Monday, 16 July 2018

Pakistan’s placement in grey list by FATF is nothing but arm twisting

Reportedly Pakistan’s name has been added to the Financial Action Task Force (FATF) "Grey-list". The overwhelming reaction to this move is being termed "arm-twisting" to add to the woes of the country already suffering from serious balance of payment crisis. A point worth exploring is that there is no official FATF terminology segregating countries into grey or black lists, Pakistan has never been identified as a potential risk to the international financial system, even after 9/11 and often being accused of supporting the various militant groups.

I am being inclined to refer to a report by Pakistan’s leading brokerage house, AKD Securities. The brokerage house has taken a cues from the    2008-14 period (public identification/monitoring status), a termed the report a non-event in terms of crucial flashpoints on the macro-front, namely: 1) Foreign ownership of equities, 2) economic assistance, 3) workers’ remittances and 3) foreign exchange reserves. Reflective of the same, the benchmark index has recovered strongly in the recent past. Post clarity regarding the FATF decision (expected by Saturday 30th June). Investor’s risk-reward profile would soon align with more dominant economic (interest rate hikes, further devaluation prospects) and ongoing electioneering.

In the backdrop of the US foreign policy with narrowing space for Pakistan and post the first plenary meeting of FATF in Feb 2018, news reports started highlighting that FATF has decided to place Pakistan back on its watch list for AML/CFT weaknesses.  The perception in Pakistan is that such news reports have been more disparaging with a tinge of exaggeration (particularly in regional and local outlets) which are not only baseless and not rooted in published reports of international organizations of repute (OECD, WB, IMF and Basel Institute of Governance). However, parsing through all FATF publications CY18TD including documentation released by the FATF after its February 2018 meeting show that Pakistan is not mentioned at all, particularly in a negative light or deficient category. That said, Pakistan has not taken the threat of being included in the watch-list seriously as it has since then taking action against non-complaints, introduce various legislations, reforms and protocols to strengthen its AML/CFT framework.

One of the immediate response is that international standards are not created equal: On a broader note, comparing Pakistan's rankings on similar global international AML/CFT benchmarks by global agencies (Basel Institute, OECD), brokerage house finds domestic regulations (post 2015) stringent enough to counter long-term structural deficiencies (grey financial flows, hawala/hundi, low financial inclusion and sub-par lending practices). The Recent efforts by the GoP have been more proactive in market by Pakistan's inclusion in the OECD's Multilateral Convention on Mutual Administrative Assistance in Tax matters giving weight to GoP's measures (amnesty schemes, increasing declarations of foreign assets, raising the tax net).

Despite Pakistan’s placement in "Grey-list", foreign participation is largely expected to remain immune. Removing outliers (early 2009 period post market freeze), foreign ownership of equities gradually increased during the review period ranging between a little over 6% in 2008 to over 8% by end-2014. In absolute Pak Rupee /US$ terms, foreign ownership increased considerably during this period.

Economic Assistance is likely to continue keeping in view the past practices. Over the years, disbursements by bilateral/multilateral agencies have averaged US$1.3 billion to US$2.3 billion annually (excluding the 3-year SDR4.4bn/US$6.2bn IMF program approved in September 2013). Even though disbursements remained weak during the 2011-2013 period, it is unlikely that Pakistan's status under the FATF had a tangible bearing on economic assistance. That said, overall assistance (including capital mobilization through floating foreign bonds, commercial borrowing and the IMF) improved substantially during the 2008-2014 period.          .

Worker's Remittances continue to play an important role in containing current account deficit, despite ever increasing imports and paltry exports. Stringent KYC/AML/CFT protocols have certainly increased the cost of transactions, inward remittances increased substantially over the years, indicating that inclusion in the FATF grey list may not have a material impact on the cost of inward remittances.

Pakistan’s foreign exchange reserves increased to US$18.6 billion at the end of FY15 from US$11.3 billion in FY08. This also indicates that the Government of Pakistan (GoP) was able to keep an adequate level to support imports and other official outflows. Reserves also received a boost in FY13 after Pakistan signed a 3-year IMF program worth US$6.2 billion.   

