political leadership and go to the people. We should conduct a referendum on the construction of dam and prior to that we should inform all the facts to the masses. I think the media should pick it up.
We have outstanding demographics. Geopolitically we are sandwiched between China, India, the Middle East and Central Asia. There is no reason that we can't grow, unless we cut our feet ourselves.
We are passing through probably the worst stage of our existence.
BRR: How do you see Pakistan in 2020?
SS: If things go as they are going now, we will still be in doldrums. But if we take charge, the people of Pakistan say enough is enough. Why are we not a Korea, why are we not a Malaysia, why are we always fighting with each other?
These are the questions the people of Pakistan have to start asking, and then I think we might have a very bright future because our leadership will have to provide those answers and have to deliver the governance promised to the common man.
BRR: So accountability has to come from the public?
SS: Absolutely! People are paying the cost of all this. The cost of not constructing the Kalabagh dam in the 1970s has been borne by masses of Pakistan in the last 30 odd years. And after that if we would have constructed Basha Dam our per capita income would have been close to $10,000 per annum - ten times of what we have today.
"After the passage of the 18th Amendment, the government should have shed some of the manpower and it should have shifted the same resources to the provinces. But that didn't happen"
"We have exhausted our debt capacity. What will be our line of action for the next oil shock? I think if oil crosses $100 per barrel again we will be in serious trouble."
"The next step is to financially empower the local governments and this would reduce the role of the provincial governments......The objective is that people should reap fruits from development"
Company Brief
Sui Southern Gas Company (SSGC)
ARTICLE: Sui Southern Gas Company (SSGC) is Pakistan's leading natural gas utility known for its strong business vision and a comprehensive gas-development plan. Commencing in 1954 as Sui Gas Transmission Company (SGTC), SSGC today caters to over 2.2 million customers comprising 3,850 industrial units including several large power plants, 23,890 commercial customers in 33 districts and 120 tehsils and 1,920 villages across Sindh and Balochistan.
Company also runs Pakistan's only meter manufacturing unit through which it supplies meters to all customers including SNGPL. SSGC is the Government of Pakistan-appointed facilitator of Pakistan 'Mashal' LNG Project designed to ensure long-term energy security and sustainability. The Company has carved out a niche for providing first-class customer service through 23 Customer Facilitation Centers (CFCs), state-of-the-art Contact (Call) Centers and an Emergency Helpline 1199.
Revival of stock market
DR. AMJAD WAHEED
ARTICLE: Since the stock market crash of 2008, investors seem to have lost interest in the Pakistani stock market. Average daily trading volumes have dropped sharply from around 212 million shares in FY07 to around 162 million shares in FY10.
The Capital Gains Tax (CGT) on the stock market has further dampened investors' sentiments. A key question is how and when the investors' confidence will be restored in the market.
The Pakistani stock market has existed for over six decades. Yet if we gauge the number of investors in the market by the number of Unique Identification Numbers' (UIN) in CDC, there are around 270,000 UINs of which more than half are inactive.
If we compare this with around 30 million bank deposit holders in Pakistan, the Pakistani stock market as an investment vehicle has not been very successful.
One of the reasons is that the risk (standard deviation) of the Pakistani stock market at 25 percent is much higher relative to other stock markets in the region. Thus, investors have found stock market investment very risky and have shied away from it.
This has partially to do with the high economic, political and security risk factors in the country. However, excessive leveraging and the mindset of investors to take short-term speculative positions rather than long-term investment positions are other factors that have made our market more risky than others.
Also, stock investing has been limited to a few large investors and has not spread among millions of small investors, as is the case in other emerging markets. This is the reason why our stock market has lacked the necessary depth and breadth, which is imperative for an efficient market.
Just about every stock market of the world has an option for investors to take leveraged positions in the market. These options provide the market the necessary liquidity, which is important for price discovery and unfettered entry/exit for investors.
Margin financing and derivative products (options and futures) are the more common options used by the investors globally. In Pakistan, COT or "badla" were more commonly used leveraged products, which evolved to CFS and later CFS MK-II.
As this product evolved over time, its risk parameters have improved. CFS MK-II had the added advantages that it was market-driven and had good price-discovery, documentation, standardisation and transparency features. The stock market crash of 2008 put this product to test with both the financees and the financiers ending up in court.
However, almost all of CFS financiers got their entire investments back without experiencing any material losses. Following this episode, CFS MK-II was discontinued prematurely without an alternative financing product in place.
Since then, there has been a significant discussion as to which leverage product suits best our market. In my view, all leveraged products, which include margin financing, margin trading (an improved version of CFS MK-II), options and futures should be available to investors, so that they can choose the one that suits their needs.
An option being considered is a margin trading product in which the investor (borrower) will put 25 percent equity in the form of cash while the remaining 75 percent will be provided by the Financier (lender). In addition, both the mark-to-market losses and concentration margins will be collected in the form of cash. Thus, this product will provide better protection relative to CFS MK-II.
In the future, mutual funds will play a key role in increasing the necessary depth and breadth of the market. All major banks have launched asset management companies that will increase the reach of mutual funds to banks' customers across the country. Also, mutual funds encourage investors to invest in equity mutual funds for the long-term.
Mutual funds are also offering hybrid funds like balanced and asset allocation funds, which have the flexibility to take less than 100 percent equity exposure. Therefore, the volatility of such funds is less than that of the stock market. This will encourage investors to take partial risk of equities to earn a higher return than bank deposits.
The Pakistani stock market declined by approx. 58percent in CY08. It rose by 60 percent in CY09 and had risen by 3.5percent in the first-half of CY10. With the recovery already underway, it is only a matter of time before investors will start returning to the market.
The writer is the CEO of National Fullerton Asset Management Ltd (NAFA). He can be reached at [email protected].
Stock investing in Pakistan has been limited to a few large investors and has not spread among millions of small investors, as is the case in other emerging markets
In the future, mutual funds will play a key role in increasing the necessary depth and breadth of the market as all major banks have launched asset management companies that will increase the reach of mutual funds to banks' customers across the country.
Company Brief
DS-CONCEPT FACTORING - A Smart Concept in Foreign Trade
ARTICLE: DS-Concept Factoring is a multinational Trade Finance company having its Head Office in Germany and liaison offices in Europe, Middle East, USA, Turkey, Egypt, Bulgaria, Hungary, Bangladesh and Pakistan. DS-Concept Factoring has a joint venture with the world's leading European Insurance Company Euler Hermes which provides the credit shield to the world-wide Exporters and Importers.
DS-Concept Factoring is the only factoring company which is operating in PAKISTAN to provide the complete trade finance solution i-e immediate liquidity and 100% security of the receivables. DS-Concept Factoring Pakistan Liaison Office was established in the year 2006.
In Pakistan DS-Concept Factoring is registered with SECP and Board of Investment, Government of Pakistan to operate as Liaison office since April - 2006.
DS - Concept Factoring is the only company which provides customised solutions to the Exporters and Importers with the credit invoice insurance without any collateral or guarantee at economical prices.
Factoring is selling your invoice with deferred payment term to get your money immediately after shipment on acceptance from your buyers, and 100% credit invoice insurance against receivable on credit terms ie, D/A, D/P, CAD, LDP or LC deferred terms of payment.
We offer best opportunities for the promotion of D/A business through factoring system. Pakistan has huge potential of value added products for foreign trade. The trend of foreign buyers is more towards credit terms which keep our exporters under great mental stress for their receivables which results in substantial loss of business if they refuse to accept credit terms of the buyers.
Cash flow and security of invoices are the decisive factors for the development and growth of any enterprise.DS-Concept Factoring enable exporters to get 80% to 90% of invoice amount just after shipment and also provide 100% invoice insurance to keep exporters free from any risk of bad debts.
The needs of international markets are changing, every buyer wants to live on the credit of supplier, D/A and LDP are becoming the preferred terms for buyers, but exporters seek the security of their receivables, DS-Concept not only secure the exporters receivables but also provides immediate liquidity to the exporters. Hence DS-Concept is helping the exporters to boost their exports and contributing in the provision of immediate foreign exchange for the country.
DS-Concept Factoring has an excellent information system that provides up to date information about the buyers throughout the world. This system helps the exporters to choose the credible buyers.
Since the establishment in mid 2006 DS-Concept Factoring has financed the exports of several millions US $and more than 100 exporters apply for credit limits each year.
After the successful operation in Export financing Solution, DS-Concept Factoring have introduced ´Import Financing Solution' for Pakistani Importers, intending to import from any part of the world. DS-Concept Factoring provides credit facility term from 30 days to 170 days for each import transaction on a very economical price than other financial institutions in Pakistan. No Collateral or Bank guarantee is required with any effect on existing credit lines.
DS-Concept Factoring took up this challenge by maximising support to the exporters to achieve their business targets. In the present difficult times when the cost of business is increasing every day and the banking channels are getting more complicated and expensive, DS-Concept Factoring can be considered as a valuable partner, capable for delivering Cash flow, Security and Credit investigation of foreign buyers for the trading companies.
The NFC Award: Punjab biggest gainer
MUHAMMAD SABIR
ARTICLE: The federal budget 2010-11 was presented in the backdrop of the 7th National Finance Commission (NFC) Award, which clearly effected some profound changes in the resource distribution formula. While several claims were made by the provinces about the gains to be expected - claims based on federal Finance Ministry projections at the time - the budget 2010-11 has produced a somewhat different result.
Nevertheless, given the past experience of several inconclusive NFC Awards, a consensus based NFC Award after 1974, 1991 and 1997, is itself a big achievement. It is the first time after secession of East Pakistan that the distribution of resources among provinces is being based not only on population but also on other criteria like backwardness, inverse population density and revenue collection/generation.
The 7th NFC Award also helped resolve other issues such as Gas Development Surcharge (GDS) and hydroelectricity profit. The financial implications of this NFC Award for federal and provincial governments are vast and long-lasting, with a substantial increase in transfers from the federal government to provinces due to four reasons.
First, the collection charges were decreased from 5 percent to 1 percent; thereby, enlarging the overall size of the divisible pool.
Second, the federal government and all the four provinces recognised the role of Khyber-Pakhtunkhwa as a frontline province against the war on terror. One percent of net proceedings of the divisible pool were, therefore, earmarked for Khyber Pakhtunkhwa during the award period. In 2010-11, Khyber Pakhtunkhwa will receive an additional amount of Rs 15 billion as a frontline state for war on terror.
Third, the remaining proceeds of the provincial share of the divisible pool was increased from 48.75 percent (inclusive of one-sixth of GST) to 56 percent in 2010-11 and 57.5 percent for rest of the award period. This means that the share of federal government in the net divisible pool would be 44 percent during 2010-11 and 42.5 percent in rest of the award period.
Finally, GST on Services collected in CE mode was also transferred to provincial governments under the straight transfers mode -- implying that revenues collected from a province would be transferred to that province on the basis of collection. The budget 2010-11, however, does not adhere to this principle.
Additionally, the NFC also allowed GDS arrears retroactively to be paid to Balochistan on the basis of the new formula and for payment of the long held up hydel profits to Khyber-Pakhtunkhwa.
Based on the estimate of gross revenue receipts (tax and non tax revenues collected by federal government), an increase of Rs 359 billion is projected for 2010-11 compared to 2009-10, which shows a growth rate of 17.5 percent. (See Table 1)
However, net revenue receipts of federal government are shown to decline by Rs 19 billion or 14 percent in 2010-11 compared to 2009-10. This decline is an outcome of greater revenue transfers from the federal government to provincial governments due to 7th NFC Award. As a result, there is an increase of Rs 378 billion in the provincial share that has risen from Rs 655 billion in 2009-10 to Rs 1,033 billion in 2010-11.
GAINERS
In contrast to general perception, the province-wise federal transfers show that in absolute terms, Punjab is the biggest gainer of 7th NFC Award, as it is likely to receive Rs 162 billion more revenues in 2010-11 compared to 2009-10.
This is on two counts. One, Punjab's greater than 50 percent share in the divisible pool has allowed it to benefit the most from huge increase in vertical transfers. And two, the distribution of GST on services on the basis of population rather than the NFC agreed principle of the basis of collection.
The absolute gains to rest of the three provinces are less than half the gains to Punjab. In percentage terms, however, Balochistan is the major gainer, with an increase of 142 percent, followed by Khyber-Pakhtunkhwa with 92 percent.
The relative picture shows that in percentage terms, the 7th NFC Award is more beneficial for relatively backward provinces. Sindh has gained the least - an increase of just 40 percent -- as the expected gain from GST Services has not been reflected in the budget 2010-11.
The budget documents of fiscal year 2010-11, when compared with NFC projections, show a decline of Rs 65 billion in the head of divisible pool transfers (See Table 2). In terms of absolute amount, while Khyber Pakhtunkhwa and Punjab are marginally affected by this decline, Sindh is considerably affected with the loss of roughly Rs 42 billion.
Resultantly, Sindh has incurred a loss of 2.6 percent as per budget documents compared to NFC projections. The decline in Sindh's share from the divisible pool was foreseen and accepted, given that Sindh is expected to be more than compensated by straight transfer receipts from GST on services.
Federal transfers to the provinces have two distinct parts: divisible pool transfers and straight transfers. While, divisible pool transfers are based on the taxes outlined under the article 160 of the Constitution, straight transfers are basically provincial revenues collected by federal government and transferred to provinces after deducting collection charges. GST on services, royalty on natural gas, GDS and net hydel profit from electricity are some examples of straight transfers.
While province-wise gains in divisible pool transfers are in line with the claims and spirit of the 7th NFC Award, the straight transfers portray a somewhat unexpected picture.
With respect to straight transfers, Balochistan gets the maximum increment such that its receipts from transfers will nearly be tripled in 2010-11 compared to 2009-10. The increase is largely on account of the revision of GDS distribution formula.
For Khyber Pakhtunkhwa, the transfers increased by 82 percent, largely due to distribution of GST on services on the basis of population. Punjab has posted a 500 percent plus gain in its straight transfer receipts on account of distribution of GST on services on the basis of population. (See Table 3).
The real disappointment is reflected in a meagre increase of 35 percent in Sindh's straight transfers. Prior to looking at these numbers, the hypothesis was that Sindh would be a major gainer of transfers of GST on services from federal government to provincial governments, because Sindh has highest share in collection of GST on services.
A thorough investigation of straight transfers, however, shows that as per budget documents, the GST services were neither devolved nor distributed on collection but only on the basis of population.
This shows that while 7th NFC Award is successful in resolving many issues, the horizontal distribution of GST services is still an unsettled impediment. The distribution of GST on services on the basis of population, though good for Punjab and Khyber Pakhtunkhwa, is not in line with the constitution.
