ABC of the economics of tariffs and import quotas-II

SHAGHIL AHMED AND IFFAT ARA

ARTICLE (July 03 2007): To summarise, the main results from the imposition of a tariff on the importing country are the following:

1. Quantity of imports falls and domestic prices inclusive of tariffs rise.

2. Domestic producers gain.

3. Domestic consumers lose.

4. Government gains.

5. Domestic economy also gains as a result of lower world price (a terms of trade gain).

6. If the country is relatively small, effect 5 above is very small, and there are net welfare losses because consumers lose more than producers and the government gain.

Our analysis is, of course, conducted with many simplifying assumptions. In particular, it done in a partial equilibrium framework and under the assumption that markets are perfectly competitive. However, economic analysis shows that in most cases the results of partial equilibrium analysis still carry through to a general equilibrium framework.

THE ECONOMICS OF IMPORT QUOTAS
An import quota is a direct restriction on the quantity that may be imported of a good. An example of this is the case of textile quotas. Many industrial countries, including the United States (US) and the major European countries, imposed quotas on the imports of textile and clothing products from developing countries in 1974 under the Multi-Fibre Agreement (MFA).

In 1995, the MFA was replaced by the Agreement on Textiles and Clothing (ATC), which scheduled a gradual phase-out of the quantitative restrictions in several stages over a ten-year period, with quotas finally completely eliminated starting January 1, 2005.

This has led to serious concerns about how Pakistan's export performance will fare in the now quota-free environment. To understand the implications for Pakistan, it is first necessary to know what economic theory has to say about the implications of quotas - and their removal - for both the importing and the exporting countries.

SITUATION WITHOUT QUOTAS
For the importing country, the initial situation is very much like the one discussed in the previous section before the introduction of tariffs. We reproduced it in Figure 5, but for the sake of change with slightly different illustrative numbers.

The initial world price is $100, which is the price at which the domestic country can import the good. At this price, domestic production is 400 units of the goods and domestic demand is 1,000 units, so that 600 units are imported from abroad.

EFFECTS OF QUOTAS
Now suppose we are talking about the textiles and clothing market and the US (say) imposes a quota of 200 units on the imports of these items. The exact implications depend on how the quota is enforced. One example is the imposition of quota by the US on imports of foreign cheese.

In this case, import licenses are given to certain trading firms, each of which is allocated the right to import a maximum quantity of cheese each year. In other important cases, such as quotas on imports of sugar or imports of apparel under the MFA or ATC, the right to sell in the importing country is given directly to the government of exporting countries. Since we want to focus on the textiles example, which is more pertinent to Pakistan, we will assume that the license is issued directly to foreign exporters.

The domestic price has to rise to reduce desired imports of textiles and clothing by the US to the quota amount of 200 units. In the example shown in Figure 5, the domestic price has to rise to $110 to reduce imports to 200 units. When the price has risen to $110, domestic producers increase their production from 400 units to 700 units and domestic demand falls to 900 units.

Note, that an import quota always increases the domestic price, so we should not be under the misconception that import quotas somehow restrict imports without causing a rise in the domestic price.

What are the welfare effects of this quota imposition in the importing country - the US in our example? Again, we can add up the gains and losses of the different groups.

When the price rises to $110, there will be loss of consumer surplus in the US amounting to the sum of the shaded areas A, B, C and D. At the same time, there will be an increase in producer surplus from the price rise, amounting to the shaded area A. There is no effect on government revenues. The quota rents being generated as a result of the rise in price to $110, which amount to the shaded area C, accrue to the foreign exporters who hold the export licenses.

The net welfare loss is, then, given by:

NET WELFARE LOSS = LOSS OF CONSUMER SURPLUS - GAIN IN PRODUCER SURPLUS = (A+B+C+D) - A = B+C+D > 0

For the importing country (US), there is thus unambiguously a net welfare loss. Part of the consumers' loss is due to more costly domestic textiles being substituted for cheaper foreign textiles and part of it is due to less quantity being consumed.

Domestic producers gain because they sell more and at a higher price. Note, that only a part of the losses of the consumers are offset by the gains of the producers (the area A). The rest of the area (B+C+D) represent net efficiency losses to the importing country from distortions of domestic incentives to consume and produce and from accrual of quota rents to the foreign exporters.

How do these quota restrictions by the importing country (the US in our example) impact on the exporting country (Pakistan, say)? First, those exporters that are able to still export - namely, the holders of the 200 unit quota licenses to sell in the US market - gain by the amount of the quota rents, as already discussed. Second, those exporters who were exporting before (recall 600 units were exported before the quota restriction came into place), but are no longer able to export, will lose out.

EFFECT ON IMPORT PRICES OF QUOTA REMOVAL WITH MORE THAN ONE FOREIGN SUPPLIER
Now we consider the effect on import prices of imposing a quota on the most efficient supplier and its implications, as the quota is then gradually relaxed and then finally eliminated, as in the case of textile quotas under the ATC. The example is stylised, but meant to illustrate the consequences for the less efficient producers.

Suppose the situation is as depicted in Figure 6. There are two potential foreign country suppliers, supplying goods that are perfect substitutes in the import basket of the domestic country.

COUNTRY A is a more efficient supplier than country B and can supply imports to the importing country at a price of $100, which is lower than the price of $120 at which country B can supply imports. All domestic producers are assumed to be less efficient than either foreign supplier, which follows because the domestic supply curve is assumed to hit the vertical axis at a price higher than $120.8

Equilibrium without an import quota is represented by point E. All 500 units of the good consumed are imported at $100 a unit from country A. Country B and domestic producers being less efficient provide none of the goods consumed. Now suppose an import quota of 200 units is imposed on country A only. This will raise the import price to the price at which the next efficient supplier can supply the goods, which is country B at a price of $120.

Intuitively, this is because the quota on the most efficient producer implies that the importing country will inevitably have to turn to other less efficient producers. At the new price of $120, 300 units will be demanded, which will still all be imported - 200 units imported from country A (up to its quota limit) and 100 units imported from country B. The producers in country A who still hold the licenses to export the 200 units will get quota rents of the amount shown by area R.