Risk of Pakistan facing economic sanctions would include a reconsideration of all business relationships with Pakistan by global financial institutions and any attempt to put Pakistan along with North Korea and Iran is totally absurd. Additionally, parsing through global financial standard authorities rankings, Pakistan is given an AML index score of 6.64 (out of ten where lower is better) giving 4/46 rank in South Asia/Globally out of 6/146 countries by The Basel Institute for Governance. Moreover, recent efforts by the GoP have been more proactive in addressing these deficiencies where Pakistan's inclusion in the OECD's Multilateral Convention on Mutual Administrative Assistance in Tax matters (news reports indicate information sharing with tax authorities to commence from September'18) gives weight to GoP's "big-ticket".

Having a strong faith in the robustness of Pakistan’s financial system and the ongoing efforts to improve it the country’s placement in "Grey-list" is nothing but "arm-twisting". It is more than obvious that the US policies towards Afghanistan, Syria, Iran, China, EU countries and NAFTA members are aimed at establishing its hegemony around the world.

Saturday, 7 July 2018

Pakistan Democracy on the Rough Terrain

On Friday, the last day of the week ended 6th July 2018, the accountability court announced its verdict imposing severe punishments and hefty fines on Nawaz Sharif (elected prime minister of Pakistan for the third time) and his family members. The decision is likely to severely impact general elections scheduled for 25th July 2018. There is a saying that history repeats itself. I am obliged to offer readers one of my articles written as back as April 2015. Its title was “Pakistan Democracy on the Rough Terrain”. To read details please click

Sunday, 6 May 2018

Talk about re-imposition of sanctions on Iran an attempt to create storm in a teacup

Lately, the western media, controlled and run by Zionists, has been talking about re-imposition of economic sanctions on Iran, as 12th May is approaching. The move has been initiated by the US president and many ‘me too’ are trying to please him. The crusade is led by Israeli prime minister, who is licking wounds caused to Israel in Lebanon by Hezbollah. The US is also adamant at taking revenge of its defeat in Syria, where it also faced Hezbollah. The west is never tired of accusing Hezbollah being supported by Iran but it is in no way part of Islamic Revolutionary Grads of Iran.   
The US commentators have very cunningly convinced OPEC led by Saudi Arabia to curtail crude oil output which has resulted in 1) substantial increase in crude oil price and 2) significant hike in the output by the US and Russia. At present, Saudi Arabia has slipped to third position in terms of daily oil output. The US has also emerged as one of the major exporter of crude oil. Therefore, Iran with a daily export of 2.6 million barrel has become ‘of no consequence’. Even if export of oil from Iran is stopped completely completely, it would be compensated by other producers very quickly.     
As a daily ritual, I have to write a few lines on commodities market and factors driving their prices. The most bizarre part is writing about the factors driving crude oil prices. The usual jargons used are increase/decrease in rig count in the US, movement in US stock piles, turmoil in Venezuela and MENA (countries including Iraq, Libya, Nigeria). Little reference is made to investment by hedge funds.  
I still remember once taking part in a live panel discussion on factors driving crude oil prices (more than ten years ago) I had said, “The price of crude oil may be driven by any factor, but certainly not by demand and supply”.  I could see the signs of disgust on the face of moderator. After the show was over he even went to the extent of saying, “Mr. Kazmi, today you said something which sounded totally absurd and I could have responded. However, I kept quiet and gave you benefit of doubt.”
Moral of the story is developed economies, through hedge funds make millions of dollars through movement in crude oil prices. To achieve their target they often breach agreements. Super powers are notorious for breaching the agreements to achieve their ulterior motives. Therefore, re-imposition of sanction on Iran will not be a surprise but an example of yet another blatant violation. However, they must not forget that even stopping oil export from Iran completely will neither make an immediate difference for Iran nor sky rocket the oil prices.

