Pakistan to Beg and Borrow to Finance 2013-14 Budget

Pakistan's proposed federal budget 2013-14 includes $36 billion in spending with deficit financing of $16 billion. Of this $16 billion, over $5 billion will be borrowed by the federal government to pay the power sector to settle the so-called circular debt.



Heavy Tax Burden on the Poor:

Direct taxes make up only about 3.5% of Pakistan's federal revenue. The rest comes from indirect taxation, mainly consumption tax, making Pakistan's tax policy among the most regressive in the world. The low-income people who have to spend almost all of their incomes will be paying tax on their entire incomes while the high-income groups who spend a small percentage of their income will pay little in taxes.

While the general sales tax (GST), a consumption tax, has been raised from 16% to 17%, vast swaths of the economy have been left out of the tax net. A major weakness in public finances is the lack of fiscal effort by the provinces. With some of the largest segments of economic activity such as agriculture, real estate, and services in the provincial domain, the provincial tax receipts total an abysmal 0.7 percent of GDP.



To make up the difference between revenue and spending, the government is forced to beg or borrow. It fosters foreign aid dependence, limits national sovereignty and burdens Pakistan's future generations with debt that they will have to repay.

Pakistan needs to revamp its entire taxation system to make it more equitable and progressive with the rich paying a larger share of the taxes and to raise the tax-gdp ratio from the current 9% to at least 15%.

Resolving Energy Crisis:

Paying off $5 billion to the power sector will do little to resolve load-shedding. The previous government paid $14.8 billion to the power sector and the problem of load-shedding only got worse.

What is needed is to clearly identify and fix the root cause which is the flawed finances of the sector. The cost of electricity production needs to come down substantially and the revenue from bill collection needs to increase significantly to bring finances into balance. The fuel mix needs to change to lower the costs. And there needs to be serious law enforcement done to reduce power theft and collect payments  for the use of electricity. In addition, the IPP contracts need to be renegotiated to link payments to fuel efficiency and power generation capacity utilization.

Pakistan needs a long-term and comprehensive energy policy to assure availability of cheap and abundant energy to fuel economic growth and prosperity in the country.

Since the middle of the 18th century, the Industrial Revolution has transformed the world. Energy has become the life-blood of modern economies. Energy-hungry machines are now doing more and more of the work at much higher levels of productivity than humans and animals who did it in pre-industrial era. Every modern, industrial society in history has gone through a 20-year period where there was extremely large investment in the power sector, and availability of ample electricity made the transition from a privilege of an urban elite to something every family would have. If Pakistan wishes to join the industrialized world, it will have to do the same by having a comprehensive energy policy and large investments in the power sector. Failure to do so would condemn Pakistanis to a life of poverty and backwardness.

 Please watch the following video discussion on the subject of Pakistan's budget 2013-14 and resolution of power crisis:



First budget of new Nawaz Sharif government, no relief for poor; Energy Crisis; Reliance on oil from WBT TV on Vimeo.

Related Links:

Haq's Musings

Pakistan's Tax Evasion Fosters Aid Dependence

Pakistan's Vast Shale Oil and Gas Reserves

Pak IPPs Make Record Profits Amid Worst Ever Load Shedding 

Global Power Shift Since Industrial Revolution

Massive Growth in Electrical Connections in Pakistan

Finance Minister Ishaq Dar's Budget 2013-14 Speech

Comments

Riaz Haq said…
Here's a Nation report on Neelum-Jhelum hydro project:

Prime Minister Muhammad Nawaz Sharif has directed the concerned authorities to speed up the pace of work on Neelum-Jhelum Hydro Power Project to save the people from load shedding.

He stated this while inspecting various parts of the Neelum-Jhelum Hydel Power Project on Wednesday.
He was apprised that the Rs274.882 billion Neelum-Jehlum power project would have the capacity of generating 969 MW power.
The Power House of the project is located in the Chattar Kalass which is 22 kms south of Muzaffarabad. Installed capacity of the project is 969 MW comprising four units of 240 MW each.
The Prime Minister was given a briefing on the project during his visit to the site of Neelum-Jehlum hydro Power Project. The original cost of the project was Rs130 billion but the revised PC-1 cost of the project was put at Rs274.882 billion as it has escalated due to change in design and machinery requirement owing to the earthquake of 2005.
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Neelum Jehlum Hydro electric Project is a mega project of immense national importance. It is in the vicinity of Muzaffarabad (AJ&K) and envisages the diversion of Neelum river water through a tunnel and after producing power‚ out-falling into Jehlum river.
It will also help reduce the gap between demand and supply of power in the country.
The newly-elected government of Pakistan Muslim League-N is paying special attention to development of infrastructure projects in the country and the allocation of Rs. 1.1 trillion in Public Sector Project Programme (PSDP) in the FY 2013-14 is a clear manifestation of government's commitment on this count.


