Pakistan's Economy: What Went Wrong 2008-2010?

Guest Post By Prof. Ashfaque Hasan Khan

This post briefly reviews two years of economic performance of the present government. What it inherited, what it informed the IMF and the people of Pakistan, why it went to the IMF, and where we stand now - are the subject matter of this article.



Pakistan positioned itself as one of the four fastest growing economies in the Asian region during 2000-07 with its growth averaging 7.0 per cent per year for most of this period. As a result of strong economic growth, Pakistan succeeded in reducing poverty by one-half, creating almost 13 million jobs, halving the country's debt burden, raising foreign exchange reserves to a comfortable position and propping the country's exchange rate, restoring investors' confidence and most importantly, taking Pakistan out of the IMF Program.

These facts were acknowledged by the present government in a Memorandum of Economic and Financial Policies (MEFP) for 2008/09-2009/10, while signing agreement with the IMF on November 20, 2008. The document clearly (but grudgingly) acknowledged that "Pakistan's economy witnessed a major economic transformation in the last decade. The country's real GDP increased from $60 billion to $170 billion, with per capita income rising from under $500 to over $1000 during 2000-07". It further acknowledged that "the volume of international trade increased from $20 billion to nearly $60 billion. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output growth, low inflation, and the government's social policies contributed to a reduction in poverty and improvement in many social indicators". (see MEFP, November 20, 2008, Para 1)

Per Capita PPP GDP


A cursory look at the above stated acknowledgment is sufficient to see that the government deliberately misguided the people of Pakistan by presenting a totally distorted picture of the economy. While it could misguide the people of Pakistan for domestic political consumption, it had no option but to tell the truth to the international financial institutions as these facts were known to them.



Even the government did not inform the people of Pakistan that it obtained the IMF Program on the basis of past performance. Pakistan received the extra-ordinary funding from the IMF under the fast-track Emergency Financing Mechanism which was meant for the countries "that have a strong track record of sound policies, access to capital markets and sustainable debt burdens but need rapid help to overcome financial crisis". (IMF Survey, October 29, 2008) Thus, a government which starts its inning on distortion can never bring stability in the economy. Most of its time and energy would be consumed for covering up of its failure.



The present government inherited a relatively sound economy on March 31, 2008. It inherited foreign exchange reserves of $13.3 billion, exchange rate at Rs62.76 per US dollar, the KSE index at 15,125 with market capitalization at $74 billion, inflation at 20.6 per cent and the country's debt burden on a declining path. The government itself acknowledged in the same document that "the macroeconomic situation deteriorated significantly in 2007/08 and the first four months of 2008/09 owing to adverse security developments, large exogenous price shocks (oil and food), global financial turmoil, and policy inaction during the political transition to the new government". (Para 3 of the MEFP, November 20, 2008)



What went wrong? Why one of the fastest growing economies in the Asian region until two years ago has been totally forgotten in the region? Firstly, the speed and dimension of exogenous price shocks (oil and food) were of extraordinary proportions. Secondly, the present government found itself totally ill-prepared and clueless in addressing the challenges arising out of the shocks. While rest of the world was taking corrective measures and adjusting to higher food and fuel prices, Pakistan lurched from one crisis to another.



Despite peaceful election and a smooth transition to a new government, political instability persisted. For a protracted period there were no finance, commerce, petroleum and natural resources and health ministers in the country. The government lost six precious months in finding its feet. It gave the impression of having little sense of direction and purpose. A crisis of confidence intensified as investors and development partners started to walk away. The stock market nosedived, capital flight set in, foreign exchange reserves plummeted and the Pakistani rupee lost one-third of its value. In short, Pakistan's macroeconomic vulnerability had grown unbearable. It had no option but to return to the IMF for a bailout package. There were no Plan A, B and C. There was only one plan, that is, to return to the IMF.

While the country was moving rapidly towards the IMF, the ministry of finance had prepared the plan to bring $4 billion by June 30, 2008 through four transactions. A kick-off meeting was scheduled on April 23, 2008 at the ministry to give a final touch to the various roadshows. These transactions were canceled on April 20, 2008. Who ordered the cancellation of $4 billion transaction? This cancellation prompted balance of payment crisis and the rest became history.

The economy continues to remain in intensive care unit and is breathing thanks to the injections from the IMF, World Bank and Asian Development Bank. The economy is not on the radar screen of the government and as such the economic managers have no relevance in the current political set up. The exit of Shaukat Tarin is a classic example. At least he tried his level best to inject financial discipline but paid the price of teaching prudent financial management. No matter who replaces Shaukat Tarin, the economy would continue to lurch from one crisis to another until and unless the government brings the economy at the center stage.

Dr. Ashfaque Hasan Khan is the Dean of Business School at the National University of Science and Technology in Islamabad, Pakistan.


Riaz Haq's Comments: In rural Pakistan where about 60% of Pakistanis live, people spend 55% of their income on food, according to a World Resources Institute (WRI) report.

The bottom two BOP (Base of Income Pyramid) groups alone account for more than 50% of national food spending in Pakistan. Average annual food spending per household in the BOP in Pakistan is $2,643. While BOP3000 households have 6 times as much income on average, they outspend BOP500 households in the food market by a ratio of only 2:1 in Cameroon, 2.3:1 in South Africa and Pakistan, 2.4:1 in Kazakhstan, 1.9:1 in Uzbekistan, and 3:1 in Peru.

Currently, food inflation in Pakistan is running at 15.49 percent, hitting the poor the hardest.

Here's a video clip of British Writer William Dalrymple speaking about Pakistan at a recent Intelligence Squared debate:



Here is a recent video clip of former President Muharraf talking about the power crisis in Pakistan:



Related Links:

Incompetence Worse Than Corruption in Pakistan

Pakistan's Circular Debt and Load Shedding

Pakistan Planning Commission

US Fears Aid Will Feed Graft in Pakistan

Pakistan Swallows IMF's Bitter Medicine

Shaukat Aziz's Economic Legacy

Pakistan's Energy Crisis

Karachi Tops Mumbai in Stock Performance

India Pakistan Contrasted 2010

Pakistan's Foreign Visitors Pleasantly Surprised

After Partition: India, Pakistan and Bangladesh

The "Poor" Neighbor by William Dalrymple

Pakistan's Modern Infrastructure

Video: Who Says Pakistan Is a Failed State?

India Worse Than Pakistan, Bangladesh on Nutrition

UNDP Reports Pakistan Poverty Declined to 17 Percent

Pakistan's Choice: Talibanization or Globalization

Pakistan's Financial Services Sector

Pakistan's Decade 1999-2009

South Asia Slipping in Human Development

Asia Gains in Top Asian Universities

BSE-Key Statistics

Pakistan's Multi-Billion Dollar IT Industry

India-Pakistan Military Comparison

Food, Clothing and Shelter in India and Pakistan

Pakistan Energy Crisis

IMF-Pakistan Memorandum of Economic and Financial Policies

Comments

Riaz Haq said…
Pakistan has appointed Abdul Hafeez Shaikh, a Musharraf-era minister, as the new finance chief to fill the vacancy left by Tarin's resignation. Here's a Wall Street Journal report on it:

The post of finance minister has been vacant since Shaukat Tarin, a former Citibank executive who was a vocal critic of government corruption, resigned three weeks ago citing personal reasons. Prime Minister Yousuf Raza Gilani has overseen the ministry in the interim.

Mr. Tarin's surprise departure and delays in appointing a successor raised concerns at a time when Pakistan's financial situation remains fragile.

The appointment of Mr. Shaikh, who is viewed as having wide-ranging political and business experience, could help to assuage those worries, analysts said. "He is noncontroversial and highly regarded in the international financial agencies," said Ashfaq Hasan Khan, a former senior finance ministry official who teaches at National University of Science and Technology in Islamabad.

The 55-year-old Mr. Shaikh, a U.S.-trained economist who served as privatization minister in former President Pervez Musharraf's military-led government, is expected to take office next week, a senior finance ministry official said.

In the 1990s, Mr. Shaikh served as country head of the World Bank's operations in Saudi Arabia. He comes from an influential family of politiciansfrom the southern province of Sindh, though he isn't a member of any political party. He will hold the official title of Adviser to the Prime Minister on Finance because he isn't a member of parliament. The post has the same authority as finance minister.

"My main priority will be on growth and sound financial management," Mr. Shaikh said in a telephone interview. "I will concentrate on creating an environment that could attract private investment."

Mr. Shaikh is a partner in New Silk Route Partners, a private-equity firm that invests in Asia and the Middle East.

"He is experienced and strong on delivery. His appointment will give a lot of confidence to the stock market and to investors," said Muddassar Malik, chief executive of BMA Capital Funds, a Karachi-based asset-management company.

The International Monetary Fund has earmarked $11.3 billion in emergency loans for Pakistan since November 2008 when Islamabad faced a balance-of-payments crisis amid an al Qaeda-linkedIslamist insurgency that deterred investors.

To get regular disbursements of this money, Pakistan has to meet goals such as reducing its budget deficit from a current 5.1% of gross domestic product, reining in runaway inflation and increasing tax collection.

A major challenge for Mr. Shaikh will be energizing the country's struggling economy. He will also be under pressure to find money to help build much-needed infrastructure, such as power plants.
Riaz Haq said…
Pakistan's economy will grow by 4.3 percent in fiscal year 2010, according to a report in Business Recorder.

ISLAMABAD (May 15 2010): Pakistan's economy has shown more resilience than expected and is likely to grow by 4.3 percent in the current fiscal, says an official document. GDP was earlier targeted at 3.3 percent for 2009-10. "Pakistan's GDP growth in 2009-10 will be around 4.3 percent because of rebound in services sector plus a recovery in manufacturing sector," says a document prepared for the National Accounts Committee meeting.

Manufacturing saw a visible recovery when its large-scale manufacturing (LSM) sector grew by 4.36 percent positive than minus 7.7 percent, making a positive change of almost 21 percent for the current year despite an acute energy crisis in the country. Had there been lesser shortage of electricity economic growth would have reached near 5 percent, says an official.

Pakistan is now near an opportunity to turn the tables by maintaining this growth trajectory to achieve about 5 percent growth rate which can cause a significant dent in poverty in the next two years, says an official who would be participating in the National Accounts Committee meeting.

Agriculture sector would be a poor performer at 2.2 percent against an unrealistic target of 3.8 percent for 2009-10 and against a bigger base of 4.7 percent of last year. Pakistan's agriculture sector hardly crossed 5 percent in its over 60 years' history.

Services sector came to the rescue this year at 6.59 percent against a target of 3.9 percent and almost similar performance of 3.6 percent last year. Overall growth in manufacturing sector is at 3.54 percent against a target of 1.8 percent and previous year's negative performance of 3.6 percent.
Riaz Haq said…
Here is the latest news from State Bank of Pakistan reported by The Nation newspaper:

KARACHI – In the backdrop of widespread losses caused by the unprecedented rains and devastating floods to the economy in the early months of current fiscal year, the State Bank of Pakistan has predicted that the real GDP growth would be in the range of 2 to 3 per cent in FY11 against the annual plan target of 4.5 per cent.
The SBP, in its Annual Report on the State of the Economy for the year 2009-10 released here on Monday, stated that the annual average inflation for FY11 is likely to remain between 13.5 to 14.5 per cent, up from both, the 9.5 per cent target and earlier SBP forecast of 11.0- 12.0 per cent for the year.
Moreover, the provisional SBP projections indicate that the current account deficit will likely to rise between 3-4 per cent while the fiscal deficit is anticipated to be in the vicinity of 5 to 6 per cent of GDP during FY11. In addition, it projected that workers’ remittances are likely to stay between $9.5 billion to $10.5 billion whereas exports and imports are likely to be between $20 billion to $21 billion and $34 billion to $35 billion, respectively in the entire course of ongoing fiscal year.
The Report pointed out that financing even the moderate increase in the current account deficit may prove stressful for the economy, with rising pressures on the country’s foreign exchange reserves and exchange rate.
The Report said, “Negative shocks stemming from the floods have further exposed the existing structural weaknesses in the economy. Addressing these will require improvements in macroeconomic discipline as well as continued reforms to improve the resilience of the economy. The required reforms include those to improve productivity, strengthen public institutions, improve economic governance, and build social safety nets to protect vulnerable segments of the population.”
The Report while referring an independent study, warned that the occurrence of poverty, which started to decline over the last decade, is expected to increase in the wake of the floods in the time to come.
According to the Report, the direct impact of the flood-related supply shock is likely to be limited. For example, the impact of flood/rain damages and shortages of minor crops are not expected to persist beyond 2 to 3 months as supply line improves and as fresh crops (e.g., vegetables) enter the market. Similarly, for some other products, any rise in domestic prices would be capped by low international prices.
It is important to note here that prices of dairy products were already continuing on a secular rise, even prior to the floods, due to sustained strong domestic and external demand. Livestock losses in the flood would exacerbate this rising trend, but only to a small extent.
It said that the extended persistence of double-digit inflation had already been a source of concern even ahead of the floods, particularly given the risk that an upward trend in food-commodity prices (e.g. wheat, edible oil, sugar, corn, etc.) could be compounded by any weakness in the exchange rate. Moreover, inflationary pressures were also expected to strengthen as a result of the recent 50 percent increase in government sector salaries, and anticipated rise in energy tariffs (as the government continued to reduce subsidies) and removal of GST exemptions to broaden the tax base.
Riaz Haq said…
Here is a Daily Times report on inflation in Pakistan:

In Pakistan, 2007, the rate of inflation was 12.5 percent, during 2006-07 it was 21 percent and in July-March 2010 the inflation has been 11.3 percent. The cumulative rate of inflation was 44 percent in three years, from September 2007 to September 2010.

The main reason of food prices inflation was the increase in wheat, petroleum products, electricity and gas responsible to an overall increase in prices. The rising interest rate, high remittances and depreciation of rupee against dollar also fueled the inflation. This situation directly hit the poor and increased poverty level in the country.

A shortfall in the production of some essential commodities also raised food prices. There are 13 food items in essential items’ list which also includes wheat and flour; sugar, poultry, mash pulse, meat, milk, tea, fresh vegetables etc, that account for almost 23 percent of the total weight in the Consumer Price Index (CPI). Prices of food items in general have made food dearer in Pakistan. For instance, the average price of sugar has risen above 41 percent, wheat prices by 17 percent, chicken 24 percent, beef 13 percent and onion prices by 64 percent since July 2008 over April 2009. With a 23 percent weight in CPI, the contribution of these few items to the overall CPI inflation was 18 percent.

Although the world price of sugar has fallen unexpectedly since its peak in January 2010, but it is still up 21 percent year on year (YoY) basis. Dairy prices, on the other hand, have continued to raise their upward march.

Global price increase enhanced inflation sharply and Pakistan has no exception that has affected both globally as well as domestically. India’s food price inflation soared to 19.2 percent in December 2009, 16.7 percent in March. Similarly, food inflation in Bangladesh rose from 3.3 percent in July 2009 to 10.9 percent in February 2010.

Poverty ratio in Pakistan is rapidly rising due to economic slowdown; high inflation and reduction in subsidies compel 40 percent people of the country to lives around the poverty line, as per SBP estimates.

The country’s population has jumped to 184 million in 2010, 119 million in 1990, of which 73 million Pakistanis have fallen below poverty line, SBP said. The poverty level during 2010 rises by 4 percent to 40 percent, from 36.1 percent in 2009.