Looking at these statistics and adding the amount of arrears in lieu of GDS to Balochistan and net hydel profit to Khyber Pakhtunkhwa, it is certain that these two provinces do gain substantially from this award as they are compensated for long standing issues.
Nevertheless, the disagreement over the distribution of GST on services is not reflected in the federal budget documents, which shows that Sindh does not gain as it was widely expected. The government needs to resolve the issue of GST on services that would certainly help ensure a more balanced resource distribution among provinces.
=================================================================
Table-1
=================================================================
FINANCIAL IMPLICATIONS OF 7TH NFC AWARD
=================================================================
As per budget 2010-11 Rs (bn)
=================================================================
2009-10 2010-11 Change
Revised Budget Absolute (%)
=================================================================
Gross Revenue Receipts 2,051.9 2,411.0 359.1 17.5
Net Revenue Receipts 1,396.7 1,377.4 -19.3 -1.4
Provincial Share 655.3 1,033.6 378.4 57.7
Punjab 331.6 494.3 162.7 49.1
Sindh 199.3 279.6 80.3 40.3
Khyber Pakhtunkhwa 83.3 160.4 77.1 92.5
Balochistan 41.1 99.4 58.3 141.9
=================================================================
Table-2
DIVISIBLE POOL TRANSFERS: NFC PROJECTIONS AND BUDGET ESTIMATES* Rs (bn)
=================================================================================
NFC Projections Budget Documents Difference
Amount Share Amount Share Amount Share
=================================================================================
Punjab 507.1 49.7% 488.0 51.1% -19.1 1.4%
Sindh 270.1 26.5% 228.4 23.9% -41.7 -2.6%
Khyber Pakhtunkhwa 157.9 15.5% 151.0 15.8% -6.9 0.3%
Balochistan 84.7 8.3% 87.6 9.2% 2.9 0.9%
Divisible Pool
Transfers 1,019.9 100.0% 955.0 100.0% -64.9 N.A.
=================================================================================
-- Both NFC Projections and Budget Estimates include GST Services - Source: Finance Division, GoP
===================================================================
Table-3
===================================================================
WHAT EXPLAINS GROWTH IN TRANSFERS Rs (bn)
===================================================================
2009-10 2010-11 Increase
Revised Budget Absolute (%)
===================================================================
Divisible Pool Transfers
Punjab 323.1 436.8 113.8 35%
Sindh 145.5 207.3 61.7 42%
Khyber Pakhtunkhwa 76.0 138.7 62.6 82%
Balochistan 29.4 83.0 53.6 182%
Divisible Pool Transfers 574.1 865.8 291.7 342%
Straight Transfers
Punjab 8.5 57.4 48.9 573%
Sindh 53.7 72.4 18.6 35%
Khyber Pakhtunkhwa 7.3 21.7 14.4 199%
Balochistan 11.7 16.4 4.7 41%
Straight Transfers 81.2 167.9 86.7 847%
===================================================================
The writer is Principal Economist at Social Policy and Development Centre (SPDC). He can be reached at [email protected]
On greater autonomy
An interview with Shahid Kardar - former finance minister Punjab
ALI KHIZAR ASLAM
TEXT: In this interview, Kardar talks about how effective administration achieved through devolution of power to provinces can help spur economic growth and how Punjab - the country's biggest province in terms of population - can help facilitate other provincial economies.
The following are excerpts from his interview:
BR Research: There has been serious debate going on about having more administrative units. Salman Shah, for instance, is a proponent of 18-20 provinces in Pakistan. What is your take on it?
Shahid Kardar: Both intuitively and practically, managing large administrative units is a problem. Punjab, if it were a country, would be the 15th most populated country in the world. Breaking large units into smaller units makes administrative sense for reasons of both efficiency and effectiveness.
However, barring the case of southern Punjab, there are no vocal lobbies demanding that more independent provinces be carved out from the existing unit. And for the south, it is essentially a part of the political class that is seeking a separate province.
Even those in the provincial civil bureaucracy with southern backgrounds that end up getting higher education in central Punjab or settle in Lahore as part of the bureaucratic elite are not supporters, let alone vociferous ones, of a separate unit.
This demand is somewhat confined to a certain class of politicians who are unable to get a key role in 'ruling' Punjab and hence the protest at the frustration of not being able to get what they perceive to be a fair share in the spoils.
There is greater prosperity, which is also more equitably distributed, in central and northern Punjab because of a more egalitarian land ownership structure, better access to quality education and wider availability of skills. So it is the southern elite that are seeking a central role in a new province which they don't get otherwise.
Also because of greater heterogeneity, both on a linguistic and cultural basis, the demand in Punjab for additional separate and independent provinces is muted.
On the other hand, Sindh is divided by language and culture because of concentrations of different ethnic groups.
But then whatever takes place in the more prosperous commercial centres is dictated by the 'settlers' in the province-Pashtuns, Punjabis and of course the majority Urdu speaking Muhajirs. With the port in Karachi and the city being easily the 'richest' centre in the country, Sindhis cannot seriously be expected to accept a further division of the province. So the view that there should be more provinces reflects a desire rather than a possibility.
BRR: Then, how else can we achieve effective administration?
SK: Well, there is a need for smaller administrative units but I am not sure that necessarily means smaller provinces. The solution is a stronger and a more meaningful and effective devolution through decentralisation of administrative and financial powers to local governments.
This also implies that we need to weaken the role and powers of the federal government, simply for strengthening the federation and ensuring its sustainability. And to begin with, we need to give provinces complete control over their resources.
For instance, Balochistan's assets have historically been controlled by Islamabad. Similarly, Sindhis should have full ownership and control of their ports and the minerals below the ground.
These assets and resources must belong to the residents of the province and the federal government should not have any control over them. They should then be allowed to sell this 'produce' to others at international prices, the same way that Punjabi farmers charge international prices for their cotton or wheat.
Obviously, with reduced resources available to the centre, it will inevitably require us to rethink the relationship with our neighbours (India) and thereby the role of army. I am convinced that the viewpoint about the army is changing even in the Punjab.
The demand for a comprehensive review of the size and role of the army and the privileges it enjoys is growing slowly in Punjab. It is fast becoming a subject of wider debate even while its role in tackling militancy is being lauded and helping in its rehabilitation.
BRR: So provincial autonomy is imminent?
SK: Yes, there will be a demand from provinces to control mineral resources and revenues, to which the centre will have to concede. The claim, that most taxes are a federal subject, that there is an NFC Award that takes care of the distribution of resources from a central pool and that we are under an IMF programme, will soon become irrelevant.
BRR: What will be the role of the centre in such a scenario?
SK: The centre will have no choice but to shed much of its power. As more provincial autonomy is sought, the attraction of a strong federal government will wane or become gradually weaker or less important. So with greater control over their own resources, there will be no desire to seek a role and representation in the federal government.
This process has begun with this year's NFC Award which has resulted in the provinces getting a larger share from the divisible pool, the elimination of the concurrent list under the 18th Amendment and Sindh's reluctance to allow Islamabad to collect GST on services.
With key aspects of education and the entire sectors of labour, health, livestock, etc handed over to the provinces and the demand for provincial control over oil, gas and other minerals beginning to be ceded, Islamabad will soon have little left in its hands.
BRR: Foreign policy will still be federal domain.
SK: The major chunk of our foreign policy relates to the relationship with India. The pressure to open up the eastern border for trade and people-to-people contact will emanate from Punjab, narrowing the space for the army over time.
BR: What about geopolitics, especially the role of the US?
SK: The role of the US is linked to the rise of militancy in the area, our status as a nuclear power in such a potentially dangerous region and the US exit strategy from Afghanistan.
They will try and design a solution for the area, although they are to some extent at our mercy. The fact that our elite is rather greedy and not prepared to undertake any structural reforms in the foreseeable future, we will continue to be heavily dependent upon external sources for financing our development needs. Hence, the US is likely to retain its influence on how we shape our future strategy.
BRR: How do you see Punjab's role in facilitating others' autonomy?
SK: Other provinces are rightly demanding greater autonomy, and it should be granted. Let me illustrate it with an example; when Punjabis sell cotton and wheat to others at international prices or even higher why should they expect other provinces to sell their gas at concessional rates. Can anyone justify this?
If they sell their gas and oil at international market price, there will be prosperity in those backward areas which will resultantly lead to better external account position and higher demand of goods and services from Punjab and Sindh.
So in essence, higher income will create more demand for goods and services and there will be all round prosperity. By the time, their (Balochistan's) industrial structure develops and meanwhile you allow the free movement of goods and services, Punjab and Sindh will flourish. This will be the scenario over the next 20 years or so.
BRR: How much has Pakistan developed in the last decade?
SK: Let me explain this to you with the help of some data for Punjab. The road network in 1999-00 was 35,000 km today it is 82,000 km. We all know how roads bring prosperity through increased economic activity.
Second, Punjab has grown by 9.5 percent per annum in per capita terms in the last decade or so, while the rest of the country was growing at less than 3 percent, with KP and Balochistan even decelerating in recent years.
A large decent quality managerial cadre is also being developed in Punjab thanks to high quality institutions of higher learning in Lahore including LUMS, LSE, BNU, GC, FC and others.
The bulk of professionals migrating to the Middle East in recent times are also from Punjab and you only have to see the growth in overseas remittances flowing into the provinces from the US, Europe and the Middle East, which has induced prosperity indirectly through demand creation for goods and services.
BRR: The first business chamber of commerce that started supporting the need to open up trade with India was the one in Lahore. Why was that so?
SK: Well, that's because, they can sense increased prosperity. They see that through the opening up of trade, the natural commercial hub will be Lahore. They have a stake in the development of improved physical infrastructure, in the shape of dual carriage ways leading to the border.
Interestingly 20-30 years ago, everyone used to say that since on the eastern side of Lahore there is the border with India, on north-west side is the river, so Lahore will grow towards the south ie towards Multan. But it is has expanded towards the border, it is fascinating.
What I am trying to imply here is that there is no attraction of the south because the southern part of the province doesn't have those kinds of forward and backward linkages with markets. This has been the natural flow of investment; no one has forced them to do so.
BRR: Are we heading towards a free border?
SK: I think it's too early to say whether we will have a free border soon, but we should certainly expect a freer movement of people across border in the not too distant future, notwithstanding Indian anger after the Mumbai incidents.
BRR: Will the security situation in south result in human capital flight?
SK: Yes, some 10 to 15 percent of those with higher level education, ie the high achievers among them will have options, and might seek an exit, to the Middle East and the West.
In the aftermath of the global meltdown and the damaged image of the country, options in the international markets for this segment of the youth have somewhat diminished, at least for the predictable future.
And it is this youth, using technology and the lessons learnt from the experiences of other nations that have done well, which will reshape this country with the help of the active media, especially of the electronic variety, which through its talk shows every night holds governments and the political leadership accountable and is creating a demand for better quality leadership and governance.
"We need to weaken the role and powers of the federal government, simply for strengthening the federation and ensuring its sustainability....we need to give provinces complete control over their resources."
"Sindh and Balochistan should be allowed to sell oil and gas to others at international prices, the same way that Punjabi farmers charge international prices for their cotton or wheat."
Time to focus on outward-looking FDI
AQIB ELAHI MEHBOOB & ASAD FARID KHWAJA
ARTICLE: Thankfully, following the partial normalisation of global financial conditions, the pre-crisis flight of capital from developed to emerging economies has resumed.
Regional currencies, as a result, have gained strength against the greenback, despite initial attempts by their respective central banks to curb appreciation through capital controls and reserve accumulation.
Yet, and though Pakistan is similar to countries in Emerging Asia in terms of economic development and demographic profile, the decline of foreign investment in the country, which began amidst the global financial crisis, has failed to reverse.
Short-term foreign portfolio flows have picked up in recent months, but even that pales in comparison to the inflows seen in Pakistan's regional peers. With long-term foreign direct investment (FDI) trending downwards on a monthly basis, FDI into Pakistan has fallen from $5.4 billion in FY08 to an estimated $2.2 billion in FY10.
This decline in private capital inflows not only hampers domestic capital formation and economic growth but also poses risks to macroeconomic stability, especially when trade imbalances are showing persistence due to reliance on energy imports. It also deprives the economy of many indirect advantages accruing from FDI, such as technology transfers and improvements in management systems amongst others.
The question arises as to the reasons behind the steep slump in foreign investment when apparently the government continues to favour economic liberalisation and global integration; the two factors, which were the centre stones of economic policy during the period where FDI flows peaked.
The answer to this interesting riddle can be found if the problem is looked at from three angles, ie global economic situation, political and security situation and policy features. Though emerging economies have recently been the recipients of substantial inflow of capital, the inflow has primary been in the highly liquid equity and forex markets. Internationally, the trend has shifted away from FDIs towards short-term portfolio investments, on which there are fewer restrictions.
This explains why the inflow of direct investment has experienced a substantial hit in Pakistan, at least for the short to medium term. More importantly, Pakistan, due to its historical track record and existing issues, represents a high-risk investment for foreign investors in a global environment where investment grade opportunities are still available at discounts to historical averages. This is particularly pertinent for Pakistan in comparison to other emerging markets, which have Pakistan's positive growth attributes and relatively cheap valuations, but which, in the spheres of politics, economic growth, security and foreign exchange risk, are significantly better placed.
On top of which, investors generally remain risk-averse on the back of uncertainty surrounding the long-term economic outlook for the global economy, preferring instead to focus on investments that have a high elasticity to cheap liquidity provided by major global central banks.
Secondly, sector wise break-up of FDI shows a high preference towards oil and gas exploration. Considering that the primary exploration belt covers remote areas of Baluchistan and Sindh, investors in this sector are highly sensitive to law and order conditions.
The overall deterioration in the security situation, especially armed attacks on the energy infrastructure in Baluchistan, has been a major factor behind falling FDI. Concurrently, uncertainty on the political front has raised question marks regarding policy continuity, and hence discourages foreign investors from making fresh commitments.
The downturn in foreign investment also reflects the government's failure to invite FDI in prioritised and targeted areas. Over the last ten years, FDI has primarily been aimed at domestic demand, case in point being the near-saturation of telecommunication and banking sector.
Bearing in mind the small size of the domestic market, there is a natural limit to the amount of foreign investment that the country can garner in the long term.
At the same time, FDI, being inward-oriented, has also suffered due to demand-contractionary policies adopted by both fiscal and monetary managers to counteract the domestic balance-of-payment crisis in 2008. Whilst the immediate balance of payments crisis was averted, the balance of risks remains skewed towards a future crisis and hence the suppression of aggregate demand in the economy is likely to persist for a significant length of time.