http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/national/19-Jun-2013/pm-directs-to-speed-up-neelum-jhelum-hydro-power-project
Riaz Haq said…
Here's a Techinasia report on Telenor's planned investment in Pakistan:

Norwegian telecom group Telenor will invest $1.7 billion in Pakistan after acquiring a 3G spectrum, reports Propakistani. The massive investment, announced by Telenor CEO Jon Fredrik Baksaas at a recent meeting with members of the Pakistan media, should have a large impact on the country; Baksass predicts that it will increase internet penetration and, by extension, the country’s GDP.

This new investment should be a boon especially for rural people who may not have internet access, as $700 million of it is apparently earmarked for spreading 3G networks across the country. Baksaas reportedly said that he expects this rollout to have a greater impact on rural residents than urban residents.

This is not Telenor’s first foray into Pakistan, the company has already invested more than $2 billion there. That shouldn’t come as a large surprise given that the company is one of Pakistan’s largest telecom operators, with more than 30 million subscribers in the country


http://www.techinasia.com/telenor-invest-1-billion-pakistan-3g/
Riaz Haq said…
Here's a Fiber2fashion report on Pak's rising exports in May, 2013:

Riding on the back of marginal rise in demand from the US and European markets, textile and clothing exports from Pakistan grew by 5.3 percent to US$ 1.187 million in May this year, as compared to US$ 1.128 million in May 2012, statistics released by the Pakistan Bureau of Statistics (PBS) show.

The items that positively contributed to the export growth during the period include, cotton yarn whose exports grew by 11.89 percent year-on-year, cotton cloth by 5.8 percent, cotton carded or combed by 177.27 percent, yarn other than cotton yarn by 46.44 percent, knitwear by 2.07 percent, bedwear by 14.04 percent, towels by 7.95 percent, readymade garments by 22.67 percent and other textile material by 6.48 percent.

On the negative side, raw cotton exports plummeted by 66.35 percent year-on-year, art, silk and synthetic textile by 30.29 percent and made-up articles excluding towels and bedwear by 0.43 percent.

During the first 11 months of the ongoing fiscal year that began on July 1, 2012, Pakistan exported US$ 11.93 billion worth of clothing and textile items, which is 6 percent higher than exports worth US$ 11.26 billion achieved during corresponding period of previous fiscal, the data shows.

According to the data, cotton yarn exports surged by 24.86 percent year-on-year during the 11-month period, cotton cloth by 10.72 percent, readymade garments by 12.58 percent, yarn other than cotton yarn by 14.87 percent, knitwear by 2.41 percent, bedwear by 2.14 percent, towels by 15.52 percent and other textile materials by 27.50 percent.

However, exports of raw cotton plummeted by 68.05 percent year-on-year during July-May 2012-13, cotton carded or combed by 48.31 percent and art, silk and synthetic textiles by 27.10 percent.

According to experts, the improved power supply allowed yarn and fabric producers to fully utilize their production capacities, resulting in enhanced export of several items, including towels and bedwear.


http://www.fibre2fashion.com/news/textile-news/newsdetails.aspx?news_id=147646
Riaz Haq said…
Here's a Bloomberg report on Nawaz Sharif govt Pakistan seeking IMF bailout:

Pakistan said it will discuss a loan program of as much as $7 billion with the International Monetary Fund, as the nation tries to rebuild currency reserves.
“Certainly, we will talk and negotiate for a program,” Finance Minister Ishaq Dar said in an interview late yesterday in Dubai. “We would be looking for anything pragmatic. It would be anything between $5 billion to $7 billion.”
Pakistan’s foreign-exchange reserves slid over 40 percent to $6.24 billion in June from a year earlier, enough to cover about two months of imports, central bank data show. The plunge has weighed on the rupee and adds to other challenges facing the recently elected government of Prime Minister Nawaz Sharif, such as energy shortages and a Taliban insurgency in the northwest.
“An arrangement with the IMF will give the market some confidence,” said Sayem Ali, an economist at Standard Chartered Plc in Karachi. It would calm fears among foreign investors that the rupee is headed for a “drastic” plunge, he said.
The rupee strengthened 0.1 percent to 98.87 per dollar as of 3:01 p.m. local time, climbing for the first time in five days, while the Karachi Stock Exchange 100 index was little changed.
Dar also said the government will clear about $5 billion of so-called circular debt that has choked power generation in the energy industry. Circular debt refers to money owed to power companies from unpaid bills.
The step will boost electricity output by 1,700 megawatts, helping to curb outages that have hurt economic growth, he said.
Policy Changes
Dar said an IMF team is already in Islamabad.
Jeffrey Franks, the head of the IMF’s Pakistan mission, said in January that the lender won’t sign a new loan program without a “deep and clear” commitment on a set of policy reforms to curb the budget deficit.
Dar in his June 12 budget speech pledged to narrow the widest fiscal deficit in over two decades and to spur expansion in an economy he said was “shattered.”
He imposed additional levies, such as a sales-tax increase to 17 percent from 16 percent, to help achieve a deficit of 6.3 percent of gross domestic product in the year starting July 1, compared with 8.8 percent in 2012-2013.
“We have already taken steps for reforms,” he said in the interview yesterday after attending an investment conference.
The State Bank of Pakistan on June 21 unexpectedly cut interest rates for the first time this year to boost economic growth, even as higher taxes and the drop in the currency threaten to revive inflation.
The rupee has depreciated about 4.5 percent versus the dollar in the past year, risking costlier imports. Consumer prices advanced 5.13 percent in May, the slowest pace since at least 2009, according to data compiled by Bloomberg.
Sharif is aiming for 4.4 percent economic growth next fiscal year, up from an estimated 3.6 percent in 2012-2013, and to keep inflation in single digits.
He returned to power in a May 11 general election, more than 13 years after his second period as premier was cut short by a 1999 army coup.


http://mobile.bloomberg.com/news/2013-06-26/pakistan-plans-talks-with-imf-on-loan-of-up-to-7-billion-1-.html
Riaz Haq said…
Here's a report from The National newspaper on Pakistan switching from oil to coal:

Pakistan plans to use a port in the Arabian Gulf to import coal and to reduce its dependence on more costly GCC oil. That dependence is "killing its economy", said the country's water and power minister in Dubai yesterday.

One of the aims of the expansion of Gwadar port in Pakistan's Balochistan province is to help Pakistan to overcome an energy crisis by widening the mix of its power supply. The port is financed more than 80 per cent by the Chinese.

Currently oil from Saudi Arabia, the UAE and Kuwait has accounted for "almost all" of Pakistan's energy imports, said Khawaja Asif, the water and power minister, speaking on the sidelines of the US-Pakistan Business Opportunities Conference in Dubai.

"We can develop some area close to Gwadar port for coal imports and coal-based plants. We will import coal from different places like South Africa, Indonesia and Australia," said Mr Asif. "It will lessen our dependence [on oil].
"The energy mix we have today is killing our economy and not providing us with cheap electricity."...
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Coal accounts for only 1 per cent of Pakistan's energy generation even though Thar mines in Pakistan's Sindh province account for the world's third-largest coal reserves. While Gwadar will help to serve Pakistan's energy needs, attracting greater scrutiny is China's plans to use the facility.
In February, the management of the port was handed from Singapore's PSA International to Chinese Overseas Port Holdings. Gwadar's close proximity to the Strait of Hormuz, through which a large portion of the world's oil flows, will give energy-hungry China closer access to GCC crude.
The two sides plan to link Gwadar, in the south-west of Pakistan, with China's far western province of Xinjiang through road and rail connections. The proposals have stirred anxiety among officials in New Delhi , where there are concerns that the facilities may be part of a Chinese attempt to encircle India through a string of overseas ports stretching from Gwadar to Myanmar.
Mr Asif played down the geopolitical significance of the port.
"It's purely a commercial thing and will develop a backward province of Balochistan and create job opportunities," he said.
The port aspired to follow the lead set by the thriving commercial trading hubs of Dubai and Singapore, he added. The government of Pakistan's newly elected prime minister, Nawaz Sharif, has declared Gwadar a duty-free port on the lines of Jebel Ali.
"In Dubai and Singapore and all of these ports there economies are based on their ports and access to major sea routes," Mr Asif said.


http://www.thenational.ae/business/industry-insights/economics/pakistan-aims-to-curb-oil-imports
Riaz Haq said…
Here's a NY Times story on KESC performance in Karachi:

Since Pakistan’s biggest electricity company was privatized, its headquarters has been looted, its employees kidnapped and its boss nearly arrested by the government.