Wednesday, 28 March 2018

Making Pakistan hub of Islamic Finance by 2025

On the inaugural day of conference Dr. Miftah Ismail Adviser to the Prime Minister on Finance and Economic Affairs said the Ministry of Finance would soon set up a separate division for the promotion of Islamic banking in Pakistan. He was the Chief Guest at a two-day World Islamic Finance Forum (WIFF-2018). The international forum was organized by Institute of Business Administration’s Centre for Excellence in Islamic Finance IBA-CIEF in collaboration with key partners. The theme was “Expanding the Footprint of Islamic Finance: Innovation, Fintech and Regulations.”
In his visionary note, Shaikh Muhammad Taqi Usmani Chairman, Shariah Board of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) said the people of Pakistan origin were holding key positions in Islamic banking industry around the world, making contribution in developing regulatory framework and above all developing products that would meet the emerging needs of trade and industry. He urged the government to take concrete steps for making the economy Riba (interest) free. He also pointed out that Islamic financial institutions have ample liquidity and the government should work for creating new avenues for its deployment in remunerative options. He suggested that the ruling party should also include in its election manifesto that Riba would be eradicated totally from economy at the earliest.
Chairman AAOIFI Board of Trustees, Bahrain Shaikh Ebrahim Bin Khalifa Al Khalifa said it was heartening to note that Pakistan was striving to become another hub of Islamic finance. The country has all the basic ingredients — a population of 200 million predominantly Muslims, a robust banking and finance sector, vibrant agriculture, industrial and services sectors.
On the occasion were present the top officials of the apex regulators – State Bank of Pakistan (SBP) and Securities & Exchange Commission of Pakistan, Deputy Governors of the central bank, Jameel Ahmad and Shamsul Hasan talked about the central bank’s initiatives for the to promote Islamic banking in the country. The progress made over the last decade has been encouraging that has facilitated in achieving the target. They were also of the view that making Pakistan hub of Islamic finance would not be difficult.
Irfan Siddiqui, President Meezan Bank requested the federal government to set a target to acquire at least 25 per cent of the local funding through Islamic banking as Islamic financial institutions have ample liquidity and limited avenues for investment.
In his key note address, Dr. Ishrat Husain, Chairman, IBA-CIEF talked about the progress made by Islamic banking in Pakistan. He was of the view that the progress made during last one decade was enormous but new products need to be introduced to provide fresh impetus for growth.
IBA-CEIF Director, Ahmed Ali Siddiqui, welcoming the delegates, said the Centre had emerged as a regional platform for excellence in Islamic finance. He said focus areas of CEIF included development of Islamic finance professionals and new human resources talent pool through industry linkages and international collaborations.
Two of the closed-door meetings deserve special mention, though details discussed were not made public. In the first session players and regulators discussed details that could help in making capital market and mutual funds Shariah compliant. The issue of financial inclusion and outreach were the two important themes to be discussed at length. The second session was between Sharaih scholars and regulators for evolving regulatory frame work that can help in developing products to meet the needs of different income strata and those having different risk appetite.
Yet another initiative was presentation of research papers discussing contemporary issues. One of the sessions deserves a specific mention where lending to farmers was discussed. At present bulk of the loans are extended to farmers against passbook or the landownership document. This process mostly benefits the feudal lords. In this discussion the issue of warehouse receipt financing was also debated. However, it was evident that unless modern warehouses and collateral management companies are established warehouse receipt financing may not be possible. Authors of selected papers were awarded cash prizes.
The takeaways of the concluding remarks of Dr. Ishrat Husain were: 1) creation of Shariah Board at Ministry of Finance, 2) borrowing for infrastructure development projects through flotation of Rupee and Dollar denominated Sukuks, 3) focus on the development of Fintechs for extending outreach of banks and ensure financial inclusion and 4) development of alternative delivery channels.