Considering that the change in trend of global capital flows and domestic political/security conditions are exogenous in nature, perhaps the only realistic future strategy to improve the investment climate is to work upon the policy framework.
Recovery in private capital inflows would be essential if the looming balance-of-payment crisis, seen as near as in FY12, is to be averted once repayment of IMF loan facility begins and imports rise due to the ongoing shift towards thermal power generation.
The agenda, therefore, is to change by removing the primary flaw of inward-bias in Pakistan's existing FDI policy.
In our view, economic policy needs to realign domestic FDI flows towards filling demand in regional and global markets by leveraging on Pakistan's strength as a cheap source of inputs, be it labour or raw materials.
The East Asian model of targeting external demand would not only be key to sustainable capital inflow, but also provide much needed support to exports. However, this has to go hand in hand with a thrust in investment by the government in improving human capital through skill development and raising the literacy rate.
While literacy improvements tend to foster advantages over an extended period of time, and hence are typically disliked by governments, there are near-term advantages that can accrue from investment in technical training in co-ordination with the private sector.
In the same vein, there is a need to define the market and implement the trade corridor strategy, whether it is allowing Afghanistan to India transit trade, or opening the sea route to Central Asian countries.
This would require upgrading and fresh laying of rail and road infrastructure, especially from the new seaport Gwadar to Northern provinces. Collaboration with the World Bank, which has experience in this area, could help the government expedite the process.
Thirdly, the government policy should support much needed infrastructure in food processing (ie quality checking, certification, fish stock audit, etc) and lobbying for greater market access to regional countries in particular for exports from Pakistan's food processing sector.
Alongside the heavy incentives that the government is providing to the primary growing sector (ie very high wheat support price relative to the world traded price), it must also focus on providing support and incentives to the processing sector.
Aqib Elahi Mehboob has over 10 years experience in economic analysis and asset allocation strategy and he is currently working with Dubai-based Elixir Business Research. He can be reached at [email protected]. Asad Farid Khwaja works as an Economist with AKD Securities. He can be reached at
[email protected]
Economic policy needs to realign domestic FDI flows towards filling demand in regional and global markets by leveraging on Pakistan's strength as a cheap source of inputs.
There is a need to define the market and implement the trade corridor strategy, whether it is allowing Afghanistan to India transit trade, or opening the sea route to Central Asian countries.
Foreign Portfolio Investment in Equities
Year to date Inflow (US$mn)
====================== India 8212 Indonesia 1082 Japan 9362 Philippines 377 South Korea 5649 Taiwan 355 Thailand -555 Vietnam 288 Pakistan 288.7 ======================
Source: Bloomberg
Efficacy of budget transparency
NADEEM AHMED
ARTICLE: Democracy is hope for the destitute. It is the solution of all ailments in society. It is considered one of the most fundamental and essential pre-requisites for societies to progress and achieve the highest level of enlightenment.
But democracy also demands uninterrupted chances to flourish and have meaningful contributions in transforming the lives of individuals. Countries that have experienced long autocratic rule have lagged behind in overall development of society and institutional strengthening compared to those countries where democracy flourished and consolidated social and economic progress.
Unfortunately, Pakistan has been devoid of democratic rule for more than three decades in its 63 years history. The consequences of that resulted in institutional decay, economic disaster, social disorder and apparent helplessness amongst masses.
What democracy can deliver to all the people in general, and poor masses in particular is the promise of a prosperous future through valiant and pragmatic policies; and the budget being a major instrument helps in converting promises into reality.
The process identified for budget formulation, when inclusive, strengthens the confidence of general public, civil society and the government. There is a growing concern about the plausibility and rationale of budgetary planning targets in Pakistan.
It is now commonly believed that the budget announcement has become 'a yearly ceremonial exercise' that inadequately portrays future direction of the economy. The principal reason of people's apathy is the centralised or autocratic policy-making process.
The visible disconnect between government and people in policy making and planning process has alienated the popular voice that already intensified corruption and inappropriate use of public funds. With the weak institutional mechanisms for accountability and transparency, financial resources that should be used for the welfare of public have been directed in projects/schemes that ensure rent-seeking and plundering.
Budget transparency and accountability are the measures adopted by several developing and Least Developed Nations (LDCs) of the world to include peoples voice in the budget formulation process. What does budget transparency and accountability mean? The answer of this simple question is not very difficult and complex, though it involves certain concrete measures on the part of government.
Budget transparency is the process that ensures sharing of budget related information and procedures with all the stakeholders in a timely and professional way. It also involves decisions/comments of major stakeholders of any policy change.
With the advent of high-tech information technology tools, public access to information has gained importance that was denied because of only availability of print media. For the dissemination of budgetary information, government may use electronic media such as TV and radio along with web portals that would greatly enhance public access of information. It is desirable to have detail, comprehensive and accurate information of projects to expedite the process of public accountability.
In Pakistan, certain measures were taken by the successive governments to ensure the transparency and accountability in the use of public funds.
However, these steps proved futile due to non-compliance and non-responsiveness of governments on certain issues. For instance, web portals of ministries are not providing adequate information of projects especially the project completion reports that is fundamental from the viewpoint of transparency and accountability.
Other government documents also provide minimum information about the allocated funds utilisation and the information about sink funds. In totality, the public access to information and participation in the budgetary process is extremely low in Pakistan.
In comparison with the neighbouring countries, Pakistan stands in the last place in the budget transparency and access to information to public. Similarly, Pakistan ranked 45th among the sample of 85 countries of all continents that lack budget transparency and accountability.
According to International Budget Partnership (IBP) - an independent Washington-based think tank -- Pakistan budgetary process is highly confidential that limits public access to budget information and opportunities to participate in the budgetary process.
The basis of such a statement is 'Open Budget Survey 2008' that was conducted simultaneously in 85 countries around the world.
For a comparative analysis, IBP constructed an index of budget transparency and accountability. The highest value of index is 88 percent for United Kingdom while the lowest value of 1 percent for Kingdom of Saudi Arabia.
Rwanda and Sudan were placed lowest in the index with 0 percent budget transparency and accountability. Pakistan scored 38 percent that was lowest in the region. Table 1 shows the Open Budget Index (OBI) ranking of 5 countries of South-Asian region. It can be seen that Sri Lanka and India have significant levels of transparency and accountability in the budgetary process while Nepal and Bangladesh have relatively better systems and procedures in place compared to Pakistan.
Lack of transparency and accountability in Pakistan reveals poor government practices, its inability to produce a pre-budget statement, citizen's budget, in-year report, mid-year review and year end-report. Sri Lanka and India have produced all the above documents except pre-budget statement from the government.
Now, the time has come to initiate the participatory budget making process that ensures greater access of information to general public. Citizen's budget will be an important step in achieving the objective of participatory budgeting process. In this regard, the parliament needs to initiate relevant legislation making process that helps take on board people's voices.
There is also a need to inform the public before finalisation of budgetary proposals and plans through a formal document that would not only set the direction of economic progress but also form the basis of discussion and debate on the priorities of expenditures.
There is a growing demand for promulgation of monthly or quarterly progress reports (in-year report) from the government so that the general public may examine and observe the implementation of budgetary proposals and plans. Pakistan has not produced mid-year review on budget that impedes general public to assess whether budgetary targets are achievable or not?
Lastly, the government needs to publish a document at the end of each fiscal year to highlight the gaps in the budgetary plans. All these steps would ensure transparency and accountability in the budgetary process that will also help address major issues of 'disconnect' that continue to exist between the government and people in spite of civilian rule.
The writer is Principal Economist with Social Policy and Development Centre (SPDC), Karachi. He can be reached at [email protected]
With the weak institutional mechanisms for accountability and transparency, financial resources that should be used for the welfare of public have been directed in projects/schemes that ensure rent-seeking and plundering.
Lack of transparency and accountability in Pakistan reveals poor government practices, its inability to produce a pre-budget statement, citizen's budget, in-year report, mid-year review and year end-report.
In comparison with the
neighbouring countries, Pakistan stands in the last place in the budget transparency and access to information to public.
========================== Table-1 ========================== Countries OBI Ranking ========================== Sri Lanka 64% India 60% Nepal 43% Bangladesh 42% Pakistan 38% ==========================
Company Brief The United Insurance Company of Pakistan Limited.
ARTICLE: United Insurance of Pakistan Ltd (UIC) the shining star of the "United International Group" was established in the year-1959. It has glorious past and quest ahead. Enlisted on Stock Exchange in 1960 and have flourishing sister concerns as :
1. The United Insurance Company of Pakistan Ltd (UIC)
2. United Tracker System (Pvt) Ltd (UTS)
3. United International Agro Services Limited (UIA)
4. United Software & Technologies International (Pvt) Ltd (UTI)
5. United International Farms. (UIF)
The United Insurance Company of Pakistan Limited, offers all type of Insurances as FIRE, MARINE, MOTOR/VEHICLES, PERSONAL ACCIDENT, HEALTH, WORKMEN'S COMPENSATION, ERECTION ALL RISK, FIDELITTY GUARANTEE, MACHINERY & EQUIPMENTS, BREAKDOWN POLICY, EMPLOYER'S LIABILITY, LIVE STOCKS, CROPS etc.
Pakistan Credit Rating Agency Limited (PACRA) has assigned Rating of "A - Positive Outlook" and UIC current financial standing in the market shows:
i. Authorised Capital = Rs 1,000,000,000/=
ii. Paid-Up Capital = Rs 400,200,000/=
iii Reserves = Rs 204,910,121/=
UIC providing a series of branded products like Travel Guard, Diplomatic Motor Plan, Auto-sure, Account Holders Plan, Borrower Protect Plan, Plastic Card Secure & Home Secure plan with unmatched value added features. UIC has treaties with world-renowned reinsures rated from Standard & Poors.
Enhanced series of products also include the "Travel Insurance Policy" for overseas travellers profoundly secured by Treaty Re-insurance arrangements with re-insurers from Madrid, Spain. UIC thus enjoying the status of approved insurer on the panel of SCHENGEN Countries. UIC has spacious vision with strong mission to strengthen its profile with zeal and diligent efforts in Pakistan Insurance Market as well as International market.
Textile industry slowdown: create synergies
SOHAIB JAMALI
ARTICLE: When Pakistan's cotton production prospects improved last year, many expected the textile sector - the country's major dollar earner -- to lead the economy to recovery. A year later, the economy has somewhat stabilised, but textile industry is still struggling to recover.
The sector that was one the mainstay of advances in corporate sector remained almost stagnant over the year, with one of the highest loan-payback vulnerabilities by the end of third quarter ending March 2010.
According to the central bank data, textile industry's share in total outstanding loans was the highest at 18.33 percent by March, with the ratio of non-performing loans to total loans also at the highest at 21.25 percent.
This paints a worrisome picture for the sector, especially considering that textile production remained lower-than-expected during the period.
Output growth for textiles as a whole remained marginally negative at 1.8 percent for July to March, compared with over all LSM growth of 4.4 percent during the same period, according to the Economic Survey 2009-2010.
More updated numbers for the July-April period do not show any turnaround either. Cotton yarn output eased by 3 percent year-on-year in the first ten months, whereas production of cotton cloth remained flat at 844950 thousand square meters, down 0.1 percent over last year.
Though, a number of factors are to be blamed to this lacklustre performance; two standout from the rest.
EXPORT-LED FIASCO
The trouble began in China, where cotton crop fell short of expectations triggering a world-wide price euphoria that attracted raw cotton imports from all over the globe. The price of cotton in international market rose from 58.75 cents/lb at the end of June 2009 to 74.65 cents/lb by the end of fiscal year 2010.
Prices were also supported by the Indian ban on raw cotton exports on April 19, 2010 after their textile mills blamed large-scale shipments for a sharp rise in prices and non-availability of the commodity in the local market.
Exports of raw cotton, as a result, surged to its highest levels in memory, while that of cotton yarn also rose to its multi-year high as exporters eyed the lucrative prices in international market.
Just as hyped exports of raw cotton to China - Pakistan's fiercest competitor in world market - left little room for yarn makers, soaring yarn exports, which jacked up prices in domestic market caused operational hiccups to the downstream sector.
"With excessive exports during the year, the downstream industry started facing severe shortages of yarn. Consequently, the downstream industry began to close down," the government said in its Economic Survey.
Consequently, in January, 2010, the government imposed a quota of 50 million kg per month for export of yarn.
However, as appropriate measures to give effect to quota were not put in place in time, yarn exports in January 2010 totalled 56 million kg, due to which the availability of yarn in local market remained profoundly inadequate and prices kept rising.
Moved by the outcry of value-added sector, the government reduced the export quota for yarn to 35 million kg per month with effect from March 2010.
The move further intensified the tug of war between the downstream and upstream textile sector. Though the tension softened a bit after the government, succumbing to rising pressures from both the stakeholders, imposed 15 percent regulatory duty in May (for 60 days) but withdrew the quota restrictions on yarn exports, the damage had already been done.
RISING COSTS
Since the first ban in January, both sides of the industry started slinging mud at each other publicly in a saga that lasted more than three months.
Back-of-the-envelope estimates suggest the industry associations (both Aptma and the value-added sector) spent at least Rs 20 million since January, in their back to back appeals in newspaper advertisement to the government to save them from losses so they could payback the loans they took to expand operations in the yesteryears.
Since spinners had invested in machineries and BMR activities the most in the pre-crisis period, they were the most vocal against the ban on yarn exports - citing the need for a free market.
However, on the premise that value-added exports earn more per unit dollars than their upstream peers, the government chose to protect the sector at the cost of spinning industry's revenues.
Critics argue that instead of capping yarn exports the government should have allowed a free market mechanism to prevail to ensure healthy competition for yarn. The value-added producers, critics say, could have been supported through other fiscal measures such as a tax cut.
In any case, by the time the government intervened, a series of strikes by textile makers in Faisalabad and other business hubs badly affected production activities on both side of the stream.
In the meanwhile, increasing cost of utilities hurt their viability, whereas power and gas outages further deteriorated capacity utilisation.
THEME FROM THE BOTTOM
If the country's biggest forex earning industry is to grow, then the change has to start from the bottom.
Cotton crop was targeted at 13.36 million bales last year. However, actual production was 5 percent less than the target due to the shortage of water, high temperatures (in August) which led to excessive fruit shedding, flare up of sucking pest complexes and a widespread of Cotton Leaf Curl Virus (CLCV).
While temperature woes may be unavoidable, other crop related issues, by and large, aren't. Water issues must be resolved and production yields must be increased simultaneously to increase annual production beyond the FY11 target of 14 million bales.