Despite all of that, it is regarded as a roaring success.

Power cuts lasting 12 hours a day or more have devastated the Pakistani economy. The loss of millions of jobs has fueled unrest in a nuclear-armed nation already beset by a Taliban insurgency.

The only city bucking the trend is the violent metropolis of Karachi, Pakistan’s financial heart — and that is thanks to Tabish Gauhar and his team at the Karachi Electricity Supply Co.

“It has consumed every ounce of my energy,” Mr. Gauhar, 42, said in an interview. “But we have helped millions of people.”

The new government of Prime Minister Nawaz Sharif won an election in May partly because it had promised to fix the power cuts. Now many are wondering whether the Karachi utility’s successful privatization will be repeated elsewhere.

Pakistan’s power companies share similar problems. Workers are often corrupt, and influential families rarely pay bills. The government sells power below the cost of production but pays subsidies late or not at all. Plants cannot afford fuel.

At the state-run Peshawar Electricity Supply Co., the majority of workers are illiterate, most new hires are relatives of existing staff members, and 37 percent of the power generated was stolen, according to a 2011 audit funded by the U.S. Agency for International Development.

Karachi Electricity Supply had all the same problems when the Dubai-based private equity firm Abraaj Capital bought a controlling stake in 2008. Mr. Gauhar and his Abraaj team decided to slash the work force by a third, cut off nonpayers and destroy illegal connections.
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Many in the populist pro-labor government vilified the power company. Later, legislators tried to arrest Mr. Gauhar on charges that he had not attended subcommittee meetings in the capital.

After the protests dissipated, Karachi Electricity Supply’s next problem was making customers pay. More than a third of the company’s electricity was stolen in 2009. Those who got bills often ignored them.

One wealthy patriarch said he could not possibly start paying because his colleagues would think he had no influence left.

Karachi Electricity Supply started cutting off those who did not pay their bills. When a transformer burned out in an area with high theft, the company asked for two months’ worth of payment from the area’s residents before replacing it.

The company divided up the city of 18 million. Areas where 80 percent of people pay bills now have no regular power cuts. Areas with high loss — often crime-ridden, sweltering slums — have long power cuts. Karachi Electricity Supply is widely hated in such places.

Muhammed Fayyaz, who works as a driver, says his neighborhood often has as much as 10 hours of cuts per day. Summer temperatures top 40 degrees Celsius (104 Fahrenheit), and protests are frequent.

“People block the main road and throw stones at passing vehicles,” he said.

Mr. Fayyaz lives in a high-theft area. Stealing power is easy. Makeshift wires with metal hooks festoon Karachi Electricity Supply’s lines in the sun-baked streets. Some lead to roadside businesses. Others head into the distance atop lines of makeshift bamboo poles.

“We clean them up, but in five minutes they are back again,” said Muhammad Siddiq, a manager at the utility.


http://www.nytimes.com/2013/07/02/business/global/turning-on-the-lights-in-pakistan.html?_r=1&
Riaz Haq said…
Here's a Daily Times report on Pakistan settling "circular debt" owed to IPPs:

In order to eliminate circular debt, the government has released Rs 362 billion to the Independent Power Producers (IPPs), out of which four IPPs announced that they have received a total sum of Rs 116.826 billion as a part of their overdue receivables, according to the Karachi Stock Exchange (KSE) notice released on Tuesday.
Five IPPs out of 19 others, in Memorandums of Understanding (MoUs) signed between government and IPPs, including Hub Power Company Limited (Hubco), Nishat Chunian Power Limited (NCPL), PakGen Power Limited (PKGP), Kohinoor Energy Limited (KEL) and Nishat Power Limited (NPL) have announced officially in notices to all bourses of the country that they have received around Rs 116.826 billion from Central Power Purchasing Agency (CPPA), Water and Power Development Authority (WAPDA) and National Transmission and Despatch Company (NTDC).
Hubco remained prime beneficiary as the company stated in a letter to the KSE that the company has received overdue amounting to Rs 75 billion out of Rs 83.2 billion (overdue as of May 31, 2013) for Hubco and Rs 17.4 billion for Narowal Plant from WAPDA and NTDC, bringing the total to Rs 92.4 billion.
Hubco announced that the company has paid Rs 55.8 billion to Pakistan State Oil (PSO) as agreed under the settlement arrangement.
Hubco has entered into three MoUs with the government as required by them for the settlement of agreeing to convert Hub plant from oil to coal, extend the credit period for its Narowal Plant from 30 days to 60 days and to endeavour to operate the plants at full capacity.
Under the MoUs, IPPs also agreed to achieve their maximum generation capacity and provide 1,500 megawatts (MW) to 1,700 MW to the national grid before Ramazan, four IPPs including Hubco, Lalpir, Pakgen and Saba Plant, have agreed on conversion to coal-based power generation within 18 months, extend credit period from 45 days to 60 days and reduce interest rate on late payments by public sector power companies.
Similarly, NCPL announced that the company has received overdue receivables amounting to Rs 6.86 billion from CPPA without any reduction in existing delay mark-up rate of existing 4.5 percent to 2.5 percent as against expected cut of 2.0 percent from 4.0 percent to 4.5 percent.
Likewise, PKGP also informed the KSE that the company has received overdue receivables amounting to Rs 6.982 billion from CPPA at existing delay mark-up rate.
Also, KEL announced in a letter to KSE that the company has received overdue receivables amounting to Rs 3.504 billion from WAPDA.
Muhammad Affan Ismail of BMA Research told this scribe that the fund injections (cash or otherwise) are a short-term solution and have no long-term implications on operational factors or returns to investors. Best would be to recall the Rs 82 billion Tem Finance Certificates (TFCs) issued last year by the government in order to help solve the power crisis, he added.
NPL has announced that it has received overdue amounting to Rs 7.080 billion.
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Naveed Tehsin of JS Research believes that PSO stands out as a key beneficiary from the retirement of the circular debt as its receivables and payables to local refineries have sharply declined to Rs 79 billion (down 54 percent) and Rs 9 billion (down 66 percent), respectively.
Tehsin expected that receivables would further decline by Rs 48 billion after the issuance of Pakistan Investment Bonds to PSO.


http://www.dailytimes.com.pk/default.asp?page=2013%5C07%5C03%5Cstory_3-7-2013_pg5_1
Riaz Haq said…
Here's a Nation story on IFI loans for Pakistan:

Pakistan would receive 250 million Euros from Islamic Development Bank (IDB) and also a trade facility of $150 million for import of fertilizer and petroleum products in August as committed by bank last week. Sources in finance ministry informed The Nation that Pakistan would receive 250 million Euros from IDB in the ongoing month of August, which is part of 750 million Euros loan. Similarly, he further said that Pakistan would also avail the trade facility of $150 million for import of fertilizer and Petroleum products in the current month of August. The Islamic Development Bank had agreed to extend loan of 750 million Euros to Pakistan and trade facility of $150 million for import of fertilizer and petroleum products in a meeting between President Islamic Development Bank Dr. Ahmed Muhammad Ali and Pakistan’s Finance Minister Senator Ishaq Dar in Jeddah last week.
“The international financial insinuations like Islamic Development Bank, World Bank and Asian Development Bank will provide loans after Pakistan had reached an agreement with International Monetary Fund in early July”, said a finance ministry official while talking to The Nation on Thursday. He said that agreement between Pakistan and IMF is paving way for other financial institutions like IDB, ADB and WB to give loans to Pakistan, which is desperately needed to build the depleting foreign exchange reserves of the country.
“Pakistan will also receive $500 million from Asian Development Bank and $500 million from World Bank during the current fiscal year after the agreement sign with IMF”, he maintained. Pakistan would receive these $1 billion from WB and ADB in the second half (January-June) of the ongoing financial year 2013-14.
Sources in finance ministry said this loan would help in building the foreign exchange reserves, which is currently around $10.25 billion. Pakistan is also expecting to receive $3.4 billion from IMF during the current financial year. Pakistan and IMF reached on consensus for $5.3 billion bailout package in first week of July 2013, which would need approval from IMF’s executive board on September 4 2013.


