Number Crunching – The Economic Conundrum

“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” - Ogden Nash

There is an urgent need to declare an economic emergency in the country as the government continues to finance its deficit through foreign debt and local bank borrowings. The excessive government borrowings coupled with increased interest rates has resulted in crowding out effect as the growth in private sector lending has declined sharply. This phenomenon has in effect dented the private sector investments largely, and economic growth remains stunted as a result.

Pakistan’s GDP growth has been the lowest in the South Asian region since 2008. Analysts have been giving various reasons for the dismal economic performance including war on terror, international oil prices and global financial crisis. In my opinion, the center point of current economic fiasco lies beyond the mentioned factors considering the historical performance (average GDP growth rate of Pakistan from 2001 – 2007 averaged at 6.15%) as well as the growth of the regional economies.

The core cause of the crippled economic growth has been the massive financial indiscipline of the current financial managers. The fiscal deficit (as a % of GDP) has been constantly above 6% since 2008. The government has been funding the ever growing deficit by Debt and printing money.

The increasing demand of the Government to fund its deficits have resulted in a total debt of PKR 10 trillion (up from PKR 5 trillion in 2007), out of which PKR 5.4 trillion is Domestic Debt while PKR 5 trillion (USD 58.3 billion) is Foreign Debt. The data released by the State Bank of Pakistan indicates that Broad Money Supply growth (M2) has averaged 11.5% over the past 3 years.

The recently released “Quarterly Performance Review of the banking system 2010” by the State Bank of Pakistan indicates that there has been growing evidence of banks’ flight for the government securities which now constitute around 30.4 percent of banks’ assets compared with 19.3 percent in Dec-08. Share of advances has witnessed a concomitant drop, from 60.8 to 52.0 percent during the past two years. Unsurprisingly, return on government paper now accounts for 34.5 percent of banks’ gross mark-up/interest income, compared to 28.8 percent in Dec-08.

The consequences of Unsustainable borrowings

The phenomenon mentioned earlier has very important implications on our economy both in the long run and in the short run. The persistent demand for funding on Government’s behalf (through debt and printing money) has fuelled inflation and thereby NOT allowed the State Bank of Pakistan to lower the interest rates. Pakistan currently has the highest inflation and interest rates in the region.

Additionally, the State Bank data suggests that growth in government borrowings, in a rising interest rate scenario, has been crowding out the private sector lending significantly. The shift in asset mix, from advances to investments in government papers for the Banks has only channelized the flow of funds towards the Government.

The Short Run Consequences:

The currently prevailing interest rates are significantly beyond the comfort zone of the business community. As a result, the business community looks to consolidate and defer their projects that require significant capital deployment. It is very important to note that despite high interest rates prevailing in the country, the inflation rate has been soaring and no respite is expected in the short run as the Government continues to borrow from the State Bank to plug their funding gap. The General Inflation this year has been 15% while the food inflation reported by Federal Bureau of Statistics stood at 19%.

It is very safe to assume that currently our economy is in the state of Stagflation and it is expected to remain so in the short run.

The Long Run Consequences:

The long run consequences of ongoing budget deficits are drastic and will be felt in times to come. Firstly, the current budget deficits are NOT as a result of deficit spending towards Public Sector Development, instead only PKR 300bn out of the budgeted PKR 610bn were spent by the government in the previous year (as opposed to the case in India where the budget deficit is a result of massive Public Sector Development Spending). As a result, the infrastructure development necessary to promote economic growth remains ignored in toto. It is now a matter of grave concern that the Government has not been able to fully utilize the allocated PSDP fund over the last 3 years.

On the other hand the crowding out of private sector lending has impacted the private sector investment in infrastructure projects severely. A classic example is the delay in a number of power projects undertaken by the private sector. Data from various banks suggest that there has been on average 2-3 years of delay from the scheduled timeline for such projects to get commissioned. The result is the prolonged power outages and expensive electricity. If the current scenario prevails, WAPDA expects that the power suffering could continue beyond 2018. Not to mention the economic loss associated.