Suppose now the import quota of 200 units on country A is gradually relaxed. The price effects will be as shown by the arrows in the figure. Until the quota reaches 300 units, nothing will happen to the price and the amount of imports will shift in source from country B to country A. Once the quota of 300 units is reached, the import price will start to fall and we will gradually move along the part of the demand curve represented by the segment BE and country A's quota rents will gradually decline.

Once we reach point E we are back to the equilibrium without quotas, since the quota becomes non-binding. Country A would have recaptured the whole market at that point.

Thus, we can see that the presence of quotas may have allowed some countries like country B that were not as efficient as country A to remain in the market. However, in the absence of quotas, the third party competition may lead these countries to lose their market share unless a competitive edge is developed and maintained against the most efficient producers.

This result underscores the importance of third-party competition and the difficulties that some countries might face in the post-quota environment for textile trade. If a country like China, say, is more efficient like country A in the example above, it might be difficult for other countries (perhaps Pakistan, hypothetically) that are like country B to compete without becoming as efficient.

SUMMARY OF THE MAIN RESULTS
The main results with respect to the effects of the imposition of an import quota may be summarised as follows:

1. Domestic price rises and obviously the quantity of import falls because of the quota.

2. Domestic producers gain.

3. Domestic consumers lose.

4. The losses of domestic consumers are more than the gains of the domestic producers, thus leading to a net welfare loss in the importing country.

5. Those foreign exporters who are still able to export and hold quota licenses gain, but other exporters who potentially could be exporting without the quotas lose.

6. Quota restrictions may allow some inefficient exporters to survive, which will be difficult to do (without matching the efficiency of the most efficient producers) when the quotas are removed.

These results suggest that when existing quotas were eliminated, as in the case of the textile quotas starting January 1, 2005, the import price in the importing countries, such as the US and the EU countries should have fallen and there should have been a net welfare gain in these countries, with the losses of domestic producers being more than made up for by the gains of domestic consumers.

Moreover, among the producers and exporters there will be gainers and losers. The less efficient exporters will lose market share to the more efficient exporters, unless they can improve their efficiency and international competitiveness.

The purpose of this article was to provide a flavour of the textbook economic arguments for the benefits of free trade and for why trade restrictions such as tariffs and import quotas are likely to lead to net welfare losses. It was shown that under standard textbook assumptions, the imposition of both tariffs and import quotas lead to net efficiency losses.

There are some gainers - domestic producers in the importing country gain, the government also gets more revenue in the case of a tariff, those exporters in the exporting country who manage to get the quota licenses also gain - but these gains are more than offset by the large losses that consumers suffer.

Consumers face these losses because the distortions resulting from these restrictions mean that they have to consume less and at a higher price because of the substitution of some production from the most efficient producers to less efficient ones.

Often the argument for free trade does not get a fair hearing because the interest groups who stand to lose from free trade are very vocal, visible and influential.

By contrast the large aggregate gains which occur from free trade are often very diffuse and made up of rather small gains per consumer but summed over millions and millions of consumers. This makes the formation of special interest groups and political influence more difficult.

It should be emphasised, though, as was noted when we began, that the world of textbooks is a very simplified one. In the real world, which is more complex, many other issues arise. For example, tariffs are distortionary but so is any other tax that is not lump-sum and yet some amount of government revenue has to be raised.

The existence of some tariffs may be optimal as part of a general package of taxes and public finance considerations. Moreover, for free trade to work best, it must operate from both sides involved in any international trade. This raises concerns having to do with perceptions of the lack of a level playing field being provided by the other side, which is the source of complications and stalling of WTO negotiations, for example.

There can be problems related to efficiency versus equity as well. What should be done when the inefficient domestic producers going out of business leads to large employment losses, particularly of low-skilled relatively poorer workers?

The free trade argument often rests on the principle that there are net efficiency gains, so that the gainers could in principle compensate the losers and still be better off on balance. But redistributions required to prevent the poor from becoming poorer hardly ever occur.

There are other political economy considerations as well. For example, there is an argument for deviating from free trade that rests on domestic market failures. If some domestic market fails to function as it should, deviating from free trade might help reduce the consequences of this malfunctioning.

This rests on the theory of second best, which states that if one market does not work properly it may no longer be optimal for the government to abstain from intervention in other markets.

Some also argue for the protection of key infant industries until they can get beyond their baby steps and for protection of key strategic industries (which might involve national security considerations) from foreign competition.

In this article, we do not take particular positions on these complex issues. The goal rather was more modest; the main point was that, in order to understand these more complex issues and appreciate the debate on them, one must first understand the textbook case for free trade and why trade restrictions could cause national welfare to fall in principle.

It is hoped that after reading the article carefully, the reader can better follow and appreciate the basics of the economics of tariffs and import quotas, which is a crucial starting point for an understanding of the issues involved in the debate about free trade.

(Concluded)

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Solving economic issues

Thursday,july 05,2007

THE federal budget has been passed and so have been all the four provincial budgets. In fact, the attention of the members of the National Assembly was diverted a great deal from economic issues during the debate as there was more focus on political issues. The budget debate was, as such, cut short by two days with mutual consent.

The last day of the debate on the budget, which was presented on June 9 with taxation proposals for Rs1.025 trillion, was devoted to the political issues particularly relating to the elections to be held by the end of the year.

There was greater interest in seeking a compromise between the government and the opposition on the electoral arrangements, including the setting up of a non-controversial caretaker government. Such an arrangement is proving to be difficult and yet the quest goes on amidst predictions that the elections may not be held at all and that President Musharraf may not shed his uniform before the elections. A proper budget debate is normally a reflection of the state of the economy focusing on the major problems and seeking solutions to at least some of them. The just-held budget debate in the NA was not an in-depth analysis of the economic problems the nation confronts but more of an opposition protest against official, political policies and practices and its inequity to the poor and the underprivileged. Amidst the political protests, the local problems of the constituencies of the members also figured.

Understandably, since this is the election year, the opposition is more interested in the political issues such as making new alliances and breaking old alliances. The tone of the budget debate was set by minister of state for finance Omer Ayub Khan who used one sentence to praise the present government and two sentences to damn the previous governments which should include his grandfather Mohammed Ayub Khan’s famous decade of development and which eventually led to the separation of East Pakistan.