http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/business/09-Aug-2013/idb-gives-pakistan-250m-euro
Riaz Haq said…
Here's a news report on upsizing of IMF bailout for Pakistan to $6.6 billion:

The International Monetary Fund has agreed that Pakistan can seek a loan package worth $6.6 billion, two top finance ministry officials said, a boost for Prime Minister Nawaz Sharif as he seeks to fix the moribund economy.
The Fund had settled on an initial package of $5.3 billion after an IMF delegation held weeks of talks in Pakistan in July. Pakistan had requested $7.2 billion.
“The IMF has raised its offer following further consultations in the US and now agreed to $6.6 billion. The official announcement will come very soon,” said a top finance ministry official.
The IMF’s executive board will formally approve the package for Pakistan sometime in early September, as long as Pakistan has made some fiscal reforms, the IMF said on its website.
The government has already slashed costly subsidies on electricity and sent out notices to 10,000 delinquent taxpayers last month as part of the conditions set by the IMF.
Pakistan has one of the lowest tax-to-GDP ratios in the world and the IMF wants it to do more to tackle rampant tax evasion by the wealthy elite.
The Saudi Islamic Development Bank Group Ltd. has also pledged a $997 million credit line and a $200 million trade facility for Pakistan to buy petroleum products, said Shafqat Jalil, the Finance Ministry’s spokesperson.
“We will end up with a shortfall of $600-700 million, which we will bridge through other donors like the ADB (Asian Development Bank),” Jalil said.
The ADB, one of Pakistan’s major lenders, estimates that Pakistan needs $6 billion to $9 billion to meet its obligations, including about $5 billion in outstanding debt on an earlier $11 billion IMF loan package that was suspended in 2011.
The new loan will come just in time.
The central bank has only about $5 billion left in foreign currency reserves, enough to cover less than five weeks of imports.
Pakistan averted a balance of payments crisis in 2008 by securing the $11 billion loan, but this was suspended two years ago after economic and reform targets were missed.
Chronic gas and electricity shortages, violent crime and a Taleban insurgency have all hampered growth and contributed to a dramatic drop in foreign investment.
The $230 billion economy grew 3.6 percent in the last fiscal year, below a target of 4.3 percent.
The new government has already made some steps toward reforms and has set an ambitious deficit target of 6.3 percent growth for 2013/14 — although some analysts say that might be hard to meet.
It also plans a new energy policy to tackle power cuts, which frequently last 12 hours a day and have devastated the economy and fueled unrest.


http://www.arabnews.com/news/461030
Riaz Haq said…
Supreme court should stay out economic decisions like fixing prices for electricity. Targeted subsidies should be given to low income households to help with energy costs. General subsidies for electricity and petrol take 34% of government's revenue ,bust budget and raise deficits and drive inflation (by printing more money to pay) hurting the low-income people the most. Energy subsidies in #Pakistan take up astounding 34% of gov revenue.Table A.3 of impressive IMF book: http://www.cgdev.org/event/book-launch-and-discussion-energy-subsidy-reform-lessons-and-implications
Riaz Haq said…
Here's a excerpt of Pakistan budget analysis by Nadeem Haq:

Pakistan’s provinces, where much of the welfare and infrastructure lies, are all running balanced budgets as required by the constitution. The federal government has obligations to smaller regions that it administers, such as the federally administered tribal areas (Fata), Gilgit-Baltistan and Azad Jammu and Kashmir, but these don’t even account for 1% of GDP. The much maligned defence accounts for 3% of GDP, which may not be as large as it seems given that the country is at the forefront of the war on terror. The running of the federal government only accounts for about 1.5% of GDP. Debt service obligations account for the largest chunk about 4% of GDP. All in all, the federal government does not appear to be a spendthrift locked up in colossal administrative and defense expenditures that cannot be reversed. Where then is the problem?

The federal deficit borders on about 8 to 9% of GDP. Our revenue is only about 9% of GDP. Adding up the above mentioned items, our expenditure commitments are only about 9.5% of GDP. Our deficit should then be about 1% of GDP at most, rounding out errors.
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PSDP

Well the government wants a public investment programme, also known as the Public Sector Development Programme (PSDP), which accounts for about 3% of GDP. Can this be contained? Used more wisely? Absolutely.