The Bottom line:

The center point of all the economic vows lies in the sharp increase in Government Borrowings over last 3 years without the government spending towards infrastructure and public development. Assuming 170 million of population, each citizen is under the debt of PKR 59,000/- per capita. How it will be repaid is a million dollar question.

The Government has to take the following actions immediately to set the economy on track:

1. Improve Tax to GDP over a period of next couple of years through urgent tax reforms. Currently Pakistan’s Tax to GDP is the lowest in the region. A 1% improvement in tax to GDP ratio adds approximately PKR 200bn to the national kitty.
2. Revamp the Public Sector Enterprises (PSEs) since they suck at least PKR 250bn annually, which is approximately half that of the total PSDP fund allocation last year
3. Efficient and targeted utilization of subsidies instead of a blanket subsidy like in the case of CNG, Sasti Roti scheme etc
4. Plug the leakages of about PKR 400bn of corruption in the system on an urgent basis
5. Serious belt tightening and reduction in day to day operational spending by the Government

The bottom line is that unless the Government takes strict measures towards spending cuts, seize additional borrowings, and utilize the deficit spending towards the infrastructure development, our economic nightmares will continue.

Think from your brain and NOT from your heart – Raymond Davis Saga finally comes to an end as expected

It’s acceptable to think from your heart sometimes …. Especially when Pakistan is playing a cricket match …. However, in matters of national and strategic interests you have to be extremely rational in your approach keeping all the emotions aside.

Our media … well, let’s be fair, they have been used and abused in this espionage game.

The spectrum of our media ranges from Left libertarian to Right Authoritarian. However, the majority of our media analysts and anchors are now either Left Libertarian (minority) e.g. Najam Sethi, Mosharraf Zaidi, Farrukh Saleem, Eijaz Haider etc. or Right Libertarians (majority) e.g. all the main stream media personnel (Kamran Khan, Hamid Mir, Ansaar Abbasi, Mujeeb Ur Rehman Shaami, Haroon Rasheed, Javed Chaudhry, Saleem Saafi …. And the list goes on)

Coming back to the Raymond Davis Saga, our mainstream media just stand confused. They don’t know whom to blame for this drop scene. Someone is blaming Punjab government, others cracking down on Federal government; a few got the courage to blame ISI and lastly interesting comments on judiciary, “this judgment is a black scar on the face of judiciary”. Well well well … I thought that the judiciary was independent … isn’t it?? Ooooppppsssss !!!!

While our mainstream media pundits are running around like a headless chicken, after realizing that all their predictions and propaganda is flushed down the drain and they have been used as a tool by our spy agency to achieve their own goals (strategic interests), the Left Libertarians stand smiling as if they already knew what was going to happen eventually, and that was common sense isn’t it?

This brings me back to the title of the subject that matters of national interests should not be thought through hearts. Currently, mainstream media is baffled with emotions and their objective analysis has been choked and hampered.

Some reality check for our audience; our economy is barely growing at a meager rate of 2% to 3% compared to average regional growth of 6% - 8%. We are in IMF program (rightly or wrongly is a separate debate) which requires slashing of subsidies to curtail our fiscal deficit that is ever increasing. Inflation is spiking so much that real incomes of middle class are actually decreasing. Our army is engaged in war on terror and demanding more money to fund them, tax to GDP is pluming down each year means lesser growth in Government’s revenue. As Farrukh Saleem rightly said “Government wakes up in the morning starts printing 2,000 million rupees to fund its intraday expenses and calls it a day”. Under this brutal reality, here comes Mr. Davis, an “American Rambo”, as some have labeled him, and conducts a Jason Bourne style assassination. Rest is needless to repeat.

Now the question is what is our national interest? Keep a myopic view and execute the CIA contactor, or re-negotiate our terms with CIA by sitting on the table and redefines the rules of war on terror. In the pretext of our circumstances, as I mentioned earlier, any sane person would opt for the latter option. Our Agency did exactly the same, created public pressure, through media leaks while Punjab Government seized the opportunity to gain some political scores. Shah Mahmood Qureshi was sacrificed in the due course. Senator John Kerry’s visit to Islamabad shows the desperation of Americans to get their contractor released. Why Americans were desperate? Simply because they didn’t want this case a precedent for other countries. Subsequent to several meetings of the spy agencies, Mr. Davis was released after fulfilling the necessary legal requirements. He was offered an exit passage in accordance with the rule of law.