In the case of Pakistan, the increase in domestic prices of essential commodities remained relatively quiet as compared to the international price movements. However, since January 2010, international prices for some of the commodities like petroleum have fallen more rapidly than in Pakistan.
Riaz Haq said…
Here's Dr. Ashfaque H. Khan, Dean of NUST Business School, opposing SBP's latest 0.50% discount rate hike in Pakistan:

...another objective of tightening monetary policy is to discourage the government from borrowing heavily from the SBP to finance fiscal deficit. Government borrowing from the SBP is the main source of the surge in reserve money growth. During the last four-and-a-half-months, the government has borrowed Rs265 billion, against Rs16 billion in the corresponding period last year. As a result, reserve money has grown by 18.4 per cent, against 9.7 percent last year.

Perhaps the SBP believes that a rise in discount rate will discourage the government from borrowing from the central bank. The SBP has forgotten that by raising the discount rate by 100 basis points in the current fiscal year, it has increased the interest payment of the government by almost Rs50 billion. Thus, everything being held constant, the budget deficit will increase by Rs50 billion. Hence, more deficit, more borrowing, a further hike in the discount rate, further increase in interest payment, and further increase in budget deficit. Do we want to create a vicious circle?

Perhaps the SBP believes that by increasing the discount rate it will encourage commercial banks to participate actively in auction of government debt. In other words, it will shift government borrowings from the SBP to scheduled banks. Government borrowings from the scheduled banks stood at Rs76 billion, against Rs164 billion in the same period last year. Perhaps the scheduled banks are deliberately avoiding participation in the auction to the extent they should have been. They have thereby signalled that they need a higher interest rate.

Should the SBP, as monetary authority, be guided by the animal spirit of the scheduled banks, or should it be in the driving seat? Perhaps the governor of the SBP would like to be guided by the scheduled banks. I personally believe that the hike in discount rate was unwarranted and the status quo should have been maintained. The hike was an act of overreaction and could have been avoided.
Riaz Haq said…
Here's Pakistani economist Dr. Ashfaque H. Khan writing about "Pakistan: a forgotten economy" in a piece published by The News:

How has that economy been transformed into a forgotten one in just three years? Unfortunately, the economy never featured on the radar screen of the present government. Additionally, the government lacked a credible economic team. In less than three years there have been four finance ministers, four finance secretaries and three governors of the State Bank.

The government wasted time and energy in downplaying the achievements of the previous government, while it lurched from one crisis to another, a rudderless ship with no sense of direction and purpose. The current economic team is weak and lacks the capacity to handle the multidimensional challenges it is confronted with, most of which are self-created.

The country’s economic growth has slowed to an average of three per cent per annum, and unemployment and poverty have risen. Higher double-digit inflation has persisted and items of basic necessity have gone beyond the reach of the common man. The debt burden has reached unsustainable levels and the dependence on donors has grown. Clearly, three years of mis-governance and poor economic management have brought the economy to near-standstill. People have lost confidence in the country’s ability to recover from the ever-deepening economic crisis. The recent unprecedented floods have further aggravated the impact of the economic ills.

It is not only the economy which is in decline. This is true of things in every walk of life. To name just a few, this has been evident in the game of cricket, the inaugural parade at the Commonwealth Games, the Haj operations, the creation of the sugar crisis, the running of public-sector enterprises like PIA, Pakistan Railways, the Steel Mills, National Insurance Corporation and TCP, the crisis in higher education, the deterioration in law and order and the debacle of the recently concluded Pakistan Development Forum (PDF).

The PDF meeting requires special mention. The PDF, the reincarnation of the Aid to Pakistan Consortium, is jointly chaired by the World Bank and the Government of Pakistan, represented through its finance minister. The purpose of this forum is to provide a platform to the government where it can present its economic and social reforms agenda before visiting delegations. The PDF has never been a platform for pledging assistance. Unfortunately, this forum was transformed into a pledging forum because every minister, even the prime minister, made statements about the financial loss caused by the floods and asked for financial support. The minister of interior even pleaded for a debt write-off.

It is unfortunate that we have turned every international forum, including Friends of Democratic Pakistan (FODP), into an opportunity for begging. No self-respecting nation begs forever. A beggar cannot command respect in the comity of nation. Continuing to do so, Pakistan risks nothing less than global oblivion. How long can we keep on begging like this? Is this the fate to which the people of Pakistan must resign themselves?
Riaz Haq said…
Here's a Daily Times report on Gallup survey finding Pakistanis are pessimistic about their nation's economy in 2011:

“This year, the public opinion in Pakistan is not hopeful as only 13 percent think that 2011 will be a year of economic prosperity while 34 percent expect it to be a year of difficulty thus giving a negative score of –21 percent on Net Hope,” said Chairman Gallup Pakistan Dr Ejaz Shafi Gilani.

“The devastation caused by floods during the middle of the year created a mood of economic pessimism among the public, despite the fact that the country fought this calamity with courage and showed extraordinary resilience,” Dr Ejaz added.

As the new century enters its second decade, both economic data and perception data suggest that while wealth is still concentrated in Europe and North America, while there is a shift of power and prosperity from the West of the 20th Century to the East, he added.

He said these findings have been derived from one of the largest global surveys covering 53 countries across all continents including all the G7 countries, the four countries of emerging BRIC (Brazil, Russia, India and China) and another 45 countries from Asia, Africa, Latin America, Australasia and including Pakistan. Together, a sample of over 64,000 scientifically selected men and women were interviewed by leading pollsters associated with Gallup International.

This is the second global survey, which the Group has conducted and released during this month. The key question in the global survey was: “Would you say that 2011 will be a year of Economic Prosperity, Economic Difficulty or remain the same.” At a global level 30 percent of the world expects that 2011 will be the year of prosperity and 28 percent expect it to be the year of economic difficulty, while 42 percent think the economic situation will remain unchanged. The hopefuls outscore the pessimists by 2 percent. That is the net Global Hope Score.

The data shows that global hope is highly concentrated among the rising economic powers, the so-called BRIC. The Hope Score for this Group is 35 percent.

In sharp contrast, the Hope Score for the rich countries of the world, known as the G7 (USA, Canada, Germany, France, UK, Italy, and Japan) is in the negative: -19 percent.

Among them, the Pessimists (36 percent) outscore the Hopefuls (17 percent) by 19 percent points.

Briefing the journalists about the survey here Wednesday, Dr Ejaz Shafi Gilani chairman Gallup Pakistan claimed that comparing the survey data with India, it must be noted that Hope Score are volatile and can make sharp jumps in short years.

“This would be true of the mood in India. In the latest survey popular opinion in India shows a Net Hope of 24 percent.

In previous years, India generally scored lower than Pakistan on such measures. Even now the per capita income in the two countries is not far apart $3260 in India compared with $2710 in Pakistan,” he said adding that our civil society and the government seem to have a tough task ahead of them in 2011. app
Riaz Haq said…
Here's Pakistan's latest economic news in brief supplied by Foundation Securities Research:

The Ministry of Finance has agreed with the proposal of the Tax Reform Co-ordination Group (TRCG) to create a Fiscal Policy Board to be headed by the Finance Minister under the reform plan to exclusively deal with the fiscal policy and taxation issues under the umbrella of the proposed fiscal board. (BR)
The country's trade deficit soared to $8.149 billion in July-December 2010, 18.20 percent up over $6.89 billion for the same period of last year, according to the Federal Bureau of Statistics (FBS). Official trade figures released by the FBS here on Tuesday showed an increase in exports of 20.63 percent for the same period which analysts say could be largely because of per unit price increase instead of increase in the quantity. (BR)
Remittances sent home by overseas Pakistanis continued to show rising trend as $5,291.41 million was received in the first half of the current fiscal year 2010-11(July-December), showing an increase of $761.23 million, or 16.80 percent, when compared with $4,530.18 million received during the same period of last fiscal year. (BR)
The CPI inflation soared by 15.68 percent in December 2010 over the same period of last year with phenomenal increase in perishable food items, showing a strong trend of increase in prices of food items which may push more people below the poverty line. (BR)
Japan has queued up to help Pakistan to plug in widening budgetary gap by granting it $60 million soft loan in response to Islamabad's call to the friendly countries for financial support to keep current budget deficit at some reasonable level. (BR)
Another round of speculations came to an end on Tuesday when President Asif Ali Zardari issued a notification appointing a PPP stalwart and former Attorney General Sardar Latif Khan Khosa as Governor of Punjab. (BR)
The monthly Consumer Price Index (CPI) during the month of December registered a decrease of 0.31 per cent as compared to previous month of current financial year. (DAWN)
The government has decided to put a freeze on electricity tariff for the remaining period of the current fiscal year owing to its inflationary impact on economy and unending loadshedding, according to a senior official. (DAWN)
The Secretary Cabinet Division, Abdur Rauf Chaudhry on Tuesday said 3G services would hopefully be available to the Pakistani mobile users by the end of 2011 — while it was expected that the policy for auction of 3G services licenses would soon be presented to the government and Economic Coordination Committee (ECC) for discussion and approval. (DT)
The FBR has started to evaluate alternative proposals to replace the controversial RGST in case the government failed to get it approved from the parliament. (TN)
Despite receiving orders from the Ministry of Petroleum, OGDCL has not replaced one of its directors on board, who also works for a partner company. (TN)
NCCPL shows a net inflow of USD2.18 million.
Crude oil is trading at USD91.1 per barrel.
Riaz Haq said…
In addition to significant foreign institutional investments (FII) in Karachi shares last year, the reports of surging remittances by overseas Pakistanis and the nation's growing exports are the only two other pieces of good news amidst an avalance of bad news on the economic front in Pakistan in 2010.

The State Bank of Pakistan has reported that overseas Pakistanis sent home $5.291 billion during July-Dec, 2010, an increase of $761 million or 17 per cent year over year, according to Pakistan's Dawn newspaper.

Remittances of $863 million were sent by overseas Pakistanis last month, up 23.72 per cent or $165 million compared to December, 2009.

Exports in the July-December 2010 touched almost $11 billion – $1.8 billion, or 20.6per cent, higher than last year’s exports in the corresponding period. Meanwhile, imports stood at $19.2 billion, marking a growth of 19.6 per cent, or $3.2 billion, in the first half, according to the Express Tribune.

Pakistani government has been relying heavily on remittances by overseas Pakistanis to fund the massive trade imbalance, which exceeded $8 billion during the first six months of this fiscal.

The increased remittances and rising exports have helped bring down the nation's current account deficit to $504 million for six months, or 0.6 percent of GDP, about 30% lower than the same period in the previous year.

Foreign direct investment (FDI) declined 15.5 per centin the first six months of the current fiscal year to $828.5 million from $968.9 million in the same period last year, according to the Nation quoting figures from the State Bank of Pakistan.

However, in spite of Pakistan's multiple serious crises, the foreign buyers have continued to be relatively sanguine about Pakistan's prospects.
Riaz Haq said…
Pakistan is Striving for Consensus to Spur Ailing Economy, Says Businesswek:

Jan. 20 (Bloomberg) -- Pakistan’s government and the main opposition met today in a bid to hammer out a consensus on ways to contain the nation’s expanding budget deficit and revive an economy battered by terrorism and floods.

Prime Minister Yousuf Raza Gilani’s economic team, led by Finance Minister Abdul Hafeez Shaikh, will begin “substantive and meaningful” negotiations with its chief rival, the Pakistan Muslim League of former prime minister Nawaz Sharif, Ahsan Iqbal, a spokesman for Sharif, said in a phone interview in Islamabad today.
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Any political agreement on a reform program will force the government to cut spending by 30 percent, restructure state- owned money-losing companies, including Pakistan International Airlines Corp. and Pakistan Steels, and set a new price mechanism for power and gas consumers, Iqbal said.

“Politics is driving economic decision making here,” Abid Qayum Sulehri, executive director at the Islamabad-based Sustainable Policy Institute, said in a phone interview. “This will provide Gilani much-needed political cover to take tough economic decisions.”

The government’s economic team met with Sharif’s party, Pakistan Muslim League-Quaid, and coalition partners Muttahida Qaumi Movement and Awami National Party on Jan. 18 to brief them about the state of the economy. Gilani reached out to the opposition after Sharif demanded the premier implement a 10- point economic agenda within six weeks and move against corrupt officials or face a campaign for his ouster.

The Karachi Stock Exchange’s 100 Index, which advanced 28 percent last year, fell 1.3 percent to 12,411.87 today in Karachi. The rupee traded at 85.73 against the dollar, after falling 1.65 percent last year.

“I’m not too optimistic that this political give-and-take will change things substantially on the ground,” said Asif Ali Qureshi, head of research at Invisor Securities Ltd. in Karachi. “Investors usually get nervous when foreign exchange reserves start shrinking and the currency comes under pressure. That hasn’t happened so far this year.”

Partner Returns

Gilani on Jan. 7 succeeded in winning back the support of his partner, the MQM, after reversing the fuel-price rise. His Pakistan Peoples Party lost its majority Jan. 2 when the MQM had quit the coalition. President Asif Ali Zardari’s grip on power was further undermined by the Jan. 4 assassination of a key aide, the governor of the Punjab province.
The petrol-price rollback, which runs the risk of a wider budget deficit, was criticized by U.S. Secretary of State Hillary Clinton, who urged Pakistan not to “reverse progress.”
“We have moved forward in a concrete way,” Ishaq Dar, a former finance minister and a key aide to Sharif, told reporters after the meeting. “You’ll see things moving in the next few weeks.”
Maria Kuusisto, an analyst at consultant Eurasia Group, said in a Jan. 14 telephone interview from London, that Pakistan’s budget shortfall may touch 8 percent of gross domestic product, or 1.3 trillion rupees ($15.15 billion) in the year through June from 6.3 percent in the previous year.
The central bank governor last month blamed government borrowing for price pressures and said raising interest rates may impede investments and undermine economic growth.
The government borrowed 401 billion rupees from the central bank between July 1 and Jan. 8, more than double the amount it borrowed in the same period last year, according to data from the State Bank of Pakistan.
“Pakistan is operating without any fiscal order,” Sakib Sherani, an economic adviser in Pakistan’s finance ministry from July 2009 to December 2010, said in an interview. “The fiscal mismanagement may produce the biggest budget deficit in Pakistan’s history in absolute terms.”
Riaz Haq said…
Here's a story in the Economist on economic mismagement in Pakistan:

ON JANUARY 3rd Pakistan’s central bank began printing rupee notes carrying the signature of Shahid Kardar, who was appointed governor of the State Bank of Pakistan in September. Unfortunately inflation has robbed money of over 15% of its value in the past year, and no let-up is in sight for the new notes. It is the most visible sign of an economy slouching towards another financial crisis.

At the start of the year the government raised petrol prices, prompting the Muttahida Qaumi Movement (MQM) to quit the coalition government led by the Pakistan People’s Party (PPP). It left the PPP “with a choice between saving the government and saving the economy,” as Maleeha Lodhi, Pakistan’s former ambassador to the United States and Britain, put it in the News, a Pakistani daily.

On January 6th the PPP made its choice, reversing the price rise. The decision has rescued the government but also robbed the exchequer of 5 billion rupees ($58m) a month. By the end of the fiscal year in June, the government’s deficit could reach 6.5% of GDP, according to Sayem Ali of Standard Chartered bank, or even 8% if oil prices continue to rise, according to Mohsin Khan of the Peterson Institute, in Washington, DC.

Pakistan’s budget has a lot to bear. The World Bank reckons that recovering from the summer’s devastating floods, which damaged over 1.6m homes, will cost up to $10.8 billion. To date, aid has been modest. Donors have pledged just $2.1 billion, or $11 per person, compared with $363 per person promised to Haiti after its earthquake —a slightly unfair comparison perhaps.

