Pakistan's biggest problem: lack of good governance

The matter of grave concern is that Pakistan suffers from three deficits: 1) budget deficit, 2) trade deficit and 3) trust deficit. Though we have listed trust deficit on number three, may economic analysts term it ‘mother of all evils’. The public trust in the ruling regime is at the lowest ebb. That is the reason Pakistan’s GDP growth rate has been hovering around 3 percent for years.

According to the experts the GDP growth rate is low because new investment is scanty, balancing, modernization and replacements are virtually nonexistent. To be honest the existing units face declining capacity utilization, which is leading to closure of the productive facilities.

The ruling regime often take pride in saying, ‘Pakistan is one of the best performing market’. The reality is around 500 companies are listed at the local stock exchange and only a small number of new companies listed is the last one decade. Banks are thriving because of huge investment in the government securities, exploration and production companies make fortune due to high international prices of crude oil, fertilizer plants are working below optimum capacity utilization, country imports huge quantity of refined products because of dismal capacity utilization and the list can continue.

To overcome budget the government has imposed huge taxes on each and every product, including lifesaving drugs and food items. Imposition of petroleum development levy increases power generation cost as well as transportation and logistics cost. High electricity and gas tariff encourage theft, which is evident from ballooning circular debt.

Over the last three years no effort has been made to contain expenditures, which prompts the government to borrow more, to be honest the government borrows to pay off the debt.

To conclude the government is creating new entities, which promise bringing in huge investment. One fails to understand if the existing industries are closing, local entrepreneurs and educated people are leaving the country, why should foreigners select Pakistan as an investment destination? The rulers must remember actions talk louder than words.

Pakistan: Ongoing Austerity Theater

The recently announced austerity measures, by the Shehbaz Sharif government should ostensibly be aiming at reducing expenses appear to be more about show than actual substance. The decisions by the president and interior minister to forgo their salaries, though commendable on the surface, pale in comparison to the extravagance that continues to plague government spending. The gesture does little to address the underlying issues of fiscal irresponsibility that have led to Pakistan’s current economic predicament.

While restricting cabinet members to three international trips per year and delineating travel class guidelines for various officials might seem like prudent steps, they barely scratch the surface of the belt-tightening needed to navigate Pakistan through its financial quagmire.

Allowing MNAs and senior bureaucrats the luxury of business class travel — which in practical terms for a return ticket to many European destinations means spending approximately a million rupees — is a slap in the face of the concept of fiscal restraint.

The image of lawmakers and bureaucrats jet-setting on public coin sends a conflicting message to the populace they serve, especially when 40% of the country’s population lives below the poverty line.

The disparity in salary ratios between various employees in the UK and Pakistan serves as a shameful mirror for reflection. In the UK, the salary ratio between a janitor and the senior-most bureaucrat is 1:8, whereas in Pakistan, it is an astounding 1:80. The officials who think they are tightening their belts by not flying first class, the president and chief justice can are sorely mistaken.

The austerity narrative pushed by the government — indeed like all other governments before it — collapses under the weight of these contradictions. The privileging of a select few to cushy travel perks, while a significant chunk of the nation struggles to eat three square meals a day, is not austerity; it is austerity theatre.

The critique here is not merely about the scale of the measures but their sincerity. Real austerity involves hard choices and genuine sacrifice, not selective tokenism. The continued allowance of benefits and the half-measures proposed signal a troubling lack of commitment to governance and fiscal responsibility.

If the government means business, lawmakers would do well to pass a resolution in parliament refusing such privileges until the economy stabilizes.

The Prime Minister, services chiefs, and at best, the foreign minister may utilize such travel perks but it is unreasonable to extend these to the rest of the government machinery.

Symbolic gestures won’t do anymore. There is a need for a fundamental reassessment of priorities and spending, with a laser focus on eliminating waste and directing resources towards sustainable economic recovery. Only then can the nation hope to emerge from its economic plight and embark on a future marked by stability and prosperity.