Like it or not, Mr. Davis was used as a bargaining chip by ISI and once the “Standard Operating Procedures” were renegotiated, it was considered unnecessary and dangerous to keep Mr. Davis in Pakistan further. Off course, it’s not wise to strain a relationship with international community beyond a certain level, after which you have to behave maturely and go for a resolution.

In my opinion, we have cut a better deal under the circumstances. People should understand that we have to first build ourselves, economically and socially by good governance and vibrant / visionary leadership in order to be in a position to influence our terms, else, all of us will suffer further.

Our mainstream media should analyze the situation in the correct context (like the Left Libertarians did in this case), stop dragging the issue further, and move on to the issues of a much higher importance. For viewers and followers of local media, this whole episode has however, helped to further define the distinction in analytical approaches of Right libertarians and Left libertarians i.e. who thinks through his heart and who uses his brains!

Yet another absurd piece of journalism

While skimming through a number of news papers this morning, I came across yet another piece of absurd and nonsensical journalism. And this time, DAWN was the culprit (Although I find DAWN maintaining relatively better standards in reporting).

The news reported by Mr. Nasir Iqbal appearing in Dawn dated 15^th March 2011 by the title “SC gives loan defaulters chance to file objections” states the following:

“The court has taken up a suo motu notice on media reports that the central bank quietly allowed commercial banks to write off non-performing loans of Rs54 billion under a scheme introduced by former president Pervez Musharraf. The amount swelled to Rs256 billion after the period of written-off loans increased till Dec 2009 (from 1971)”.

The above mentioned lines are ugliest piece of crappy reporting that has numerous flaws and facts twisting.

1. The writer is trying to give a false impression that under some conspiracy scheme, Mr. Musharraf (The president) allowed write off of loans by Commercial Banks (Private Business) through the Central Bank (Regulator). This is clearly fact twisting since the Supreme Court is probing the loan write offs since 1971, but it has nothing to do with Mr. Musharraf or his “scheme”. The writer is clearly giving a false impression that Supreme Court is probably implicating Mr. Musharraf in this case as a mastermind which is certainly NOT the case.

2. Someone should tell this idiot writer that Banking Policy Regulatory Department which deals with the Prudential Regulations for commercial / microfinance banks is headed by the Governor Sate Bank and NOT the President of Pakistan. And there was NO such “special scheme” during 2002 – 2007 that secretly allowed commercial banks to write off loans. Yes there were write offs of the loans in that period and court is perhaps rightly inquiring the matter.

The bottom-line is that the writer here is deliberately misstating the fact and twisting it according to his own bias, giving an impression that Mr. Musharraf was directly involved in facilitating loan write offs. Shame on you Mr. Nasir Iqbal.

The IMF program and Reformed GST; a positive step forward

There have been a lot of talks over the Reformed GST (RGST) since the cabinet has approved the RGST to be imposed effective from January 2011. There has been a hue and cry all day yesterday with majority (barring a few) well known media, social and political personalities appeared on various TV programs and criticized Government and IMF on this matter.

To me, it’s an extremely important and a good decision on behalf of the Government. RGST or VAT should have been implemented long time ago and those who have a little bit of basic understanding of what the nature of this tax is will appreciate it.

I am writing this blog just to give a basic understanding of the IMF program and what RGST is all about and what are its mechanics, costs and benefits.
First of all to those who are IMF bashers, please accept the fact that we are under IMF's program since the day we decided to procure USD from them to meet our expenses and run the country. (You can bash Government for going up to IMF, but NOT IMF itself). IMF is just like another Multilateral and it makes money by lending to countries in need of money. Like any other lenders, they impose certain covenants in order to make sure they get their money back with due interest, and this is how they do their business. (It is pertinent to mention here that I am in no way related to IMF or any of its associates, I am just a banker, an Investment Banker, and therefore I understand the mechanics of lending).