Saturday, 24 March 2018

Energy Crisis in Pakistan: Fact or Fiction

If one looks at the history of power sector in Pakistan, a few points are clear. These include: 1) a myth that the country has been persistently suffering due to the shortage of energy products, 2) the successive power policies have been have been introduced to serve the interest of local and overseas investors, 3) blatant theft of electricity and gas has been going on with the connivance of employees of utility companies, 4) regulatory authorities have failed in protecting the interest of consumers and remained subservient to the incumbent governments.
Energy shortage
Pakistan is blessed with an enormous potential of hydel power generation. According to the experts Mighty River Indus along has the potential to generate more than 40,000MW electricity per annum. Another 10,000MW electricity per annum can be generated from smaller hydel plants (run of the river type facilities which does not require construction of dams/reservoirs. In addition to that 50,000MW electricity can be produced annually from Thar coal. However, at present total hydel generation is around 8,000MW, which goes down when water level drops in dams. Thermal power plants (mostly owned and operated by the private) have the lion’s share in the total generation. The share of coal and nuclear power plants in the total electricity generated has remained minuscule. Though, a lot is being talked about changing the energy mix and curtailing use of gas for power generation, a little success has been achieved.
Serving vested Interest
Major hydel power generation facilities, i.e. Warsak, Mangla, Tarbella and Ghazi Brotha are located in the northen parts of the country and cater to the needs to KPK and upper Punjab. Karachi is hub of trading and industrial hub and it is totally dependent on thermal power generation. The city has 10% of the total population of the country but gets nothing from low cost electricity generated from hydel power plants. To be precise, K-Electric supplies electricity to some parts of Sindh and Baluchistan. If transmission of hydel electricity to Karachi is difficult or uneconomical, quota allocation of gas to K-electric should be doubled. Karachi is surviving on self generated electricity, the city has a latent demand of 5,000MW, whereas K-Electric is capable of meeting only half of this demand. One can still recall that in the early nineties E-Electric used to export electricity to Punjab. HUBCO was constructed to primarily meet Karachi’s demand, but it was ‘hijacked’ by WAPDA for meeting Punjab’s demand.
Blatant Theft
Blatant theft of electricity and gas been been going on for ages with the connivance of utilities. On top of all some of the parts of Pakistan are provided free of cost electricity. One may recall that at one time the average T&D losses of electric utilities were as high as 40%. Lately, gas UFG, which mostly comprise of theft hover a little less than 10%. On top of this, utility companies carry the load of billions of rupees of receivables, the probability of recovery is very low. According to some analysts, if K-Elecric pays off its outstanding dues, SSGC will be able to pay off almost all the payable amount to E&P companies. Containing theft or recovering outstanding dues does not require any rocket science, but a firm commitment. However, utilities fail completely helpless because of the pressure of political and linguistic groups. It is also necessary to put on record that utilities don’t provide connections, taking refuge behind non-availability of electricity/gas, but are prompt in providing ‘temporary connections, which are often without meters. Analysts term this ‘offical kunda’.
Regulatory Authorities
The Government of Pakistan (GoP) initiated the process of liberalization, deregulation and privatization. Under this policy, the private sector was encouraged to establish industries, which remained the exclusive domain of the state for decades and it was also offered the stake in state owned enterprises along with management control. Prior to that the World Bank has refused to lend more money to WAPDA and the shift in policy gave birth to HUBCO and other IPPs. 
IMF Recipe
Many analysts have the consensus that the International Monetary Fund (IMF) is the lender of last resort, but its recipes are not aimed at enabling any country to ‘stand on its own feet.’ Often the country is trapped in a vicious cycle of borrowing. However, the advantage is that if the country succeeds in developing its own home grown plan and meeting the condition imposed by the IMF, it may overcome the balance of payment crisis. 
Pakistan has a long history of remaining under the IMF support program. In one of the latest country report, the Fund has once again highlighted the need to introduce structural reforms for the power sector. These weaknesses identified are: 1) the persistence of circular debt, 2) DISCOs still operating under the state control, 3) high T&D losses, 4) failure to follow corporate governance and 5) lack of the mechanism for passing on input cost adjustments to end consumers.
Emphasizing US$55 billion in planned investments as a part of CPEC, the Fund anticipates improved economic activity made up of 19 Chinese sponsored power sector investments (US$17.7 billion) and non-CPEC energy projects (US$25.4 billion). Mode of financing for energy projects has been bifurcated into: 1) direct borrowing and investment from Chinese financial institutions, and 2) financing of projects by private domestic sponsors as well as government backed borrowing from multilateral lenders.
A detailed analysis of the power sector shows: 1) the country has enormous resources to produce low cost electricity, 2) if pilferage is contained cash flow of DISCOs will improve and 3) circular debt issue will be resolved. Appropriately managed conventional sources of power generation can help in meeting the electricity demand and there may not be an urgent need to invest in alternative sources of power generation.