Yet Pakistan’s fiscal troubles are antediluvian. It is one of the most lightly taxed countries in the world. Fewer than a quarter of the country’s firms declare any taxable revenues, and only 11 out of every 1,000 of its citizens pay tax on their incomes, according to the World Bank. As a result, tax revenues amount to a mere 10% of Pakistan’s GDP.

The government had hoped to raise that ratio by broadening its sales tax, which is riddled with exemptions. Yet it lacked the heart to defy lobbies which slip through the threadbare tax net. They include exporters who escape tax on their domestic sales, as well as retailers and wholesalers who elude tax altogether. The proposed reforms also proved unpopular with the broader public, who resent paying anything to a government that gives them so little in return.

The government’s failure has jeopardised its agreement with the IMF, which is withholding the remaining $3.5 billion of the bail-out funds it offered back in 2008. At that time, the rupee was tumbling and Pakistan’s foreign-exchange reserves barely covered three weeks’ worth of imports. If the country is not yet in similar trouble, it can thank Pakistani folk abroad, whose remittances surged by 16.8% in the second half of 2010, compared with a year earlier (see chart). This is one reason why the rupee has not sunk further, and why the central bank’s reserves still cover six months’ worth of imports.

Yet foreign investment has slowed to a trickle, and higher commodity prices will add to the country’s import bill. Meanwhile, Pakistan’s foreign debt must be serviced. The finance minister is in a pickle. If Pakistanis lose heart, too, they may quit the currency, scrambling for dollars instead. Should that happen, Pakistan’s reserves will quickly vanish. And here is the big difference between 2008 and today: Pakistan has already had its IMF rescue.
Riaz Haq said…
In 2008, the PPP government pushed the procurement price of wheat up from Rs. 625 per 40 kg to Rs. 950 per 40 kg. This action immediately triggered inflationary pressures that have continued to persist as food accounts for just over 40% of Pakistan's consumer price index. According to State Bank of Pakistan (SBP) analysis, cumulative price of wheat surged by 120 per cent since 2008, far higher than the 40 per cent between 2003 and 2007. it is also many times greater than the international market price increase of 22 per cent for wheat in the same period. Similarly, sugar prices have surged 184 per cent higher since 2008, compared with 46 per cent increase during 2003-07.

The transfer of additional Rs. 300 billion to Pakistan's agriculture sector during the current fiscal year 2010-2011 by higher prices of agriculture produce and direct flood compensation to 1.6 million affected families at the rate of one hundred thousands rupees each will boost economic confidence in the countryside. It will generate rural demand for consumer items including consumer durables such as fans, TVs, motorcycles, cars, refrigerators, etc.

Already, the upside of the government policy is that Pakistan's rural economy is being spurred by high crop prices that may help the GDP growth this year and next. Increased farm incomes are whetting the rural households' appetite for industrial and consumer goods in 2011 and beyond.

While it is good to see Pakistan's rural farm economy perk up, it is also important to recognize that the overall national economic outlook can not improve significantly unless the growing budget deficits and rising inflation are brought under control. And this will require the ruling feudal elite to pitch in by paying their fair share of income tax on their rising farm incomes. It is time for them to lead by example.
Riaz Haq said…
There seems to be consensus developing among Pakistani economists that "prompt measures needed to control rising inflation", according to a report in Daily Times:

LAHORE: Pakistan is fast heading towards higher inflation and to overcome this grim scenario; improvement in governance coupled with a drastic cut in expenditure and revenue generation is crucial.

The doom and gloom scenario needs an urgent handling. Good governance, good policies, good institutions, good macroeconomic management are the drivers of economic growth that have gone dormant for quite some time. This was the crux of the speeches delivered at Economic Dialogue 2011 held at Lahore Chamber of Commerce and Industry on Tuesday. Senior economist Dr Akmal Hussain said the country is facing its gravest economic crisis in history after 1971. He said the economy is in deep recession, poverty along with high inflation is a recipe for disaster.

Unfortunately, he added, the government has zero fiscal space. He warned that Pakistan was heading towards higher inflation if immediate improvement in governance is not accompanied with cut in expenditure and substantial increase in revenue.

The former WB Executive Abid Hassan said that the institutional decay has now started taking its toll and the government should take appropriate measures on emergent basis to stop this decay. He said that with every passing day the country is going deeper and deeper into the economic mire. “Today we have reached a situation where even an economic stimulus would not work. The government should concentrate on tax collection and controlling unnecessary expenditures. Unless and until these two measures are not taken, the economy would not be able to be back on rails,” he said. The PIDE Vice Chancellor Dr Rashid Amjad said that the present day doom and gloom scenario could be changed by overcoming the acute energy shortage being witnessed by the country. The issue of circular debt needs to be taken care of by those sitting at the helm of affairs. “PSDP has a multiplier effect on the employment and economy. It should not be cut,” he said.

Former chief Economist Planning Commission Dr Pervaiz Tahir blamed the political chaos for our economic woes and termed the dictatorship democracy cycle as mother of all ills.

Energy sector expert Munawar Baseer, ex Executive committee member Almas Hyder and LCCI President Shahzad Ali Malik while appreciating the input provided by the economists said that most of the issues and challenges faced by the country are more of political. The political leadership while realizing the sensitivity of the situation should come up with a solid solution with close coordination with the chambers. “The policies are being made in isolation without the consultation of real stakeholders and that’s why the economic situation today has become more complex and directionless,” he said. The speakers said that the business community should be involved for the sake of correct decision-making.

They urged the government to evolve a more realistic and pragmatic framework by putting an end to inter-provincial disparity and the disparities within the province. The government should re-do its priority list and concentrate on the few areas that come on the top of that priority list.

It is very unfortunate, the speakers said, that the country has become the most inhospitable for both the local and the foreign investors for security reasons.

“Our inability to reach a consensus on water issue and inability to tap hydrocarbon potential of Balochistan has virtually pushed us to the wall,” they said. staff report
Riaz Haq said…
Here's an interesting assessment of Pakistan's economy in 2H-2010:

...“The country’s exports, money sent by overseas Pakistanis, balance-of-payments position and foreign exchange reserves have reflected an encouraging growth during July-December FY11, showing strong signs of improvement in the economy,” Saad-bin-Naseer, CEO of Pearl Capital, told Central Asia Online January 28. Pakistan’s exports were $10.97 billion, an increase of US $1.88 billion, in the first six months of FY11.

That 21% increase was a very positive sign for the growth of export-oriented industry and the national economy, he said.

In FY11 exports could cross the $22 billion mark for the first time because of a significant increase in the value of Pakistani products on world markets, Naseer added.

“The textile industry had taken the lead by fetching $1.28 billion in additional foreign exchange through exports,” Anisul Haq, secretary of All Pakistan Textile Mills, told Central Asia Online.“The textile industry had taken the lead by fetching $1.28 billion in additional foreign exchange through exports,” Anisul Haq, secretary of All Pakistan Textile Mills, told Central Asia Online by telephone from Lahore. “From July-December FY11 textile exports increased to $6.28 billion” compared to 2010 figures.

Total annual textile exports could exceed $13 billion for the first time, he added. In 2009-10, they totalled $10.5 billion.
“The textile industry had taken the lead by fetching $1.28 billion in additional foreign exchange through exports,” Anisul Haq, secretary of All Pakistan Textile Mills, told Central Asia Online.
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Another pillar of the economy is remittances from overseas Pakistanis. The money they sent home increased by $780m in the first half of FY11, to $5.3 billion, Haq said.

“We hope the country would receive $11 billion from overseas Pakistanis in 2010-11 with major increase in inflows from Pakistanis staying in Arab countries and other western countries,” Haq said.

Foreign aid from institutions and countries, not just individuals, helped. The disbursement of $633m in coalition support and the extension that the IMF gave the government for imposing the Reformed General Sales Tax (RGST) helped improve some of the major economic indicators, Naseer said.

The picture did much to bolster Pakistan’s balance sheet, which has had its ups and downs. Pakistan recorded a current account surplus in the first six months of the fiscal year, which enabled growth in foreign exchange reserves and stabilised the dollar-rupee exchange rate, Pearl Capital’s Naseer added.

In 2009-10, the country incurred a $2.5 billion current account deficit from July-December, but for the same period in 2010-11 it enjoyed a surplus of $26m – a dazzling switch from red ink to black, he said.

The robust performance of exports and remittances enabled Pakistan to accrue a record $17.3 billion in foreign exchange reserves by January 21, he said.

Investor confidence has grown in response to these positive indicators. The stock market capitalisation grew to $36 billion in January 2011 from $32 billion in October 2010, he said, adding that such growth would encourage foreign and local investment.
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warned.

Islamabad, which still hasn’t imposed the RGST the IMF wants, doesn’t collect enough taxes, Khan said. It levies only about 9% of GDP against the required international standard of a minimum 15% tax-to-GDP ratio, Khan said.

The government must implement tax reform, reduce reliance on borrowing from the IMF and generate its own resources to enhance tax revenues and to bolster economic growth, he added.

Serious efforts to solve chronic gas and power shortages are also imperative, he said.
Riaz Haq said…
Here are some excerpts from an Op Ed in Newsweek Pakistan by Meekal Ahmed, a former IMF official:

The government hopes to generate Rs. 53 billion during the last quarter of the current financial year, which concludes on June 30. It hopes to achieve this by imposing a 15 percent surcharge on income tax paid by Pakistan’s paltry 1.7 million registered, individual taxpayers. Given the small tax base and modest yield, the surcharge seems unfair and not worth it. In a move that is regressive and potentially inflationary, depending on the market, excise duty on certain import items has been increased from 1 percent to 2.5 percent until end-June. While these measures are better than doing nothing at all—which is what happened during the first three quarters—they are far from ideal, and don’t go far enough to address the big problems with the economy.

But it’s not all bad. The elimination of tax exemptions for agricultural inputs (including tractors, fertilizers, and pesticides) was long overdue. With a strong agro-lobby preventing taxation on their handsome incomes in a sector that contributes 21 percent of GDP, the government might as well tax the inputs. Tax exemptions for export quality textiles sold within Pakistan have also been nixed despite resistance from the fierce textile lobby. The freeze on additional hiring in the public sector, and the 50 percent cut in several spending categories should also be welcomed.

Then there is the profusion of what many Pakistani media outlets call “petrol bombs”—highly unpopular oil price adjustments at the start of each month. The government announces the adjustments, and then rolls them back under popular and political pressure. The fuel price adjustments are unavoidable. Pakistan is a net oil importer and can’t insulate itself from global price shocks. Oil prices have risen steeply in the last three months, and have now crossed the psychologically important 100-dollar mark. Pakistan’s fuel subsidies—at an estimated Rs. 5 billion per month that could have been spent on development—are unaffordable and unsustainable. Oil prices will remain high for a while. Pakistanis must adjust to this reality. .....
...
Despite the new measures, doubts remain about the revised tax-revenue targets and the state’s capacity to achieve them. The Federal Board of Revenue is notorious for its chronic underperformance. The justification that there is a tax revenue shortfall because the economy is in recession holds no water. An economy expected to grow at around 3 percent is not, technically speaking, in recession, but is growing below its potential. There is no cycle for fiscal revenues in Pakistan: whether the economy grows at 3 percent or 7 percent, whether inflation is 2 percent or 25 percent, tax revenues fail to keep up. If they did not, there would be a constant tax-to-GDP ratio, which is actually falling. This trend points to the existence of deep-rooted structural deficiencies in the tax system, which is regressive, anti-poor and plagued by too many exemptions and concessions. Then there’s also corruption, abuse of the system, and evasion. Even taxes withheld at source are not deposited in the government’s account because of alleged connivance between withholding agents and tax officials.
Riaz Haq said…
Here are some excerpts from an ADB report on Pakistan as quoted by Daily Times:

Pakistan’s budget deficit may cross 5.5 percent of the gross domestic product (GDP) due to less than expected revenues, excess expenditure on floods, security and subsidies.
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According to the report, severe floods in July-August 2010 have affected fiscal year (FY) 2011’s prospects. Damage was less severe than initially feared, but agriculture and communications were hit hard.

The report says that Pakistan’s public debt (excluding guarantees) as a share of the GDP continued to climb in FY 2010. Government domestic debt amounted to 37.0 percent of the GDP, including commodity debt and liabilities of State Owned Entities (SOEs). External debt rose to 31.9 percent of the GDP, including 0.6% of the GDP in external liabilities of SOEs. Interest payments due on domestic debt represent a heavy burden, accounting for 3.9 percent of the GDP in FY 2010, or 43 percent of the Federal Board of Revenue’s (FBR) revenue. External debt amortisation payments, excluding amounts owed to the IMF, are relatively stable for FY 2010 – FY 2013 at about $3.3 billion. Amounts due for FY 2012 and beyond will be raised substantially by repayment obligations to the IMF. The report maintains that the inflation accelerated after the floods, to 15.7 percent in September, reflecting actual and expected shortages. It remained above 15 percent through December, falling to 14.2 percent in January owing to a government-freeze on oil and electricity prices. It is expected to stay high through FY 2011, for an average annual 16.0 percent, and is then expected to recede in FY 2012 to 13.0 percent (moderation in international food prices is likely to be at least partly offset by electricity price rises).

ADB expects Pakistan’s economy to continue to build on the vital signs of recovery. The good news is that Asia is maintaining a strong growth trajectory, and expanding South to South links presents supplementary opportunities for developing Asia, including Pakistan. Pakistan’s recent entry into Central Asian Regional Cooperation (CAREC) opens up new trade and development corridors ... but it all depends on getting back on course in implementing the fiscal reforms and creating an enabling environment for the industry and job creation for the youth in the years ahead, the ADB country director added.

The total disbursements made to Pakistan by ADB during the calendar year 2010 were $799.18 million that were 117 percent more than the projected amount of $683.28 million.
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According to the report, Pakistan’s external reserves reached a record-high of $17.4 billion in early February 2011, amounting to more than five months of imports of goods and services. This build-up essentially reflects IMF releases of $7.1 billion under the Stand-by Arrangement programme, an additional $450 million in emergency support in September 2010, and support from the Coalition Support Fund ($633 million).
Riaz Haq said…
Here's blog post from today's Dawn newspaper:

GLORIOUS countryside lies between Rahim Yar Khan and Bahawalpur. Travelling across six districts in Punjab, before a blazing summer sets in, I experienced endless fields of wheat waiting to turn golden, of freshly harvested mustard, acres of ripe sugarcane and sprawling mango orchards.

Far from the drudge and gloom of metropolitan Pakistan, economic privation, traffic snarls, extreme religion and the cricket World Cup agony, this is another Pakistan. Over a quarter of a century after the green revolution ended the rural economy is back in boom, this time on the back of rising prices. The feel-good factor is all around.
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Alongside the cash economy, the place is also brimming with ideas, and with an entrepreneurial spirit. A young man I meet at Rahim Yar Khan’s chamber of commerce has an IT degree and owns an ice cream distribution business spawning an elaborate cold chain across three districts. He tells me that sales are surging because rural society is transitioning to modern desserts which are now more affordable than traditional sweets like mithai and khoya.

Meanwhile, he’s toying with the bigger vision of an electronic marketplace for agricultural produce. Live connectivity to grain mandis and markets for fresh produce and milk will empower farmers to obtain prices online and through their cellphones. He wants to materialise this and wants tips. I give him my two cents worth: study similar models, write a concept paper, galvanise partners around it, put in seed money and get the venture to mezzanine level.

