Pakistan: Painful Path to Recovery

I am pleased to share with my readers a report by IMS Research. You may not agree with all the points, but it makes a good basis for an ‘Academic Discussion’. Pakistan needs a ‘home grown plan’ to overcome its inadequacies.

According to the brokerage house, FY23 Federal Budget saw the government attempt to widen the tax net, but the brunt eventually fell on the existing narrow tax base in the shape of higher corporate and personal taxes.

The benchmark index of Pakistan Stock Exchange (PSX) shed 3.6% (6.6% in US$), with turnover thinning out even further.

Foreign institutions and local insurance companies remained aggressive sellers. Pakistan is inching closer to the IMF program, but investor confidence remains low due to a sticky current account deficit, and ugly inflation prints around the corner.

That said, we believe risks are largely in the price, with default likely be avoided as the IMF agreement draws near. 

Inching closer to the IMF program

Pakistan has significantly reduced energy subsidies and sharply raised direct taxes. The 7th and 8th IMF reviews are reportedly being combined and Pakistan could see US$2 billion program resumption.

The FY23 Budget attempted to widen the tax net on real estate and retailers, but ultimately could not avoid further burdening the narrow tax base.

Most large corporates will now face additional 10% tax in in 2022, which reduces to a permanent +4% in subsequent years.

Improved fiscal discipline reduces the load on the monetary side but the State Bank of Pakistan (SBP) could yet raise rates on July 07, 2022 monetary policy, with the next inflation print expected north of 18% and international oil prices failing to come off. We expect an increase of 100bps, which will take the Policy Rate to 14.75%. This may be the last rate hike of the cycle though.    

Improving relations with others

Chinese commercial banks have recently disbursed loans of US$2.3 billion, negotiations are underway with Saudi Arabia to enhance the deferred oil payment facility, and UAE is reportedly interested in acquiring stakes in state-owned entities listed at the PSX.

Progress includes the appointment of a new US Ambassador to Pakistan for the first time since 2018, the visit of the German Foreign Minister, and a positive outcome in the recent FATF plenary with exit from the grey list looking likely subject to on-site verification.

A European Union mission also reached Pakistan to assess GSP+ compliance, and the broader improvement in relations with the West should help Pakistan’s case in our view.

The brokerage house assigns little probability to Pakistan procuring oil from Russia, even though local refineries have been asked to assess suitability, with political considerations likely to win out over economic ones.

Key risks

The government is digging in, going by its increasing willingness to take tough decisions and secure the IMF program. While coalition partners such as MQM have expressed discontent at the results of local body elections in Sindh, and PML-N rule is vulnerable in Punjab, it is difficult to envisage the coalition fracturing at this stage.

Imran Khan is a lot quieter but remains a uniting factor for the ruling parties, no matter their disparate nature.

For the economy, stabilization measures are underway and Moody’s decision to downgrade Pakistan’s outlook to Negative has not been matched by the other major credit rating agencies.

Corporate profits will hurt in the near-term, owing to the 10% super tax for 2022, but the impact on recurring profitability is modest. On market cap to GDP, Pakistan is cheaper than its Covid low and nearly as cheap as its trough during the global financial crisis.

 

Welcome Yair Lapid, Goodbye Naftali Bennett

Yair Lapid swears in as interim Prime Minister of Israel at midnight, replacing Naftali Bennett, who announced not be running in the next elections being held on November 01, 2022.

This makes Lapid the 14th Prime Minister of Israel

Bennett, Lapid and their families participated in a small ceremony for Lapid's transition to Prime Minister. Before the ceremony, Lapid also paid a visit to Yad Vashem.

"Yair, I'm handing you the stick," Bennett told Lapid. "This country and this position do not belong to any one person. We're doing this together and now it's your time."

The Knesset dispersed a few hours earlier the same day with a 92-0 vote.

When Knesset Speaker Miki Levy announced the dissolution of the 24th Knesset, Bennett rose from his chair and signaled incoming Prime Minister Lapid that he would be replaced.

The two are expected to sit down for a long conversation in which they will discuss the overlap between them, Ynet reported.