The Ministry of Food and Agriculture (Minfa) plans to introduce Bt cotton variety and Bt Hybrid in Pakistan in collaboration with M/s Monsanto in the following years. This can potentially increase cotton yield by up to 30 percent as Bt cotton is resistant against chewing pest and hence additional income to poor farmers in the country.
Still, adequate efforts must be made to protect crop from other sucking pests such as Mealy bug and at the same time, the government has to ensure that only approved Bt cotton seeds are planted to lessen growers' woes.
Reportedly, in some areas, Bt cotton varieties were marketed with wrong notation of resistance to all pest, whereas in some other instances, Bt cotton seed was mixed with non-Bt cotton seed that affected the yield.
COMPETITIVENESS
While high power tariffs and energy shortages dampen the country's textile competitiveness, there are other critical factors or off-balance-sheet transaction costs such as worker skills, design capabilities, product development services, infrastructure, productivity, costs of doing business and corruption, which have to be dealt with on a high priority basis.
"The cost of doing business in Pakistan, particularly energy outages, textile quality, security and workforce specialisation, are emerging factors that will influence sustained competitiveness," a USAID study on Cost Competitiveness of Pakistan's Textiles and Apparel Industry noted in September last year.
Noting Pakistan's competitive advantage of low priced locally sourced fabric in Pakistan, the study found that the fabric cost advantage helps to offset the labour cost disadvantage ($0.55 per hour vs. $0.32 per hour in Bangladesh and $0.34 per hour in Cambodia).
Attention to off-balance-sheet costs, therefore, is important to sustain competitiveness of the sector. Off-balance-sheet items could include improving duty rebate programmes, improving skills of workforce to better serve the textile and apparel industries, improving cotton grading systems and standards, or improving pre-production services required by buyers, such as developing new fabric finishes, styles, markers, samples and patterns, according to the study.
Looking ahead, the key to resolve textile industry's four major and partly interrelated problems -- energy crisis, lack of value addition and branding, technological standstill and an over burdening debt - is sector consolidation.
The 'fragmentation crisis' is central to all other problems, particularly evident by their rising marginal cost of production and failure to compete in international market despite gradual currency depreciation.
Creating synergies is the only way forward, as no consolidation means, no serious innovation at scale, resulting in fewer success stories. Clearly, if small and scattered Pakistani textile producers continue the way they are at present, they will not have the capacity to compete with their global peers in today's post-WTO globalized world.
========================================================= BREAK UP OF TEXTILE EXPORTS ========================================================= $(mn) FY10 FY09 Variance ========================================================= Raw cotton 195.6 87 124% Cotton yarn 1,417 1,115 27% Cotton cloth 1,818 1,955 -7% Knitwear 1,761 1,740 1% Bedware 1,724 1,735 -1% Towel 676 642 5% Readymade garments 1,283 1,230 4% Other made-up articles 540 480 13% Ancillary textile materials 828 587 41% =========================================================
Source: FBS
============================================================= PAK EXPORTS TO CHINA ============================================================= $ (000) 9MFY10 9MFY09 Variance ============================================================= Raw cotton 29,316 913 28,403 Cotton yarn 523,103 253,116 269,987 Cotton fabric 51,860 53,236 -1,376 Bedware 5,436 2,323 3,113 Yarn other than cotton yarn 4,932 814 4,118 Textile made-up 1 055 784 271 (excluding bedware & towel) Knitwear 1,036 76 960 Readymade garments 726 327 399 Towel 178 103 75 Knitted & Coached fabric 3 5 -2 =============================================================
=============================================================================================
PRODUCTION INPUT COST SUMMARY
=============================================================================================
Unit India China Pakistan Bangladesh Cambodia
=============================================================================================
Labour $/hour 0.83 1.44 0.55 0.32 0.53
Electricity $/kwh 0.086 0.065 0.071 0.053 0.14
Transport $/TEU
Ocean freight 2100 1800 2000 1900 1900
Land * 400 470 300 250 600
Building** $/sq meter 140 97 150 120 130
Corporate tax on profits % of profit 33.6 25 35 35 20
=============================================================================================
-- Factory to port.** Construction cost of garment factory
Source: USAID study 'Cost Competitiveness of Pakistan's Textile & Apparel Industry' September 2009
(The writer can be reached at [email protected])
Telecom saturated; game changing dynamics on the cards
MANAL IQBAL
ARTICLE: No other technology has found its way so successfully in Pakistan as cellular technology. Since the onset of 2005, when telecommunication industry welcomed two additional mobile operators Telenor and Warid to make a total of four giant operators, the industry saw huge boost in its subscriber base.
Though, the pace of cellular growth has slowed in fiscal year 2010, the industry added nearly 4 million new users - bringing the total number of subscribers to around 98 million. And with growth primarily led by Mobilink and Telenor, the market was dominated by the same with 33 and 24 percent share each; Ufone followed with a market share of 20 percent.
The cellular boom has gobbled up any prospects of growth in substitute industries, as despite massive cuts in call charges and innovative packages, fixed line service providers continue to struggle. Fixed line density fell to 2 percent in 2010 from 2.20 percent in the year before.
Even, wireless local loop providers weren't able to gain a warm welcome in the market, in the presence of across the board availability of low cost mobile services. Growth in WLL subscribers continues to fall -- easing to 6 percent in FY10.
But behind the cellular industry's rosy picture hides a dark reality.
Competition is furious in the industry, with consumers being the biggest beneficiaries, as cellular operators' desires to capture maximum market share has led to a severe price war in recent years - a move that has made mobile telephony cheaper for users.
Consequently, the industry's Average Revenue per User (ARPU) has dragged to $2.5, down by nearly three-quarters in the past six years. Average monthly pre-paid mobile dollar cost for a medium user in Pakistan has slid to the lowest in the region, according to LIRNEasia, a Sri Lanka based regional ICT policy and regulation think tank.
Most players are suffering from poor bottom-line performance, which can be gauged from the fact that only one telecom player, Ufone, declared a profit in 2008-09, while the rest faced losses, according to PTA annual report 2009.
If this wasn't enough of a headache for cellular operators, growth prospects are fast becoming even more challenging in the face of slowing demand - leaving the industry with much to ponder over how to sustain and survive.
NEW AVENUES
M-Banking
Of the three most promising avenues currently being considered, m-banking services top the list.
Majority of the country's population remains without banking facilities; the low penetration of branches can be gauged from the fact that there are just seven branches per hundred thousand adults and 0.22 branches per thousand kilometers, according to CGAP - a Washington-based consultative group on global microfinance environment.
According to a UN report, mobile subscriptions in Pakistan expanded at a cumulative growth rate of 102 percent in the past four years, while bank account holdings stood as low as 226 bank accounts per thousand adults.
Such a dearth in banking facilities in the backdrop of significantly high penetration of cellular technology shows that growth opportunities in the m-banking sector are fairly high.
Eyeing this opportunity, Telenor stepped into branchless banking spectrum in October last year, by launching Easy paisa - a service that facilitates payment of utility bills and money transfer through retail agents and mobile phones.
The product managed to gain acceptance, in less than six months, it served more than 0.6 million utility bills transactions and transferred money worth Rs 1 billion - a growth that also convinced United Bank Limited to move ahead with its planned launch of m-banking services, UBL Omni.
A few other telecom operators and bankers are trying to join the m-banking bandwagon, given its speed, convenience, flexibility and also its relatively cost effective nature for banks themselves. With the passage of time, as awareness increases, the volume of transactions is likely to witness a steep growth.
Yet, the future of m-banking lies in how efficiently and effectively mobile operators' manage and tackle their network of retail agents.
This is not due to any fault in domestic branchless banking model. But, in essence, it is the very nature of heavy cash-based economy in developing countries that makes it difficult for retail agents, especially for those in far-flung areas, to handle cash transactions or keep sufficient float to maintain service continuity.
Broadband
In other developments, broadband internet usage gained wide currency all over the country.
Realising the fact that Pakistan has nearly a 10.5 percent internet penetration rate - with an estimated 18.5 million users (using 3.7 million Internet subscriptions), according to the International Telecommunications Union, internet broadband has become the epicenter of the telecom industry these days.
Though, internet penetration in Pakistan is quite lower than in many other Asian economies, but it is still highest in the region---with 4.4 percent in India, 0.3 percent in Bangladesh, 5.8 percent in Sri Lanka and 1.7 percent in Nepal, as per latest data available.
With the arrival of new packages in the market and catchy advertisement campaigns, the broadband industry sold a little more than 0.25 million subscriptions, taking the total subscriber base to around 0.8 million users in just the last six months.
A rising appetite for broadband technology has ranked Pakistan as the world's tenth fastest growing market; in the DSL segment, the country is ranked as the second fastest growing economy in South and East Asia; according to the fourth quarter 2009 report by Point Topic - a UK-based broadband statistics provider.
Expansion in broadband technology, however, depends on the availability of personal computers to household users at affordable prices. At present, only 9.8 percent of Pakistani households own a personal computer, a number that needs to grow by leaps and bounds if broadband is to make a mark.
3rd Generation
The third promising avenue is what industry experts like to fashionably call 3-G, after the third generation of technology that allows fast internet access and faster data transfer speed over the mobile phone.
If and when, the 3G mobile telephony arrives, a new wave of expansion in m-services portfolio can be expected, which, hopefully, could help develop an environment where operators will compete with each other on the quality front rather than prices alone.
When will 3G be finally launched, it's difficult to say at the moment, as many factors, such as low literacy rate, a lack of appetite for value added services over and above voice services, and low purchasing power, are potential barriers to its access.
And by the time the industry manages to overcome these impediments and the management of these operators convince their respective shareholders abroad to pump more money in the risky, yet high potential Pakistan market, a new technology ie 4-G might be launched in the region at affordable rates. This can jeopardise the success of selling 3G licenses by PTA this year.
There is, nonetheless, great optimism in government quarters after the successful auctioning of 3G licence in India earlier this year.
The Indian government netted a handsome $14.6 billion from the 3G auction, providing space to deal with the rising deficit. Not that Pakistan is looking forward to such a huge amount, but the Indian experience has surely filled hopes in the government camps.
The government plans to sell 3G licences some time later this year, with an aim to raise Rs 51 billion as a part of its non-tax revenue.
However, given the lukewarm response to a recently held seminar on 3G in Islamabad, it is quite likely that telecom operators would look forward to consolidating before entering into the 3G spectrum.
"Pakistan's telecom market will have to consolidate before the government can even consider a planned push into third-generation technology," Jon Eddy Abdullah, Telenor Pakistan's chief executive, told international media a couple of months ago.
CONSOLIDATION
Amid signs of medium-term saturation, mobile operators in Pakistan are hardly making money for their shareholders in the real sense; therefore as Eddy says, consolidation of the sector is imminent.
This is also because reportedly none of the shareholders is ready to pump in more money owing to a host of reasons, including steep rupee depreciation in the last couple of years and threats of further weakening, high inflation and poor law and order situation.
Also, knowing that Ufone's green bottomline is not due to smart management, but due to the synergies it gains from parent company (PTCL) the case of gaining synergies is augmented.
Therefore, unlike buyouts, where one pays money to the other and the deal is over, a merger is more likely in the offing.
Reports from the telecom firms' headquarters suggest that everyone is talking to everyone else either to seek a potential merger or to create rifts to ensure that other suitors don't even come close to a pre-nuptial agreement.
In other words, it's the mergers game, which makes perfect sense given the current market dynamics.
For instance, if Telenor that has 25 percent market share (in terms of revenue) initiates merger talks with Ufone, which has a 20 percent share, the new entity could suddenly become the biggest player. And Mobilink that currently enjoys 38 percent of the revenue pie would never let this happen for obvious reasons.
Conversely, Mobilink has a number of options to play; it could strike a deal with Telenor or Ufone, and in case it fails, it will seek to thwart any potential merger between the latter two. Mobilink could also try initiating talks with Warid, which has a 14 percent market share, to ensure its market dominance. A similar set of options can be employed by Warid and the late entrant Zong.
Few have any idea about how will this circular game of wooing, which looks more like John Nash's famed Prisoner's Dilemma, will eventually end; when it does, consumers could potentially face relatively higher tariffs, possibly with some premium services.
(The writer can be reached at [email protected])
Power sector: think better of it?
ZUHAIR ABBASI
ARTICLE: No government in Pakistan has earned the level of anger and public fury over the power crisis like the present government. Never before was the electricity crisis in Pakistan so acute as it was found to be in FY10.
Total installed generation capacity increased by 2.1 percent during FY10 against a growth of 1 percent in the corresponding period last year. Unfortunately, however, increased generation capacity does not always result in actual increased generation and FY10 was a prime example of this phenomenon.
The severity of energy crisis in FY10 can be gauged from the fact that it is believed to have caused a slippage of 2-2.5 percent in the country's GDP, according to the Economic Survey 2009-10. Of course, the social cost of power outages is in addition to that, which led to widespread public protests, causing damage to public and private property amongst other losses.
Pakistan's electricity generation during the first nine months of fiscal year 2010 increased by 5 percent year-on-year. The mismatch between generation capacity and actual generation has been the major cause of concern and was a key factor in worsening the electricity crisis last year.
Asian Development Bank, in its extensive audit report on rental power plants, highlighted the issue of idle capacity which could be utilised to bridge the supply-demand gap without going for expensive options.
Amongst other various sorts of breach of law, FY10 also saw the violation of Nepra Act by the government, as it continued to refrain from adopting the least cost option.
"Presently, a number of power plants are not contributing power supplies due to a range of issues, such as contractual and administrative reasons, and shortages of gas supplies from the national gas grid," so stated the ADB report published in January 2010.
The idle capacity resulting from these issues mounted to 1000 MW, which is roughly about the same number that the eight RPPs approved by the ADB would add to the grid. The government, however, out rightly rejected ADB's findings of the unutilised capacity of 1000 MW in the system, while stressing on the argument that power generation capacity is optimally utilised.
On the demand side, ADB agreed to fund a massive programme of $30 million for CFL bulbs to conserve electricity that was aimed to reduce the electricity requirement by 1280 MW. The CFL programme, was unfortunately, never taken up seriously as reports of mismanagement and corruption by the relevant authorities emerged in the media, which left the massive energy saving initiative for a time, to be done or considered later.
Instead, the government decided to go ahead with the controversial rental power projects, for which it received severe criticism from media and the Opposition. Unfortunately, however, the recommendations of the ADB audit report, which was ironically made on the request of government in the first place, were not followed.
The ADB recommended to the government to go ahead with only eight RPPs instead of the earlier planned 14. But, the situation obtaining in the country for the past four months strongly suggests that government is less likely to implement ADB's recommendations.