Dawn Editoria

Pakistan: Interim setup likely to remain in place a little longer

Over the months I have been saying that current account deficit and budget deficit are the outcome of “Confidence Deficit”. However, the team headed by Shehbaz Sharif, spent most of the time talking about non-issues.

Please allow me to say that Pakistanis were ready to bear the brunt, but unwillingness of the ruling junta to cut contain its extravaganzas, created rebellious attitude. Now, top of the agenda items should be bridging the confidence deficit, curtailing extravaganzas, facilitating the local manufacturers and exporters.

The economic managers must stop saying “these are the conditions of IMF” and come up with a home grown plan. Restoring the competitiveness of the local manufactures can not only help in boosting exports but containing inflation and generating new employment and taxes.

It is encouraging that the Caretaker Prime Minister, Anwaarul Haq Kakar, has assembled a small cabinet comprising of 24-members, which sworn in on Thursday. This can also be termed the implementation of a technocratic framework. One has all the reasons to believe that the setup has been put in place to serve the country beyond 90 days due to the potential delay in holding scheduled elections.

This extended period presents a unique opportunity to the caretaker government to spearhead essential economic reforms. Unburdened by political considerations, they can make tough but necessary decisions to jumpstart the economy. Notably, the caretaker setup comprises of accomplished professionals, particularly in key ministries such as Finance, Foreign Affairs, and Power. This strategic placement underscores their significance in the forthcoming period.

The Prime Minister's unwavering commitment to address pressing economic concerns is evident in his swift actions. His decision to transfer DISCOs (Distribution Companies) to provincial authorities, his efforts to attract investments through the SIFC, and the prompt convening of the inaugural cabinet meeting on Friday, all reflect the priority he places on resolving these issues.

 

 

Focus on agriculture can pull Pakistan out of current economic malice

At present Pakistan faces myriad of problems, from rising food import bill to very limited availability of foreign exchange. While the industrial sector remains import dependent, focus on two of the large scale industries i.e. textiles and clothing and sugar and allied can yield multiple benefits: from huge earning of foreign exchange to creating extensive employment for low-skill workers. However, this requires commitment of the government, introduction of supporting policies and implementation of these policies in letter and spirit.

It is on record that 20% to 40% of agriculture produce goes stale before reaching the market. This on one hand deprives the farmers from modest return of their efforts and on the other hand creates shortages and use of paltry foreign exchange available to Pakistan. It is pertinent to point out that the Government of Pakistan (GoP) had come up with Warehouse Receipt Financing (WRF) program as back as in 2013. The lack of commitment on the part of the GoP as well as the financial institutions has failed in facilitating construction of modern grain storage silos in the country.

Over the years the GoP has been increasing quantum of lending to farmers and the indicative target for the current financial year is PKR1.8 trillion. The lending is being done under two heads: for the purchase of inputs and for the development. The most shocking part is that some of the financial institutions prefer to pay the penalty, rather than extending credit to farmers. This has resulted in exclusion of small farmers from the formal banking system.

Financial institutions have been lending to farmers against ownership documents of their land. Despite multiple land reforms, bulk of the land is still owned by the feudal lords. Small land holders or those who have no land ownership documents have remained out of the formal banking system. WRF system was conceived as an alternative system for financial inclusion. Under this scheme farmers could use their produce as collateral and secure funds from the financial institution.

If the GoP is serious it has to take on board State Bank of Pakistan, Securities & Exchange Commission of Pakistan, commercial banks and Naymat Collateral Management Company to undertake construction of grain storage silos on war footings.

The most disappoint fact is that the country produces over 25 million tons wheat, the federal and provincial governments are the major buyers but virtually no wheat storage silos are present. Bulk of the produce is kept in warehouses not fit for the storage of staple food grain. The result is over 20% of the produce goes stale before reaching the market.

I was amazed to hear from some religious clerics that construction and management of warehouses is not Shariah compliant, the basic objection is it facilitates hording. They are unable in distinguishing between ‘safekeeping’ and ‘hording’.