On Tuesday, Lapid will make his first political trip abroad as Prime Minister to France, and will meet with French Prime Minister Emmanuel Macron.

He will also host US President Joe Biden in his visit to Israel.

In accordance with the coalition agreement, Naftali Bennett stepped down from the premiership, becoming alternate prime minister, a title Lapid held for the past year. Lapid will remain foreign minister, as well.

Lapid’s first stop after becoming prime minister was the Hall of Remembrance at Yad Vashem, which he said he visited “to promise my father that I will always keep Israel strong and capable of defending itself and protecting its children.” His father, former justice minister Tommy Lapid, was a Holocaust survivor.

After that, Lapid went to the Prime Minister’s Office for a handover ceremony and transition meeting with Bennett. Lapid’s wife, Lihi, and Bennett’s wife, Gilat, and their children attended, as did Prime Minister’s Office staff, but the ceremony was otherwise closed to press or guests.

Lapid made brief remarks, saying to Bennett, “I have worked under Prime Ministers. I am familiar with Prime Ministers. You are a good man and an excellent Prime Minister. You are also a good friend. This is not a farewell ceremony because there is no intention to take leave of you."

Bennett told Lapid that Israel and the premiership do not belong to any one person; they belong to the entire people of Israel.

“I hand over to you the responsibility for the State of Israel. I wish that you guard it well and may G-d watch over you,” he said.

Bennett wished Lapid luck and said to him the blessing parents traditionally say to children on Shabbat, “May G-d make you like Efraim and Menashe. May the Lord bless you and keep you. May he make His face to shine on you and be gracious to you. May He lift up His face to you and grant you peace.”

Lapid said his mother, author Shulamit Lapid, had blessed him in the same way earlier that day.

The new Prime Minister’s next stop was expected to be the residence of President Isaac Herzog. Lapid’s first trip as Prime Minister, originally planned for Bennett, is set for Tuesday.

 

 

Why Pakistan fails in boosting local production of crude oil and gas?

The report filed by Kazim Alam in Dawn should be an eye opener the policymakers and law enforcing agencies of Pakistan. The first and most important point is that production of oil and gas is constantly on the decline and E&P companies have not been able to increase production.

The second point is the real cause of concern, despite the fact that the country has a drilling success rate that’s notably higher than the international average (Every third drilling is successful in Pakistan as against one in five internationally; the average wells drilled in the country remains low.

Kazim has raised a pertinent point, whom to blame for the poor state of E&P in Pakistan: nature or bad governance? In my opinion the Government of Pakistan has to accept its inadequacy. It has failed in attracting foreign companies as well as providing security cover to the staff of E&P companies working in remote areas.

Since shifting blame to others is common the quote of an executive burst me into laughter. Citing the example of Kekra, a field located near Iran, he said the prospects seemed so good that E&P companies went all in, committing as much as US$140 million, or more than Rs28 billion at the current exchange rate. But they found nothing there. The supposedly huge reserves accumulated over hundreds of thousands of years had already slipped away in the intervening period.

The conclusion is that discoveries are small the efforts have to be accelerated by allocating more funds for drilling more wells. One of the most painful observations is that most of the E&P companies operating in public sector are made to pay huge dividend rather than spending money on drilling of new wells.

Some analysts say that in Pakistan people with vested interest often prevail over, they make big money in the purchase of crude oil as well as finished products. In case indigenous production of crude and POL increases, they will go bankrupt.

If any one does not agree with me should peep into the history. Excluding the output of OGDC, the share of all other companies is disappointingly low.
No ‘green’ refinery has been established after PARCO. Byco may be a good addition, but it is based on outdated technology. Other refineries have also failed major revamping and continue to produce low value added products.

To conclude it is sufficient to say only the Government of Pakistan can play a lead role by: 1) bringing in foreign E&Ps into the country, 2) offering new leases throughout Pakistan and 3) Encouraging OGDC to form new joint ventures.

Is Israel a free state?

Freedom in the World publishes a global report evaluating political rights and civil liberties in different countries and selected territories. The 2019 edition of the report includes development in 195 countries and 14 territories between January 1, 2018 and December 31, 2018.