Had the National Assembly been interested in a real debate on the economy, it would have adopted a thematic approach to major economic issues instead of following clause by clause discussion of the finance bill. It would have allotted two to three days to discuss inflation threadbare, two days to discuss unemployment and two to three days to debate poverty alleviation with various official claims of lowering the rate of poverty and the non-official denial. Such focused debates would have thrown up some positive solutions which could be applied to solve the major problems with the sanctions of the people.

But the Assembly devoted more time not only to the forthcoming general elections but also to the Karachi killings, the prolonged judicial crisis, the disappearing voters and the dominance of the intelligence agencies. If the political parties are seriously interested in the elections, they should be setting up committees of economic experts who would formulate proper economic programmes befitting a poor developing country trying to grow economically fast but, except the PPP, the political parties do not have economic expert groups.

In fact, it would be better if the opposition parties setup a joint committee on the economy and come up with their own proposals for solving the major economic problems. The economic problems of the country are not simple, nor easily soluble. They are complex and tough to tackle to meet the needs or demands of 160 million people, a 100 million of them under 25 with high expectations.

The political parties need to reach a compromise on major issues relating to the economy as neither the simplistic formulas of Islamic parties nor the demands of socialist parties can truly solve our problems at the moment. If the parties do not work out a compromise, they will be going on a collision course and hence defeating their common cause and failing the people. Providing employment to three to five million people in a year for a few years is not easy. And yet that has to be pursued and achieved. Similarly, promoting high economic growth and holding down inflation or the prices of essential supplies is a difficult exercise. There is too much money coming from various sources, half of which is illegally earned that is spent on mass consumption and pushes up the prices in spite of the fact that food imports now cost 2.6 billion dollars.

Two striking features of the budget are renaming of the Central Board of Revenue as the Federal Board of Revenue (FBR) and investing it with vast powers for taxation and providing relief, and the decision to sell a number of essential items through the utility stores.

Once the National Assembly invested the FBR with such exceptional powers, the Assembly was bypassed when it came to making announcements of new taxes or relief measures. That was all done by the government not in parliament but outside of it. Even the increase in profits of five official saving schemes, from 8 paisa to 50 paisa for 100 rupees, was done outside the Assembly. Maybe the increase in the interest rate was so small, that the government thought that the members of the Assembly would jeer at it and hence announced the increase to the press.

Anyway, for a budget which has no new taxes, the one per cent import surcharge which has now been converted to excise duty will yield a hefty Rs20 billion. The FBR has also raised import duty on 204 items and reduced and raised the duty on a number of small items. It has become a truly autonomous taxation mechanism.

The great promise of the budget to reduce the prices of a number of essential items and seek price stability through their sale at the utility stores has not come to pass. Instead prices of essential goods particularly those of edible items have gone up. The disruption caused by the rains has pushed the price of tomato to 100 rupees at places. Even wheat prices have risen by 30 to 40 rupees for 40 kg despite its abundant supply following a crop of 23.5 million tones and the continuing ban on exports.

A thousand utility stores, mostly where the government officers live, is too small a number through which the essential supplies can pass. We have been promised 500 more utility stores, one in each union council area within 4 months, but that is too ambitious a target for an official agency.

While the FBR has been invested with vast powers, the World Bank has asked it to undertake a study of the taxation reforms that it has carried out so far and their results particularly in respect of the large tax payers unit. And with the current account deficit rising to 7.3 billion dollars in the first 11 months of the year, the World Bank, IMF and the Asian Development Bank have cautioned Pakistan that it may not be able to sustain such large deficits and maintain high growth.

Meanwhile, oil prices in the world are rising and have gone above 70 dollars a barrel in both New York and London. And there is distinct possibility of a rise in prices of power and gas in Pakistan, while the POL prices may be reviewed. There is also a possibility of a rise of half a percent in interest rates of banks with the approval of the State Bank of Pakistan to help its tight monetary policy.

Meanwhile, the free trade agreement with China has come into operation and the Russian consul-general in Pakistan has spoken of the advisability of a free trade area agreement between Pakistan and Russia. There is such an agreement between Russia and India and so Indian goods are cheaper in Russia. If an FTA agreement is signed between Pakistan and Russia, Pakistani goods will become cheaper and more popular in Russia.

Textile exports of Pakistan have been inching up and during the last 11 months rose by six per cent to nine billion dollars. The Social Policy and Development Centre has brought out three handy booklets to help exporters to the European Union with whom we have problems. They are the Elimination of Textile Quotas and Pak-EU trade, ABC of the Economics of Tariffs and Import Quotas and the Elimination of the Textile Quotas and Pak-EU trade – a policy brief. They are timely publications and very handy to its users.


http://www.dawn.com/2007/07/05/op.htm

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

Citizen participation and community empowerment: system recognised as crucial for poverty alleviation-I

RIZWAN RAHEEM AHMED AND SHAFI AZAM

ARTICLE (July 05 2007): Pakistan has a poor track record of democracy as for more than half of its years of existence after independence, it has been ruled by the military. While the military governments always found faults with the politicians, it was always them who created the local government systems.

Pakistan has experimented with two systems of local government before the present devolution plan. These were in 1959 under General Ayub Khan and then under General Zia-ul-Haq in 1979, both during military regimes. The present devolution plan is also a brainchild of military government.

History of local governments in Pakistan is characterised by two factors; Firstly, the local governments have never been autonomously functional in the presence of democratic governments. Secondly, every time a new system of local government was created, it was totally from a scratch with no linkages to the previous system.

Under the previous system of local government, there were four levels of municipal government in the urban areas: town committees, municipal committees, municipal corporations and metropolitan corporations. Members of the council elected the senior officers of these councils and the controlling authority was the elected house.

There was a three-tier system of local government in operation in Pakistan in the rural areas, where Union Councils, Tehsil or Taluka Councils and District Councils were supposed to exist. However, provincial governments in practice usually abolished the middle-tier, the Tehsil/Taluka level. As a result mainly Union Councils and District Councils existed, which were elected on the basis of adult franchise.

The elected members then elected the Chairmen of these councils themselves. Municipal status was primarily a function of population. Two types of functions were allocated to local governments-compulsory and optional. Compulsory functions for urban local councils included sanitation and garbage disposal, water supply, drainage, education (primary), fire fighting, public streets, street lighting, and social welfare. Whereas major functions of rural councils included provision, maintenance and improvement of public roads, water supply, drainage, primary schools, medical and veterinary services.