For years the PSDP has been used as a slush fund by all political factions, politicians, dictators, defence establishment, and the bureaucracy. There is a rush for development without purpose. Indeed, much of it is brick and mortar with a low rate of return and often times developed for non-economic ends.
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PSEs

But the other major drain the budget is the public sector enterprises, especially in the energy sector. Over the years, the PSEs have been enmeshed in administrative bureaucracy and often used for their own slush funds and repositories of perks. The DMG gets positions in boards and often even as executive heads of the PSEs. The rules of business make the secretary the principal accounting officer (PAO) of the PSE. This status allows the PAO to raid the PSE for vehicles and real estate.
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Commodities

For some reason, despite agriculture being a provincial subject now, the federal government for its own political needs wishes to intervene in agricultural markets. It subsidises fertiliser and chooses to set the procurement price with a commitment to buy wheat. While the fiscal cost of these commodity operations is only about 0.5% of GDP, they do involve large and expensive government guarantees (almost 2% of GDP worth of bank credit is used). In addition, they distort the agricultural market. Cleaning out this operation i.e. rescinding government involvement is expected to increase GDP growth by about 0.5% annually.
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The net result

Summing up these figures we can see that our fiscal deficit of about 7-8% comes from PSE losses, PSDP and commodity operations.

Careful and well articulated reform in these areas could not only make the budget manageable but have the additional payoff of increasing annual economic growth by about 5 to 6%. The quick fix of arbitrary taxes and chasing false revenue numbers is a bad strategy that is exacerbating the ailment of poor governance and low growth not fixing it......


http://magazine.thenews.com.pk/mag/moneymatter_detail.asp?id=6761&magId=10&catId=92
Riaz Haq said…
Pakistan borrows $2 billion through bond offering, reports Wall Street Journal:

Pakistan returned to the international bond markets Wednesday after a seven-year hiatus, joining a number of other countries around the world raising cash as yield-hungry investors look to put money to work.

Pakistan sold $2 billion of debt, with almost two-thirds going to U.S.-based money managers, two days after Sri Lanka sold a bond for a second time this year. Bankers say Papua New Guinea, Bangladesh and Bhutan are also expected to come to the market this year, hoping to lock in low yields.

The demand reflects both improving economies in these countries and investors' appetite to venture further afield for high returns. The appeal of emerging-market debt has risen as central banks in U.S., Europe and Japan pledge to maintain stimulus measures to keep growth humming, a move that pushes up asset prices across the globe.

"There's been a reversal in the sentiment towards emerging markets over the last two weeks. Everyone loved to hate them, and now, all of sudden everyone is increasing their positions," said Rajeev DeMello, head of Asia fixed income at Schroders SDR.LN +0.38% Investment Management in Singapore, which has $435.4 billion of assets under management.

Mr. DeMello's fund holds Pakistani bonds and said his funds are interested in buying more, and Sri Lankan bonds.

In March emerging markets saw $39 billion in portfolio inflows from global investors—$24 billion of which was into bond markets—up from $25 billion in February and $5 billion in January, the Institute of International Finance estimated.

Pakistan racked up orders worth $7 billion while Sri Lanka drew over eight times the $500 million on offer with orders of $4.3 billion, with a significant uptick of Asian investors' participation compared with its $1 billion January issuance. The finance ministries of Papua New Guinea, Bangladesh and Bhutan weren't immediately available for comment.

Devesh Ashra, head of Asia debt syndicate at Bank of America Merrill Lynch, said the most important reason these countries are issuing bonds is the expectation that global interest rates are going to rise. The Federal Reserve has started slowing the pace of economic stimulus, meaning it is likely that yields are set to rise as the U.S. economy improves.

"U.S. investors are looking for incremental yield and issuers are ready to lock in rates knowing that we are going to be in a higher-rate environment in one year's time," he said.

The debt is sold in dollars, another lure for investors given strong prospects for the greenback in the long run on signs of a slow but renewed recovery.

But even outside the U.S. dollar, there is demand for emerging markets that had been shunned last year. Turkey said Tuesday it would issue a euro-denominated bond and Greece says it will return to the market with an approximately €2 billion ($2.75 billion) debt sale, for the first time after being bailed out.
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While many other long-term investors remain convinced there is high-growth potential of these emerging markets, several are treading carefully and in some places demanding extra compensation for holding risky assets.

