Pakistan being pushed to imminent default

Having followed the rhetoric of the economic team headed by Prime Minister Shehbaz Sharif and spending hours in listening to trade and industry and economic analysts, I am forced to arrive at the conclusion that all the steps being taken are hastening Pakistan’s default process.  

If anyone is still living under some kind of illusion, he/she must understand that the foreign exchange reserves held by Pakistan have almost exhausted, whatever, numbers are being quoted are ‘borrowed’ not ‘owned’ by Pakistan.

Therefore, the top of the agenda item should be getting the US$ one billion IMF trance released. Once this amount is released only then other friendly countries and multilateral financial institutions will start disbursing the count.

Along with this, the ‘disaster recovery plan’ has to be supported by taking measures for luring remittances, boosting exports and containing import.

I believe the worst deficit being faced by the incumbent government is ‘confidence deficit’. Without mincing words, it may be said that most of the decisions taken since coming into power are not aimed at strengthening the economy but creating ‘financial chaos’.

For boosting exports, Pakistan’s competitive advantage has to be restored. Hike in interest rate, electricity and gas tariffs and POL prices will only erode competitiveness of the local manufacturers. If they can’t compete in the global markets, the objective of boosting exports just can’t be achieved.

It has become a must that economic team must learn to remain silent and avoid giving funny statements i.e. taking lesser tea. They just can’t deny the fact that no reduction has been made in the salary and perks of elected representatives, bureaucracy and judiciary. On the contrary there are proposals to increase their salaries and perks.

There is a lot of talk about ‘circular debt’ but no admission that the root cause of this menace is ‘blatant theft’ going on with the connivance of high officials of the utility companies.

Prime Minister was prompt in imposing 10% super tax on companies, but there was no is mention about taxing income from agriculture.

Always a refuge is taken behind ‘taxing income from agriculture being a provincial subject’. If taxing all income is the responsibility of the federal government why taxing income from agriculture is a provincial subject?

If the provincial governments keeps on failing in collecting tax on income from agriculture, these should be ‘stripped off’ this right.

Last but not the least; indiscriminate load shedding in the name of saving fossil oil/gas is the most illogical approach.

Therefore, there is an urgent need to produce exportable surplus by boost working of industrial units, attaining synergy and optimizing cost of production.

 

Pakistan Stock Exchange posts 2.6%WoW decline

During the week ended on June 24, 2022, news flow was dominated by the accord between the Government of Pakistan (GoP) and the International Monetary Fund (IMF). 

On Friday, the Prime Minister announced that a 10% super tax will be imposed on large sectors in FY23, causing the Pakistan Stock Exchange benchmark index to lose 1,665 points in one day, closing the market at 41,052 points or 2.6%WoW decline.

Earlier on Tuesday, it was announced that an agreement had been reached, in which the GoP revised the FBR collection target for FY23 to PKR7.4 trillion from PKR7.0 trillion.

Average volume for the Index surged to 300.5 million shares, up 72.6%WoW mainly due to Friday’s grand sell-off.

Other major news flows during the week were: 1) loan agreement signed with consortium of Chinese banks for US$2.3 billion, 2) FDI shrank 29%YoY in May, 3) cost of power generation surges by 131% YoY due to high fuel costs, 4) May banking spread plunges 42bpsMoM, 5) GoP mulled pledging five federal assets to issue Sukuk, and 6) ECC approved PKR149 billion in payments to IPPs and KE.

The top performing sectors were: Vanaspati & Allied industries, Power, Tobacco, Insurance, and Refinery, while the least favorite sectors were: Automobiles, Textile, Cement, Close-end mutual fund, and Banking.

Stock-wise, top performers were: POML, EFUG, KEL, SML, and PAKT, while laggards were: CHCC, KTML, GATM, MLCF, and JVDC.

Flow-wise, Insurance companies remained as the net sellers, offloading US$8.4 million followed by Foreigners (US$2.4 million), Mutual funds (US$1.1 million), NBFCs (US$0.7 million), and Companies (US$0.1 million), while Individuals (US$7.0 million), Banks (US$2.1 million), Brokers (US$0.2 million), and Other organizations (US$3.4 million) were on the buying side.