In practice, however, the councils were just performing some of the functions. It has been argued that the allocation of functions to the councils was very liberal. However, the availability of resources and institutional capacity for undertaking development work has been the operative constraints.

Since local governments were not a central part of the Constitution and were delegated powers by the provincial governments, local governments actually owed their existence and powers to the provincial governments. Provincial governments could dismiss local governments by themselves or on the advice of the federal government.

This was a subjective and dominating, relationship; local governments did not operate independently from the provincial government and could hardly exercise any influence. From senior appointments to requests for more resources or the permission to increase taxes and rates, local governments were dependent upon their provinces. It would not be unfair to say that provinces controlled local governments. Besides, the budgets of local councils had to be approved by the provincial government, who were entitled to make amendments and suggestions.

Pakistan has a federal administrative structure guided by the Constitution of Pakistan of 1973 with amendments. Parliament consists of the National Assembly and the Senate. National Assembly members are directly elected on adult franchise basis and have a term of 5 years in office.

The National Assembly determines the major policy issues and passes annual budget and legislation. It elects the Prime Minister from among its members. The Prime Minister forms the cabinet from among members of the National Assembly and the senate. Provinces have their own elected legislative assemblies and Chief Ministers. Majority of the members of the Senate are elected by the Provincial Assemblies on the basis of proportional representation.

The allocation of functions of the federal government and the provincial governments is specified by the Constitution with the former having the authority to make laws with respect to any matter in the Federal Legislative List and the later in the Concurrent Legislative List. However in case of a dispute between the two, the writ of federal government shall prevail, hence providing for the root of centralisation in Pakistan.

Until the introduction of current legal changes 8, the Constitution of Pakistan did not fully recognise local governments as separate tier of government with their own powers and functions. They were essentially viewed as extensions of the provincial governments, having been created by the provincial legislation, through which some functions were delegated to them.

The purpose of giving an overview of the old system was to prepare a ground for comparison with what the new plan promises to offer by way of addressing the issues identified. Pakistan began implementing a major devolution plan in 2000, which has produced a new breed of local leadership under the military-led government of General Pervez Musharraf, who also holds the civilian office of the President of Pakistan. Some studies have viewed the current devolution exercise in Pakistan as a success; others have seen it as the military's attempt to prolong its rule in Pakistan.

The National Reconstruction Bureau (NRB) developed the Local Government Plan in 2000, and the provincial governments promulgated the Local Government Ordinance in 2001. The aims were to extend democracy to the local level, to create a proactive citizenry that directly solves problems through community organisation and projects, to strengthen local legislative bodies, to improve respect for citizen's rights and improve service delivery, and to reduce high levels of corruption.

These aims have measurable endpoints. Their achievement will depend on the level of Governments and civil society effort, the measurement of any progress and, based on reliable local evidence, midstream adjustments to reinforce changes through positive feedback. The objective of the study is to evaluate the performance and effectiveness of CCBs (Citizen Community Boards) in income generating field in Sukkur, Larkana and Nawabshah district, furthermore, to evaluate the participation of local people in CCBs projects in Sukkur, Larkana and Nawabshah districts.

THE CITIZEN COMMUNITY BOARDS (CCB): The development at the level of all tiers of local government is governed by the Citizen Community Boards (CCB). The CCB are designated agents of change and catalysts for activity. This institution has been created to organise and enable proactive elements of the society to participate in community work and undertake development-related activities in both rural and urban areas following a bottom-up and participation based approaches.

In the previous system, administrative control as well as development planning was carried out through a centralised system. It was essentially a top-down approach in which the people, for whose alleged benefit the development was being done, were conspicuous by their absence in the entire decision-making process. By creating an enabling environment, the people are themselves involved in arranging and managing various kinds of social and developmental projects.

In a local area, a group of non-elected citizens may set up a voluntary organisation with the name of CCB. The creation of CCBs is formalised through registration.

Unlike NGOs, which are registered under various laws; the CCBs are registered with the Community Development Office of the respective District under the Local Government Ordinance. The CCB has a general body, comprising all its members, which elects a Chairman, Executive Committee and a Secretary of the Board for carrying out its functions. A CCB may raise funds through voluntary contributions, gifts, donations, grants and endowments for its declared objectives, ie establishing a needed welfare or development project for the community. It may also receive project-based cost-sharing support from any local government in accordance with the provisions of the Local Government Ordinance.

The law lays down that at least 25 percent of the District development funds will be reserved for projects that will be identified, planned and sponsored by the CCBs. The Boards will submit the details of their development projects along with the proof that they have collected at least 20 percent of the estimated cost specifically for that project.

The Union Council and the Union Administration will then take up the project either with the Zila Council or the Tehsil Municipal Administration for approval and grant of the matching funds at the Union and/or Tehsil and/or District levels.

Depending on the socio-economic characteristics of the Union, the District Government or the Tehsil Municipal Administration may grant funds up to 80 per cent of the total estimated cost. Since development funds are available at all three levels, the Boards may seek funding from any level. Following the selection and approval of the project proposal by the Council, an agreement will be signed between the authorised official of the Local Government and the CCB.

A major problem has been the non-establishment/registration of CCBs. It is taking a lot of time for people to grasp the idea of the concept. This is also affecting the utilisation of allocated funds for development projects to be implemented through the CCBs.

OPERATIONAL ISSUES: In situations where CCBs have been established and registered, capacity of these entities and those of its members has found to be very weak. They have not been able to formulate projects to benefit from funding allocated by the local governments. Some CCBs are finding it difficult to arrange for 25% contribution to initiate projects.

Non-cooperation of the bureaucracy and elected councillors are also cited as some of the operational constraints. In many cases the required personnel of department for community development have not been posted. The new system tends to isolate the existing local organisations as it puts additional demand on them to fulfil various procedural requirements. It is also contended that in the plans proposed by CCBs are crowded by those put forward by the district development Committees.

CITIZEN PARTICIPATION THROUGH CCBS: The active promotion of CCBs amongst the most vulnerable citizens could help ensure that they do not miss the opportunity for citizen participation and community empowerment, elements now internationally recognised as crucial for poverty alleviation.