For now the agricultural economy is growing more in value than in volume. As it does, it pulls in a rising demand for inputs. Fertiliser and agrochemical companies, some listed on the stock exchange are making record profits. Still, few find time to complain about rising input prices. With a population of 400,000, Rahim Yar Khan sports showrooms displaying cars, motorcycles and generators, fast food outlets and even private healthcare clinics.

Even then, not all the cash would appear to go into consumption. Pakistan now ranks amongst the world’s top 10 markets for tractors. Alongside, and despite constrained credit to agriculture, farmers are investing in agricultural implements, irrigation channels and farm modernisation.
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“Simple”, he explains, “this year the ginners got together with the local utility company, Mepco. We’ve instituted a system whereby instead of intermittent hours of loadshedding we get it in one block of 12 hours. This way we can run the factory on one shift per day”. With that problem behind him he now wanted to move on; that is, to a pasteurised milk business.

As the green revolution tapered off, a poultry revolution began; in the late 1970s. Ever since, Pakistan has been gnawing away
at broiler chicken and there’s no turning back. Today a dairy revolution is sweeping Pakistan. As the world’s fifth largest milk producer, the country can only process three per cent of its milk production. Sitting in his factory office in Khanpur — one could have been in any plush office in a metropolis — we open his wireless notebook and download a pre-feasibility study for a milk pasteurising business from Smeda’s website. We glean through it, and at a Rs160m capital outlay it looks doable for him.
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In 2009, an NGO distributed young cattle on micro-credit to 1,000 small farmers and built an apex organisation to collect and market milk from these grass-roots. The Dutch consultant for the NGO informs me that a modern farmers’ cooperative model is now evolving. Such models have long been in vogue in Europe and indeed in several developing countries. Usually the extended supply chain ends at farmer-owned retail outlets — co-ops. Why hasn’t this concept gained traction in Pakistan?
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And so Pakistan prepares to harvest another bumper wheat crop in 2011.
Riaz Haq said…
Here's an AFP report on Pakistani tax dodgers:

ISLAMABAD — Pakistan is defying mounting Western pressure to end a giant tax dodge with fewer and fewer people contributing to government coffers, spelling dire consequences for a sagging economy.

Tax is taboo in Pakistan. Barely one percent of the population pays at all, as a corrupt bureaucracy safeguards entrenched interests and guards private wealth, but starves energy, health and education of desperately needed funds.

Less than 10 percent of GDP comes from tax revenue -- one of the lowest global rates and worse than in much of Africa, say economists.

Federal Board of Revenue (FBR) spokesman Asrar Rauf said 1.9 million people paid tax in 2010, less than the year before, despite 3.2 million being registered to pay -- itself a drop in the ocean of a population of 180 million.

As a result, Pakistan's fiscal deficit widened from 5.3 percent to 6.3 percent of GDP in 2010, the Asian Development Bank said this month, knocking 2011 growth figures to 2.5 percent and predictions for 2012 to 3.2 percent.
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This month visiting British Prime Minister David Cameron pressed the point home, saying aid increases were a hard sell when: "Too many of your richest people are getting away without paying much tax at all and that's not fair".
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The IMF last May halted a $11.3 billion assistance package over a lack of progress on reforms, principally on tax.

And despite a flurry of meetings, no new loan has been agreed in the run-up to the IMF and World Bank's Spring meetings.

An IMF review mission is due to visit on May 8. "Consensus is building, we have almost reached agreement (on reform)," one government official told AFP, but gave no details.
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What would really work, say analysts, would be scrapping exemptions that serve entrenched interests, such as a 50 percent tax discount on sugar and a gate on taxing agricultural income that largely exempts wealthy feudal landowners.

But stalemate and vested interests have made that impossible.

"There's talk of early elections. One has a brittle coalition. A lot of the reform areas that need to be dealt with have very well entrenched and powerful lobbies that are making the case against it," said a finance ministry official.

As it is, the tiny minority who contribute say they carry a disproportionate tax burden, for which they get nothing in return.

Pakistan suffers from an awful energy crisis, yet government spending on electricity subsidies last year reached just under one percent of GDP, health spending 0.5 percent and education two percent, said the finance ministry.

According to a 2009 study by the Pakistan Institute of Legislative Development and Transparency, the average member of parliament was worth $900,000 and the wealthiest $37 million.

Those figures stand against estimates that a quarter of the population lives below the poverty line and that GDP per capita stands at $2,400.

"No one trusts the government," says industrialist Mohammad Ishaq, former vice president of the chamber of commerce in the northwestern province of Khyber Pakhtunkhwa.

"Without social welfare and with this corruption, nobody is ready to pay tax... in return one gets nothing -- no health, education, social security."

Eunuchs have been appointed tax collectors in Karachi, the financial capital, on the understanding that a visit from the maligned transgender group would embarrass people into paying up.

But former finance minister Salman Shah said tax evasion was inevitable because of corruption within the FBR, which employs 23,000 people nationwide.

"There's a big mistrust of the tax authority itself. That's why a self-assessment scheme came in," said Shah.
.............
Riaz Haq said…
South Korea's LOTTE is planning to invest $500m in Pakistan, according to The News:

KARACHI: Lotte, the parent company of Lotte Pakistan PTA Limited, has hinted at expanding its operations in Pakistan, besides entering into other businesses such as confectioneries and constructions, officials said on Tuesday.

“If government of Pakistan offers us some concessions in taxation then we are keen to expend operations of Lotte Pakistan with a fresh investment of $500 million,” said Jung Neon Kim, Executive Director of Lotte Pakistan.

The PTA plant was acquired by Lotte in September 2009 and renamed as Lotte PTA Pakistan Limited.

Kim said Lotte is also in the process of acquiring Kolson. Therefore, it is about to enter the confectionary and food businesses in the country, as well.

The parent company also wanted to concentrate on the beverage industry, as well as expand into the chemicals and construction sectors, he said.

To attract more foreign investment and foreigners to the country, he said, Lotte wanted to develop and build residential projects exclusively for foreigners where they could live and enjoy sports and cultural facilities along with full security.

“Pakistan is a big market and the government could help encourage foreign investment if it supports persistency in tariff rates and offers lower taxes and tax breaks.”

He said that his company was the tenth largest taxpayer in Pakistan, contributing around Rs20 billion to the national exchequer in the form of taxes.

In his opinion, the tax rates in Pakistan were among the highest in the region and should be reduced to attract more investment.

Lotte Pakistan took CSR (Corporate Social Responsibility) very seriously and spent Rs400 million on CSR activities last year, besides contributing to the relief efforts for flood victims. He said Lotte is intensely involved in education and around Port Qasim where Lotte Pakistan PTA plant is located. Lotte, he said, is committed to spending Rs60 million annually on education in the area.
Riaz Haq said…
Pakistan bond offering withdrawn, says Dr. Ashfaque H. Khan:


Yet another debacle has occurred on the economic front, with the government failing to float its exchangeable bond in the international debt-capital market. In an act of desperation, the Pakistani economic manager had decided to launch a $500-million exchangeable bond with 10 percent shares of Oil and Gas Development Corporation (OGDC) attached to this transaction, the proceeds of which were to come by the end of the current fiscal year. It was the intention of the government to use these proceeds for retiring its State Bank debt and reducing its budget deficit to that extent.

The Pakistani team was informed by the global investors during the road show that they had little appetite for Pakistani paper at the moment, particularly in the presence of the Greek debt crisis and the unresolved issue of increase in the debt limit of the US administration. The Pakistani team did not pitch for the bond and returned empty-handed.

Why did Pakistan have to abandon its transaction? Are the economic managers aware of the consequences of such a colossal failure for the country? One thing is clear from the perspective of the economic managers: who cares about the country? They are there to improve their resumes.

What is an exchangeable bond? The country issues a normal sovereign bond with an option that the bondholder can convert the bond into common shares. The transaction under discussion provided an option to bondholders to convert their bonds into OGDC shares. The advantageous thing about such a bond is that it has the option for conversion of debt into portfolio investment.

There are many reasons for the failure of this transaction. Firstly, the timing for floating the bond was highly inappropriate. This is summertime, when investors close their books and go for vacations. Secondly, the international economic environment, particularly the persistence of the Greek debt crisis and the emergence of issue pertaining to enhancing the debt limit of the US administration have created severe uncertainty in the international debt-capital market.

Thirdly, Pakistan’s own economic fundamentals are weak. Why would anyone invest in a country’s paper whose debt is rising, budget deficit is averaging over six percent of the GDP, high double-digit inflation continuous persists for the last 45 months, and growth is slowing to an average of 2.6 percent per annum over the last four years. Fourthly, Pakistan’s relations with the IMF and other development financial institutions (DFIs) are not smooth. Fifthly, Pakistan’s relations with the United States are also on a bumpy ride. For an emerging market country, its relationships with the US, the IMF and the DFIs are critical in attracting global investors to invest in its paper.

Sixthly, Pakistan’s domestic political and security environment are not conducive to attract global investors to invest in Pakistani paper. Seventhly, the Pakistani team involved in this transaction, barring one member, was quite immature and had no idea whatsoever about the transaction. All these factors have contributed to the failure of the transaction, damaging the reputation of the country and OGDC. In order to save face, the economic team could call this transaction “non-deal road show.” But the international capital market participants are not novices. Word has already travelled across the globe that Pakistan has failed to find takers for its paper.
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It is in this perspective that Pakistan floated its paper from February 2004 to May 2007. Each time the Pakistani paper was oversubscribed substantially. Pakistan emerged as one of the few countries which successfully floated a 30-year bond. This simply reflected the confidence of global investors in Pakistan’s economic management....

http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=54874&Cat=9
Riaz Haq said…
What a difference 3 years under PPP-led feudal democracy have made.

The failure of the recent bond offering is a serious setback that proves yet again the utter incompetence of the economic team and lack of international investor confidence in the current PPP govt.

It stands in sharp contrast to Pakistan's multiple successful bond offerings from February 2004 to May 2007. Each time the Pakistani paper was oversubscribed substantially. Pakistan emerged as one of the few countries which successfully floated a 30-year bond. This simply reflected the confidence of global investors in Pakistan’s leadership under President Musharraf.
Riaz Haq said…
Here's The Express Tribune story on Pakistan's decision to cancel $500m bond offering:

Two (Pakistan) government teams, which went to London, Singapore and Bangkok for holding road shows, have come back. They did not pitch the bonds at investors, instead restricted the presentations to the state of Pakistan’s economy, said one of the officials who travelled abroad for the road shows.

Another official, who also took part in the road shows, said foreign investors told the visiting teams that capital markets were nervous at this time because of a couple of international developments. They proposed that Pakistan should wait until the Greece debt crisis and issue of increase in debt limit for the Obama administration are resolved.

“In an effort to keep the budget deficit at manageable levels, the government wants to float $500 million worth of bonds before June-end,” said a spokesman for the finance ministry. Economists and a parliamentary panel have advised against the transaction, arguing that long-term assets cannot be consumed to settle short-term liabilities.

Sources in the Privatisation Commission told The Express Tribune that the government suddenly decided to convert the road shows into a ‘no-deal’ event, where it would not disclose the size of the bonds and the indicative interest rate it wants to pay.

Despite questions put up by international investors, the teams did not disclose details of the bonds. A Privatisation Commission official said the investors were keen to know the coupon price but the officials remained tight-lipped.

The Cabinet Committee on Privatisation has approved the term-sheet of the exchangeable bonds with an indicative mark-up ceiling ranging between 6.5 and 8.5 per cent.

Sources said international investors expressed interest in the bonds, as they were keen to invest in the energy company. However, some of them raised questions about Pakistan’s relationship with the International Monetary Fund (IMF). The Fund has suspended the $11.3 billion bailout programme since May 2010 after the government failed to meet some conditions.

IMF and European Union approved a 110-billion-euro bailout package for Greece last year but have withheld payment of a tranche of 12 billion euros that will help Athens pay its debts coming due by September. The international lenders have asked Greece to first place deep cuts on spending, prompting riots across the country. The Greek parliament on Tuesday voted for reforms but still IMF has not disbursed the tranche.

On the other hand, the United States too is coping with a crisis to avoid defaults on payments as the Obama administration reached its borrowing limit of $14.3 trillion on May 16. The administration sought an increase in the debt limit to avoid default that was overwhelmingly rejected by the House on May 31, reported the ....
Riaz Haq said…
Here's an interesting Op Ed by Kamal Monnoo, a Pakistani industrialist, as published in The Nation:

Agreed, that some of the macro-indicators in Pakistan are showing healthy trends or resilience, exports are up, current account deficit is down, remittances are climbing, reserves are stable and the Pak Rupee is holding out, but gauging from the manufacturing and productivity figures over the last two quarters could Pakistan’s economy be finally sliding into a serious recession? Riding on the back of some positive figures, the economic managers have thus far not only been blowing their own trumpet of success, but also literally ignoring and mocking their critics, who have tried to draw their attention to the missed opportunities and rather weak economic scaffolding that can simply crumble one day without warning like a house of cards!
Based on industrial production and productivity (especially in the small and medium enterprise sector) Pakistan’s economy contracted by nearly 4 percent - much more than expected - for at least two quarters running now, which basically means that technically we have already entered recession. Going by this, the big question actually should be that does the country have the political and economic will to fight its way out? The data underlines how the worst natural disaster (floods) to hit Pakistan in decades has foiled all hope of recovery and how the government’s addiction to borrow and the absence of visionary economic policies have contributed to the decline leaving the country in a vicious trap of high debt and a low growth amidst a rapidly rising population.
The global scenario is not helping either. Serious downturns both in the United States (where the predictions of recovery continue to be proven wrong) and the Western European economies, the two main markets for Pakistani goods, mean that the coming months for Pakistani exporters will be even tougher. All political endeavours on ‘trade not aid’ and preferential ‘market access’ in lieu of our help in the war on terror have also not been fruitful so far. What this basically tells us is that to avoid sinking we need to look inwards and start taking our own measures to embark on a path of economic recovery before the recession turns into an economic quicksand. Time and again, I have pointed out to the examples of China, India and Bangladesh, who have consciously maintained focus on manufacturing at home as their ticket to sustained economic activity and job creation. To help keep their engine of the industry running all related state and private sector institutions, banking/financial, power and energy, human resource, commerce and trade, have played their due role.


http://nation.com.pk/pakistan-news-newspaper-daily-english-online/Opinions/Columns/29-Jun-2011/Is-economy-entering-recession
Riaz Haq said…
ATOL reports yet another quick resignation from Pakistan's economic team:

KARACHI - Shahid Kardar's resignation as governor of the State Bank of Pakistan this week after less than a year in the job sends out another deeply negative signal on the country's economic management and further erodes belief in Islamabad's commitment to fiscal reforms demanded by the International Monetary Fund (IMF).

Finance Minister Abdul Hafeez Shaikh is making last-ditch efforts to persuade Kardar to withdraw his resignation, which he submitted mid-week before leaving Islamabad for Lahore. Kardar returned to the capital on Thursday at Shaikh's request to iron out their differences, Dawn reported on Friday, citing an unnamed source.

Kardar was appointed central bank governor last September and is the second in succession to leave the post before completion of the three-year statutory term. His predecessor, Salim Raza, quit for personal reasons in June 2010, although commentators at the time said his resignation was a response to efforts to curtail the central bank's independence. Kardar will remain central bank governor until his resignation is officially accepted, the Wall Street Journal reported.

Critics say the two resignations in quick succession, and Shaukat Tarin's resignation as finance minister in February last year, reflect a failure by the government to take management of the economy seriously. The Pakistan People's Party (PPP)-led government has gone through four finance ministers, five finance secretaries, four deputy chairmen of the Planning Commission and now possibly three central bank governors since it came to power in September 2008.