Besides being inefficient, rental plants will also result in expensive electricity to the consumers. Interestingly, the reply to ADB's report presumably drafted by the power ministry, points that if all the 14 RPPs are allowed to operate, power tariff could increase by as much as 87 percent by FY11 in comparison to the 58 percent tariff hike, under no-RPP scenario.
The RPPs also attracted criticism because of a number of inconsistencies in government's approach as the bidding process termed the state-owned power generation companies as buyers of rental electricity. This is in complete defiance to the Power Policy 2002, which explicitly states that the buyer should be National Transmission and Despatch Company (NTDC) and not the generating companies.
ADB's report also highlighted bad procurement practice adopted by the government, which revised down-payment requirements from 14 percent to 7 percent after the bids were received. The controversial amendment drastically changed the cost and risk profile, particularly equity risk, in the favour of RPPs.
The inclusion of unsolicited proposals, especially those based on gas, did not miss ADB's radar and came under heavy scrutiny. It is indeed absurd that the bidders were free to offer plants based on different fuels, which raises concerns over the credibility of the agreement.
The report was also critical of the ill-formulated risk mitigation measures that are heavily tilted in the favour of RPP contractors. The fact that RPPs, as per the contract, will enjoy government cover on their LCs for fuel payments, places them at an advantageous position over the IPPs.
Dangerous blends
RPPs aside, one broader issue that continued to trouble was that of the power mix. The electricity generation mix continued to remain in the favour of thermal electricity generation that is a huge problem for a country like Pakistan, which is heavily dependent on oil imports.
The share of hydel electricity generation remained disappointingly low at 33 percent during FY10 as drought like situation decreased the water flow to the dams resulting in depressed hydel electricity generation. To this date, the bigger agenda of building more water reservoirs remains unaddressed.
Political pressures have halted the construction of mega dams, which will keep Pakistan's energy mix heavily tilted towards the unviable thermal sources unless the indigenous and alternative resources are fully tapped.
Load-shedding got worse during FY10 as power outages, owing to line losses and theft, continued to dent the transmission system, despite tall claims by the government of partially solving the transmission and distribution problem.
Although, Wapda does deserve a mention for having brought the T&D losses down to 19.6 percent during the period, the performance of KESC remains questionable as the firm's line losses reached a massive 34 percent in FY10, not much different from the year ago period.
The problem is two-fold; one is the old and inefficient transmission system, which leads to system leakages, the resolution of which needs adequate investment throughout the country on urgent basis. The other problem, of Kunda system or illegal connections, has not been dealt with an iron hand due to strong political pressures.
Moreover, the inefficient billing collection system of the utility companies does not help the cause either, as it leads to lower collection, which starts the never-ending trail of inter-corporate circular debt - a menace which has not been eradicated fully up-till now - despite various efforts by the government to inject money to wipe the circular debt off.
What needs to be realised at the government level is that these injections will only provide a breather to the system and it will always end up reaching a level where government will have to pour more money in - something which the government cannot afford given its fiscal constraints.
There are no hopes of the power woes of the country to end in the near future. The government needs to step up and decide on constructing smaller dams in big numbers. Higher dependence on oil based electricity is not viable, gas reserves are fast depleting, Thar coal needs time - the solution lies in building smaller dams - now!
The missing grid
One thing missing from the entire public debate on Pakistan's power crisis, however, is the dearth of adequate human capital.
Although, a 222-page energy reform study prepared by Farooq Rahmatullah, former Chairman Oil and Gas Development Company Limited - Pakistan's biggest oil and gas exploration and production firm - mentions the need for capacity building in terms of skilled labour, it is just a scant passing reference with little details. The government's education policy in terms of producing human capital for the power sector is equally wanting.
Compared to the growth of business management schools in the last two decades, power related university programmes have lacked far behind. This is true in nearly all aspects; from energy production, conservation, technological innovation to the studies concerning power and socio-economic factors.
In the last 50 years, 6,200 PhDs were produced by Pakistani universities, of which only 14 theses were written on energy or ancillary studies, according to data provided by Higher Education Commission of Pakistan.
This performance may be excused due to unavailability of adequate academic programmes or infrastructure. However, what then explains the low number of power specific graduate and Phd students sent abroad under government sponsored programmes?
According to HEC data, some 3,000 students were sent abroad for masters or doctoral studies under its sponsorship in the last five years. Of these, only 209 were sent for power or related studies.
While this clearly shows a serious lack of policy focus on the part of government officials, the private sector is equally blameworthy in this response. Although, the Federation of Pakistan Chambers of Commerce and Industry - the country's biggest business association - hasn't conducted any power-related study in recent memory, it is heartening to note that the Overseas Investors Chamber of Commerce and Industry, which represents about 181 foreign investors, is reportedly conducting its first-ever study on this subject.
It goes without saying that human capital is the building block of any economy. And for that, education and research are vital to bridge the gap between the industry and academia. Given Pakistan's security woes, available foreign expertise would likely become scarcer and more expensive by the day; hence the need for indigenous human capital.
If this South Asian state must grow into a stronger nation, energy independence is instrumental. And for that, igniting academic power is the key. Indeed, turning this situation around should be one of the top items on the things-to-do list of Pakistan's policy makers and that of its noble Friends (of Democratic Pakistan).
===========================================================
DISMAL UTILIZATION LEVEL
===========================================================
Net capacity Purchase Plant
IPP Fuel (MW) price (c/kwh) factor
===========================================================
AES Lal Pir RFO 348 13.04 59%
AES Pak Gen RFO 348 14.2 67%
Altern Energy Gas 26 3.19 59%
Chashma Nuclear Nuclear 300 5.31 40%
Japan Power RFO 107 16.83 27%
Saba Power RFO 126 12.94 64%
Saba Electric RFO 119 47.65 5%
KAPCO Gas/RFO 1342 13.4 64%
===========================================================
Source: Pepco
==========================================================================
THE EXPENSIVE RPPs vs IPPs
==========================================================================
RPP cost IPP cost
RPP Fuel (cents/kwh) (cents/kwh) Difference
==========================================================================
Techno Rental RFO 18.64 17.31 8%
Pakistan Power, Multan Gas 8.02 7.06 14%
Karkey Karadeiz, Karachi RFO 22.36 17.31 29%
Walter Power RFO 21.01 17.31 21%
Sialkot Rental RFO 19.16 17.31 11%
Kamoki Energy RFO 20.56 17.31 19%
Walters Power, Naudero Gas 10.82 7.06 53%
Ruba Power RFO 20.27 17.31 17%
==========================================================================
Source: Pepco, PPIB
(The writer can be reached at [email protected].)
The sour truth about sugar
HAIDER NAWAB
ARTICLE: The words sugar and crisis have almost become synonymous in Pakistan. Robust consumption and a relatively tight supply through much of the fiscal year, kept demand firm and prices solid. Problems continue to plague the industry, as murmurs of another sugar crisis are making the rounds in Islamabad.
In the summer of 2009, sugar prices shot up. Reason? The same old hoarding, inadequate supply and millers' failure to pay the right price to farmers. The result, the already weak purchasing power of local consumers being further pressed.
In view of the high price of sugar in international markets, millers withheld the supply chain so that prices would become artificially high. The government's regulatory duty came under critical review and it became apparent that the supply chain was not under the administration's control.
The issue attained the level of a national crisis with individuals, media, activist groups and politicians becoming involved in a heated debate without any substantial resolution. In the end, it was determined -by the Economic Co-ordination Committee (ECC) - that 1.2 million tons of white sugar would be imported.
FALLING OUTPUT
Historically, the production of sugarcane has been awarded 1 million hectares of cultivable land. Price variations prompt farmers to vary the area under cultivation." For 2009-10, sugarcane was sown on 943 thousand hectares", according to the Pakistan Economic Survey published in June 2010. That is 8.4 percent lower than area under cultivation over the previous year.
Consequently, the production of refined sugar also dropped to 49.4 million tons compared to 50 million tons in the last year. Main factors contributing to decreased production levels are substitution of the sugar crop in favour of wheat, shortage of irrigation and water supplies, lower prices earned compared to other commodities and higher cost of inputs.
Opportunity costs are just as important to farmers as there are for corporate executives. The possibility of attaining a higher price is enough of a motive for farmers to till the land for the cultivation of another crop. Perceived higher earnings led to the substitution effect, which weighed heavy on sugar production.
Sugarcane is a highly water intensive crop. Colonial legacy provided the country with one of the most intricate irrigation systems in the world. Despite elaborate departments for irrigation in provincial governments, no significant progress has been made in increasing the network of canals that supply water in the past 40 years.
Lawmakers in Pakistan have a vested interest in the agricultural productivity of the country; they are the ones who must be at the forefront of water security if food security has to be ensured.
Globally, the price of sugar has been on somewhat of a rollercoaster ride in the last two years. Tight global supplies led to increased prices of up to 30 cents per pound in international sugar markets in January 2009 and then fell by more than 50 percent to just under 14 cents per pound by June 2010.
In line with international price movements, the market mechanism in Pakistan saw spiralling prices of sugar in late 2009, up to Rs 80 per kg on an average. Prices have softened a bit in recent months, down to Rs 56 per kg. But, the decline in sugar prices has not been tracked by local traders. When global sugar prices fell by half to 14 cents per pound, consumers in Pakistan were unable to benefit from the decline. They still pay around 30 cents per pound of white sugar.
THE FINAL PRODUCT
Pakistan's refining capability has risen from just two mills at its inception to more than 75 sugar mills in recent years. Though not at the bleeding edge of high tech industries, sugar mills still require electricity to run their machinery. Where the energy crisis has held industrial capacity of the country, sugar millers have faced a similar fate. Pakistan economic survey cites the lack of energy availability as a major factor for the decrease in sugar production in the country.
Millers claim that production costs have been significantly higher in this year compared to the last. The primary reason millers claim are the high prices of sugarcane, hovering between Rs 230-240 per 40 kilograms. On the other hand, sugarcane growers maintain that highest prices paid remained between Rs 190-195 for the same amount.
Despite variations in production, human consumption of sugar has consistently been rising about 2 percent per year since 2000, according to a report published by the US Department for Agriculture. In Pakistan, and in the rest of the world, this phenomenon has resulted in a steady decline in the stockpiles of sugar.
To bridge the gap between supply and demand, Pakistan has had to import sugar. The deficit between local production and consumption was estimated at 1.2 million tons by Trading Corporation of Pakistan (TCP).
After seeking approvals from the ECC, TCP has "awarded tenders for 0.825 million tons of sugar while tenders for the remaining 0.375 million tons have been floated and will be opened for bidding in July", according to S. Anjum Bashir, Chairman TCP.
The process has been far from transparent, as one tender had to be cancelled and another was awarded to a company that failed to deliver, costing time and money to the public. In one of the tenders, the contract was awarded to an American company, whose offering price was not the lowest and it subsequently failed to deliver on its contract. The matter was subsequently resolved.
Sugar imports have made local manufacturers nervous in recent weeks. With international prices considerably lower than market prices in Pakistan, the influx of imported sugar is bound to drive down the price of white sugar. Sugar manufacturers lobbied for an import duty of 25 percent as a hedge against potential losses. ECC swiftly rejected the demands, in an effort to move towards a market mechanism.
SUPPLY CHAIN AND OUTLOOK
As is the case with many industries in Pakistan, the supply chain in the sugar industry of Pakistan, from the grower to the consumer is very convoluted. The farmer sells at a price often lower than the government established support price, to a middleman. The middleman adds no value but charges significant margins and millers claim thin margins on higher input costs.
Stakeholders and the government alike need to reform the integration mechanism of the industry. The government should restrict its involvement and play the role of an efficient regulator, a duly it has failed. Vertical integration from crop cultivation to refined sugar would cut out middlemen, who do not add any value to the production chain.
In seeking innovative solutions to the energy crisis, PSMA and power authorities in the country have contemplated producing electricity making use of bagasse. For those that don't know, bagasse is the waste product left after sugarcane has been refined into white sugar.
According to estimates by Private Power Infrastructure Board some 3,000 MW can be produced using the by-product. Negotiations for the projects have been making the rounds. Given the drawn out gestation period, it may be a few years before consumers will be able to make use of sugar power.
Production in Brazil, India, China and Pakistan accounts for more than a third of the global sugar supply. Estimated production figures from India and the beginning of the crushing season in Brazil (March) had already led to a softening of sugar prices in international markets down almost 50 percent from last year. "India's top sugar producing state, Maharashtra, is expected to produce a 33 percent higher output", according to a note published by Standard Chartered.
Likewise, production estimates from Brazil are expected to be up 12 percent from last year, according to USDA. Exports from Brazil are slated to reach 41 million metric tons, which will account for about 53 percent of the global sugar trade.
Price of sugar in international markets is expected to remain range bound within 14-15 cents per pound. That translates roughly to about Rs 30 per kg. Unless weather conditions severely deteriorate or the government is unable to regulate the market efficiently, consumers can look forward to sweet times ahead.
===========================================================================================
Sugarcane: key fundamentals
===========================================================================================
Area Production Yeild
(000) hectares % Change (000) tons % Change Kg/hectare % Change
===========================================================================================
2005-06 907 -6.1 44666 -5.5 49246 0.7
2006-07 1029 13.5 54742 22.6 53199 8
2007-08 1241 20.6 63920 16.8 51507 -3.2
2008-09 1029 -17.1 50045 -21.7 48635 -5.6
2009-10(P) 943 -8.4 49373 -1.3 52357 7.7
===========================================================================================
-- Source: Pakistan Economic Survey
(The writer can be reached at [email protected])
THE COMSATS EXPERIENCE
ARTICLE: COMSATS Institute of Information Technology (CIIT) started its journey in 1998, and established its first campus at Islamabad in April, 1998. In August 2000, in recognition of CIIT's achievements, the Federal Government granted it the status of a Degree Awarding Institute (DAI) through promulgation of its charter.
The CIIT, besides its principal campus at Islamabad, has six other fully functional campuses at Lahore, Abottabad, Wah, Attock, Sahiwal and Vehari, while a few more campuses are in different planning stages. On the advice of the Federal Government, efforts are also under way for opening an overseas campus in the Gulf region.
Vision of CIIT is dedicated to the search for truth through advancement of learning and extending the frontiers of knowledge; to the sharing of this knowledge through education in academically diverse disciplines; and to the application of this knowledge to benefit the people of Pakistan in particular, and the Muslim Ummah and the world, in general. Its mission statement is three-fold ie Research and Discovery, Teaching & Learning, Outreach and Public service.