The 2004-05 social audit provides evidence that citizen participation is increasing; both generally, for example in increased membership of voluntary groups, and specifically in increased awareness and willingness to participate in CCBs. All the indicators point in the same direction, and there is synergy so that people who are interested in joining a CCB are also those more positive about their community and the way people work together in the community. Again, it will be necessary to keep monitoring the situation for equity of participation.

At present, the vulnerable (poor), women and the uneducated are less likely to participate than others. It will require additional efforts to draw in the more disadvantaged members of society. The willingness to participate is there: people from vulnerable households were as willing to join a CCB as people from less vulnerable households. But they face practical difficulties and special arrangements might be needed to ensure they can participate fully.

CCB promotion could actively target these groups to ensure equitable presence of the most vulnerable in the CCB movement. Women's participation remains a challenge and there is clear evidence of women's continuing exclusion from many aspects even of household functioning. For example, female respondents' under-reported household contacts with councillors, with the police, and with courts. Women councillors described some of the difficulties they faced in their role.

And women were less aware of, and expressed less willingness to join CCBs, undoubtedly because of the practical problems involved. On the other hand, women in the community focus group discussions showed their clear awareness of what was going on in their communities and had ideas about what needed to be done to improve matters. For the first time in the 2004-05 social audit we added some specific questions about social capital, which will serve as a baseline for following this important indicator over time. If devolution works as intended, social capital ought to increase.

To achieve the objectives under district governments, institutional arrangement was done. Formation of Citizen Community Boards (CCB's) is one of the institutions which are unique in nature in the history of local government. People at the grass-root level have been managed to form Citizen Community Boards (CCB's) to develop an environment of self help in collaboration with the government. As a result thousands of CCB's have been established so far throughout Pakistan. Through CCB's local development is being carried on.

In fact, CCB's can recommend projects to be financed by the development budget on an 80:20 principle11, where the community bears 20% of the proposed budget. Some communities have taken advantage of the opportunity by proposing projects to improve water supply and sanitation. Other communities have spent funds on projects that were not urgent in nature.

For instance, one community in Lodhran District used the funds to build a wall around a graveyard. Detractors of the devolution plan point out its financial shortcomings. For instance, the plan has transferred responsibility of municipal service delivery such as water supply, sanitation, primary education, and basic health to the local governments. However, the devolution plan falls short of building institutional, financial, and technical capacity of local governments.

How far these CCB's are successful in coping with the development challenges is not very clear till this date. Therefore, the undertaken study will evaluate the effectiveness and role of CCB's in social development projects (income generation sector) in Sindh province (Sukkur, Larkana and Nawabshah districts).

(To be concluded)

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__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

Education budget



THE government announcement, in the budget 2007-08, to raise the education outlay to four per cent of the GDP to improve the declining standard of education is a welcome move but not sufficient to rehabilitate the facade of the system that has been badly vandalised over the years due to sheer mismanagement of the resources allocated to the educational sector, rampant corruption and maladministration.

Available data suggests that despite high spending, enrolment has decreased in the public sector educational institutions.

At the moment we are spending less than two per cent of the GDP, which is considered peanut in the light of educational budget of our neighbours. India spends 3.5 per cent, Sri Lanka spends about five per cent and Bangladesh about four per cent, and their standard of education is far better than that of ours.

Personally I think this is a misplaced notion on the part of the government that with the injection of more liquidity the standard of education will improve. Increasing educational budget is a good thing but this does not serve as panacea as we have seen in the past that the injection of more liquidity has led to more corruption in the absence of a viable system of checks and balances, which can only be attained if there is efficient but democratic system of governance.

For example, Shah Abdul Latif University has suffered much in terms of its physical and human development. Most of the critics attribute such predicament to the increasing financial indiscipline and deviation from the codal formalities.

For instance, the special audit 2002, released recently, accuses the university of flaws and instances of misappropriation, nonobservance of codal requirements, etc. While cataloguing the details, the report maintained that there had been total of 50 cases of misappropriation, fraud and doubtful cases amounting to Rs703.359 million, 71 cases of violations of rules and nine cases of non-production of record.

The audit reports carried out during the years 2003-2004, 2004-2005 also accuse the university administration of misappropriation and failings in reconciling the accounts with the bank.

As a matter of fact, the only way to check such irregularities could be through computerisation of data and reconciliation with bank accounts to which university has so far turned a blind eye.

In the country where universities are allegedly auctioned like police stations and the highest bidder is appointed as vice chancellor, the proliferation of corruption is not an unusual thing to happen. But if the government wants to raise the standard of education in the country, it has to change its policies and treat the universities as centres of learning and research instead of using them as job factories to recruit the workers of political parties and appoint them as teachers and researchers.

To turn universities into centres of knowledge, however, it is imperative to initiate sweeping administrative reforms under which the appointment of the vice-chancellor must be made on merit rather than political consideration as political interference has ruined educational institutions, resulting in the declining standard of education and diminishing enrolment.

This can be judged from the fact that recently the Higher Education Commission has spent about Rs70 million on the strengthening of the Department of Computer Science, Shah Abdul Latif University, but shockingly no student has turned up for admission this year. The apparent reason is the poor standard of teaching and the practice of favouritism and nepotism while recruiting teachers.
By:
MANZOOR ALI ISRAN

__________________
Irfan Ali Samo
Police Service of Pakistan

Federal budget 2007-2008: a review



Budget making is definitely a very serious exercise and the budget document a solemn piece of legislation that reflects a nation's resolve how best to overcome economic hardships and how to effectively harness the available resources to achieve autarky in all fields of national economy.

Unfortunately, the budget presented by the government for the fiscal 2007-2008 is highly disappointing. It is obviously an election budget and not one based on genuine economic logic. The government has taken credit for what it claims to have achieved by way of seven per cent rise in the GDP and $14 billion as foreign exchange reserve. The question, however, arises as to what extent are these due to the government's economic policies and to what degree due to exogenous factors like foreign remittances of Pakistani expatriates and economic and political assistance received as a result of the government's dubious surrender to US pressure after 9/11.