Concern that Kardar's departure will add to confusion among international organizations such as the IMF as to who has authority to deal with issues that include increasing tax revenues and cutting the government's heavy dependence on loans was downplayed by Sakib Sherani, a former economic adviser to the Finance Ministry.

"The IMF deals with institutions and not individuals so it's likely the acting governor will attend IMF meetings," he said, according to a Reuters report. "What's critical for the markets is who his successor is and why he resigned."

Such pre-term departures from the central bank "serve as a jolt to the banking and finance industry in the country, as the entire industry adopts a 'wait-and-see' strategy", The News reported economist Ashfaque Hassan Khanas as saying.

Kardar resigned amid reports suggesting he had developed serious differences with top state functionaries, according to The Express Tribune. Kardar is reputed to have given the government a hard time at cabinet and economic coordination committee meetings.

Even so, his critics claim he has been unable to exert the central bank's independence. His inability to have a bank amendment act passed in its original shape meant the government approved a "toothless" act, maintaining the Finance Ministry's hold over the central bank.

Pakistani officials, including the central bank governor, are due to meet with an IMF team later this month. Kardar has been supporting fiscal reforms demanded by the IMF, urging a broadening of the tax base and gradual elimination of untargeted subsidies.

He recently called for better debt management by the government to contain the fiscal deficit. The IMF since August 2010 has suspended a US$11.3 billion loan program, initially agreed late in 2008, as Islamabad drags its feet on introducing tax reforms, raising power tariffs and cutting subsidies.


http://www.atimes.com/atimes/South_Asia/MG16Df03.html
Riaz Haq said…
Pakistan to end IMF program, reports Dawn:

..The government’s inability to implement three major economic policy commitments — limiting fiscal deficit to 4.7 per cent of GDP, introducing integrated value added tax (VAT) and power sector reforms — will lead to technical completion of an unsuccessful $11.3 billion programme with the International Monetary Fund (IMF) on September 30, according to Finance Minister Dr Abdul Hafeez Shaikh.

This is the eighth programme with the IMF to conclude on an unsuccessful note. On the eve of the departure of Pakistan’s economic team for Washington to attend annual meetings of the IMF and World Bank, the finance minister told journalists that Pakistan would not waste its energy on revival of the incomplete programme or seek a fresh programme owing to a comfortable external balance of payments position.

He, however, said the government would stay on course on power sector reforms and macroeconomic adjustment and stabilisation programme and take steps so that it has reasonable credibility to return to the IMF programme with ease in case of any difficulty with external account.

--

Officials said the government might have to increase electricity tariff by 10-12 per cent if it succeeded in pushing forward the power sector reforms to reduce subsidies. The Deputy Chairman of the Planning Commission, Dr Nadeem ul Haque, said he could not even imagine the quantum of tariff increase required to be introduced in case reforms failed to progress because the power sector’s financing gap stood at about Rs250 billion this year.

Officials said the government had committed to the IMF to contain the fiscal deficit below 4.7 per cent of the GDP after the last year’s floods, which was later revised to 5.3 per cent of the GDP. However, the government could not meet even the revised fiscal deficit limit which officially exceeded 5.9 per cent at the end of the financial year on June 30 this year.

The government also could not introduce the value added tax in an integrated form and then it could not show a good performance on power sector reforms which also contributed to higher than anticipated fiscal deficit.

The official said both the government and the IMF understood that spending energy on revival of existing programme for a couple of billions of dollars were of no use.

The government’s comfortable feeling stems from anticipated $37 billion earnings from a five per cent growth in exports and strong workers’ remittances during the current fiscal year, enough to meet the country’s foreign exchange requirements with a current account deficit of about 1-2 per cent.

The officials said the government would have to repay $1.2 billion to IMF during the current year in two instalments and it estimated a gap of $500 million to a maximum of $2 billion during the year.

The finance minister tried to explain how the government could remain fiscally responsible in the absence of an IMF programme when elections were fast nearing. Reminded that the previous government had given up the IMF programme prematurely which later led to a freezing of power tariffs and build-up of oil-related subsidies and that the current government was also following the same path ahead of elections to leave a poor economy for the next government, the minister said elections were never discussed in any official meeting.


http://www.dawn.com/2011/09/17/pakistan-to-end-imf-programme.html
Riaz Haq said…
Here's the latest IMF assessment of Pak economy, as reported by The News:

ISLAMABAD: The International Monetary Fund (IMF) on Saturday said that Pakistan’s economy is braving serious challenges of an energy crisis and fast dwindling investment that is why it needs to ramp up efforts to carve out a long-term recipe to stimulate growth and reduce rising unemployment.

Pakistan’s economy is exposed to the worst effects of the floods and appalling security. The government has though undertaken many economic reforms, yet there are many serious challenges of energy crisis and dwindling investment.

Adnan Mazarei, Assistant Director of IMF for Middle East and Central Asia, after a seminar on “Revival of Pakistan Economy” stated this during a press briefing here on Saturday.

Mazarei expressed his dissatisfaction over the government’s performance in the energy sector and asked it to restructure the power sector to make it turn around. “The broadening of the tax base is also one of the biggest challenges the Pakistan economy is braving as the political consequences also negatively impact on the economy and people avoid paying taxes because they wanted an honest government and some dividends in return.”

He said that fiscal imbalances are also needed to be addressed. “Pakistan needs inclusive growth and employment generation as well as better distribution of resources and lowering of poverty rate to ensure equitable benefit to the people.”
-------------
Finance Minister Dr Abdul Hafeez Sheikh said that role of the government representative during the day-long seminar was to listen to the economists, business community and development partners and share with them the steps taken for the economic reforms in the country. He said the economic team held very constructive discussion with the IMF during Article IV discussion in Dubai on economic reforms and about way forward policy mix to move on to high growth path.

Hafeez Sheikh said that first four months of the current fiscal year were very positive with exports going over 6 billion dollar which were 23% more than the same period of previous year and remittances 4.2 billion dollars, 23% up by the same period of last year. The minister said the growth in taxes during the first four months was 28% with total collection of Rs509 billion compared to the same period of last year.


http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=10412&Cat=13
Riaz Haq said…
Here's an excerpt from an Op Ed by Dr. Ashfaque Khan published in The News:

Reviving the economy will require addressing both near and medium-to-long term economic challenges. The solution to these challenges boils down to restoring macroeconomic stability on the one hand and promoting economic growth through growth critical reforms on the other.

Let me share my thoughts on these economic challenges. For addressing near term economic challenges, the commitment to fiscal discipline is a pre-requisite. A sound fiscal position is essential to achieving macroeconomic stability, which is increasingly recognised as a critical ingredient for promoting strong and sustained economic growth and lasting poverty reduction. An adequate level of revenue generation is sine qua non for the public policy to fulfil growing expenditure requirements.

The thrust of revenue mobilisation must include reducing tax rates, broadening the tax base, shifting the incidence of taxes from imports and investments to consumption and incomes, and providing a congenial environment to increase tax compliance. Every sector of the economy must be brought under the tax net. An equitable taxation system demands that income originating from any sector, if it crosses the threshold level, must be taxed.

Potential areas which can be brought under the direct tax net include agricultural income, incomes of doctors, lawyers, beauty parlours, chartered accountants, wholesalers and retailers and transporters to name a few. Improving withholding tax regime would increase the government’s tax revenue immensely. Taxes are being collected by withholding tax agents but are not being deposited in the government’s treasury. I am glad that the FBR has taken note of this and is making efforts to address this issue.

On the expenditure side, the government will have to take a bold decision as to the future of the rotten PSEs. In particular, how long can the government bail out these bleeding institutions from taxpayer money? The time has come to offload some of them even at a rupee each and appoint the best team available to manage the others. The government can save at least over Rs300 billion which can be spent on millions of defenceless poor and improving the country’s physical and human infrastructure.

Inept handling of the power sector has resulted in the accumulation of unsustainable circular debt. By raising the power tariff alone, the government has caused circular debt to balloon. Raising the power tariff is tantamount to raising tax rates. It is common knowledge that if we keep on increasing tax rates people will avoid paying taxes. Similarly if we keep on raising power tariffs it will encourage people to use unfair means to avoid paying electricity bills. As long as there are line losses and power theft, the issue of circular debt will always be there.

The government will have to reduce fiscal deficit from 6.5 percent of GDP last year (2010-11) to three percent by 2013-14. This can be achieved, provided there is commitment to fiscal discipline. Reduction in fiscal deficit will reduce the government’s borrowing requirements which in turn will help the SBP to reduce interest rate thereby freeing more credit for the private sector. This would also help the government to lessen its borrowing from the SBP and to moderate inflation.

Restoring fiscal discipline would help maintain price stability provided the government maintains moderation in enhancing government administered prices such as support price of wheat, and power and gas tariffs. Mobilising more resources through taxation on POL products would not help in reducing inflation. Thus, reducing budget deficit, moderation in government administered prices and maintaining exchange rate stability would be critical to bringing inflation down to a single-digit...


http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=78636&Cat=9
Riaz Haq said…
Here's a Businessweek report on IMF's assessment of Pakistan's economy:

Pakistan faces a “challenging” economic outlook and should seek to contain its deficit while adopting a cautious monetary policy, the International Monetary Fund said after an annual review of the country’s policies.

Economic growth is expected to reach about 3.5 percent for the fiscal year started July 1 and inflation is forecast to slow down, the Washington-based IMF said in a press release today.

Still, “the external current account balance is projected to return to a deficit, and global risk aversion and security concerns may limit capital inflows,” the IMF mission said. Beyond fiscal and monetary policies, “a responsive exchange rate would reduce vulnerabilities, contain inflation and protect Pakistan’s international reserve,” the fund said.

An $11.3 billion loan program to Pakistan expired in September with no payments disbursed since May 2010 because the country didn’t meet the conditions attached to it.

The IMF mission and Pakistani authorities, who met in Dubai and Islamabad Nov. 9-19, also discussed policies for the medium term, including changes to the tax system and in the energy sector.

A detailed report of Pakistan’s economy will be examined by the IMF board in late January, the mission said.


http://www.bloomberg.com/news/2011-11-22/pakistan-faces-challenging-outlook-may-grow-3-5-imf-says.html#
Riaz Haq said…
Here's an Express Tribune story on a discussion at Inst of Business Admin in Karachi, Pakistan:

A vigorous difference of opinion among technocrats, economists and corporate leaders on a number of socio-economic issues was witnessed during an interactive session held at the Institute of Business Administration (IBA) on Saturday. And at the end it was unclear whether democracy was the answer, or a dictatorship, as advocates for both arguments came up with pretty convincing logic.

Speaking at the session organised by IBA in collaboration with Blinck, a youth resource group, under the title of “New Year Resolutions for the Economy of Pakistan,” panellists candidly expressed disagreements over the questions of foreign aid, democracy and the interplay of policy-making and implementation at the national level.

“Many people think that a non-democratic set-up is a panacea for the economic problems of Pakistan. They’re wrong. A non-democratic government is not sustainable,” said Ishrat Husain, former governor of the State Bank of Pakistan, who is currently serving as dean and director of IBA. “Democracy is slow and messy. It takes two steps forward and four steps backwards. Yet it’s the only option. The democratic process shouldn’t be interrupted.”

Husain said military regimes do make an extra effort in the beginning to improve the economy because they have not yet developed a constituency of their own. “But later on, they start making compromises.”

Claiming that a democracy needs low poverty and high literacy rates to prosper, Gillette Pakistan CEO Saad Amanullah Khan said Pakistan had only two eras of development: first, in the early 1960s, and second, during the first three years of the Musharraf government. “I don’t care if a dictator is there as long as he revamps the economy,” Khan said.

He said that the idea of a government led by technocrats that could bring the economy back on its feet had its relative merits. Khan emphasised the need for adopting a national vision for long-term growth, adding that the entire nation should work towards its realisation. “Go to Proctor & Gamble or Gillette, and they’ll tell you their five-year goals in detail. But ask a government representative what the vision for Pakistan is for the next five years, you won’t get any definite answer.”

Disagreeing with Khan, Husain said Pakistan did not need any more “visions,” as the problem existed in their implementation only. “The country is full of pious documents. These are beautifully written policy papers that nobody reads. We all agree on the substance of policy, but the implementation is the real issue.”

Responding to a question, former Asia editor for The Economist Simon Long said it was wrong to attribute Pakistan’s dismal economic performance of six decades to its culture or laid-back attitude to work. He said that 35 years ago people often assumed China’s poor economy was a consequence of Confucianism. He said it was now obvious that Confucianism had nothing to do with the slow growth in the economy of China.

Talking about Pakistan’s economic indicators, Long said an economy with a tax-to-GDP ratio of less than 9% was not sustainable. He said it was hard for him to understand how Pakistan’s economic managers would bring down the fiscal deficit in next two to three years.

In response to the comment of a business student that Pakistan should stay away from all kinds of foreign aid and assistance to achieve self-reliance, Husain said the assumption that the Pakistani economy depended on US aid to survive was wrong. “Isolationism won’t solve our problems. Transfer of knowledge and technology is important. You’ve to be outward-oriented.”


http://tribune.com.pk/story/301827/failed-rescue-act-too-many-visions-for-pakistan/
Riaz Haq said…
Here's Wall Street Journal on Bilawal Bhutto's first ever Op Ed published in Pakistan's Express Tribune:

Mr. Bhutto Zardari uses his op-ed, published in the English-language Express Tribune newspaper, to enumerate what he sees as his mother’s achievements, including pushing women’s rights. The PPP in the 1980s could have used its popular position to unseat the military-run government of the time, but did not do so, he writes. “The PPP has always been careful to distinguish between the army as an institution and the dictator who abuses his position,” he says.

It’s a challenge to the military to stay out of politics. And it seems that army chief Gen. Ashfaq Parvez Kayani for now has no designs to take over the government.

Still, the PPP is a lot less popular in Pakistan than it was in Ms. Bhutto’s day and you sense her son feels that. In many places of the op-ed, it feels as if he is writing as the head of an opposition party, not co-chairman of the ruling PPP.

“We can only dream of what might have been had she lived,” he writes at one point of his mother.

He enumerates the challenges facing Pakistan –from education, to energy shortages to the investment-starved economy – but offers no solutions. It’s easy to forget reading it that the PPP is in power.


http://blogs.wsj.com/indiarealtime/2011/12/27/bilawal-bhuttos-first-pakistan-op-ed-marks-mothers-death/?mod=google_news_blog

Here's an excerpt from Bilawal's Op Ed:

What we do know is that there are 86,000 more schools because of Shaheed Benazir Bhutto. That, under her government foreign investment quadrupled; energy production doubled; exports boomed. Under her government, 100,000 female health workers fanned out across the country, bringing health care, nutrition, pre and postnatal care, to millions of our poorest citizens. It was under her government that women were admitted as judges to the nation’s courts, that women’s police departments were established to help women who suffered from domestic violence and a women’s bank was established to give micro loans to women to start small businesses. It was under Shaheed Benazir Bhutto’s leadership that cell phones, fibre optics and international media were introduced, and the Pakistani software industry blossomed. And it was on her very first day as prime minister, that all political prisoners were freed, unions legalised and the press uncensored. It was an amazing record of accomplishment, made even more remarkable by the constraint of aborted tenures, by constant pressure from a hostile establishment and presidents with the power to sack elected governments.

http://tribune.com.pk/story/312290/on-the-fourth-death-anniversary-of-my-mother/
Riaz Haq said…
Here's a Reuters report on increase in Pak forex reserves:

Pakistan’s foreign exchange reserves rose to $16.85 billion in the week ending Dec. 30, compared with $16.77 billion the previous week, the central bank said on Thursday.