According to the report, with a score of 80 out of 100, there is only one free country in the Middle East, Israel. Among all Mideast nations, this compares favorably with non-free nations such as Iraq (27), Iran (17), Saudi Arabia (10) and Syria (-1).

Rather than evaluating governments or government performance, Freedom in the World measures the rights and freedoms of individuals in the real world. Political rights and civil liberties can be affected by both state and non-state actors, including insurgents and other armed groups.

The US-based Freedom House said in its latest annual report that Israel is the only "free" state in the Middle East, contrary to claims by the country's critics who say its democratic values are being eroded. "Israel remains the region's only free country," read the report, Freedom in the World 2013, released days before Israel's election.

Independence is a condition of a person, nation, country, or state in which residents and population, or some portion thereof, exercises self-government, and usually sovereignty, over its territory.

But it also means what Mrs. Eleanor Roosevelt said. ”With freedom comes responsibility”

A Country is independent of other countries, but it relies on its people for leadership, productivity, development, healthy society, and keeping democracy and freedom alive.

For that to happen we must follow what Jonathan Lockwood Huie said, “Independence of a nation begins with independence of self. “

Israel and the United States of America (US) both claim they are independent countries, but don’t they need each other? Certainly Yes, Israel needs the support of the US with weapons, shared research and development of new weapons, new technologies, new medical research, and mutual ideas for their free countries, and keeping democracy and freedom alive.

The US as well needs Israel, which is the only free and modern Democratic country in the Middle East, as a gateway to Asia and the Middle East, as well as its scientific teams that cooperate with the American researchers, technology developers, etc.

Therefore, it has to be remembered that the independence of the nations starts within themselves, the independence of the people, their hearts, and their speech.

John Kerry demands action against 'Petrostate Dictators'

According to a report by Reuters, US Climate Envoy John Kerry said on Tuesday Russia's invasion of Ukraine was a warning to nations around the world that they cannot be hostage of oil-rich autocratic governments to meet their energy needs.

Speaking to Reuters on the sidelines of the UN Ocean Conference in Lisbon, Kerry said Russia has been using energy as a weapon and would continue to do so in the future but Europe was committed to put an end to its dependency.

"It's a warning to everybody that you do not want to be prisoners of petrostate dictators who are willing to weaponize energy," Kerry said.

Russia launched a large-scale invasion of Ukraine on February 24 this year, which Moscow calls a "special operation".

Kerry said the world was "running out of time" to tackle climate change but governments should not use the war in Ukraine as an excuse to delay the process even further.

"We have seen people choosing short-term (solutions) in order to respond to the challenge of losing gas for Russia," he said.

"And we cannot allow the war in Ukraine to alter the reality that we need to reduce emissions and we need to deal with speeding up the transition to alternative renewable energy."

Soaring energy costs and supply shocks triggered by the Russian invasion have spurred some countries to bet more on renewables but others to burn more coal, buy up non-Russian gas or pause efforts to reduce fossil fuels.

The European Union (EU) relied on Russia for 40% of its gas before Moscow invaded Ukraine.

"We have to make up some gas for Europe, which the US will work to do with others, but it has be a one for one replacement - not a whole series of new infrastructure with a 20- or 30-year horizon because that will crush the ability to respond to the climate crisis," he said.

He added, "We do not need to have new liquefied natural gas projects that require new drilling."

Germany drew criticism from the United States and others, including EU member states, for supporting the planned Nord Stream 2 gas pipeline, designed to deliver Russian gas directly to Germany. The project was halted two days before the invasion started.

Kerry said it was not worth "going backwards" and described the European Union as a "terrific leader" on renewable energies that has set higher goals than many other countries in the world.

 

World Bank happy over Padma Bridge opening

The World Bank that pulled out of financing Padma Bridge, citing a never-proven “corruption conspiracy”, has now congratulated Bangladesh and its people on completion of the much-awaited bridge.

“We are happy that the bridge is complete and Bangladesh will benefit from it,” World Bank Country Director for Bangladesh Mercy Tembon told the media during the inauguration event on the Mawa end of the bridge.