While investors welcomed junk-rated Pakistan's 10-year bonds, the country had to pay investors a hefty premium for the deal. The yield was at 8.250%, compared with 6.875% it paid to issue a similar-duration bond in 2007 and that is currently trading at 6.338%...


http://online.wsj.com/news/articles/SB10001424052702303873604579491092081538738?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303873604579491092081538738.html
Riaz Haq said…
#Nawazsharif #PMLN Government will forfeit right to rule if energy crisis not resolved http://www.dawn.com/news/1121503 #Pakistan #loadshedding


WASHINGTON: The government will forfeit its right to rule if it fails to resolve the energy crisis, says Musadik Malik, Special Assistant to the Prime Minister on Energy.

“It happened to the previous government and it will happen to this government too if we do not end the load-shedding,” he said.

Addressing a seminar on Pakistan’s energy crisis at the Woodrow Wilson International Centre for Scholars, Washington, Secretary Water and Power Nargis Sethi emphasised the need for a multi-pronged approach to end this crisis.

“The power sector subsidies had been costing about 2 per cent of GDP and taking 15-17 per cent of the revenues,” she warned. “This is not sustainable.”

Power ministry hopes new strategy to cut losses will pay off

In a power-point presentation, Mr Malik said the government had developed a new approach, based on “meritocracy, transparency, automation and accountability” to overcome this crisis.

“We will encourage competition by developing energy corridors and favourable tariffs for low cost energy sources, and by creating a key client management system,” he said.

He identified load-shedding, theft, receivables and poor collection of revenues as the key distribution issues causing circular debt and compromising the viability of the power sector.

Mr Malik said there’s considerable variance in load-shedding across feeders; ranging from as little as 3 hours a day to as much as 23 hours.

“In addition to human suffering, the load-shedding is causing a loss of up to 3 pc of GDP each year; in 2013-14 this loss amounted to Rs 630 billion,” he said.

Nearly all DISCOs had losses that were considerably higher than acceptable levels indicating that “theft is occurring across the board,” he said.

Mr Malik said that more than 90 pc mixed feeders had theft / under-billing, hidden often by overbilling remote or rural feeders. “In industrial connections (3 per cent loss), 30 feeders steal 64 per cent of all stolen electricity,” he explained. “This theft is hidden by over-billing other companies.”

The government had created loss targets for each feeder length and linked it with load-shedding, he said. “Meeting these targets will save Rs 40 billion to the national exchequer just from 6 DISCOs, (27 Billion rupees from MEPCO and LESCO alone).”
Riaz Haq said…
#Pakistan to borrow another $3.5b in commercial debt by floating #Eurobonds http://www.pakistantoday.com.pk/?p=497133 via @ePakistanToday

Amid concern over high cost of unconventional borrowings, Pakistan is planning to raise another $3.5 billion from international debt markets by floating Eurobonds over a period of three years to retire earlier loans. A new medium-term debt management strategy that the ministry of finance unveiled this week gives a plan for floating dollar-denominated Eurobonds up to fiscal year 2018-19.

Last month, the Senate Standing Committee on Finance decided to summon representatives of three international banks that the government hired for offering $500 million worth of Eurobonds after it suspected that the money invested by foreigners had actually flown from Pakistan. The government insists that the resources mobilised by the bonds were used to retire the expensive domestic debt in the past. It intends to raise $1 billion in 2015-16 and thereafter $500 million each in 2016-17 and 2017-18, according to the debt strategy.

The new debt strategy largely focuses on diversification of financing and lengthening the maturity of debt profile. However, it has completely ignored implications of the off-budget fiscal risk for the country’s debt projections. A recent report of the International Monetary Fund (IMF) has given broader pillars for strengthening the debt and public finance management to reduce fiscal risks. “A debt management strategy based on building funding buffers, assessing off-budget fiscal risks, diversifying financing from both domestic and external sources and lengthening the maturity profile of domestic debt will help mitigate these risks,” said the IMF.

PROJECTIONS

The debt strategy has used ambitious macroeconomic projections for its calculations, unlike the IMF that is taking a conservative approach. The government has projected that the economy will grow at a pace of 6.5 per cent in 2016-17 while the IMF puts the expansion at 4.7 per cent

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