Reserves held by the State Bank of Pakistan (SBP) were flat at $12.81 billion, unchanged from the previous week, while those held by commercial banks rose to $4.04 billion, compared with $3.96 billion the previous week.

Foreign exchange reserves hit a record $18.31 billion in the week ending July 30, but have since eased due to debt repayments.

Reserves were boosted in June last year by inflows of $411 million, including a $191.9 million loan from the World Bank, and a $196.8 million loan from the Asian Development Bank.

Higher export proceeds and a record inflow of remittances have also helped support Pakistan’s foreign exchange reserves.

According to official data, remittances rose 18.33 per cent to $5.24 billion in the first five months of the fiscal year (July-June), compared with $4.43 billion in the same period a year earlier.

However, they fell slightly to $923 million in November, compared with $926.89 million received in November last year.

Islamabad has to start repaying an $8 billion International Monetary Fund loan in early 2012. Without additional sources of revenue, that will put further pressure on Pakistan’s foreign exchange reserves.


http://www.dawn.com/2012/01/05/pakistani-forex-reserves-rise-to-16-85-billion.html
Riaz Haq said…
Here's a report on Fortune magazine's interview with Pakistan's former leader Shaukat Aziz:

Despite the regular eruptions of bad news from Pakistan, Shaukat Aziz, a former finance and prime minister there, remains cautiously bullish about his country's prospects, including the peace dividend that could come with the orderly exit of U.S. troops from Afghanistan. But that depends, he says, on a Marshall Plan-like reconstruction of Afghanistan -- and the U.S. delivering on tribal economic development plans.

That might seem overly ambitious for distracted Western capitals with tapped out coffers. But the 'mostly-sunny' technocratic vision is not unusual for Aziz, a former Citibank (C) executive who presided over strong growth as finance minister after General Pervez Musharraf staged a coup in 1999. (Musharraf just announced he would shortly be returning to Pakistan -- and risking arrest -- from Dubai where he has been since leaving office.)

Aziz, 64, was elected prime minister in 2004 (surviving an assassination attempt while campaigning) and was the first of 23 predecessors to serve out a full term, until 2007. He took up residence in London soon after and now serves on the board of the British hotel chain Millennium and Copthorne Hotels, and as an advisor to the Blackstone Group (BX).

Aziz recently spoke with Fortune about the state of Pakistan's economy, how to rebuild Afghanistan, and why Pakistan deserves a free trade agreement with the U.S. Below is an edited transcript of that discussion.

It's been more than six years since Goldman Sachs (GS) recognized Pakistan among the Next Eleven newly industrialized countries -- inflation is up, investment is at a 40-year low, and infrastructure is deteriorating, particularly in the power sector. By just about any measure things are not particularly good, so what is the source of your optimism about the Pakistani economy?

The problems of the world economy have obviously leaked to Pakistan. Yes, investment is down, trade also, but in Pakistan's case a lot of this is due to the security situation, the war on terror. We have to pay a huge price in terms of damaging our investor confidence -- both domestic and foreign.

On the other hand, we should bear in mind that more than two-thirds of the population lives in rural areas and agriculture has done well, especially in cotton -- prices and exports are up and the farmer is relatively more comfortable.

The country's human capital is a strong suit, the Pakistani people are very talented, their skills levels are impressive and they are hard-working. There's a huge number of Pakistanis working overseas and we can export a few more million and there won't be an iota of difference because there is a whole pipeline of trained – and untrained - people coming.
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http://finance.fortune.cnn.com/2012/01/09/pakistan-shaukat-aziz/?section=magazines_fortune
Riaz Haq said…
Here's a report on Fortune magazine's interview with Pakistan's former leader Shaukat Aziz Part II:

You mentioned the need for good management. How would you assess the current management of the economy? I ask that in light of the lapsing of the stabilization plan with the IMF.

Being out of the IMF -- obviously this reflects the desire of the government to have more flexibility to pursue its reforms. The IMF program does bring with it certain macroeconomic discipline and that's beneficial, but I also believe in economic sovereignty. You need good governance and good management, but abdicating the economy to the IMF is not the way to succeed. What we need is growth and job creation, like every other country in the world.

The disagreement with the IMF is at least in part related to tax collection, which has been notoriously weak in Pakistan. There is a lot of concern whether Pakistan can muster the political will to make tough reforms, partly because of self-serving elites among the political class that have brought the country to the point of being nearly a failed state.

No, I think that's not true. The country is large -- roughly 180 million people -- and it's functioning. It has many challenges -- governance issues, transparency and management issues -- on top of the security issues that have cost us dearly. But the country is functioning. Obviously it could function better, but it's not come to a grinding halt. Life is going on.

Don't expect an Iranian oil crisis

Clearly, the country is facing a challenging situation financially, and tax reform has been an issue. It's true there is low tax compliance, but you have to look at the political impact -- not just the economic impact -- of taxes. The tax system has been around for a long time. Trade-offs have to be made; indirect taxes -- sales tax and customs duties -- have grown because of that, quite handsomely. Income tax is also up, but that is mostly out of big corporations' profits.

The key question is: How do we get growth? The pie has to get bigger for you to collect more taxes. You can't squeeze the lemon if there's no juice in it.

Moving on to Afghanistan, the U.S. is being more realistic about its transformative agenda and the Obama administration seems to be determined to wind things down. How do you see this playing out?

I think this is the right way to go. The presence of foreign troops generates ill effects and the sooner they are gone, the better. But the exit strategy has to be very carefully choreographed.

We need a Marshall Plan-like approach, a massive program for reconstruction. The World Bank, the Asian Development Bank, the sovereign banks, and many individual countries, have to be involved. There was a very successful meeting recently of Turkey, Pakistan, Afghanistan and others in Istanbul. People need to see a future, that tomorrow will be better than yesterday. The people of Afghanistan will have to work hard themselves to leverage this opportunity. It's a good thing that the U.S. and the Taliban are talking -- all stakeholders have to be included. I'm cautiously optimistic that adversity can be changed into an opportunity if it is funded well.

U.S.-Pakistan relations are generally refracted through the prism of Afghanistan but also through the fact that Pakistan is a nuclear power.

I think certainly the relationship is opportunistic on both sides. But I think the U.S. is pursuing a policy of both engagement and containment of Pakistan at the same time. We are both a friend and an adversary. Therein lies the conflict in the relationship. There is a trust deficit and when it comes to the nuclear issue there is a fundamental problem.....


http://finance.fortune.cnn.com/2012/01/09/pakistan-shaukat-aziz/?section=magazines_fortune
Riaz Haq said…
Here's a report on Fortune magazine's interview with Pakistan's former leader Shaukat Aziz Part III:

Investing after the Arab Spring: Unfinished business

When India was drawn into the Nuclear Suppliers Group (a multilateral anti-proliferation organization) Pakistan should have been included too. The United States has to decide: are we in the tent or outside? That was a major missed opportunity. Inclusion in the NSG comes with a lot of responsibility and obligations. Engagement becomes more formalized, providing a forum for all key players to be around the table to discuss and solve issues. We are a nuclear power – there is no such thing as a halfway house here - and to deny it doesn't help anybody. It's not too late to rectify this. It would help the whole atmosphere in South Asia. If you keep people out of the tent, things can suddenly move the other way.

You've said that Pakistan would be better off with a free trade agreement with the U.S., instead of aid, but given the state of US-Pakistan relations that seems very unlikely.

I'm not optimistic about a free trade agreement because even when Congress was very friendly, they couldn't get things through, even things which were promised like the Reconstruction Opportunity Zones in the border area of Afghanistan and Pakistan, which was important for all three countries. The idea was to give duty-free access to the U.S. market for any goods produced in the tribal areas. Obviously when you put up a factory there the cost of production will be high, initially at least, because there is no infrastructure. This was a well-conceived and well-designed way of creating jobs. Otherwise they will have no incentive to put down their guns. Congress has approved other special market access programs like this for Haiti and Jordan, and maybe others. It was promised by the U.S. five or six years ago but nothing happened.

We really need to re-focus on these things so that when peace returns in the area, especially in the border areas, people will have alternatives for making a living. Security is not a big issue. It can be done by local people. You don't need expatriates; there are already plenty of entrepreneurs in that area. You're talking about very small numbers for the textile market, but symbolically it's very important because it will give people hope. This would be a good way for the U.S. government and Congress to send a message to people in the border areas: we want you to have a better, peaceful future.....


http://finance.fortune.cnn.com/2012/01/09/pakistan-shaukat-aziz/?section=magazines_fortune
Riaz Haq said…
Here are excerpts from The Nation newspaper story on World Bank's Global Economic Prospects report for 2012:

The World Bank has observed that Pakistan’s weak economic growth is due to worsening security condition accompanied by greater political uncertainty and a breakdown in policy implementation. It predicted country’s economic growth at 3.9 per cent during the year 2012.
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According to the report, GDP growth rate in Pakistan would be 3.9 per cent during the year 2012 that was 2.4 per cent in 2011. Pakistan’s weak growth outturns are also tied to the worsening security situation, accompanied by greater political uncertainty and a breakdown in policy implementation. Infrastructure bottlenecks, including disruptions in power delivery, remain widespread. However, a notable bright spot has been the increased exports, evident particularly in the first half of 2011, led by textiles that surged 39 per cent in the first half of the year.
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Industrial production surged to grow at a robust 32.1 per cent annualised pace during the three months ending in October (3m/3m, at seasonally adjusted annualised rates), after falling at 9.1 and 10.1 per cent rates during the first and second quarters, respectively. Part of the strengthening in growth reflects base effects due to the widespread flooding that had hampered activity in the second half of 2010. Indeed, because the floods occurred in July and August 2010, GDP growth on a fiscal year basis (ending June-2011) slowed to 2.4 per cent from 4.1 per cent of the fiscal year 2009-2010.

Worker remittances remain a critical source of foreign exchange in South Asia. Remittance inflows to Pakistan rose by an estimated 25 per cent in 2011, partly in response to the widespread flooding in the second half of 2010. When measured in local currency terms, given the appreciation of the dollar, remittances inflows to the region grew by a more vibrant 13 per cent in 2011 (median rate). Adjusting for inflation, worker remittances inflows to the region grew by a less robust 5.8 per cent (median rate) in local currency terms.


http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/national/19-Jan-2012/pakistan-s-economy-to-grow-at-3-9pc-wb

http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1322593305595/8287139-1326374900917/GEP_January_2012a_FullReport_FINAL.pdf
Riaz Haq said…
Here are excerpts from a Dawn report on World Bank's assessment of Pakistan's economy:

...Pakistan is South Asia’s second largest economy, representing about 15 per cent of regional GDP.
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The portion on Pakistan points out that the country’s economy firmed in the second half of 2011. Industrial production surged to grow at a robust 32.1pc annualised pace during the three months ending in October, after falling at 9.1 and 10.1pc rates during the first and second quarters, respectively.

Part of the strengthening in growth reflects base effects due to the widespread flooding that had hampered activity in the second half of 2010. Since the floods occurred in July and August 2010, GDP growth on a fiscal year basis (ending June-2011) slowed to 2.4pc.

The report notes that Pakistan’s weak growth outturns are also tied to “worsening security conditions, accompanied by greater political uncertainty and a breakdown in policy implementation”.

The report also notes that “infrastructure bottlenecks, including disruptions in power delivery,” remain widespread.

A notable bright spot has been a strengthening of exports, evident particularly in the first half of 2011, led by textiles that surged 39pc in the first half of the year.However, like India, Pakistan’s export volume growth saw a sharp fall-off in October.

Indeed, Pakistan’s export volumes fell to a minus 46pc rate in the three-months ending October.

Along with an upswing in worker remittances inflows, robust exports have supported Pakistan’s external positions and contributed to an improvement in the current account from a deficit of 0.9pc of GDP in 2010 to a surplus of close to 0.5pc of GDP in the 2011 calendar year.

The World Bank notes that monetary tightening in Pakistan brought about positive real lending rates in early 2011 as well, the first time since late 2009.
------------
The bank points out that for South Asian nations, including India and Pakistan, domestic crop conditions and price controls are more important determinants of domestic food price inflation.
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Regional monetary policy authorities face several challenges in reducing inflation.

More recently, currency devaluation has contributed to inflation as well. In Pakistan, monetary authorities have also been monetising the deficit, complicating the efficacy of other monetary policy efforts to reduce inflation.

A key factor working against monetary policy efforts is the overall stance of fiscal policy, which despite some consolidation, remains very loose.

Monetary authorities in Pakistan have responded to persistent price pressures by raising policy interest rates and/or introducing higher reserve requirements.

Lower revenue growth has contributed to larger fiscal deficits in Pakistan. Terms of trade losses are estimated at about 1.9pc of GDP for the region in aggregate. India and Pakistan saw negative impacts of close to 1.8pc of GDP – estimated January through September 2011 terms of trade impacts relative to 2010.

Remittance inflow to Pakistan rose by an estimated 25pc in 2011, partly in response to the widespread flooding in the second half of 2010.

International reserve positions in South Asia have generally improved since mid-2008. Latest readings of foreign currency holdings were equivalent to at least three-months of merchandise imports in Pakistan.
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A good crop year (2011-12) in much of South Asia and sustained high regional stocks are providing a buffer for grain prices and import demand in 2012....


http://www.dawn.com/2012/01/19/pakistans-economy-recovering-wb.html

http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1322593305595/8287139-1326374900917/GEP_January_2012a_FullReport_FINAL.pdf
Riaz Haq said…
Here's a Dawn report on ADB's assessment of Pakistan economy:

...After devastating summer floods caused economic growth to slow to 2.4 per cent in the 2010/11 fiscal year, ADB country director for Pakistan Werner Liepach forecast growth to pick up to just 3.6 per cent in 2011/12. The government targets an expansion of 4.2 per cent.

“Short-term there are huge challenges… (the) next few months will continue to be protracted as there are repayments and not enough inflows, reserves will go down,” Liepach said.

“But I don’t see a crash coming, and I don’t see the economy taking off either and that’s not good enough.”

There is grave concern amongst analysts about a possible balance of payments crisis as Pakistan’s current account deficit has widened to $2.154 billion in the first six months of the 2011/12 fiscal year.

Pakistan had a surplus of $8 million in the same period last year.

The deficit is likely to widen further in the coming months because of debt repayments and a lack of external aid.

The country’s foreign exchange reserves stood at $16.90 billion in week ending Jan. 13, compared with its record of $18.31 billion in July last year.

The pressure on reserves is likely to continue especially as IMF repayments start from next month.
---------
Pakistan has to repay IMF about $1.1 billion by the end of 2011/12 fiscal year.

“Pakistan has huge potential and not all is negative or gloom and doom,” said Liepach. “I am positive in the long term if right decisions are taken today.”

Pakistan has been criticised over its slow implementation of fiscal reforms which include elimination of energy subsidies and restructuring of the state owned utilities.

The government also received criticism for not being committed towards implementing the necessary reforms to bring the economy back on track.

“The people who we are talking to in the government, technocrats, they are committed and want to see the benefits and improvements in Pakistan, they are very sincere in bringing a change in Pakistan,” said Liepach.

“But when you move away from the technocrat level, that’s when it becomes more complicated. It is a complex decision making system.”

Focus on projects and delivery of results

ADB’s focus and therefore assistance largely now revolves around projects with four core areas, energy, urban services, water infrastructure and irrigation, and transport.