Before moving on to RGST lets first understand the IMF program.
Pakistan entered into IMF program in November 2008. A 25 months Stand-By Arrangement (SBA) of US$11.3billion was sanctioned for the country. In addition to that the IMF Board also approved US$451 million disbursement under the Emergency Natural Disaster Assistance framework to help Pakistan manage the immediate effects of the massive and devastating floods.
The SBA program aims to:
1) restore financial stability through a tightening of fiscal and monetary policies to bring down inflation and strengthen foreign currency reserves;
2) protect the poor by strengthening the social safety net—this is a key element of the government’s policy strategy; and
3) raise budgetary revenues through comprehensive tax reforms to enable significant increases in public investment and social spending required for achieving sustainable growth (Source: www.imf.org).

To achieve the above mentioned objectives, one of the key covenants is that the budget deficit should NOT surpass 5.1% of the GDP for the current financial year and 4.9% for the next financial year.
RGST buds from the above mentioned covenant, to enable the Government to generate more revenue and lower the budget deficit.

Here I would like to mention that all the criticism on government to plug the leakages in the system, curtail corruption, taxing the agriculture and real estate sector is truly justified and should be taken care immediately, without any further delays, full stop., and there is no disagreement in this regard whatsoever. BUT, saying that all these actions should be a conditions precedent to the implementation of RGST in highly unjustified. Let’s take whatever “good” coming in our way!!

Now, let’s try to understand what RGST or VAT theoretically is and what will be its mode of implementation.
A value added tax (VAT) or RGST is a form of consumption tax. It is a tax on the estimated market value added to a product or material at each stage of its manufacture or distribution, ultimately passed on to the consumer. It differs from a sales tax, which is levied only at the point of purchase.
Maurice Lauré, Joint Director of the French Tax Authority, the Direction générale des impôts, was first to introduce VAT on April 10, 1954. Personal end-consumers of products and services cannot recover VAT on purchases, but businesses are able to recover VAT (input tax) on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer. (Source: Wikipedia)

15% RGST or VAT and 15% Sales Tax should result in the same end price to the consumer, meaning that RGST is NON inflationary; let me demonstrate how:
Assume that currently there are no taxes (Sales tax or RGST) and a Farmer (A) grows potatoes and sells it to a Chips Manufacturer (B) at a price of PKR 100. B now sells it to the Distributor (C) at a price of PKR 150. C sells it to the Retailer (D) at PKR 175 who further sells it to the consumer (E) at PKR 200.
Let’s now look at and compare two tax scenarios: 1) Sales Tax is 17% (like it is currently in Pakistan); and 2) RGST of 17% is implemented instead of Sales Tax.
In Scenario 1, the end consumer (E) will be paying PKR 200 plus 17% i.e. PKR 34, total of PKR 234 for a packet of chips.
In case of scenario 2, where RGST is implemented, the farmer (A) will receive a sum of PKR 117 from (B). The breakup will be PKR 100 for potatoes and PKR 17 in lieu of RGST. Farmer (A) then deposits the PKR 17 with the FBR as RGST. Chips manufacturer (B) receives a total of PKR 175.5 from the Distributor (C); PKR 150 for the manufactured chips and PKR 25.5 as RGST. The Chips manufacturer (B) has actually paid PKR 17 to the farmer (A) in lieu of RGST while it has received PKR 25.5 from the Distributor (C). Therefore, the Chips manufacturer (B) will pay the incremental amount i.e. PKR 8.5 (PKR 25.5 minus PKR 17) to the FBR. Similarly Distributor (C) will charge a total of PKR 204.75 from Retailer (D) (i.e. PKR 175 for the chips and PKR 29.5 in lieu of RGST). The Distributor (C) shall pay PKR 4 as tax to FBR (PKR 29.5 received from D minus PKR 25.5 already paid to B). The Retailer (D) shall similarly charge PKR 234 from the Consumer (E) i.e. PKR 200 plus PKR 34 as RGST. The Retailer (D) shall pay PKR 4.5 as tax to the FBR.