Now is the time to move Bangladesh-World Bank relations forward. The Padma Bridge will make a huge contribution to the economic growth of Bangladesh, she said.

“This bridge will contribute to accelerating integrated growth in the country and reducing poverty,” she added.

The World Bank, which initially agreed to co-finance the construction of Padma Bridge, cancelled its loan alleging corruption over the appointment of consultants for the bridge.

The Washington-based agency had a loan deal amounting to US$1.2 billion with Bangladesh for the project involving an initial estimated cost of US$2.9 billion.

Other lenders, such as the Asian Development Bank, Japan International Cooperation Agency, and the Islamic Development Bank also backed out of financing the bridge, leaving the government quite off-guard and embarrassed.

But, neither a case by the Anti-Corruption Commission nor another in a Canadian court failed to prove the corruption allegations.

It was Prime Minister Sheikh Hasina who stood alone and decided to go ahead with the nearly US$4 billion project with the country’s own funds.

The government took a challenge and proceeded with the self-financing plan, keeping aside money in the annual budget for the Padma Bridge project. The construction began in December 2015.

Dispelling all clouds of uncertainties, Prime Minister Sheikh Hasina finally inaugurated the long-awaited Padma Bridge, the longest in Bangladesh, connecting people on both sides of the Padma River.

The Padma Bridge project has been implemented at a cost of Tk30,193.39 crore with almost 100% internal funding which is believed to bring a new world to the country’s economy by connecting 21 southwestern districts through roads and railways with the capital.

The construction of the 6.15km (3.82 miles) bridge began in November 2015 to connect 21 districts of the country’s southwest with Dhaka via road and rail, thereby cutting travel time considerably.

The double-layer steel truss bridge incorporates a four-lane highway on an upper level along with a single-track railway on the lower level.

This is one of the largest mega projects Bangladesh has ever undertaken and the entire amount is financed by the Bangladesh government. 

Qatar to host Iran United States talks on reviving 2015 nuclear deal

According to a Reuters report, Qatar will host indirect talks between Iran and the United States in coming days. Iranian media also reported on Monday that amid a push by the European Union to break a months-long impasse in negotiations to reinstate a 2015 nuclear pact.

"Iran has chosen Qatar to host the talks because of Doha's friendly ties with Tehran," Mohammad Marandi, a media adviser to Iran's top nuclear negotiator, told the ISNA news agency.

A source briefed on the visit said that US Special Envoy for Iran, Robert Malley, was expected to arrive in Doha on Monday and meet with the Qatari foreign minister. An Iranian official told Reuters that Iran's chief nuclear negotiator, Ali Bagheri Kani, would be in Doha for the talks on Tuesday and Wednesday.

Iran's foreign ministry was not immediately available for comment and the Qatari government didn’t comment. Later, however, Iran's Tasnim news agency cited a source at Iran's foreign ministry as saying that "Bagheri will travel to Doha on Tuesday".

The pact appeared close to being secured in March when the European Union invited foreign ministers representing the accord's parties to Vienna to finalize an agreement after 11 months of indirect talks between Tehran and President Joe Biden's administration.

But the talks have since been suspended, chiefly over Tehran's insistence that Washington remove the Islamic Revolutionary Guard Corps (IRGC), its elite security force, from the US Foreign Terrorist Organization (FTO) list.

Last week, one Iranian and one European official told Reuters that Iran had dropped its demand for the removal of the IRGC's FTO sanctions, but still two issues, including one on sanctions, remained to be resolved.

"Nothing is agreed until everything is agreed," Iran's Foreign Ministry spokesman, Saeed Khatibzadeh, said on Monday.

The 2015 nuclear pact imposed restrictions on Iran's nuclear activities in exchange for the lifting of international sanctions. Then-President Donald Trump pulled the United States out of the deal in 2018, reimposing tough economic sanctions on Tehran.

Iran's clerical establishment responded by breaching the pact's nuclear restrictions, including a 3.67% cap on the level to which it could purify uranium and a 202.8-kg limit on its enriched uranium stock.