“We want to fight poverty through growth and right now our business is focused on implementation of projects and to get results on ground,” said Liepach.

ADB does not require a letter of comfort from the IMF for approval or disbursement of project-based assistance.

ADB has an envelope of $2.9 billion for energy for Pakistan until 2016, out of which $1.4 billion has been utilised and $1.5 billion remains to be drawn down by the government.

Pakistan’s power sector faces a shortfall that often peaks at 5,000 megawatts per day.

For urban services, the board has approved $300 million, out of which $260 million remains, water infrastructure and irrigation $900 million has been approved with about $400 million left to be drawn down and $1.1 billion has been approved for transport, and $700 million is left.

Government can draw down the assistance when a project is approved and made effective.

“It’s a success when power reaches families and industries or when water becomes available to the families etc,” said Liepach.


http://www.dawn.com/2012/01/20/pakistan-growth-challenging-dependant-on-reform-pace-adb.html
Riaz Haq said…
Here's a 2011 Dawn Op Ed on cement industry by Pakistan Cement Industry Association leader Tariq Saigol:

While the private sector performed magnificently whenever provided with an enabling environment, the response of the present government remains mired in confusion and inertia. Installed capacity was a paltry nine million tons in 1990, much of it being grossly inefficient as it was based on the outmoded wet process technology. As demand rose, the industry responded by launching a massive expansion programme. Over time, the installed capacity rose to nearly 44 million tons, a magnificent feat by any standards and a credit to the entrepreneurial spirit of the private sector.

However a number of adverse developments from 2007 onwards have brought the GDP growth to some two per cent. It is being reported by the media that the revised allocation after the latest cut, is a measly Rs180 billion. High inflation combined with slump in real estate and increase in the cost of production due to weakness of the dollar, resulting in a spike in coal prices, electricity and freight rates and accounting for 70 per cent of the cost, has adversely affected consumption while production cost soars, retarding construction activity in the private sector.

The current economic environment including low public spending has had disastrous consequences for the cement sector.

Local sales during the first half of the current fiscal year have witnessed an eight per cent year on year drop to around 10.1 million tons. Simultaneously, exports fell from 5.6 million tons to 4.6 million tons. The bad news does not end here. On top of low volumes, the average cement FOB prices fell to $48 per ton during the corresponding period— a level low enough to hardly break even.

Consequently cement sales through the sea route alone declined by about one third. Cement sales to India were also hard hit on account of non renewal of BIS certification (a quality control licence). Burdened with high energy and freight costs as well, the manufactures are desperate for some government support.

But no support is forthcoming. One would expect the government’s economic planners to appreciate the tremendous odds against which the industry is battling. If care of the cement industry is in short supply, then some thought may be given to the enormous exposure of the banks which have provided financing to the tune of $1.5 billion to the sector during 2003-2008.


http://www.dawn.com/2011/03/14/opportunities-missed.html
Riaz Haq said…
Here's a blogger' view Pakistan's cement industry:

Cement is one of the most important industries of Pakistan. Limestone and gypsum are the main raw materials for manufacturing of cement and they are present in abundance in Pakistan along with good supply of Natural gas. This great potential makes the country capable of producing cement not only for local use but also for export as well. Pakistan cement industry has exporting cement to the neighbouring countries like U.A.E, Afghanistan, India, Iraq and Russia.

At present there are 22 cement plants are operating in Pakistan with the production of approximately 9.403 million tonnes. Out of these 22 cement plants, 17 are private and 5 are publicr. 11 new plants are also in planning stage and the capacity of these plants is estimated around 12.988 million tonnes. The industry has achieved a growth of 32% with the domestic demand increasing by around 24.95% and the exports by nearly 111.86% according to the financial year end June 30, 2007 ratings. Recently the country has been able to export to some of the African countries as well.

Cement industry is divided into two main regions; the northern and the southern region. Northern region is producing 35.18 million tonnes and southern region is producing 8.89 million tonnes of cement per year.

Per capita consumption of cement is an indicator of rate with which any country is developing. Unfortunately per capita consumption of cement in Pakistan is less if we compare it with other developing countries. It is about 131 kg per person annually; whereas world average is about 270 kg. This less consumption is due to the negligence given to the construction sector. However in last few years consumption of cement showed some rise due to increased commercial activities, infrastructural development and increasing demand of constructing houses.

Local demand for the year 2007-2008 was 20 million tonnes. Pakistan has started exporting cement few years back and has earned repute as a premium quality cement producer in the global market in this short period. Pakistan exported around 7.716 million tonnes of cement in 2007-2008 and earned a foreign exchange of 459 million dollars. There is surely a great potential of growth in this industry in Pakistan.


http://pakistan360degrees.contentcreatorz.com/cement-industry-of-pakistan/
Riaz Haq said…
Pak threat to Indian science

Hindustan Times

Pakistan may soon join China in giving India serious competition in science. “Science is a lucrative profession in Pakistan. It has tripled the salaries of its scientists in the last few years.” says Prof C.N.R. Rao, Chairman of the Prime Minister’s Scientific Advisory Council.

In a presentation to the Prime Minister, Rao has asked for a separate salary mechanism for scientists. The present pay structure, he says, is such that “no young technical person worth his salt would want to work for the Government or public sector”.

He adds, “You needn’t give scientists private sector salaries, but you could make their lives better, by say, giving them a free house.”

Giving his own example, he says, “I have been getting a secretary’s salary for the last 35 years. But I have earned enough through various awards.

But I can raise a voice for those who aren’t getting their due.” Last year, Rao won the prestigious Dan David Award, from which he created a scholarship fund. So far, he has donated Rs 50 lakh for scholarship purposes.

The crisis gripping Indian science seems to be hydra-headed. “None of our institutes of higher learning are comparable with Harvard or Berkeley,” points out Rao. The IITs, he says, need to improve their performance: a faculty of 350 produces only about 50 PhD scholars a year. “That’s one PhD per 5-6 faculty members,” says the anguished Professor.

Rao fears that India’s contribution to world science would plummet to 1-1.5 per cent if we don’t act fast. At present, India’s contribution is less than three per cent. China’s is 12 per cent.

“We should not be at the bottom of the pile. When I started off in the field of scientific research at 17-and-a-half, I had thought that India would go on to become a top science country. But now, 55 years later, only a few individuals have made it to the top grade,” he laments.


http://www.hindustantimes.com/News-Feed/NM13/Pak-threat-to-Indian-science/Article1-124925.aspx
Riaz Haq said…
Here's a News Op Ed by Dr. Ashfaque H. Khan, Dean of NUST Business School:

...The government’s economic team would have us believe that the economy is moving in the right direction. According to the team, exports have touched an all time high at $25 billion and foreign exchange reserves have risen to $18 billion, they further contend that the tax collection has doubled, the current account shows a surplus, and economic growth is on a path of recovery. In addition, the new NFC Award is hailed as a great success.

On the other hand, four reports that appeared in the last two months on Pakistan’s economy have painted a rather dismal picture of the economy. These reports include the IMF Report under Article IV Consultation (February 2012), Moody’s and Standard and Poor’s (the two international rating agencies) reports (March 2012) and the Second Quarter Report of State Bank of Pakistan.
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The economic performance of any country is often assessed by the degree to which national outputs are growing. Economic growth is therefore the most critical indicator of any country’s economic performance. Higher economic growth on a sustained basis can bring the country in the limelight of the comity of nation. India is a classic example. India has maintained its economic growth in the range of 7-10 percent per annum since the mid 1990s and has drawn the attention of global investors and leaders which finally helped the country to join the league of the ‘rich man’ club – the G-20.

Pakistan sustained an average economic growth of 7.0 percent per annum for five years in a row (2002/03-2006/07) and drew the attention of global investors and Goldman Sach which included Pakistan in the ‘Next-Eleven’ club. Whenever a country is consistently growing in the range of 2.5-3.5 percent per annum, it loses the interest of global investors and prestige in the comity of nation.

Pakistan’s economy has been growing at an average rate of 2.9 percent per annum since 2007-08. It needs to grow by 7.0 percent annually to absorb two million new entrants in the job market. A growth of less than three percent in four years in a row cannot have created enough jobs for the new entrants, hence giving rise to unemployment and poverty. Pakistan’s growth performance would remain disappointing as long as fiscal indiscipline persists.------------

Moody’s report has linked the high debt burden with “low” government financial strength. A highly indebted country would see the persistence of macroeconomic instability, low economic growth, rising unemployment and poverty, low prestige in the comity of nations, and hence risk being overlooked by global investors and “friends”.

All the reports have termed financial indiscipline as the ‘mother’ of economic crisis. Persistence of large fiscal deficit is one of the critical sources of high and rising debt burden. Reducing fiscal deficit is central to addressing debt burden, safeguarding macroeconomic stability and laying the foundation for higher economic growth. A substantial increase in revenue is necessary to reduce fiscal deficit for which the implementation of RGST, improvement in withholding tax regime, bringing income originating from agriculture and services under a direct tax net, and improvement in tax administration and tax compliance are absolute necessary.

On the expenditure side, the resolution of the power sector ‘subsidy’ and rotten PSEs are a must to remove large drains of budgetary resources. Improvement in current NFC Award is sine quo non for a meaningful fiscal policy.....


http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=99759&Cat=9
Riaz Haq said…
Here's a summary of Pakistan's economy since 2008 as published in The Nation:

Pakistan’s macroeconomic indicators had shown a declining trend in last three years (fiscal years 2008-9 to 2010-11) mainly because of disastrous floods and also involvement in the war on terror.

According to the Poverty Reduction Strategy Papers (PRSP), Pakistan’s economy witnessed a sharp downturn in last fiscal year 2010-11 and recorded at 2.4 percent, whereas in year 2009-2010 the economy saw a rise in GDP growth i.e. 3.8 percent compared to the 1.7 percent of the year 2008-2009.

During the course of last three years, inflationary pressures have intensified and caused serious threats to macroeconomic stability. In fiscal year 2008-09, the observed inflation rate was 17.03 per cent that fell down to 10.10 percent in 2009-10 and then again witnessed a rise of 13.7 percent during the year 2010-11. However, GDP at current market price increased from Rs 12,724 billion in 2008-09 to Rs 18,063 billion in 2010-11.

The PRSP further revealed that investment as percentage of the GDP fell to 13.4 percent in fiscal year 2010-11 from 18.2 percent in 2008-9. The deceleration in investment owes mainly to the intensification of war on terror, the haphazard security environment and high profile killings over the last few years. On the contrary, the national savings as percentage of GDP showed some resilience and marked a growth of 13.6 percent in the FY 2010-11 as compared to FY 2009-10 in which growth was 13.1 percent. Despite this increase in growth rate, the national savings fell short of the targeted rates.

The nominal exchange rate (Rs/$) has been on an increasing trajectory over the last three years. The exchange rate reached a record level of 85 (Rs/$) in FY2010-11 as compared to 78.5 in FY2008-09 and 83.8 in FY 2009-10 (i.e. 78.5 & 83.8) almost meeting the projected PRSP nominal exchange rates. The population rate is on a continual rise since last three years, notably from 168.2 million in FY 2008-9 to 175.31 million in FY 2010-11.

Meanwhile, during the last three years, Pakistan’s fiscal position worsened considerably as its fiscal deficit rose to Rs 1194.4 billion in FY 2010-11 from Rs. 680.4 billion in FY 2008-9. The increase in current expenditures was at the cost of drastic cuts in development expenditures. The catastrophic floods that hit Pakistan slowed the economic growth drastically and posed grave challenges for limited revenues. The urgent additional spending to meet the humanitarian and reconstruction needs worsened the fiscal balance. Fiscal deficit as a percentage of GDP has seen a persistent increase in the last few years. Fiscal deficit rose from 5.3 percent in FY2008-9 to 6.6 percent in FY 2010-11.

A low and decreasing tax to GDP ratio and increasing public debt stock has imposed a constraint on fiscal stimulus to support revival of growth momentum needed for the economy. Pakistan is confronted with the issue of stagnant tax to GDP ratio; owing mainly to structural deficiencies in the tax and administration system.
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Exchange rate of Pak Rupee reflected stability during the course of three years as it depreciated nominally by 0.7 percent in FY 2010-11 against 4.7 percent in FY 2009-10 and 12 percent in FY2008-9. This improved stability in Pak Rupee/US$ is attributable to encouraging performance witnessed in the external account.


http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/business/28-Mar-2012/macroeconomic-indicators-show-declining-trend

http://www.finance.gov.pk/poverty/PRSP_II_ProgressReport_2008_09_2010_11.pdf
Riaz Haq said…
Here's a News report of losses at sta6e-owned Pakistan Steel Mills:

The Federal Cabinet that met here on Wednesday with Prime Minister Yousaf Raza Gilani in the chair turned down the loss making Pakistan Steel Mills’ (PSM) request for Rs9 billion to bail it out of financial crisis.



PSM, a few days ago, had moved a summary to the federal cabinet through the Ministry of Production to seek a Rs9 billion bailout package from the government as it was in severe financial crisis; and the Mills was running below 20 percent of its capacity. The cabinet deferred the Mills request until the next meeting of the cabinet.



It is worth mentioning that PSM remained a profit-making entity for seven years, from 2000 to 2007, but as the PPP-led coalition government came into office, the entity started accumulating billions of rupees losses and continues to nosedive. The Mills is spending about Rs1.2 billion a month under different heads, whether it is making profit or raking up losses. The giant holds a constant burden of 21,000 employees despite suffering from low productivity.



The Ministry of Production is also now distancing itself from this politically sensitive entity and believes that the Mills is more in control of the Cabinet Committee on Restructuring of State-Owned Enterprises, headed by the Finance Minister Dr Hafeez Sheikh, well-placed sources told The News.



Interestingly, last year in November, the federal minister for production Chaudhry Anwar Ali Cheema also gave a blatant statement by calling the Mills “nothing but a burden on the economy of the country” and had advised the government that it is better to get rid of it rather than feeding it with billions of rupees every year.



Official sources, while giving a blue print of the Mills performance, said that during 2007-08, PSM production attainment stood at 82 percent of its capacity utilisation and after that, it took a declining course to 64 percent in 2008-09, 40 percent in 2009-10 and 35 percent in 2010-11.



This year too, due to shortage of raw material including iron ore and coal, the Mills is running on less than 20 percent of its capacity.



As far as the sale of PSM products is concerned, it was recorded at Rs42.938 billion in 2007-08 and has been on the decline since then, with Rs34.340 billion in 2008-09, Rs23.832 billion in 2009-10 and Rs27.379 billion in 2010-11.



The last time PSM had fetched Rs2.38 billion in profit was in 2007-08, while after that it continuously racked up losses. In 2008-09, its losses were 26.53 billion in 2009-10 it was Rs11.52 billion and in 2010-11 it was Rs11.49 billion.



According to PSM data, during the first quarter (July-September 2011-12) it accumulated losses of about Rs4.3 billion.


http://www.thenews.com.pk/Todays-News-3-102456-Pakistan-Steel-Mills-denied-Rs9bn-bailout-package
Riaz Haq said…
Here's a BR story on FDI plummeting in Pakistan:

According to the latest data released by the State Bank of Pakistan on 15th May, foreign private investment in the country dropped to only dollar 595 million in July-April, 2012 as compared to dollar 1.622 billion in the corresponding period last year, showing a huge fall of over 63 percent.

Out of this, foreign direct investment (FDI) fell to dollar 667 million as against dollar 1292.8 million in the comparable period of 2011-12, while portfolio investment showed an outflow of dollar 71 million in sharp contrast to an inflow of dollar 329 million in the corresponding period last year.