Saturday, 4 November 2017

Investment opportunities in Pakistan

It is an undeniable fact that Pakistan suffers from two contentious problems: 1) low savings and 2) limited opportunities for investment. All the successive governments have been making efforts to lure foreign investors. However, they fail to understand that if the local investors are shy no foreign investor would be keen in investing in Pakistan. The problem is further aggravated because per capita income is low and there is hardly any incentive for saving. Those who have some money want to become rich overnight but mostly fall in the trap of cheaters and ultimately loose whatever amounts they have. The successive governments have not been doing anything more than lip service and regulators can be termed ‘sleeping watch dogs’. If one looks at the history of financial scams taking place in Pakistan, only the regulators could be held responsible for those.
Lately, some of the cheats ripped off people and the event was termed ‘Modaraba Scam’. Interestingly media flashed headlines, which gave an impression as if the Modarabas listed at Pakistan Stock Exchange (PSX) were involved in the scam. In fact a few clerics belonging to KPK were the master minds, who cheated the innocent people. The amount involved is estimated from Rs6 billion to Rs45 billion. The most regrettable point is that the regulators failed in identifying the crisis, while it was brewing. According to a financial analyst, “State Bank of Pakistan (SBP) considered it an issue which pertained to Securities and Exchange Commission of Pakistan (SECP) and the high ups at the Commission had an opposite view”. Another analyst said, “The quantum of money involved is still not known because some of those having given the money to the cheaters preferred to remain silent and also didn’t lodge any claim because they couldn’t provide evidence of source of fund”.
As stated above there is little incentive for saving in the country, not only that the opportunities are limited, the investors are penalized by the government in one way or the other for making investment. To begin with, people having other sources of income have to pay tax, often at a fabulous rate, but the income of feudal lords is tax exempt because it is termed income from agriculture. It has been highlighted by experts repeatedly that that now business tycoons have also learnt the trick of clubbing income from other sources into income from agriculture.
It would not be out of context to cite two example, rate of tax applicable on the income of listed companies and tax charged on dividend income. The number of listed companies at Pakistan Stock Exchange (formerly Karachi Stock Exchange) is on constant decline because of merger and acquisitions and voluntary delisting. At an average the listed companies pay above 30% tax on their income and when they distribute dividend, on that income tax/withholding tax is charged. The rationale put forward is that listed company is a legal entity and shareholders are different, therefore both have to pay tax on their income. The propagators of this philosophy tend to forget that listed companies also pay taxes on import of machinery and raw material, GST on finished goods and effectively act as tax collection agents for the government. Therefore, not more than 5% tax should be charged on the income of listed companies. On top of all these listed companies are the providers of employment and also the earners of much needed foreign exchange for the country.
Investment in listed companies is still considered risky by the small investors, particularly after the global financial crisis of 2008. Unlike developed countries, Pakistan didn’t suffer from ‘sub-prime loans issue’. However, imposition of floor for a long time, did not allow the small shareholders to take an exit. On top of all shares kept by investors in subaccounts were sold by some of the brokerage houses that created the real havoc. This disheartened many investors of stock market, who pulled out their investment from capital market and invested it real estate, foreign exchange and precious metals.
Around the world mutual funds are considered a safe haven for the small investors. The logic is simple that asset management companies have substantial investments in various types of funds and that any decline in the income of on particular company does not affect the overall income of a particular type of fund and in turn the income of the unit holders. Along with this there is constant sale and redemption by the unit holders that save does not causes spikes in value of the asset under management (AUM). However, in various funds bulk of the investment is by corporates and large net worth investors that results in sudden rise and fall in the value of AUM.
The big investors also invest in real estate, foreign exchange, precious metals and energy products. One of the reasons for investing in these products is the lack of documentation, which allows the investors to evade tax payment. It is estimated that the documented economy constitutes only one-third of county’s total economy and size of undocumented economy is always increasing due to exemptions and evasions. There is always an incentive for the evasion because the incumbent governments have been offering amnesty schemes with regular intervals. It is also on record that billions of rupees are being sent out of Pakistan in the form of US dollars every year. According to certain estimates, funds kept by Pakistanis outside the country range from US$50 billion to US$500 billion. Bulk of this amount has been invested in real estate, international trading and manufacturing facilities. Some of the favorite destinations are India, UAE, Malaysia and Singapore. If the government of Pakistan is serious in accelerating GDP growth rate, it has to ensure that each penny saved is invested in Pakistan.