It is important to note that the end consumer ends up paying the same amount PKR 234 for the packet of chips regardless of Sales tax (Scenario 1) or RGST (Scenario 2).
The question is then … what is the advantage of RGST?
The answer is simple and straightforward and can be derived from the example above. In case of RGST, every party in the supply chain (A, B, C and D above) are accountable and pay tax to the government directly, and thus to avail the tax credit they have to be registered (i.e. have an NTN number) and maintain appropriate documentation. So, the bottom-line is that all those traders, distributors, and retailers who currently evade taxes, will come into the tax net since they will have to maintain all the documentation to avail the tax credit. (Tax credit in our example for B is PKR 17 already paid to A)

It is estimated that GoP will raise 0.8% of GDP additionally in next financial year upon implementation of RGST provided the rate is similar to the current sales tax rate of 17%. Theoretically, the impact will be non – inflationary if the goods already exempted under current sales tax policy remain exempted for RGST as well. I can only hope that RGST is implemented in its true spirit (corruption free) to attain the desired results as discussed above.

UNDP – Human Development Report 2010

UN has released it Human Development report for 2010.

The Human Development Index (HDI) is an aggregate measure of progress in three dimensions—health, education and income. As a composite measure of health, education and income, the HDI assesses levels and progress using a concept of development much broader than that allowed by income alone. . Few very important observations to be made that when we compare Pakistan with India.

1. Pakistan ranks lower than India in overall Human development index. It has been the case since 1980
2. Pakistan is way below India in Gross National Income per capita
3. Pakistan is also ranked lower in all indicators pertaining to Health and education

However, Pakistan has higher ranking relating to Gender Inequality as well as in Multidimensional Poverty Index. Poverty Index reveals that 22% of Pakistan's population is below the poverty line (USD 1.25 per day) as compared to India where the statistics is 41%.

Despite relatively lower poverty levels, Pakistan has lower ranking than India in overall HDI due to its lower literacy rate, poorer health facilities and lower Gross National Income per capita. It is very interesting to see that "Perception of well being and happiness Index" for Pakistan is higher than India. It means that Pakistanis "perceive" themselves as more prosperous than their neighboring countries where actually they are NOT.

Another nail biter

The second one day between South Africa and Pakistan eneded in a dramatic way with SA just managed to clung to the victory. It was yet another nail biter and an entertaining game of cricket.
Pakistan did well to restrict SA to 228, however as usual Pakistan batting looked edgy, underconfident and occassionally reckless.
If I were to describe ONE reason of Paksitan NOT winning the match yesterday was Fawad Alam's SHORT RUN.
There are three things that Pakistan should consider for the upcomming two games if they want to seal the series in their name.
1. You cant afford to waste first 10 overs at Dubai. The wicket tends to get slower and it gets hard to score runs and pick up boundries as the game progresses and bowl gets older . Therefore its imperative that you capitalize on the initial overs and score minimum at 6 to 7 RPO.
2. Opening slot continues to be a problem, one pair should be selected and should be given a long run till the world cup in order to give them confidence
3. Get Umar Akmal and Umar Gul playing ... you cant keep match winners out ... no matter how much out of form they are. Misbah and Farhat SUCKS !!!