A recent study on development indicators released by the World Bank on April 15, shows that from 1999 to 2005 the average GDP per capita growth in Pakistan on the basis of purchasing power parity has been 4.62 per cent. During the same period the average per capita increase in other developing countries was: Philippines 5.17 per cent, Indonesia 5.77 per cent, Turkey 5.79 per cent and India 7.32 per cent. It is important to note that the average growth of GDP per capita for all low-income countries during this period was 6.38 almost 30 per cent more than what was achieved in Pakistan. In this context too much clap drap about macro indicator is to be taken with a pinch of salt.

The government's claim about reduction in poverty to the extent of 10 points, i.e. from 34 per cent of the population to 24 per cent, is similarly hardly tenable. In fact this would mean almost 33 per cent of the people living under the poverty line to cross the poverty line upwards. This means that every year 2-3 per cent of the population has moved above poverty line. In aggregate terms this would mean that out of 52 million people living under the poverty line some 13 million have improved their status and got out of the grip of poverty. A statistical miracle indeed!

What about the ground realities? Do these confirm the government's claim? Even the survey (PSLM 2004-05) on the basis of which this claim is made contains evidence, which falsifies this official position. Accordingly to Vol. II of the survey, giving provincial and district data, it is stated in Table 5.1 (Page 406) that actually 24 .15 people interviewed had claimed that they were worst off or much worst off in 2005 as compared to 2001. The remaining 51.5 said that their position has not changed. How can the official claim of 33 per cent of people moving upward from poverty line be reconciled with this confession by the same group of people? Asian Development Bank's latest report on Poverty Reduction Programme of Pakistan (Working Paper No. 4, 2007) also records people's perception that the development programme conceived so far, including the SAP, have not brought about any real qualitative change in the country, particularly, in rural areas.

One feels seriously concerned about the mis-presentation of facts and data by the government. Surprisingly, there are serious discrepancies and contradictions in the budget speech and documents. The minister of state, as well as the prime minister and his advisors have claimed that the size of the current budget is Rs1,875 billion. Yet in the federal budget document the total outlay of the budget is given as Rs1, 599 billion: (Budget in Brief, Chapter 2, p.7). This goes to show how irresponsible the government has been even in a highly serious exercise like budget-making.

Even a cursory glance of the budget reveals at least six major failures, which may be summed up as follows:

1. The country is faced with unprecedented balance of payments and balance of trade deficits. When the government took over in 1999-2000, the trade deficit was $1.74 billion. Now it has risen to over $11 billion. In fact, it is feared that this deficit could be well over $13 billion. The balance of payment deficit in 1999-00 was $1.14 billion, which turned positive in 2002-2003 and became $3.16 billion in the year the current National Assembly was elected. Presently the B/P deficit has reached the Himalayan figure of $6.2 billion. The budget fails to come up with any policy initiative to drastically reduce these two major deficits.

2. Economic growth can be sustained only if the Commodity Sector of the economy grows and becomes the main engine of growth. The growth we are witnessing at the moment is based more on the services sector and exogenous factors like foreign remittances and the US aid for Pakistan's mercenary role in its 'war on terror'. There has been no significant and sustained quantitative or qualitative improvement in the agricultural sector of economy. Basically, the agricultural sector has remained a neglected sector where the cost of production is escalating resulting in food inflation. The industrial sector is also lagging behind, particularly the textile industry, which accounts for almost sixty per cent of our exports. It is because of this crisis in our textile sector that exports have seriously lagged behind. In fact, raw cotton is now being exported ($3 billion this year), while value-added textile exports are on the decline. Other industries including leather, surgical instruments and even the sports industry are in serious trouble. Their cost of production remains high, making our exports uncompetitive. The government has neglected these problems. Unless these problems are thoroughly reviewed, this may lead to even de-industrialisation of Pakistan. Already 116 textile mills have been closed, half a million spindles gone out of motion and several million people rendered jobless. So strong in rhetoric, the budget is silent on the problems of the country's most crucial commodity production sector.

3. Inflation is beyond anybody's control. The common man is caught in its menacing grip. He is unable to have two square meals a day. Food inflation, according to official figures, is over 10 per cent and according to unofficial assessments between 15 to 20 per cent. This is ironical in the context of claims about bumper agriculture crop. The proposed relief measures stated in the budget are non-starter. Subsidies have always increased corruption and failed to deliver. There can't be a substitute for a correct economic strategy to fight inflation. Out of a subsidy of Rs210 billion that the government claims to offer in vital sectors of public interest, over Rs90 billion are meant for WAPDA and KESC. One wonders, how this hefty subsidy could be relevant in reducing inflation and bringing any relief to the poor consumers? The country needs a policy to reduce the cost of production by reducing import duties and sales tax on items of daily use. Utility Stores do not cater for more than two per cent of the population and do not serve the poor only. They are hardly the answer. Inflation can be fought only with a combined use of monetary and fiscal policies, taking care of the demands and supply sides simultaneously. This is, however, not being done. That is why the Frankenstein of inflation has been haunting the country throughout the tenure of the present government. Inflation in the year 1999-2000 was 3.58 per cent. In 2002-2003 it was 3.1 per cent and in 2004-2005 it rose to 9.3 per cent. It has been eight per cent during the current and last fiscal year. The budget has miserably failed to seriously address the very crucial issue of inflation in all its dimensions.

4. The other major problem faced by the country relates to poverty and unemployment. Both are organically linked. So is the question of human resource development and manpower and educational planning. The budget is full of rhetoric but there is no plan to effectively face these challenges. There are no sufficient allocations for poverty reduction and massive promotion of health-care. A vital sector like education is starved of resources. The government has increased expenditure and remains addicted to ostentatious living. The development expenditure has been revised downwards to the tune of Rs36 billion. The budget fails on the count of real development, poverty eradication, human resource development and social welfare.

5. Another major problem relates to the elitist nature of the economy. Musharraf-Shaukat policies have made the rich richer and the poor poorer. The extent of inequalities in the country has increased to scandalous proportions during the last eight years. The government's economic survey admits that the top 20 per cent are getting at least 400 per cent more than what is being received by the lowest 20 per cent. According to another study, out of every 100 rupees added to the national income, only Rs3 go to the lowest 10 per cent and over Rs40 to the upper 10 per cent. The stock exchange and real estate boom has only been instrumental in producing millionaires and billionaires because of speculation, not through real value-addition in the economy. The country's elitist class of big landlords and capitalists has become the robber-barons. They are subject to no tax. It is the common man that is crushed under the weight of indirect taxes, while the class of exploiters is spared of any effective tax regime. Inequalities are multiplying and producing divisiveness and polarisation in society. The budget fails to even take note of this gruesome situation.