The super tax imposed on large sectors has come as a major shock to all players in the market. With profitability of these sectors decreasing by 10%, the market sentiment is surely negative as players look to liquidate their positions. Add inflationary pressure and rising interest rates to the mix, and this creates a strong bearish environment for the market. With that being said, the agreement with IMF is crucial for the country, with further financing now expected to be available from World Bank, China, and Saudi Arabia which will alleviate the downward pressure on the currency along with supporting the depleted foreign exchange reserves, hence having the potential to trigger a bull-run in the short term.

Israel occupying Palestinian lands for more than half a century

Fifty-five years after Israel began occupying Palestinian lands; it is more difficult than ever to imagine a way out. The seeds of the two-state solution that were planted by visionary leaders on both sides have failed to take root. 

All that remains is a fatalistic acceptance of the conflict’s insolubility. For both the occupied and the occupier, the future is bleak

Over the last 55 years Israel has been occupying Palestinian lands, there have been two intifadas, four wars in Gaza, and a long series of failed efforts to negotiate a two-state solution roughly adhering to Israel’s pre-1967 borders. The situation may truly be as hopeless as it seems.

Intransigence on both sides—which no US president has managed to overcome, though virtually every one since the Six-Day War has tried—has gotten us to this point. While the Palestinians have sometimes embraced international diplomacy, they have also engaged in periods of obdurate resistance. It was the Palestinians who thwarted two promising peace initiatives, led by the forward-looking Israeli governments of Ehud Barak and Ehud Olmert.

Given sentiment in Israel today, they might not get another chance. With each failed peace process, the promise of peace has lost its potency as a mobilizing cause in Israel. Meanwhile, Israel has gradually tightened its control over the occupied territories, with virtually no international pushback. Even the Arab states—six of which have normalized ties with Israel—seem to have grown indifferent to the agony of the Palestinians.

All of this has driven Israeli voters radically to the right, leaving Israel’s peace camp demoralized and weak. The religious-nationalist bloc that former Prime Minister Benjamin Netanyahu leads now represents the majority of Israelis. And as far-right as Netanyahu may be, he is practically a leftist compared to the tens of thousands of radical Jewish nationalists who marched through Jerusalem’s Muslim Quarter on Jerusalem Day last month waving Israeli flags, repeating violent and Islamophobic chants like ‘death to Arabs’, and attacking Palestinians.

When Algerians rebelled against their French occupiers in one of the most brutal anti-colonial wars of the post-1945 era, the philosopher Jean-Paul Sartre wrote, ‘It is not their violence, but ours, which turns back on itself.’ In fact, the French found the violence being enacted in their name so abhorrent that 75% of them voted to grant Algeria independence in the 1961 referendum.

A similar sentiment is difficult to discern in Israel. On the contrary, popular support for the military’s fight against ‘Palestinian terrorism’ is overwhelming.

To be sure, Israel has known its share of mass demonstrations in support of a peace deal, with protest movements like Women in Black still going strong. Israeli non-government organizations such as B’Tselem, Peace Now and Breaking the Silence work hard to alert Israeli society of the sins of occupation. Joint Israeli–Palestinian organizations, like those bringing together family members of those lost to the ongoing conflict, do similarly admirable work.

But none of these efforts has had a transformative impact on the peace process. This stands in stark contrast to the experience in Northern Ireland during the Troubles, when checkpoints, home searches, abusive language, blackmail, beatings and arbitrary arrests were once standard practice, just as they are today in the occupied Palestinian territories.

In Northern Ireland, pressure from civil-society groups and NGOs eventually drove the security forces to curb abusive practices, improve their recruitment processes and introduce training for dealing with intercommunity tensions. The path to peace in Northern Ireland was paved largely by a mobilized civil society.

In Israel, however, only the Supreme Court stands between the military and worse behavior. The reason seems to lie in the nature of the conflict. Algeria’s war of independence was an anti-colonial struggle taking place far away from France’s shores. And the Troubles came down to an intercommunity cleavage, which could be resolved through disarmament and power sharing.

The Israeli–Palestinian conflict, by contrast, is existential. The question of where to draw borders is not merely practical; it has deep religious and cultural significance. For the Palestinians, Israel is the occupying power, impinging on their right to self-determination, but it is also their homeland. And for the now-dominant Israeli right, the occupied territories are the cradle of Jewish Biblical civilisation.

By fighting for the same lands, the two sides are effectively calling for the unconditional exclusion, even destruction, of the other. That goes a long way towards explaining their eagerness to alter the demographic balance—Israel through Jewish immigration and the expansion of settlements, and the Palestinians by demanding the ‘right of return’ for all refugees. Yasser Arafat, the late founder of the Palestine Liberation Organization, once called the womb of the Palestinian woman his ‘strongest weapon’ against Israel, as it would give the Palestinians a demographic advantage in the occupied territories.