The CIIT currently comprises of 5 Faculties and 14 Departments. Presently 25 undergraduate degree programs and 23 graduate programs are on offer in which 16,608 students are enrolled. There are more than 1,750 faculty members working in CIIT. More than 260 faculty members and academic managers have PhD qualification, while the remaining have MS / MPhil degrees in relevant fields. CIIT has proudly produced around 10,000 graduates since its inception. So far 24 convocations have been organised in its campuses. Undergraduate engineering degree programs of the CIIT have been accredited by the Pakistan Engineering Council (PEC), the accrediting body for engineering education.
More than 400 faculty members are undergoing advanced education leading to MS and PhD degrees and post doctoral research in USA, UK, China, France, etc. The funding for advanced education has come from CIIT Scholarships, HEC Scholarships and Ministry of Science and Technology Scholarships.
During the ten years since its inception, independent entities have evaluated CIIT and the quality of its programs, such as the Higher Education Commission (HEC), Pakistan Engineering Council (PEC) and the Institute of Scientific Information (ISI) Web of Knowledge. The Higher Education Commission (HEC) in an exercise for the ranking of institutions has ranked CIIT at number 8 among the engineering institutions of higher education during 2006. While in terms of research output, CIIT has been ranked at number five among institutions of higher education numbering more than 124 in the country during 2005-2007. In terms of research citations, the research produced at CIIT has been ranked at number two, as notified by HEC in 2008.CIIT was ranked at No 7 in 2009 in terms of research output.
To reward the most productive faculty members, the CIIT has instituted 'Cash Awards' since 2005 for publication of research articles, in national & international journals, while COMSATS Institute Medals for Innovation (CIMI) medals were instituted in 2006. These awards include cash plus appreciation of the work of the awardees. Under Cash Awards series, the total number of research articles published by faculty members in international and local journals is close to 1,000.
Since its inception, the CIIT has been focusing its efforts in establishing professional linkages with prestigious international universities and research & development institutions. These linkages are targeted at: advanced training of its faculty and students in cutting edge technologies, joint research projects, faculty exchanges, and for organising professional meetings, seminars and workshops. As a result of such efforts, CIIT has already signed almost four dozen Memoranda of Understandings (MoUs) with reputed institutions through out the globe. The hallmark of these linkages has been the signing of a Memorandum of Agreement (MoA) with University of Illinois, Urbana-Champaign (UIUC), USA and with Lancaster University, UK to launch a Dual Degree program for its students from fall 2010.
CIIT realises it responsibility towards the society of which it is a part and tries its best to bring about improvements wherever possible. Reaching out to less fortunate segments of society and responding to emergencies with full vigor has been the hallmark of CIIT and a stated goal. Responding to the emergency situation that had forced people residing in the Swat Valley to leave their homes to save their lives, CIIT responded immediately to the human catastrophe and all its employees, including teaching and non-academic staff members, contributed one day salary for the Internally Displaced Persons (IDPs) in their hour of dire need as a public service. A cheque for Rs 2.516 million was handed over to the Higher Education Commission (HEC). CIIT also decided to waive off the entire tuition fees for Fall 2009 and Spring 2010 of all displaced students, to mitigate their financial burden.
During 2008, CIIT allocated 125 seats in its undergraduate degree programs to students from Balochistan. A year prior to that, 20 seats were distributed equally between the Attock and Abbottabad campuses among qualified students from Balochistan and FATA and their tuition fees and living allowances were subsidised through a grant. CIIT also launched the 'D.I. Khan Initiative' by virtue of which 44 students from the Dera Ismail Khan region were admitted at various campuses in Fall 2008. Their tuition, hostel fee and all other charges were waived-off and they continue to avail this privilege as long as they remain in good academic standing. Additionally, CIIT Lahore Campus has continued to offer 30% seats to children of industrial workers free of cost besides other scholarships.
There are currently 596 students enrolled in Master of Science (MS) programs while 135 are completing their PhD degrees in 14 different subjects such as Computer Science, Health Informatics, Computer Engineering, Electrical Engineering, Management Sciences, Mathematics, Physics, Meteorology, Biosciences, Bioinformatics, Sustainable Water Sanitation Health and Development, Environmental Sciences, Chemistry and Biotechnology. Out of ten thousand graduates, 390 students have completed their MS degrees and 5 have earned their PhDs.
Balanced fertilisation: increase crop yield, profits
ZUHAIR ABBASI
ARTICLE: If Pakistan's economy is to witness agricultural growth, fertilisers productivity will, undoubtedly, be the mainstay. Yet, despite decent strides in the past decade to increase domestic dependence on fertilisers, balanced fertilisation, which means that all plants of a crop can uptake various needed nutrients according to certain proportion to ensure vigorous growth, remains a distant dream.
Pakistan's current urea production capacity stands at around nearly 5 million tons per annum, after Fatima Fertiliser - the latest entrant in the industry - commenced its operations in early 2010. But urea imports are still on the higher side, as the country continues to import urea to plug the demand-supply gap which keeps changing in the wide range of 0.5 million tons to 1.2 million tons a year.
The situation on the phosphate front is even less encouraging as Pakistan remains heavily dependent on phosphate fertiliser imports. Lack of raw material availability is to be blamed for its shortage. The country has to import two-thirds of DAP fertiliser because the country has only one DAP producer - Fauji Fertiliser Bin Qasim.
Fertiliser off-take has increased on an average 5 percent during the past five years on the back of a number of factors, including higher support prices and subsidised fertiliser prices among others. Unfortunately, however, the decent growth in fertiliser off-take has come at the cost of healthy crop yields caused by imbalanced fertilisation of soil.
Pakistani soil is deficient in nutrients; about 80-90 percent of the cultivable land is nitrogen deficient, while 30 percent of the area is marked by potassium deficiency. Though, nitrogen deficiency is widely catered to by ample application of urea, potassium deficiency remains largely unaddressed despite efforts to encourage potash-based fertiliser application.
To achieve improved crop yields, an NP ratio of 2:1 is considered ideal. This ratio is a measure of nitrogen fertiliser applied to the soil in proportion to that of potassium fertiliser. Unfortunately, a serious lack of farmer education coupled with a yawning gap between the price of urea and DAP have been some formidable obstacles towards attaining the desired ratio.
When DAP prices were on a decline, the government abolished the subsidy on DAP fertiliser in 2009, but that did not work out favourably as the NP ratio stayed pretty high at 3.7:1 during 10MFY10. Since, urea prices stayed relatively stable during the period, farmers opted for more urea instead of going for expensive DAP - which by no means is a good idea - hence badly affecting crop yields.
As a result of imbalanced fertiliser application, Pakistan has one of the lowest crop yields in the region. Wheat crop consumes the bulk of fertiliser application, but its yield still remains abysmally low.
A strong correlation between balanced fertilisation and crop yield can be assessed looking at the yield graph with respect to NP ratio - which reflects improved wheat crop yield during 2006 and 2007 when the NP ratio was slightly on the higher side owing to a government subsidy.
Urea off-take on the other hand, remained robust during 10MFY10, showing a massive 18 percent increase compared to the same period of FY09. Besides a minimal 5 percent increase in urea prices during the period, farmers' tendency to substitute urea for DAP when the price of the latter goes up also led to a higher urea off take and naturally an undesirably high NP ratio.
No matter how vocal the government is, in its claims of improving the fertiliser application balance, nothing on paper suggests the same as the government has abolished the subsidy on imported urea as well.
In addition, the elimination of fertiliser subsidy would naturally result in a massive surge in domestic urea prices. It would have been justified had there been an allocation of a targeted subsidy for the affected farmers - but there isn't any, which leaves farmers at the mercy of local manufacturers who would raise product prices to as much as the imported price.
The budget document for FY10-11 also failed to shed any light on feedstock gas subsidy, which should have been eliminated, keeping in mind that the subsidy should be diverted from the rich to the poor. Whatever little hopes one had that Ogra's July 1, 2010 announcement will shed some light on feedstock subsidy abolishment, died as the status quo remains.
On the supply side, Pakistan may not require to import urea from the beginning of 2011, assuming that Engro Corporation's new 1.3 million tons plant will commence operations in time. It is good news for the government as it will ease the import bill. But then again, urea has never been that big a problem for the government or for the farmers.
Even the oversupply of urea in 2011 is less likely to result in reduction in prices as local manufacturers have strong pricing power. Since, there will be no subsidy on imported urea, there seems to be no justification for the feedstock gas subsidy to continue.
Nothing will hit the manufacturers' margin a great deal though any increase in raw material costs will be transferred entirely to consumers. So the real test for the government is to manage the situation that will arise once all subsidies are removed.
DAP off-take will remain a major headache as import dependency will continue in the foreseeable future. In the absence of DAP subsidy, any abnormal increase in oil prices would lead to a massive surge in the price of phosacid, which is the basic ingredient in DAP manufacturing. This can lead to higher DAP prices. Surely, Pakistan can ill afford DAP prices as high as those were seen in 2008 and led to a massive slide in DAP off-take.
On the risk front, fertiliser manufacturers have now tasted the business risk for the first time as energy crisis deepened in early 2010 leading to a cut in feedstock gas supply to fertiliser companies.
The fertiliser companies wasted no time in passing on the impact of reduced production to the end user, raising the prices in the range of Rs 50-80 per bag, in order to keep their profit margins intact.
FY10 did not come without a few negatives for the fertiliser manufacturers, as the Competition Commission of Pakistan issued an inquiry report on the wrong-doings of fertiliser companies involved in the tying-in of sales.
The country's top fertiliser makers were accused of tying-in the sale of urea with DAP -- meaning the buyer, in many cases a poor farmer, must buy a bag of DAP if he wants to purchase a bag of urea. The evidence available with the CCP suggests that different companies tied-in the sales in different ratios.
The commission's report on the issue was based on numerous complaints from all over the country that led to an investigation into the matter resulting in issuance of show cause notices to fertiliser manufacturers, as the tying-in of sales is deemed illegal in the view of competition ordinance.
Urea to the end consumer reaches at a considerably higher rate compared to what is reported in the monthly price list released by the NFDC. This is because the dealers have to follow the tie-in sales practice to maintain their margins and they cannot sell DAP any more expensive because imported DAP is of a higher quality than the local one. This forces them to sell urea at higher rates to sustain their margins.
This explains to a fair extent why farm yields haven't improved despite all those subsidies and support prices. The unfair practice hasn't only been hurting the farmers but has also been diluting the impact of the government subsidy, paid by taxpayers' money.
There is no doubt that the business risks of fertiliser companies have increased with the shortage of gas, but at the same time, all companies are well equipped to handle the situation. It is now time for the government to act and stop feeding the fertiliser firms by subsidising the raw material.
Instead, there is a need to direct the subsidy to the end users, especially when the manufacturers take no time in passing on the cost increase to the farmers. Lastly, there needs to be more focus on educating farmers on balanced fertiliser application, without which the dream of healthy crop yields will remain a distant one.
(The writer can be reached at [email protected])
Prospects bright for cement makers
MANAL IQBAL
ARTICLE: Running a business in today's globalized world does not often offer easy times, as Pakistan normally scores quite low on global competitiveness indicators. One such industry in Pakistan, that seems to be bucking this trend however, is the cement industry, which faced quite a challenging period during FY10.
Though, relatively stable commodity prices eased production costs during FY10, weak demand in local markets and lower cement prices in international markets kept the industry's bottom line under pressure.
To no one's surprise, massive cuts in development expenditure ignited a price war in domestic cement market - pushing the tag lower by 15-20 percent to an average of Rs 245 per bag during the first half of last fiscal year, from around Rs 310 per bag in FY09.
Plants situated in the northern region, which boast about 80 percent share of total production capacity, were the most hit, as the magnitude of price reduction was much higher than that seen in the southern region.
Persistent logistical problems at the Eastern Wagha border has restricted manufacturers' ability to export the product to India, which still has enough appetite for imported cement.
As a result, cement manufactures had no other option but to take refuge in exports elsewhere. But with capacity expansion coming online in neighbouring countries -- like Iran, Qatar, UAE, Saudi Arabia and India - prices in international markets followed a downward trend.
The FOB price of cement in international markets slid to an average $50 per ton in FY10 from $60 per ton in FY09. Since 70 percent of all exports from Pakistan are routed through sea ports, decline in cement export prices has been alarming for domestic cement producers, primarily for northern manufactures, who have to incur an additional cost of $11 to $17 per ton to dispatch cement to seaports in the south.
On an average, cement manufacturers are incurring $32-37 per ton manufacturing cost, which translates into total cost of more than $46 per ton when accounted for an average freight cost of $14 per ton -- making exports comparatively expensive.
Industry sources reveal that some of the cement manufactures exported at a loss just to cover fixed expenditures, while many small manufacturers suspended their operations for a few months.
Moreover, a negative consequence of depressed prices became more obvious, when Maple Leaf Cement was forced to knock at the creditors' door to restructure its debt payment schedule.
For manufacturers in the south, close proximity to sea ports remained a blessing as they incurred a nominal $3 per ton as inland freight cost to transport goods to seaport - facilitating them to capture Africa, Sri Lanka, Iraq and some other markets in the Middle East.
African markets, which absorb around a quarter of cement exports from Pakistan, held a dominant position for domestic cement exporters during the year.
While for southern cement producers, the strategic importance of the African market is even higher, as they are currently looking forward to further increasing their market share in this continent through increasing their respective production capacities.
Previously, Middle Eastern countries were favourable export destinations, but as new production capacity started coming online in the region, cement exporters started eyeing the African market.
This can be gauged from the fact that cement exports have increased significantly to African countries during the first eight months of the last fiscal year, while exports to Middle East were down, as per latest available data from the Trade Development Authority of Pakistan.
Following the global trend, two giant domestic cement manufacturers of late have expressed their intention to install production capacity in Sri Lanka and Africa, where cement industry doesn't produce enough to cater to local demand.
According to last available financials, both LUCKY and DGKC were able to realise volumetric sales during the first nine months of the last fiscal year, but depressed prices at home and lower FOB export prices exerted pressure on their top line, which fell by 6 percent and 10 percent, respectively.
Being from the southern lot, growth in Lucky's exports, therefore, mitigated the dent on its gross margins. Lucky's gross profit margins decreased by 200 bps to 35 percent - a drop much lower compared to its peer DGKC, which saw margins lopped by 1000 bps to 18 percent
However, at the start of the fourth quarter, some market dynamics turned in favour of the cement industry, after the government announced a 35 percent inland freight subsidy on all shipments made between March 26 and June 30, 2010.
This is believed to have resulted in average transportation cost savings of $5 per ton and $1.25 per ton for northern and southern manufacturers respectively.