Pakistan earns bulk of its foreign exchange from export of textiles and clothing. Without any exaggeration the country is capable of producing 20 million bales of medium staple fiber. However over the last few years cotton production has reduced to around 6 million bales. An output of 10 million bales can be attained by: using certified quality seed, stopping cultivation of sugarcane in sugar belt and using certified quality of pesticides/insecticides. This would also help in boosting production of ‘cotton seed oil’ – an edible oil as well as oilcakes for feeding cows and buffaloes.

The third important crop is sugarcane which not only produces sugar but also exports ethanol and molasses in huge quantities. Cultivation of superior quality sugarcane varieties can help in boosting production of sugar, molasses and ethanol.

It is necessary to remind the policy planners, if they still don’t know, that ethanol is used for the production of bio-fuels. At one time the GoP had started sale of E-10 - petrol containing 10% ethanol. Only the policy planners know why this project was abandoned?

Maize is yet another crop that can help in containing food import bill. Maize yields oil, flour and oilcake (used in the production of chicken feed). Now cultivation of two crops is a norm and in certain areas third crop is cultivated.

It may be pertinent to mention that maize yield in Pakistan is substantially low and the prime reason is high price of DAP fertilizer.

This takes to another key industry, fertilizer industry. Over the years the industry has help in saving precious foreign exchange. Now it has the capacity to export one million tons of urea. At times the country has to import urea, which is due to the bad policy of stopping gas supply to fertilizer plants during winter.

The GoP must also facilitate running of power plants on furnace oil. The plea taken by the GoP for not running power plants on furnace oil is most absurd – it contains high percentage of sulphur. The GoP must immediately arrange fund for installing sulphur at local refineries. It would yield two benefits: use of furnace in local power plants as well as its export - extra foreign exchange will be earned from the export of sulphur.

 

 

 

 

 

 

 

State of Pakistan Economy

Pakistan’s central bank, State Bank of Pakistan (SBP) has recently released its Annual Report for the financial year ended 30th June 2016. The Report is full of praises of the economic managers for achieving targets under prevailing difficult circumstances. However, it also highlights the serious problems facing the country. The bottom line is that unless right structural reforms are undertaken the country may once again plunge deeper in serious crises, worst being balance of payment crisis. I would talk about praises later as I consider it my ardent duty to first highlight the problems facing the country.

Notwithstanding these positive macroeconomic stability gains, the Report highlights some challenges as well. Firstly, the current level of private investments and savings in the country needs acceleration to keep pace with required investible resources. Secondly, structural issues in the export industry need to be resolved. Thirdly, the reliance of the tax system on stop-gap measures is creating distortions in the economy. Finally, the country needs to spend more on social sector development to address social issues.

The Report, considers Pakistan to be well positioned to address these challenges. It anticipates all-important support coming from a stable macroeconomic environment and growing investments in CPEC-related projects. These would help improve the existing infrastructure and power supplies to businesses. Some analysts don’t agree with this rationalization.

The Report recognizes the positive impact of improved macroeconomic environment, better energy supplies, and subsiding security concerns. The central bank believes that in addition to CPEC, economic activity would benefit from pro-growth policies. It specifically says that the current policy rate, at a historic low of 5.75 percent has made funding easier for businesses and consumers. Similarly, growing development spending, despite a planned reduction in budget deficit, would continue to support infrastructure-related industries. One also tends to disagree with this because bulk of the deposits are being invested by commercial banks in government securities rather than extended to private sector.

The Report further explains that though some macroeconomic indicators were short of targets, they still posted better performance over the last year. For instance, real GDP growth of 4.7 percent during FY16 was below its target, but nevertheless higher than the growth achieved a year earlier. Meanwhile, the accumulation of the country’s foreign exchange reserves reached an all-time high level at end FY16; the exchange rate remained stable; and CPI inflation fell to only 2.9 percent during the year. Similarly, fiscal consolidation remained on track, and the budget deficit was reduced to 4.6 percent of GDP – the lowest since FY07. All this is not due to any good policies adopted by the government but lower international prices of crude oil.