Even if Israel did accede to the creation of a Palestinian state, it might continue to face threats to its survival. After all, Palestine wouldn’t be located far from its borders, like Algeria was from France.

What if a radical Islamist group rose to power in Palestine and challenged the peace agreement? What if state-building faltered or failed, generating rising instability on Israel’s doorstep? Or what if Palestine became a frontline outpost of a hostile foreign power? Already, Hamas and Hezbollah—with robust assistance from Iran—have turned Gaza and southern Lebanon, respectively, into launching pads for missiles targeting Israeli territory.

 

Pakistan one of the best customers of IMF

According to a report by The Express Tribune dated April 29, 2019, Pakistan has borrowed around SDR 13.79 billion from the International Monetary Fund (IMF), out of which 47% of the loans were secured by PPP, followed by PML-N at 35%, while the military dictatorships lag behind with a mere 18%.

Pakistan joined (IMF) in 1950 as newly established country was facing fiscal problems since its creation in 1947 from British rule. In 1958, for the first time, Pakistan went to IMF for bailout. For this, IMF lent out US$25,000,000 ‑ originally the loan-amount is given in SDR; for this article it is considered to be 1SDR = 1USD to Pakistan on standby arrangement basis on December 08, 1958.

Pakistan again went to IMF in 1965. This time, IMF gave US$37,500,000 to war-torn nation on 16 March 16, 1965.

Three years later, Pakistan again went to IMF for third time for balance of payment problems for which IMF gave US$75,000,000 on October 17, 1968.

In 1971, Pakistan lost its Eastern half, East Pakistan, after the Bangladesh Liberation War. This war caused huge loses to Pakistan. For which, Pakistan got loan a loan of US$84,000,000 in 1972, second loan of US$75,000,000 in 1973 and fourth of US$75,000,000 in 1974 to meet its growing needs. 

In 1977, a standby arrangement of US$80,000,000 was made on urgent basis. 

Three years later, an extended facility of US$349,000,000 was reached in 1980.

Struggle of Pakistan continued, as Pakistan withdrew another US$730,000,000 as Pakistan was already part of US cold war against Soviet Union.

Another era was started, as democracy came back to Pakistan but old ways to handle economy poorly continued. 

Benazir Bhutto government withdrew US$194,480,000 as standby arrangement and another US$382,410,000 in shape of structural adjustment facility commitment on December 28, 1988.

In 1990, government of Nawaz Sharif decided against going to IMF instead arranged donations from friendly countries like Saudi Arabia.

In 1993, Benazir Bhutto again came to power and her government again went to IMF and reached an agreement to get standby arrangement of US$88,000,000 on September 16, 1993.

Poor handling of economy continued by her government as she got loan of US$123,200,000 under the extended fund facility and another US$172,200,000 were borrowed on February 22, 1994.

During that period economy of Pakistan remained in poor shape and Pakistan had to go to IMF again for record third in the period of Bhutto government.

This time Pakistan got an amount of US$294,690,000 on 13 December 1995.

 In 1997, Nawaz Sharif came to power. Benazir Bhutto government was sacked and left economy of Pakistan in worst shape.

Sharif government went to IMF on urgent basis for the first time and reached an agreement to get two amounts of US$265,370,000 and US$113,740,000 on October 20, 1997.

In 2008, Yousaf Raza Gillani received a US$7.6 billion loan from the IMF.

In 2018, Imran Khan became Prime Minister of Pakistan. For this, they arranged friendly loans from Saudi Arabia, United Arab Emirates and China to avoid tough IMF conditions. 

In 2019, when economic conditions worsened, they went to IMF for the twenty-second time for a loan of US$1 billion. 

IMF gave loan based on conditions such as hike in energy tariffs, removal of energy subsidy, increase in taxation, privatization of public entities and fiscal adjustments to the budget.

Israel takes aim at ruining Iran Turkey ties

In the recent past, Israel has launched an all-out media campaign against Iran that included bizarre claims of Iranian threats against ordinary tourists in neighboring Turkey. 

Israeli media and officials first issued warnings of imminent alleged threats from Iran to Israeli tourists in Turkey and then claimed that several attacks were foiled as a result of Turkish-Israeli security cooperation.