United States of Erotica by S.Kamal

"Pornistan?" Only if you believe one Foxy intern from the United States of Erotica.by S. Kamal
A couple of weeks ago, Fox News published an article on their “World” section titled “No. 1 Nation in Sexy Web Searches? Call it Pornistan.” The article has subsequently been the source of much discussion online, and has been published and circulated to a fairly wide audience. While the point of the article was unclear, the article called Pakistan the “world's leader in online searches for pornographic material” and stated that “Google ranks Pakistan No. 1 in the world in searches for pornographic terms.”
My reaction to reading the article, particularly some of the lewd terms for which Pakistan ranked #1 in, was bewilderment. Perhaps this was why Pakistan’s economy is in such poor shape? It appeared that everyone was seeking the wrong type of stimulus.
That is, until I started checking a few facts. Reader comments on the article on the Fox News website were promptly disabled, so I couldn’t voice my thoughts there. Finally, I contacted the author of the article – who, as I discovered, was an intern at Fox with quite a vivid imagination.
Some facts:
1. None of the rankings in the article were published by Google. Rather, every single absurd term reported in the article (“donkey sex,” “horse sex,” etc.) was manually typed into two Google tools called “Google Insights” and “Google Trends” that give statistics for where in the world certain searches originate. In other words, every single term reported in the article was a term that the Fox News intern who wrote the piece CHOSE to search for.
Now, if I were writing an article on the irony of a government that is passing laws against online blasphemy while its citizens engage in watching porn online (presumably the point of the story – although this hardly seems like a dramatic, newsworthy phenomenon), searching for “donkey sex” would certainly not pop into my mind first. So, I posed this question to the author on her blog, for which her response was: “I did not think up the searches on my own. They were brought to my attention from an outside individual. I am going to respectfully end my engagement in the discussion.” Ah. So her “source,” if you can call it that, is an “outside individual.” Must be quite the colorful character.
2. The method used to produce these results is obviously flawed. Interestingly (but not surprisingly), minor variations of the search terms on Google Insights yield dramatically different results. So I did a 15 minute exercise on Google Insights. First I looked at slight modifications of the terms in the article, to see how countries rank. As an example, let’s take “Donkey sex”, where Pakistan ranked #1, and change the search term to “Sex with Donkey.” The U.S. ranked #1 for “Sex with Donkey” for 2006, 2007 and 2010, and #2 in 2008 and 2009, while Pakistan does not appear in the top five countries for this search term in any of these years. Now, if one were to ascribe scientific certainty to such a finding, as the author has done, one could argue that “Donkey sex” (where Pakistan ranks #1) could refer to a search for donkeys reproducing with each other, while “Sex with Donkey” (where the U.S. ranks #1), is, well, less ambiguous.
In this case, it seems that the Islamic Republic of Pornistan has a lot of catching up to do with the United States of Erotica.
Along similar lines, the U.S. has also been ranked #1 or #2, for the period 2004 through 2010, for the following terms that are slight modifications of terms in the original article: “Sex with school child,”“sex with farm animals” and“sex with camel”. Pakistan was not ranked in the top ten countries for any of these search terms.
To further demonstrate the ridiculousness of this methodology, I’ve documented some results from my own “research.” Let’s just say that an outside source tipped me off that Americans fantasize about having sex with their vegetables. So, I put this to the test. The results, according to Google: The U.S. has ranked #1 for 2004 to 2010 in searches for the following terms: “tomato sex,”“corn sex,”“cabbage sex,” “spinach sex,” celery sex,” “sex with vegetable,” and even “chicken sex” and “tractor sex”. The U.S. also ranks highly in several other searches, “not suitable to publish here.” Surely, these results have deep philosophical implications on the psyche of the average American?
And the gem? The author claims in her blog that: “I contacted the appropriate [embassy] officials and attempted to contact multiple individuals in Pakistan.” Ah. So no one at the embassy responded to her interview request. Yes, we should certainly take our Embassy chaps to task for not paying due attention to this groundbreaking scientific research; and wasting their time instead on trifling issues such as the war on terror, strategic dialogue with India, internal political strife, Pak-U.S. relations, etc. As another commentator pointed out on the author’s blog, a more reliable source for information on internet use in Pakistan may have been to contact the Internet Service Providers Association of Pakistan. The author may have found them through a simple Google search – if she wasn’t too busy Googling her sex search data.
I could say that this is journalism at its worse. But, to be frank, this is not journalism. This is a dishonest and irresponsible story, written in very poor taste.
As a respectable news source, Fox News needs to publish a retraction of this story, or at the very least, some clarifications on the intent of this article and the methodology employed. I believe this is in order, lest the general public conclude that they are in the business of cheaply seeking attention through controversy.
The author can be reached at sxkamal@gmail.com