6. Finally, the government's claim about the fiscal discipline is fictional. The budgetary deficit is above Rs300 billion. The quantum of both the external and domestic debts has increased. Total national debt has swollen to more than Rs1500 billion during the last seven years. The debt management strategy has totally collapsed. Another aspect of the government's failure relates to squandering away of the fiscal space of around forty billion dollars provided during the last seven years in the form of remittances from Pakistani expatriates ($26 billion) and foreign assistance ($10-12 billions). These huge resources have not been harnessed in investment avenues and the bulk of them has gone in conspicuous consumption, real estate and stock exchange speculation. The country is living beyond its means. The rulers have set the worst example. Unproductive expenditure has recorded exponential increase. So has expenditure on the armed forces, whose budget has increased three-fold from around Rs90 billion to virtually over Rs300 billion in the 2007-08 budget. This has made the country's economy lop-sided and the government will have to account for this strategic failure.

Finally, huge allocations made for district and tehsil governments and local unions, are for all practical purposes a lucid political bribe to be used for election purposes. This is a total abuse of public money.

Viewed in this backdrop, the federal budget 2007-08 deserves to be thrown out by the parliamentarians in the same way as happened with the budget presented by Mr Yasin Watto in 1986-87. This year's budget deserves a similar fate. Would the National Assembly do its duty or buckle under pressure from the government in uniform?

By Prof Khurshid Ahmad

A recipe for instability

Mir Jamilur Rahman
August 8 was a nightmarish day. That afternoon the whole country was abuzz with the talk that the government was contemplating proclamation of Emergency. By nightfall, the TV channels were running the strip that proclamation of Emergency was imminent. Some highly placed functionaries of the ruling party let it be known to a select group of media persons that proclamation of Emergency was a matter of time. Some even went to the extent of explaining the reasons for declaring a state of emergency: American threat of attack was cited as the top reason. This brings up the question: how declaration of emergency could stop American belligerency? Is Emergency our secret weapon against foreign aggression and internal threats?

The news of the Emergency stunned and horrified the people. The official spokesmen's denials were feeble and smacked of double-speak. First a spokesman would flatly deny the news and then in the same breath he would add that the government has the authority to proclaim emergency because it is in the constitution.

Next day, Aug 9, the Karachi Stock Exchange fell by 610 points, a record fall. Later, when firm denials started coming in, the market recouped about 320 points. The irresponsible handling of the Emergency news, or was it a rumour floated by the government itself, deprived the people of billions of rupees for no fault of theirs.

Various interpretations are being put forth for the great mishap but none stick. Perhaps, it was written in the stars that whatever important action President Musharraf took, it would boomerang and harm him politically and the country economically. It cannot be explained away by taking cover under 'mishandling'. There could be a plausible reason for the tactical mistakes which Presidency has been committing on a regular basis starting with three-nine, the day the Chief Justice was sacked.

Apparently, Musharraf's faceless advisors are tired and have become impotent sitting at the same posts for ever and ever. They have outlived their usefulness. Resultantly, they have been failing again and again in gauging the public mood correctly in the post 3/9 period. Or perhaps President Musharraf's grip over national politics has softened. He is definitely overworked. In fact, he is a workaholic. I remember him once saying that to him sleeping was a waste of time. With his workload, looking and monitoring every aspect of his government, he gets scant opportunity to relax or have a vacation to get away from it all for a few days.

The saying goes that Pakistan is the most difficult country to govern. This conclusion is rubbish. On the contrary, Pakistan is one of the most pliable countries to rule. The ruler can get away with grand larceny; can put people in jail and forget about them; can tax them without giving them representation; and can make hash of the constitution. However, despite their pliability, the people would hit back violently if they are deceived by the rulers. In fact, it is the rulers of Pakistan who are most difficult to discipline. They make laws and are the first to break them. Most of them consider themselves indispensable. They think and think very wrongly that Pakistan would collapse if they are not at the helm of affairs. They wish to live for ever.

It is undeniable that Pakistan has made more economic progress in the last eight years, 1999-2007, than it achieved in 52 years, 1947-1999. The cynics can attribute the eight years' exceptional progress to extraneous factors but the fact remains it happened during Musharraf's time. Musharraf, with the help of Shaukat Aziz, first as Finance Minister and later as Prime Minister, has done wonders by raising the GDP to over seven per cent consecutively for six years. The per capita income now touches 1,000 dollars and the living standards have risen appreciably. The social sectors have been given all the money they could spend. The foreign direct investment from negligible figures has risen to respectable figures.

It is unbelievable that President Musharraf, who has brought Pakistan to new economic heights by unleashing the hidden potency of Pakistanis, would put his economic bullet train in a reverse gear. It is unbelievable that the architect of the economic growth would himself contribute to the destabilisation of the politics and the economy of the country. The country's stability cannot be assured by the 'unity of command'; it is guaranteed by the 'predictability of command". Gen Yahya Khan had the unity of command and yet he lost the war and East Pakistan. The fact is that people do not like confusion and they hate unpredictability.

President Musharraf might have been personally offended on the restoration of Chief Justice Iftikhar Muhammad Chaudhry, but it has done wonders to the image of Pakistan internationally. Our foreign friends could not believe that Supreme Court could have the courage to go against the wishes of the President. Even the Indian commentators had to concede that their judiciary went underground to avoid the wrath of Indira Gandhi who had proclaimed emergency which only gave political and economic turmoil to India. In Pakistan, the restoration of Chief Justice gave stability to the country. Everybody felt relieved at the decision of the Supreme Court. People annoyed at bad governance saw a ray of hope vis-a-vis judicial activism.

President Musharraf was the first ruler, absolute or otherwise, who was not afraid of the independent press. Because of press freedom the newspaper industry has gown phenomenally in his tenure. He introduced private TV channels in Pakistan, a feat that no political ruler had dared to do. It is not a small achievement to have 50 channels in a short period of five years. It has opened up new job opportunities and it appears it may become the largest job provider.