"If the purpose of inland freight subsidy is to boost exports, then the three months window was too short an opening," says one cement maker, adding that "benefits from this facility would be higher if the government extends this facility into next year, since many of our contracts are long-term in nature."
Going forward, export demand is likely to grow further as many developing economies are seen showing strong growth. It is predicted that global cement demand will rise by 4 percent per year to 3.5 billion tons, in 2013, according to The Freedonia Group, a US based Research Company
In this regard, cement players are optimistic that the government will extend inland freight subsidy in the upcoming Trade Policy, to enable them to successfully tap the large export market on offer.
Cement industry was able to fetch $478 million in export proceeds in FY10 against the $580 million a year earlier, according to FBS data. On the local front, cement prices surged in June -- reached Rs 290 per bag---on the back of government's plans of substantial spending on infrastructure in FY11.
The government has increased PSDP allocation to Rs 663 billion for FY11, from the revised estimates of Rs 510 billion for 2009-10. Improvements in industry dynamics signal good times ahead for cement manufacturers. However, overseas cement sales reached around 10 million tons during last fiscal year, bringing total industry dispatches to around 34 million tons Rising coal prices, however, remain a major threat to the cement industry since demand for commodities is picking up in developing countries.
Furthermore, oil and petroleum product prices will also exert pressure on distribution costs if they move in the north direction. Realising the tough times, cement manufacturers have started evolving strategies to cut energy costs which accounts for around 40-60 percent of total production cost.
To generate electricity at a lower cost, some of the domestic cement manufactures have been installing Waste Heat Recovery (WHR) plants. Few have already installed the WHR, such as Lucky and DG khan, while for others, projects have been in their initial phases.
To add efficiency to the system, players have also undertaken Refused Drive Fuel projects, aimed at making more efficient use by reducing coal contents in the kiln. Similarly, Lucky has also signed an MoU with Oracle Coal Fields for the supply of indigenous coal.
Stakeholders are pretty optimistic about the future growth of the industry, as manufacturers have shown great resilience in the past through diversifying their export markets and energy mix.
While, the industry intends to explore further opportunities in the future to help meet its long term goal of shifting significant portion of the energy mix to alternative fuel sources. By looking at the situation of depleting energy resources, this seems like the right way to go.
The writer can be reached at [email protected]
Company Brief
PSO-A rising star!
ARTICLE: A journey that began in December 1976 continues on a steady pace towards remarkable progress and exponential growth. Seen as more than just a state-owned oil marketing company, Pakistan State Oil (PSO) touches the lives of 2.8 million Pakistanis on a daily basis, in more than one way.
If success can be measured in figures, PSO's current market share - 88.3% in the black oil market and 55.6% share in the white oil market; an overall market share of 70.8% - strongly reflect it.
Pakistan State Oil is involved with the marketing, storage and distribution of various POL products, including Motor Gasoline, High Speed Diesel, Furnace Oil, Jet Fuel, Kerosene, LPG, CNG, Petrochemicals and Lubricants. PSO also possesses the largest storage facilities and is the major fuel supplier to aviation, railways, power projects, the armed forces and agriculture.
The Company is also cognisant of its civic duty and the needs of the communities it operates in. Access to clean drinking water has been identified as an important need that residents of Lyari have been deprived of. Recently, to address this need, PSO management has approved a project to set up a water desalination plant at PSO forecourt in Lyari area which will provide residents access to potable water and hence reduce incidence of various water borne diseases in the vicinity. Earlier, to provide access to healthy recreational avenues, PSO endorsed donations to Lyari Football Club which hosts hardy youngsters from the area itself.
With its inherent strengths and the government's support, PSO continues to play a vital role in the national economy. It sells products even during crises. The Company's name has become synonymous with nation-building and community contributions. PSO's management is optimistic about maintaining its leadership position in the energy sector and overcoming the challenges imposed by global and local market dynamics.
Auto industry shows reluctant recovery
MANAL IQBAL
ARTICLE: Selling cars in the damp economic climate such as today may be difficult business, but Pakistan's auto industry has shown strong resilience. Sales of automobiles continued to climb much faster than previously expected, thanks to the gradual recovery in the overall economy, better agricultural income and, primarily, the low-base effect.
The industry managed to increase car sales by a whopping 50 percent to 123,957 units in FY10. Since the onset of the fiscal crisis in 2008, automobile industry is among the worst hit sectors in Pakistan. Massive rupee depreciation against the yen and dollar, along with escalating commodity prices and rising inflation in the domestic economy all have tremendously increased cost of production.
On top of that, weak economic growth, together with high inflation dented the purchasing power of people. Therefore, car sales fell to 82,844 units in FY09 from 164,650 units in the previous year. Despite a massive sales growth last year, reaching the high level of the golden period of 2006-07, however, still remains a distant dream.
During the last fiscal year, auto sales were driven by the enormous growth in the high-end car segment - clearly evident from the massive surge in the sales of Toyota Corolla, though, surprisingly, consumers have shown an increased appetite for all the three segments despite a considerable rise in automobile prices.
In the low-end car segment, Suzuki Alto and Suzuki Mehran were the star performers, showing 65 percent and 68 percent growth in sales, respectively, in FY10. On the whole, Indus Motor Company outperformed other automakers with 48 percent growth in sales during FY10, while Pakistan Suzuki (PSMC) followed with a sales growth of 46 percent.
Consequently, PSMC and INDUS managed to increase their market share, at the expense of Honda Atlas and Dewan Motors, to 53 and 36 percent, respectively in FY10, from 51 and 35 percent in the year before.
In addition to robust car sales, growth also spread to other division of auto industry, such as tractors, pickups, jeeps, trucks and two wheelers.
COST PRESSURES
Though, the industry marched back into positive territory during the past year, industry margins were not able to get out of the high cost trap, due to uncontrollable factors that have taken a toll on the auto industry in the past two years.
The most daunting task for the automakers is that of controlling the cost of imported car parts, as the rupee depreciated sharply against both the dollar and yen by 27 percent and 50 percent respectively, since June 2008. In the last fiscal year alone, the rupee declined by 6 percent and 14 percent against the greenback and yen, respectively.
Similarly, rising commodity prices, such as steel, aluminium and copper also continue to dent gross margins. Iron ore prices alone increased by 65 percent to 167 cents per dry metric tonne during the last fiscal year, according to IMF data.
Although, inflation has tapered off relative to the last year, domestic manufactures of original auto parts are still facing high input costs in a double-digit interest rate scenario amid high electricity prices, which makes them fairly uncompetitive.
All these factors compelled auto manufacturers to increase unit prices a number of times during the period, as low capacity utilisation levels compared to pre-crisis levels had made it difficult for them to spread the burden of fixed costs.
On the demand side, high cost of borrowing and reluctance on part of banks to provide car financing remain barriers to spurring demand.
FINANCIAL PERFORMANCE
Barring Indus Motor Company, the margins of Pakistan Suzuki Motor Company and Honda Atlas Cars remained under significant pressure last year.
On the back of high demand for Toyota Corolla, along with company's ability to pass on the rising cost to buyers -- since it sales mix is tilted more towards the higher end of the auto market, where demand is relatively price inelastic - Indus Motor remained solidly profitable.
On the other hand, Paki Suzuki Motor Co Ltd, delivered a surprise with a loss, as the company's bottom line swung into negative territory, as high production costs eroded the gains achieved through higher volumetric sales growth during the first quarter ending March 31, 2010.
Honda's bottom-line also went deeper into the red during the year ended March 2010 - posting a record loss of Rs 852 million, from a loss of Rs 402 million incurred the year before, as sales fell to around 12,000 units in 2010, against an annual average of 21,000 units sold between 2005 and 2008.
Poor economic performance during the last two years has created many of the hurdles for the industry. Moreover, with surplus production capacity, low levels of capacity utilisation are going down hard on the industry.
OUTLOOK
At present, there are signs of relief for automakers, as the government ignored the proposal - by the Ministry of Industries and Production - to raise the duty structure on high tech parts as envisaged under the Auto Industry Development Programme.
Eyeing these developments, in the midst of stabilising economic indicators might signal good times ahead for domestic car manufacturers.
Some expect the industry to post a nominal growth; others see automobile industry to grow by as high as 10-15 percent in FY11.
The auto industry may have come out of the woods, but clouds of threat are still hovering over industry on the back of uncertain policies.
At the time of writing the note, trade policy for FY11 is around the corner, and with that Pakistani auto manufacturers are gripped with nervousness as there are fears that the government will relax the rules of commercial used car imports.
The Ministry of Industry and Production is said to have recommended to the government to relax the age limit on the import of used cars to 5 years from the existing 3 years, and increase the allowed depreciation rate to 2 percent from the existing 1 percent, according to industry sources.
If the government relaxes the age limit and increases the existing depreciation rate, it would essentially cap the room for the industry's growth. And since the auto industry is currently caught in a cost quagmire, it can't realistically afford foreign competition.
At a time when cost pressures are rising at home, amid lack of credit-driven demand growth, the liberalisation of auto import policy would undoubtedly hit domestic automakers hard, and when it does that, it could trickle down a series of dampening effects all along the auto value chain.
(The writer can be reached at [email protected])
The flour price! Dear, Oh Dear
HAIDER NAWAB
ARTICLE: It's been somewhat of a bitter-sweet journey so far as the wheat economy is concerned in Pakistan. Wheat being the staple crop of the country can have significant impact on nutrition as well as purchasing power of the common man.
Pakistan needs 22 million tons of wheat for its domestic consumption, while almost 1 million tons is required as seed to be used for the next crop. Further, 0.5 to 1 million tons is required for preparing poultry and cattle feed. All these requirements add up to approximately 23.5 million tons, leaving a little surplus which could have been utilised domestically by lower prices instead of exporting it, had it not been for the storage constraints.
The spring harvest produced 23.8 million tons of wheat gold, but estimates from US Department of Agriculture (USDA) monitoring agricultural produce were slightly slower at 22.6 million tons. And given the surplus stock left over from last year of about 4 million tons, the output has been a 'bumper' one.
Putting the numbers into perspective, almost 40 percent of the cultivable land in Pakistan is sown with wheat. The majority of the country's farmers, roughly 80 percent, depend on wheat to provide them sustenance. That makes wheat, the largest contributor to the agricultural sector, in terms of employment.
Globally, wheat production has finally found its feet after the food crisis of 2007-08 witnessing surge in commodity prices. Overall production was recorded at 668 million tons, according to a monthly survey conducted by USDA.
STRUCTURAL ISSUES
Government of Pakistan maintained its support price target of Rs 950 per 40 kilograms. "The price set by the government is about 25-30 percent higher than the international market" commented one wheat trader based in Karachi. The higher support price was instituted back when commodity prices globally were on records highs. They have since not been revised downwards.
Food inflation is a tax that disproportionately affects the lowest income brackets of society. According to the State Bank of Pakistan (SBP), wheat flour carries a weight of 5 percent in the consumer price index. "A very high contribution, 9.6 percent in food inflation is from wheat flour, which is mainly a factor of government's pricing policy", according to the third quarterly review of the economy published by the central bank.
More than 53 percent of the area under cultivation on Pakistani fields is devoted to wheat. A marginal decline in the area under cultivation for wheat in FY10 may not be the only reason behind the decline in yield per hectare, which was down almost one percent over last year. The average yield of the March harvest was 2,644 kilogram per hectare.
Water shortage is the prime reason cited by industry participants for a declining yield. Since the 1970s, demand for wheat in Pakistan has increased by 50 percent according to the data collected by USDA.
The hike in demand over the past 40 years has primarily been on the back of an increasing population in the country.
Balanced fertilisation is another way to provide a better environment for the crop plant to grow. FY10 Rabi season saw an increase of about 11 percent in fertiliser off-take.
Farmers need to be educated on the best practices, including balanced fertiliser application, use of seeds that reap the best results and the crop efficiently. In some parts of the world, that are suffering from less than optimal water resources, drip irrigation has taken off - India for example. Drip irrigation uses a grid network of plastic water pipes that supply just enough water reducing wastage.
Commodity financing operations serve as the backbone of the wheat harvest season. The increase in support price phenomenon has an immense pressure on commodity financing. Credit disbursals for commodity financing increased to Rs 166 billion compare to Rs 152 billion last year. Fears of a commodity circular debt - similar to the energy circular debt - are merely a hold up of liquidity till surplus stocks are sold in domestic market or exported.
Storage capacity, or the lack thereof, has echoed in media reports as a potential hazard to health. "It's a difficult situation, we have 700,000 MT, almost half of our stock is sitting out in the open", said Munir Jalbani, spokesman for Sindh Food Department. And the situation is similar in most provinces.
Amongst other harmful factors, wheat stocks are susceptible to monsoon rains. While makeshift arrangements are made to restrict the dampening of the crop, the disease can spread.
Recently, Pakistan Agricultural Storage and Services Company (PASSCO) has announced plans to construct new godowns with a projected storage capacity of 1.5 million metric tons. The project is in conjunction with the Islamic Development Bank, which will provide 80 percent of the Rs 4.5 billion estimated cost of the project.
CURRENT SCENARIO AND OUTLOOK
As it stands today, Pakistan does not allow the export of wheat. The last time Pakistan allowed export of wheat was in 2008, the same year the country faced spiralling prices for staple bread all over the country. So, the government nowadays is cautious in not allowing wheat exports.
Given a bumper crop in the most recent season, PM Gilani announced plans to export 2 million tons of wheat in the international market - primarily Afghanistan. However, the approval from the Economic Co-ordination Committee could not be secured.
The ECC was informed that it was appropriate to offload wheat stocks beyond strategic reserves because the present storage capacity is inadequate to cater for additional wheat.
Globally, a severe virus has hit the wheat crop. The deadly fungus threatens to disrupt global supplies of wheat that have been stabilised in the last year.
Keep your fingers crossed and pray "sasti roti" doesn't turn out to be a distant dream in the international market.
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Wheat: key fundamentals
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Area Production Yield
(000) hectare % Change (000) tons % Change Kg/hectare % Change
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2005-06 8,448 1.8 21,277 -1.6 2,519 -1.9
2006-07 8,578 1.5 23,295 9.5 2,716 7.8
2007-08 8,550 -0.3 20,959 -10 2,451 -9.8
2008-09 9,046 5.8 24,033 14.7 2,657 8.4
2009-10(P) 9,042 -0.04 23,864 -0.7 2,639 2.1
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-- Source: Pakistan Economic Survey
(The writer can be reached at [email protected])
'We don't blindly follow European or US precedents'
An interview with Khalid Mirza - former Chairman Competition Commission of Pakistan
ALI KHIZAR ASLAM & ZUHAIR ABBASI
TEXT: Two weeks before his retirement from the Competition Commission of Pakistan, BR Research met Khalid Mirza, who, along with the institution he chaired, made Pakistan proud on the world stage. In this interview, Mirza discusses his experience at the CCP and talks at length about issues facing some of the country's leading institutions.