This article was originally published in Pakistan & Gulf economist

Thursday, 26 October 2017

India opposeing CPEC

Indian Ocean is the oldest and most efficient trade corridor. On its one side are hydrocarbon rich countries and on the other side are energy deficient but major energy consuming and industrially developed countries. The ships carrying goods destined for Europe using Suez Canal also passes through Indian Ocean. In order to provide security to their maritime trade navies of different countries are also present in the Indian Ocean. In the recent past pirates having safe sanctuaries in Somalia have created serious havoc, which prompted many countries to further enhance their presence in the Indian Ocean, which also included India.
India not only claims that it is the strongest regional super power, but also openly denounces any world super power that refuses to accept its hegemony in the Indian Ocean. India is fully cognizant of the fact that bulk of the international trade, energy products, consumable and capital goods pass through Indian Ocean. It is also a fact that India and China have never enjoyed cordial relationships; in fact they are involved in boarder disputes for decades. In such a scenario, China has no option but to protect its maritime trade, particularly movement of energy products. The US Navy is also active in Indian Ocean and it has been constantly increasing its presence around Striate of Hurmaz and in the Malacca Striate. In South China Sea dispute, Japan and Korea are fully supported by the US, which also wishes to contain Chinese growth.
India has emerged as the biggest opponent of Chinese program, which is commonly known as ‘String of Pearls’. Under this program China is building sea ports in various countries and out of these Gwadar is one. While China says that all these ports fall under the category of ‘Listening Ports’ that helps in the movement of merchant ships. However, India has been refuting Chinese claim and call these ‘Chinese Naval Bases’ and term these a serious threat to its sovereignty.
India is actively operating in Afghanistan, under the disguise of developmental work. Afghanistan is a land locked country and bulk of its transit goods having been passing through Pakistan for ages. India often complains that its Afghan destined goods are not allowed to pass through Pakistan conveniently. In this backdrop India has invested huge amounts in constructing Chabahar port in Iran and linking it to the Central Asian Countries via Afghanistan by road and rail. While the Indian endeavor may succeed in offering an alternative route, the undeniable fact is that Pakistan offers the shortest and the most efficient passage to Afghanistan. This fact became most obvious when Pakistan stopped movement of NATO supplies though land route.
Pakistan decided to handover management control of Gwadar Port to China and also entered into an agreement for the construction of China Pakistan Economic Corridor (CPEC). The corridor will link Gwadar with Kashgar and enable China to contain transit time of its imports/exports. The goods will move on-land rather than sea. Under CPEC, Gwadar port will be linked to china by construction of allied infrastructure­ - road and railway track. India is opposing construction of CPEC section passing through newly constituted Gilgit-Baltistan Province of Pakistan.
With the commencement of full scale activities at Gwadar Port and construction of road and rail networks, Baluchistan is likely to reap enormous benefits. Over the years India has been supporting rebel groups and supplying them funds and arms. A banned outfit Jundullah had enjoyed external support but the group was disintegrated after the hanging of its chief in Iran. Lately, ‘Free Baluchistan’ banners were seen in Switzerland and analysts suspect that it is the work of those Baloch groups who have obtained political asylum there.
One can still recall that India announced to disassociate itself from Iran-Pakistan-India (IPI) project due to security reasons as the gas pipeline has to pass through troubled Baluchistan province. Later on, it dawned that another gas pipeline project, Turkmenistan- Afghanistan-Pakistan-India (TAPI) was being sponsored by the opponents of IPI.  A point beyond comprehension was that India decided to quit IPI because of security issue in Baluchistan, but joined TAPI that has to pass through war-torn Afghanistan.
A substantial part of road network that will ultimately become part of the CPEC has already been constructed and now it is being revamped to offer speedy and safe mode of transportation. It is believed that CPEC will change the entire landscape. India has the realization that it has missed the opportunity by strangulating its relationship with China. It also fears that Chabahar port would never be as efficient and cost effective as Gwadar. Therefore, it is making last ditched efforts to sabotage Gwadr Port and CPEC projects. Now it is the responsibility of all the Pakistanis to frustrate Indian efforts and make Pakistan ‘natural corridor for trade and energy’.

This article was originally published in Pakistan & Gulf Economist