Sector-wise, the most discouraging news was in the telecommunication sector which used to be the favourite area of investment of foreigners but witnessed a profoundly high net outflow of dollar 327 million of investment during the first ten months of the current fiscal as against an inflow of dollar 73 million in July-April, 2011.

The power sector also recorded a net outflow of dollar 25 million compared to a net inflow of dollar 129 million in the same period of last year.

FDI in financial business declined to only dollar 54 million compared to dollar 223 million in the corresponding period of 2010-11.

Transport and trade sectors also witnessed massive declines of 83 percent and 55 percent, respectively, in FDI during the year.

However, investment in the oil and gas exploration sector at dollar 466 million witnessed an increase of 12 percent during July-April, 2012.

Country-wise, FDI from the US was the highest at dollar 196 million followed by the UK at dollar 171 million, Italy at dollar 162 million and China at dollar 113 million.

A steep fall in FDI during the first 10 months of 2011-12 is definitely disturbing news for the country, especially at a time when the economy is in dire need of liquidity to revive its growth prospects to create job opportunities and reduce poverty.

Also, foreign investment is crucial for technological upgradation, innovative improvements and overall modernisation of the industrial base to allow it to be competitive at the international level and enhance exports to narrow the widening trade gap.

Of course, the compulsion to attract FDI would have been less severe if the country was able to generate the required level of domestic resources to finance the needed investment, but obviously this is not the case as indicated by a huge gap in these two variables.

The most worrying aspect of the situation is that foreign investors have, over the years, changed their perception about the country as a favourable destination of investment and shifted their attention to other countries.

This is indicated by a steady decline in FDI in the country from dollar 5.4 billion in FY08 to dollar 3.7 billion in FY09, dollar 2.2 billion in FY10 and dollar 1.7 billion in FY11.

If the present trend continues which we have no reason to contest, the inflow of FDI during 2011-12 could be less than dollar one billion or highly inadequate to make any meaningful contribution to the country's economic prospects.

The reasons for a rapid decline in FDI in the recent years are not difficult to understand.

Although, there are ample opportunities for investment in various sectors of the economy and Pakistan has one of the most conducive policy framework to attract FDI, the inhibiting factors are so dominant and pervasive that foreign investors seem to avoid the country without giving much thought to the positive gestures of the government.

Some of the deterrents to foreign investment include poor infrastructure, energy crisis, very poor law and order situation, corruption, political instability, lack of good governance and increasing militancy......


http://www.brecorder.com/editorials/0/1190691:slump-in-foreign-investment/?date=2012-05-18
Riaz Haq said…
Here's an ET piece on history of economic growth under various leaders since 1947:

The Express Tribune took the trouble to go through Pakistan’s historical GDP growth rates and compared various governments. We used GDP growth numbers from the Pakistan Bureau of Statistics records, which go all the way back to fiscal year 1952. We then calculated the geometric average (which calculates the compound average growth rate) rather than the simple arithmetic average to calculate the growth rates during the entire tenure of a government and then we ranked them. The results were somewhat surprising.

For instance, former President Ayub Khan – widely regarded as Pakistan’s best ruler when it comes to economic growth – is actually in second place. The number one spot is held by former President Ziaul Haq, who averaged 5.88% growth during his 11 years in office.

For fans of President Ayub who insist that his record before the 1965 war was better, we checked: it is not true. Pakistan’s growth rate during that period averaged 5.73% per year, which is actually lower than President Ayub’s own overall average of 5.82%. Having said that, industrial growth from the 1958 coup to the 1965 war averaged 9.21%, higher than any Pakistani ruler’s record, including Ayub’s own overall average of 8.51%.

Another surprising insight: if one ranks the ten rulers Pakistan has had since 1952 according to the average economic growth rate during their tenure, both the top five and the bottom five include three dictators and two democrats.

Yes, the top three slots are undoubtedly all taken up by the usual suspects: former Presidents Ziaul Haq, Ayub Khan and Pervez Musharraf, in that order. The next two are somewhat surprising: Benazir Bhutto comes in at fourth place and her father Zulfikar Ali Bhutto is not far behind. The supposedly pro-markets Nawaz Sharif comes in at seventh place.

Yet another surprise: Benazir Bhutto’s average was 5.08%, not far off from Pervez Musharraf’s 5.14%. She beat her rival Nawaz Sharif by a full percentage point: Pakistan’s economic growth averaged 4.06% during Nawaz Sharif’s both terms as prime minister.

Length of time in office appears to matter far more than whether the ruler was a dictator or a democrat. The top three were all in office for at least nine years, with the top two each in office for eleven years. Yahya Khan, Iskandar Mirza and Ghulam Muhammad – none of whom was democratically elected or subject to a popular mandate – all come in close to the bottom of the rankings. None of them had longer than four years in office.

But the more intriguing question to ask is why both the Bhuttos vastly outperform Nawaz Sharif.

The answer lies in the breakup of the GDP number: while Nawaz beat both Bhuttos on industrial growth, he was abysmal when it comes to agriculture. Benazir Bhutto was the best in Pakistani history for agriculture, which grew at an average of 6.65% during her five years in office.

Zulfikar Ali Bhutto, meanwhile, had blowout growth in services, averaging 10.63% during his only term in office, the highest of any Pakistani ruler. (Oddly enough, the elder Bhutto had a poor track record on agriculture, despite his family background. Agriculture grew at a paltry 2.12% per year during his tenure, worse even than Nawaz.)

For those who are currently pessimistic about Pakistan’s economic prospects, you may find some comfort in knowing that the numbers back you up: President Asif Ali Zardari ranks dead last in terms of economic growth, averaging a paltry 2.62% during his term in office so far.


http://tribune.com.pk/story/381450/setting-the-record-straight-not-all-dictators-equal-nor-all-democrats-incompetent/
Riaz Haq said…
Here's an interesting perspective on Pak economy in a Dawn Op Ed by Akbar Zaidi:

Is the analysis that this is Pakistan’s worst-ever economic performance valid, or is this merely point-scoring and political posturing by those who represent different political dispensations?

Many of the key economic numbers which are to be announced later this month in the Economic Survey will show that some are, indeed, the worst ever, or at least the worst in the last 50 years. While inflation was higher during the Z.A Bhutto government, there has hardly been a month of the 51 months in power of this government, when it has not been in double digits; this is a notorious first.

Similarly, the fiscal deficit has been in the range of 4-6.5 per cent under this government, but was higher — often more than eight per cent of GDP — under Gen Ziaul Haq’s military rule. The growth rate in the pre-9/11 Musharraf three years 1999-2002, after which his government received a bonanza and huge windfall, was a mere three per cent, but it has been lower, though only slightly so, over the last four years.

Overall domestic debt, which has been growing over the last four years, is still much lower than that which was accumulated over the Ziaul Haq period and in the period between 1988-1999. However, two indicators which are considerably worse and are particularly worrying are the falling tax-to-GDP ratio and investment.

There are numerous other indicators related to the economy, which have never been this good, despite problems in slowing trends. Per capita income continues to rise albeit at a slower pace; remittances and exports have also improved; and poverty is probably lower than many were expecting, given Pakistan’s slow growth and rising and persistent food inflation.

Any fair, unbiased account of the state of Pakistan’s economy shows that while parts of Pakistan’s economy have been in a poor state, this is certainly not the worst period ever. Moreover, many of the factors which have affected the current state of affairs have their origin in the policies of the Musharraf era.

Nevertheless, what is perhaps striking about the last four years has been the poor and wavering economic management and leadership of the economic team. The absence of vision, insight and any clear idea of what needs to be done, given Pakistan’s persistent and, in many cases serious and growing, economic problems, has been the most striking aspect in the leadership of the Ministry of Finance and the Planning Commission.

A committed and more able leadership was critical to improving Pakistan’s economic situation, and in this perhaps lies the government’s biggest failure. While it is clear that the economy’s overall performance has certainly not been the ‘worst ever’, the verdict on the economic team and its leadership, is less certain.


http://dawn.com/2012/05/21/the-worst-ever/
Riaz Haq said…
Here's a report on the launch of secondary market for trading of Pakistan govt debt:

KARACHI — Regulatory approvals and operational procedures, including the appointment of market-makers, will be in place by the end of January to enable the commencement of trading in government securities through the Karachi Stock Exchange (KSE).
KSE Managing Director Nadeem Naqvi met Finance Minister Ishaq Dar last week, to discuss the implementation of secondary market trading of government securities on the stock exchange through the KSE’s Bonds Automated Trading System (BATS) platform.
In an exclusive interview on Wednesday, Naqvi said that government securities that will be traded on the KSE include market treasury bills, Pakistan Investment Bonds (PIBs) and, at a later stage, Sukuks and other government papers.
“The government’s objective is to enable retail investors to invest in government securities using the settlement process of the Central Depository Company (CDC),” Naqvi said, adding that the development will broaden the investor base of government securities.
He noted that another objective of allowing the trading of government securities on the bourse is to attract international fixed-income funds to invest in Pakistan’s local currency government securities.
Currently, the government issues PIBs and holds auctions for market treasury bills in which only selected banks and financial institutions take part as ‘authorised primary dealers’. For the fiscal year 2013-14, the State Bank of Pakistan (SBP) has appointed 11 banks/financial institutions as primary dealers of government securities.
Under the current mechanism, secondary market transactions take place among these institutions through the Bloomberg Bulletin Board facility on a counterparty risk basis, also known as over-the-counter (OTC) transactions.
According to KASB Securities research analyst Farrukh Khan, a change in the intermediation process offers a significant scope for government securities, as their ownership is currently concentrated in the banking sector.
“Scheduled banks currently own 84 per cent of treasury bills, 53 per cent of PIBs and 91 per cent of Ijara Sukkuks. The rest of the ownership is divided between corporate entities, insurance companies and mutual funds,” Khan said. Retail investors have little direct ownership of government bonds and bills, as most of their savings are parked in either bank accounts or invested in the National Savings Schemes (NSS), he added.
“Despite distribution challenges, total money invested in the NSS is Rs 2.5 trillion, which is 35 per cent of the total banking sector deposit size. This highlights the enormous potential of this product (T-bills and PIBs),” Khan noted. —Internews


http://main.omanobserver.om/?p=42430
Riaz Haq said…
Here's a Dawn report on avg 2.9% gdp growth rate in last 5 years since Musharraf's departure:

The economy grew at an average rate of 2.9 percent per annum during the last five years though GDP growth witnessed growth in financial year 2012-13 to stand at 3.6% against the target fixed was 4.3%, the yearly report published by Federal Board of Revenue (FBR) said.
The performance by the important sectors of economy like agriculture, manufacturing and services remained below their capacity. However, the recent EU approval of duty waiver in the form of awarding GSP PLUS status (Generalized System of Preferences Plus) has created much wanted space for the economy.
Duty free access to Pakistan’s exports to the bloc of 27 member countries of European Union has offered much attention for the domestic and Chinese investors. The Chinese investors have started entering into joint ventures with local manufacturers to take advantage of trade concessions. Due to these developments, the ambitious growth of textile and clothing sector has become possible. One may hope that a prudent use of EU duty concessions avoiding any caveat therein will lead towards improvement of business environment and to the desired destination of economic stability.
The economy of Pakistan continued facing various shocks since beginning of FY: 2012-13. The energy crises got complex and worsened. The security hazards vastly affected the economic and social environment. The fight against terrorism got another additional front of sectarian extremism. The extensive financial constraints, economic mismanagement and less than capacity electricity generation despite its acute shortage have been the major weaknesses in the economy. An estimate indicated that around 2% of the GDP has been washed away due to power shortage. Moreover, the challenging scheduled payments due, to the international donor agencies added further difficulties for the economic management.
However, the positive aspects of the economy included comparatively lower trade deficit, strong remittances and above 33% decline in inflation rates i.e., reduced from 11.0% in 2011-12 to 7.4% in FY: 2012-13. Some prudent measures have been taken for improvement of economy (most important step was the settlement of circular debt to the tune of Rs 480 billion which paved the way of 1700 megawatts additional electricity generation). Similarly, easy monetary policy with low interest rate during the FY: 2012-13 increased the cheap credit borrowing by the corporate sector. Resultantly, improved performance by the large scale manufacturing sector became possible and observed.
Despite unfavorable economic conditions, the FBR has been able to collect Rs 1,946 billion at the end of the fiscal year 2012-13. A growth of 3.4 percent over last year’s collection has been recorded. The FBR revenue target for the FY: 2012-13 was fixed at Rs 2,381 billion with an envisaged growth of 26.5% over last year’s collection of Rs 1,883 billion. Keeping in view the broad based challenges faced by the economy, the revenue target was revised downward to Rs 2,007 billion and expected a growth of 6.6%. The important indicators considered for assigning of revenue targets includes expected growth in GDP, the rate of inflation, level of ease in monetary policy, growth in the Large Scale Manufacturing sector, tax buoyancy, budgetary measures and imports.


http://www.dailytimes.com.pk/business/27-Feb-2014/pakistan-s-gdp-grow-2-9-in-5-years
Riaz Haq said…
Excerpt from Wall Street Journal:

I called James Carlson, Chief Product Officer of Questis. His website asks eight questions and delivers portfolios within seconds. He would defend, I assumed, the new, new way of doing things.

Not quite.

"The robo-adviser isn't the solution," says Mr. Carlson. "You need the right balance of humans and algorithms." His company offers a hybrid model to clients. For Questis the questionnaires are a first cut at give-and-take dialogue, which leads to thoughtful, asset-allocation recommendations.

"Phew," I thought. "There will always be a place for financial advisers even if our compensation models come under pressure."

Not so fast.

Amazon changed publishing because it looked at the world in an unexpected way. E-readers, for example, revolutionized the way we think about books. What if an organization approaches investors with a tool other than questionnaires, something outside the box? Or compensation models based on a formula other than assets under management?

These questions led me to BidnessEtc.com, a hip new website that discusses individual stocks. The graphics look more like something you find in a comic-book store than a ho-hum-if-I-read-another-disclaimer-I'll-scream financial website.

I Skyped with Nadir Khan and Babar Din, the two founders, and asked if they plan to introduce asset-allocation or estate-planning tools on their website. BidnessEtc is based in Pakistan, but the founders built much of their financial expertise in U.S. equity markets.

Mr. Khan says BidnessEtc is rolling out a business search engine this week. It is curated by humans and targeted at investors.

Initially, the engine will focus on individual companies. But over time, it will broaden its reach to include "asset planning," "retirement planning," and "every possible vertical."

"There's a big problem in the wealth management industry," says Mr. Khan, "and that's visibility. That's why the fees are too high. If you give wealthy people discovery of those mechanisms, margins are going to zero." That is a huge thought. If the founders of BidnessEtc are right, wealth management as we know it will be over.

The new, new competitors are companies that empower investors to make financial decisions without financial advisers. Think this sounds like another the-sky-is-falling prediction from a do-it-yourselfer?

Maybe. But maybe it is the long game, a business strategy that will catch fire as baby boomers pass their wealth to the next generation.

Mr. Din of BidnessEtc says the world has changed. "Gen Y is living their lives on social media, mobile phones and gadgets and has higher interest in investing." The experience during the financial crisis has made them more prudent about "financial planning at a younger age than their parents."

Right now, BidnessEtc is pretty much the upstart, with lots of other online advice services getting more mainstream attention. But my take: The competitors we should fear the most are probably the ones we know the least.

http://online.wsj.com/news/articles/SB10001424052702304178104579535542166997318

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