“The operational efforts with the Turkish security forces have borne fruit,” Israeli Prime Minister Naftali Bennett claimed.  “In recent days, in a joint Israeli-Turkish effort, we thwarted a number of attacks and a number of terrorists were arrested on Turkish soil.”

Neither Bennett nor other Israeli officials have offered any kind of evidence to support their claims.

The string of warnings began last week when several Israeli officials alleged that there were concrete threats that Iran was allegedly trying to target Israelis in Istanbul over the weekend, and urged all Israeli citizens to leave Turkey immediately.

Iran has officially responded to Israeli hyperboles. Iran believes that Israel is openly spreading lies unworthy of a response.

Nour News, a news outlet close to Iran’s Supreme National Security Council, said Iran is determined to avenge the assassination of Colonel Sayad Khodaei but it’ll not target innocent people. 

“Given the past experiences, Israel is well aware of the certainty of Iran’s response to this regime’s mischief and terrorist moves such as the martyrdom of Sayad Khodaei,” Nour News said, adding, “The officials of this regime also know that the Islamic Republic of Iran will not punish innocent individuals when taking vengeance on the Zionist government’s crimes.”

The outlet said the leaders of Israel know that only the perpetrators and those who issued orders will be punished. This is why Israeli officials seek to mobilize the public with unfounded claims to increase the cost of Iran’s revenge, according to Nour News. 

The Israeli claims are intended to achieve another goal. According to Nour News, Israeli officials want to pitch Turkey and Iran against each other through unfounded claims. This is while the Iranian and Turkish foreign ministers have recently spoken over the phone and discussed ways to boost bilateral ties. 

This month, Iranian Foreign Minister Hossein Amir Abdollahian and his Turkish counterpart Mevlut Cavusoglu spoke over the phone twice in less than a week. In the first call, they discussed the latest developments in bilateral relations, according to the Iranian foreign ministry.

Amir Abdollahian stressed the need to keep up the consultations between the two countries and promote cooperation, especially in bilateral trade and consular issues. The top Turkish diplomat invited his Iranian counterpart to visit Ankara for talks on issues of mutual interest in the near future.

In the second call, Cavusoglu once again extended an invitation to Amir Abdollahian to visit Turkey and expressed hope that continued negotiations between the officials of the two countries will help boost bilateral ties and increase their cooperation.

Amir Abdollahian reaffirmed Tehran’s determination to boost ties with Turkey more than ever before. The top Iranian diplomat also expressed hope that the two sides will hold more consultations over the matter.

The Israeli claims come against a backdrop of broader tensions between Iran and Israel. Israeli officials have ramped up their threats against Iran and, recently, even boasted about taking the battle into Iran. Bennett and other Israeli officials are now talking of ‘Octopus Doctrine’ a new strategy allegedly aimed at dealing with Iran directly instead of countering its allies in the West Asia region.

“The past year has been a year of changing course in Israel’s strategy vis-à-vis Iran,” Bennett said on June 7 at a meeting of the parliamentary defense and foreign affairs committee, according to the New York Times. “We have shifted into a higher gear. We are acting at all times and places, and we will continue to do so.”

Iran has said it will respond to Israeli provocative measures. Amir Abdollahian has recently said Israel must stop its provocative and hostile behavior.

In late May, IRGC chief Major General Hossein Salami vowed revenge for Sayyad Khodaei. He blamed the assassination of Khodaei on Israel, underlining that Iran will avenge his killing.

 

Iraq clears US$1.6 billion Iranian debts

Both, Iran and Iraq have announced that Baghdad has cleared its debts to Iran after months of talks over how to move forward with the financial issue. The move came after intensive diplomacy between Iran and Iraq.

A few weeks ago, Iranian Ambassador to Iraq Mohammad Kazem Al Sadeq met with the Governor of Iraq’s Central Bank Mustafa Ghaleb Mokhif in Baghdad to discuss ways to clear Baghdad’s gas and electricity debts to Iran.

During the meeting, they discussed aspects of banking and economic cooperation between the two countries, the payment of financial dues from Iraq, and overcoming the obstacles facing the work of Iranian companies in Iraq.

The repayments of Iraq’s debts faced two major problems: first, the Iraqi Parliament’s delay in approving the country’s fiscal budget and Second, US unilateral sanctions on Iran. 