The following are excerpts from the interview:
BR Research: You have had a successful tenure at the Competition Commission Pakistan. How are things going at the moment?
Khalid Mirza: Things are so far so good. Have you heard about the octopus who fell from the 24th floor like a shooting star and as he passed each floor, he said I am alright so far (laughs out loud). So yes, so far things seem fine. I am holding my office till the 25th of July; Inshallah, I will then take some time off and after that think of doing something else.
I will probably teach, deliver lectures abroad, may get on a few corporate boards, consult, and perhaps get involved in one or two private equity funds and so forth.
BRR: Are there any chances of your tenure being extended?
KM: No, there is no question of extension. The law is very clear. For an extension to be granted, the government will have to amend the law. I am not saying that they cannot do it, but will they do it? Am I the right kind of person? Do they really want me to stay on the job? These are the real questions.
BRR: Even if the government is not willing to extend your tenure at CCP, there are a lot of vacant positions at important organisations as many of Pakistan's institutions are headless at the moment.
KM: It is not only about institutions being headless. Whenever they appoint people at higher places, it often seems to me that they choose a person that appears not particularly qualified or suitable for the job.
I should not really give live examples but take, for instance, the new Chairman of Pakistan's premier investment institution appointed in place of an accomplished professional.
I do not know the new Chairman at all and he may be a very nice guy, but the question is does he have the necessary investment experience. I do not know if my information is reliable but I am told he is, in fact, a banker, not an investments man, and was looking after the sports affairs of a bank some years back.
Frankly speaking, there are a lots of sound investment professionals in Pakistan. They could have chosen anyone of these. However, in my view they may have, perhaps, chosen someone who, on paper, does not appear to be qualified for the job.
And insofar as capital markets regulation is concerned, it seems we now need a 'De Gaulle' at the helm to fix the situation. However, the question is what kind of person do they really want?
Let me assure you that I am not fishing for any such post. I have had my innings for 44 years. I think, by the Grace of Almighty Allah, I have done reasonably well in every job that I have held.
BRR: How do you see the CCP after you leave?
KM: My view is that they should appoint one of the existing members of the Commission. I would not like to mention any names publicly as this would be very wrong on my part. They should pick one of the existing members to continue the good work that we have done and to achieve sustainability. We have a track record of doing things together, as a collegiate body. So, I would very strongly urge that they pick a person form the existing CCP set-up.
I don't think they should look outside CCP, and if they do, they should look for a person with unimpeachable integrity and guts. Also, someone with real capability.
BRR: Do we really have people of such qualities and skill set?
KM: Yes, we do! It is not that we don't. The only thing is that such people may not be very obvious, but they are there. I have, after all, chosen a team of thorough professionals and highly skilled people. So these people are very much there; you just have to look for them. Frankly speaking, we (in CCP) are the victims of our own success. This is a real test for the government ie, who would they want to see at the top in CCP?
BRR: Do you really see that will in the government?
KM: I don't see very clear evidence of it - may be it is there.
BRR: How different was your experience at the SECP compared to the MCA/CCP? What were the commonalties and differentiations between the two jobs?
KM: The most common thing was that both SECP and MCA (the Monopoly Control Authority) were very bureaucratic government-type organisations. What was different was that the MCA had no money. It had done nothing of note, so the morale was very low. Officials became members of MCA to buy time; it was not taken seriously by anyone, within the government and outside.
SECP, on the other hand, had real money accruing to it in the shape of fees and charges, unlike the MCA, which was entirely dependent on government's money. So, the challenge was much bigger in the case of MCA (which afterwards became CCP). At SECP, the law was already there, but in the case of CCP the law had to be put into place when I joined.
BRR: How do you see CCP now after so many years when the law is in place?
KM: Let me tell you that CCP has been acknowledged world-wide even by discerning institutions like the Federal Trade Commission of the USA. We are regarded as one of the best performers amongst developing countries in the area of competition. We are almost at par with jurisdictions like Turkey, Brazil and South Korea; we are in the elite club of competition commissions.
CCP is a shining example in the region. India has had a competition agency for 7-8 years but they have not done anything of significance. We have holistically implemented a state-of-the-art competition law. Our judgements and our orders are used as reference and adverted to by agencies of developed countries - we are at that threshold.
We have contributed a lot to the public good - in the form of our jurisprudence, studies, position papers, reports, guidelines etc. Along with our well drafted law, all this is a treasure trove for the nation. We have also taken pains to evolve our jurisprudence to suit our own circumstances; we don't blindly follow European or US precedents.
BRR: Another critical issue in Pakistan is that of crossholdings. When you were the SECP Chairman, you allowed the brokers to come up with mutual funds and banks. All those banks are in trouble now. What is your take on this?
KM: I have nothing to do with banks. Please ask the State Bank. The question whether or not to allow stock brokers to promote mutual funds is a very difficult one. When you are trying to develop the second leg of the financial sector ie, non-banking, you have to see how to tap the expertise needed for this purpose.
When you look around in the region, you do not find anybody other than the stock brokers who have some expertise and knowledge to manage investments. I allowed stock brokers because they had the expertise, but only on the basis that they joined hands with a reputable international asset management group as foreign technical partner to actually manage the mutual fund.
I allowed brokers to establish mutual funds only in partnership with established financial institutions abroad. I did not give permission if this criterion was not fulfilled. Subsequently, after I left SECP, a lot of mutual funds were licensed without fulfilling this requirement. Also, things changed, rules were relaxed and floodgates were opened.
BRR: But NIT and ICP were started in 60s, so the expertise for mutual funds was very much there or wasn't it?
KM: To be honest, my impression is that the expertise in ICP was actually pathetic. NIT was no different either. I believe, these institutions were effectively under the influence of a few powerful stock brokers. Both NIT and ICP were also used by the government as a means of political largesse through favoured debenture placements and stock investments.
I was following a model most suited to developing countries; the problem is that they did not stick with this model. Local knowledge is there but you have got to marry it with foreign expertise. The problem is that the vision for developing the funds market was not carried forward; it has actually fallen backwards in the past several years.
In recent years, SECP's main problem has been enforcement. Rules and regulations are fairly adequate but these have not been implemented or enforced properly and in the right spirit.
BRR: Another area of concern where we have not graduated to a desired level is that of the rating agencies. What's your view?
KM: At the time I took over as Chairman SECP, there were two rating agencies. One was very well structured while the other, I am afraid, wasn't. Rules were relaxed to allow the other agency to operate, which should not have happened. SECP should have resisted the pressure to allow this agency to be formed and then to operate.
I was going to issue a tender for a third agency because it was clear at that time we needed a third one. Unfortunately, this did not happen. Effectively, rating agencies 'sell' integrity and debt servicing assessment capability. Issues of debt securities should ordinarily seek being rated by a rating agency because the rating provided helps in pricing and marketing the security being issued. Our rating agencies never acquired the operational standing and acumen to play this crucial role and our agencies continued to operate on regulatory crutches.
The development of rating agencies to a higher level did not occur because the regulator started using these agencies to address matters for which they should normally never be used.
BRR: One thing that Pakistan has failed to successfully establish itself in the bond market. What are the reasons for this failure in you view?
KM: Bonds are best traded in over-the-counter networks or through specialist market makers, and are ill-attuned to be marketed and traded on ordinary order-pushed stock markets. We must allow, in fact facilitate, bond markets to evolve through over-the-counter operations, and if banks can do this - as in China - why not?
BRR: Why did you give the commodity exchange to the stock brokers?
KM: First, let us be clear that we are talking about a futures "securities market" ie, a futures market, not a forward market in physical commodities like the cotton exchange. Second, nobody came up with a viable scheme to establish a commodities futures market except the stock exchanges. This was quite natural since stock brokers understand "securities" and "securities exchanges". And in many countries commodity futures markets have developed as offshoots, in a sense, to stock exchanges. There was nothing wrong with it and I was anxious to move expeditiously in the matter!
FY10 - that was the year that was
BR RESEARCH
TEXT: Some 365 days before today, the country's economic challenges appeared tough but manageable, with hopes peeking on and off from the veil of gloom cast in the crisis of 2008.
Inflationary pressures were gradually losing pace, creating a mirage that the benchmark interest rate would be cut by the end of the ongoing fiscal year. There were expectations, though only in slavishly optimistic corners, that energy shortage would ease after the promised deadline of December 2009.
FoDP hopefuls were beaming in anticipation of fresh foreign liquidity. Global economy was also showing signs of recovery, enabling fiscal managers to chalk out plans to sell sovereign debt papers in international bond market.
A slow but steady recovery in the world economy also generated hopes that Pakistan's exports would pick up. And, though wary of Pakistan's perpetual trait of political uncertainty, some had pinned their hopes on the new breed of economic managers, including the then Finance Minister, Shaukat Tarin, and the then SBP governor, Salim Raza, amongst others.
But compare then and now, and the picture appears completely upside down; as all expectations have come full circle - nearly to the starting point in 2008.
Inflationary pressures have started ticking up again, thanks to higher power tariffs, burgeoning fiscal financing and ceasing of the high base effect that had kept inflation relatively tamer in FY10. Most seasoned economists, now see interest rates unchanged at present levels, if not increasing over the next few quarters.
Bond prices have already started incorporating these developments with yields on the benchmark government paper rising by some 40 basis points in the last three months.
Energy shortage is here to stay -- despite the setting up of controversial rental power plants - at least until the government pays off circular debt, completely phases out energy subsidies and resolves infrastructural issues in the power system.
Hopes of FoDP inflows have, by and large, turned forlorn, even in quarters which had directly received the pledge commitments from the forum.
"The question is... does the so-called Friends of Pakistan set of countries... really deliver and provide the resources, because all the resources needed are not supposed to come from the IMF," IMF's Managing Director Dominique Strauss-Kahn inquired with concern last month.
Global economy is still reeling from debt issues, which means chances of high risk bond issues of states such as Pakistan look dim. If economic mangers are still able to pull the deal off, it would likely be a costly one.
And while the weather turned stormy again, the crew of the boat changed at various levels, leaving major institutions headless for considerable periods. Tarin's office was filled by Hafeez Shaikh after a gap of four weeks, Raza's is still being occupied by an acting governor, while that of their counterpart in SECP lies vacant to date.
THE WRANGLINGS OF FY10
Much of these problems have their roots imbedded in the wrangling amongst the ministries, the legislators, the government, businessmen and even amongst the business groups themselves.
Take for instance the passage of 7th NFC Award after months of discussion between the federation and federating units. It was perhaps the only good thing in the spectrum of political economy. But no sooner than later, the award saw post-natal complications, as the final bill signed by the president allegedly didn't give provinces the right to collect GST on services.
The row that reminded all citizens that promises in Pakistan aren't necessarily meant to be kept, later transformed into a major contention over VAT, as Sindh remained adamant over its constitutional right to collect VAT on services.
Though, Sindh's concerns were eased following a series of negotiations, VAT itself stood out as the single most divisive factor amongst the stakeholders, including politicians and businessmen.
PML-N cited a lack of infrastructure as the reason why the VAT wasn't such a good idea, PML-Q lashed out VAT on the premise of injustice to traders, ANP termed it inflationary, while MQM office bearers opposed the tax because they thought the burden would be felt most by middle and lower middle classes.
A similar outcry was seen from several business groups owing to which the plan to introduce VAT was eventually deferred; though interestingly few of those creating a hullabaloo actually knew what VAT is.
One very vocal senator of a leading party, who also owns a sizeable business house, had actually perceived that VAT and GST will co-exist, until the time BR Research clarified the situation to the gentleman. But by that time he had already made several censuring remarks against VAT on the media. Aside from revenue issues, there was a row between the judiciary and the government over the NRO cases.
Then, of course, who can forget the debate over RPPs, which, though, failed to prevent the government from rolling out expensive energy plans. One thing that did come out of that debate and media backlash, however, is that the government was forced to invite the Asian Development Bank for audit. ADB's report confirmed RPP's flawed nature, yet the RPPs live on.
In other heated disagreements, yarn spinners and textile value-added players pitched a battle against each other for at least three months over the imposition of yarn export duty.
Back-of-the-envelope estimates suggest the industry associations (both Aptma and the value-added sector) spent at least Rs 15 million, in their back to back appeals to the government - often stating facts that were almost on the verge of being obnoxious.
Others issues in the list include the sugar crisis, PM's 'mistaken' axing and then re-appointment of CCP Chief Khalid Mirza in September, and rifts amongst Pakistan's cricketers.
Then there was a duel between former finance minister Shaukat Tarin and former debt manager (under previous regime) Dr Ashfaque Hasan, in a blame game that involved the question 'who pushed Pakistan into debt'? Seeing such mudslinging amongst politicians and business lobbies has become a norm for average Pakistanis; but when thorough-bred professionals such as Tarin and Hasan quarrel publicly, you know the virus has spread across the country.
Finding the cure for this you-take-the-blame virus isn't much of a task; the most we have to do is to look inside ourselves. Remembering a fiscal year isn't usually a time for introspection; but when times are as tough as today's, asking ourselves what we have done right and what wrong and whether making a difference is worth the effort, is a healthy change in itself. This is merely a respectful offering of a portion of food for thought.
-- based on previously published stories by BR Research
Company Brief
Sui Northern Gas Pipelines Limited
ARTICLE: Sui Northern Gas Pipelines Limited (SNGPL) was incorporated as a private limited company in 1963 and converted into a public limited company in January 1964 under the Companies Act 1913, now Companies Ordinance 1984, and is listed on all the three Stock Exchanges of the Country.
The Company took over the existing Sui - Multan System (217 miles of 16 inch and 80 miles of 10 inch diameter pipelines) from Pakistan Industrial Development Corporation (PIDC) and Dhulian - Rawalpindi - Wah system (82 miles of 6 inch diameter pipeline) from Attock Oil Company Limited. The Company's commercial operations commenced by selling an average of 47 MMCFD gas in two regions viz. Multan and Rawalpindi, serving a total number of 67 consumers.
SNGPL is the largest integrated gas company serving more than 3.5 million consumers in North Central Pakistan through an extensive network in Punjab and Khyber Pakhtoonkwa (formerly known as NWFP). The Company has over 46 years of experience in operation and maintenance of high-pressure gas transmission and distribution system. It was also expended its activities to undertake the planning, designing and construction of pipelines, both for itself and other organization.
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