The government envisages a GDP growth of 5.7 percent for FY17. The current account deficit is likely to stay in the range of 0.5 – 1.5 percent of GDP during the current financial year. The Report draws attention to the IMF program’s contribution in restoring macroeconomic stability and confidence of international creditors. Crucially, it maintains that the reform process – related to energy-sector, loss-making PSEs (like PSM, PIA), and business-friendly regulations – must continue after the IMF program’s completion.

Finally, the Report reiterates that without private sector participation, it will be hard to achieve a higher and sustainable growth that is built on the pillars of entrepreneurship, innovation and competitiveness.

The detailed Report is available at SBP website www.sbp.org.pk

Pakistan must address structural issues on top priority

Historically Pakistan and International Monetary Fund (IMF) has lived with each other, at times with comfort and at tome with some unease. While the IMF role as ‘lender of last resort’ has helped Pakistan in overcoming economic malice, the loan covenants are often seen by Pakistani’s rather stringent.

Ideally the ruling regime in Pakistan should be more careful in formulation of policies and implementing these in letter and spirit but the overall impression is that the successive governments sooner or later suffer from complacency. It may also be said that political agenda pushes economic agenda in the back ground. Many analysts strongly believe that condoning deviation may not be difficult had appropriate efforts were made. In other words these deviations are the result of not following the ‘IMF Recipe’.

A team of AKD Securities, Pakistan’s leading brokerage house, recently met the IMF Regional Representative for a discussion on Pakistan’s progress on the macro front in the context of the ongoing EFF program. After the meeting it has also released a report that has many takeaways.

While progress on reform agenda so far remains commendable, continued reform implementation post completion of the program was stressed, where energy crisis and low revenue collection continue to rank as high priority issue areas.

The IMF, though cognizant of likely delays, sees room for steady structural changes even post completion of the program based on higher GoP resolve. Benefits of low oil prices and earlier reforms have placed Pakistan in a macro sweet spot with economic indicators marking record levels.

Agreeing with the IMF, AKD team believes this opens room for addressing deeper structural issues that can help Pakistan sustain recent economic gains where key reform areas highlighted were: 1) exports sector revival, 2) tax base expansion and 3) efficient expenditure and resource allocation between federal and provincial governments.      

Key takeaways

Priority on energy and revenue: Key issue areas for reforms that retain the highest priority were Energy and Revenues expansion – both resonated by all participants. Resolution to the country’s energy problems was highlighted, particularly in the context of its impact on industrial growth. Also, revenue collection remains equally crucial where considerable focus should be directed towards structural changes both through a) regulatory/legislative action and b) operational changes in FBR/tax collection mechanisms.

Privatization to slowdown: The privatization program remains on agenda, however it is likely to stretch beyond the current program as political opposition in PIA’s strategic divestment and labor union concerns in case of DISCOs continue to be major hurdles. That said, recent road shows for DISCOs’ sell-off were regarded as a key positive. Analysts expect revision of current timeline in the upcoming IMF review report for December 2015. Moreover, with the current government resorting to populist decisions in the run up to next general elections (expected 2018), the brokerage house highlight heightened risks to PSE sell-offs.

Another program unlikely: With the current program effectively concluding in June 2016, rollover to another program remains unlikely on account of Pakistan’s stable Balance of Position position. However the Fund is likely to remain engaged in a consultative process with the GoP to monitor current program objectives, though without imposition of conditions/targets.

CPEC – lack of clarity lingers: The Fund views the landmark China Pakistan Economic Corridor (CPEC) agreement as largely positive, though details on nature of agreements remain sketchy and are yet to be factored in fiscal expectations/targets. Alongside, infrastructure projects need for investment in export oriented sectors was also noted.