Iraqi Prime Minister Mustafa al-Kadhimi had sought to find a solution to both issues. He said, “One of the problems that caused the delay in the payment of dues to Iran is the absence of the budget.” 

It seems that this issue has been resolved in recent weeks. Al-Kadhimi said Iraq’s debts date back to before 2020. Al-Kadhimi had cleared the responsibility of his government, which was formed in May 2020, from Iran's gas debt, amounting to about US$1.6 billion. He said, “There are no debts owed by the current government regarding Iranian gas.”

Iraq’s Electricity Ministry echoed a similar point in its statement announcing the repayment of debts. “The ministry announces the start of the payment procedures that will be completed within the next two days, bearing in mind that the issue of financial obligations towards neighboring Iran is one of the problems carried over by previous governments, and the current government has borne it, by heading towards internal borrowing to pay off debts, which were not paid due to the scarcity of financial allocations resulting from not approving the budget for that year,” it said. 

After much bickering, Iraq paid its debts to Iran and Tehran confirmed that it received its money from Iraq. 

Iranian Oil Minister Javad Oji announced that Iran had received US$1.6 billion in arrears for gas exports to Iraq. 

“In light of the active energy diplomacy, and after several months of negotiations, we received, hours ago, US$1.6 billion in arrears due from past years regarding gas exports to Iraq,” Oji wrote on Twitter. 

“Since the beginning of current Iranian year, as compared to the same period last year, the country's gas exports have increased by 25%, and the receipt of hard currency earnings from it has increased by 90%,” he added. 

Iraq relies on Iranian gas to operate electric power plants. Earlier, the Iraqi Minister of Electricity Adel Karim announced that Iraq needs Iranian gas for 5-10 years while confirming the ministry’s agreement with the Iranian side to supply the country with 50 million cubic meters of gas per day.

The repayment of Iraq’s debts to Iran came at a time when US unilateral sanctions against Iran are still in place. This may be the reason why some analysts underlined the need for South Korea to follow in the footsteps of Iraq. South Korea owes Iran US$7 billion in oil debts and has been reluctant to clear its debts. Iran has called on Seoul to pay its debts but the Iranian demand has fallen on deaf ears. 

South Korea has linked the repayment of debts to the outcome of talks in Vienna over reviving the 2015 Iran nuclear deal, officially known as the Joint Comprehensive Plan of Action (JCPOA).

Iranian Foreign Ministry spokesman Saeed Khatibzadeh pointed to South Korea’s stonewalling in his Monday presser. “A new government has come to power in South Korea and they have made promises that they want to pay off Iran's debt, but we have not seen any move,” he said.

Khatibzadeh noted, “We are waiting to see the difference between the new government and the previous non-compliant government in terms of debt repayment.”

He then appeared to compare South Korea with Iraq. “We give the new Korean government time to show in practice what it is doing to repay its debts, like the friends we had in the region,” he said. 

 

Is Pakistan at the verge of technical default?

This mornings I was alarmed to listen to three rumours: 1) banks are unable to buy foreign exchange for their clients from the inter-bank market, 2) whatever US dollars are still held by the central bank just can’t be used and 3) most probably the PML-N will do, what it did in nineties ‑ freezing of foreign currency accounts of Pakistanis till the time forex starts flowing into Pakistan.

I had brief chat with some of the senior analysts and the conclusion was, “Pakistan is at the verge of technical default”.

The overwhelming consensus was, “It is not because of any weakness of the economy of the country, but due to the inability of the decision makers to make prudent and timely decisions”.

The consensus was, “If the casual attitude of the policy planners is not changed immediately, they will only hasten the default”.

The first and the worst habit of the incumbent government is that it spends more time on blaming the previous government, but does not take into accounts its own acts.

It talks about austerity, but indulges in extravaganzas.

It even fails in listening to what the International Monetary Fund (IMF) and friendly countries (also willing to support Pakistan) are saying.

The coalition partners were too keen to control the reigns, but neither had the plans to take the country out of the crisis.

Someone was indecent but may be right, “They wanted to take their names out of Exit Control List (ECL) as well get immunity to rule the country”.

They neither have the will nor the spine to make difficult decisions.

Raising POL prices and electricity tariffs are the easiest decisions because all their expenses are borne by the government.

Their thinking is still not synchronized with what the IMF is saying.

They have not only failed in containing the twin deficits (budget deficit and current account deficit) which is also proliferating the third deficit – confidence deficit.