President Musharraf would meet the media persons in small groups at regular intervals. He preferred direct rapport with them. He interacted with them in a relaxed manner. He valued the feedback he received from them. He now meets them rarely. His advisors do not want direct interaction between the President and the media because such meetings provide mountains of information to the President, which his advisors consider an encroachment on their authority.

It is painful to watch President Musharraf undoing his achievements in economic, social and political fields. He is doing it for the sake of his uniform that he wants to retain at any cost. His uniform has become a red rag to politicians and the people. Legally he may be right that he can fight his re-election in uniform. He can force his way into the presidency in uniform but it would completely alienate him from the people. What President Musharraf needs is political solution to the uniform problem, and not a legal one.



The writer is a freelance columnist. Email: mirjrahman@yahoo.com

http://www.thenews.com.pk/daily_detail.asp?id=67856

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

Pakistan’s per capita availability of water fell by 80 per cent between 1951 and 2006, from 5,300 to 1,105 cubic metres per person per year. Now a report by the Asian Development Bank confirms that the situation is dire and worsening by the year. Anything under 1,700 cubic metres per person falls below the ‘water stress threshold’ and Pakistan is well short of this benchmark — we are hovering, in fact, just above the scarcity ceiling of 1,000 cubic metres. Water quality and waterborne diseases are also pressing concerns, as are salinity, waterlogging and contamination of underground reservoirs. In terms of efficient use, Pakistan is rated at ‘zero’ by the ADB. The bank stresses that this value must quickly rise to 40.

Election 2008
likely expectations from the elected govt

The general elections, scheduled to be held in the country on February 18, are now only 2-3 weeks away. It may, therefore, be interesting to analyse what would be the likely expectations of the people of this country from the newly elected government.

Since the previous government has left and the caretaker government has taken over about 2-3 months ago, a number of unfavourable developments have taken place. The PPP leader and the former prime minister Benazir Bhutto was assassinated when she came out of the Liaqat Bagh after finishing her election speech. Her assassination was followed by serious turmoil, loot and arson throughout the length and breadth of the country. Particularly in Sindh, private and public property including private cars, petrol pumps, railway engines and railway tracks, banks and jewellers shops etc were damaged, burned and looted. While a commission of enquiry has been constituted to look into the matter, the loss resulting from the aforesaid loot and arson is estimated to be over Rs.100 billion.

There is both political and economic instability in the country right now. Although the government has repeatedly stressed that the elections will be conducted on time. Besides, the wheat flour situation, which has already been causing concern for the last so many months, had worsened in recent weeks. The item has disappeared from some parts of the country and its price has increased two-folds. However, the situation has now slightly improved, after the federal food committee (FFC) (constituted by the government recently) took steps to check hoarding, profiteering and smuggling of wheat/ wheat flour across the border.

In addition to the above, power shortage resulting from water scarcity and damage caused to the infrastructure for power generation (during recent riots) caused great inconvenience to the people in all parts of the country during this winter season. The industrial and commercial sector has also suffered badly due to the power shortage and load-shedding during the last few weeks. A number of industrial units have reportedly been closed and their employees have become unemployed.

But, the prohibitive price of wheat flour has, in particular, hard-hit a large number of poor families who are now finding it extremely difficult to make both ends meet within their limited income. The caretaker government is presently considering issue of ration cards to such families to enable them to purchase items of daily use such as wheat flour, pulses, vegetable ghee and sugar etc. from the utility stores, at subsidized prices.

In the above-mentioned circumstances, and poor and low-income groups have suffered badly. People falling in these categories would naturally expect that the elected government should come to their rescue and help them in getting out of the situation, instead of celebrating their victory in the elections. To be able to do this, the party winning in the elections would have to manage with a small cabinet. It would have to shun ostentatious profile and adopt austerity measures. This is, also, the need of the hour at a time when the budget deficit is poised to shoot up to 6.8 percent of the GDP from the present level of 4.2 percent, due to the heavy burden of subsidy on oil, electricity, wheat flour and fertilizers etc.

People are now tired of frequent increases in the prices of items of daily use such as wheat flour, rice, pulses, sugar and vegetable ghee etc as a result of speculative hoarding, profiteering and smuggling etc. They would expect from the new government that it should be able to ensure availability of all items of daily use at reasonable prices, not only at the utility stores but also in the open market. This is a normal practice the world over.

At the same time, it is the duty of the government to protect the poorest of the poor in the country. The double-digit food inflation during the last 2 years had badly eroded the limited income of the poor.

In addition, people would expect from the new government that it should save them from the long and painful load-shedding during the coming summer season. It would of course not be possible for the government to increase the available electricity supply of electricity in the short run. However, an improvement could still be brought about even in the short run through conservation and better management. In the long run, construction of mega dams, power generation from coal and development of wind and solar energy could be of immense help in overcoming the current power shortage.

In all future energy plans, government should give preference to power generation from coal, water, wind and sun. All these sources are cheaper and locally available in abundance.

Even the industrial and commercial sectors would like the new government to address and resolve the problem relating to the growing power shortage, as quickly as possible. During the last few months, both the sectors have suffered losses due to frequent power outages. To solve some of the energy problems, business community was recently required to close their shops early in the evening to conserve energy for industrial and other important uses.

The new government would, no doubt, be facing a difficult task in putting the economy back on the right track. It will have to control the soaring fiscal deficit, bring down inflation – particularly food inflation from its higher level and contain the ballooning trade/current account deficit.





http://jang.com.pk/thenews/feb2008-w...02-2008/p8.htm

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ஜ иστнιπg ιš ιмթΘรรιвlε тσ α ωιℓℓιиg нєαят ஜ

Pakistan's foreign exchange reserves fall by $487 million



KARACHI (May 16 2008): The country's liquid foreign exchange reserves have declined by 487 million dollars during the last week. The State Bank of Pakistan statistics show that total liquid forex reserves held by the country stood at 12.2071 billion dollars on May 10, 2008, as compared to 12.2558 billion dollars at the week ended on May 3, 2008.

Major decline was witnessed in the reserves held by the SBP, down by 788 million dollars to 9.8474 billion dollars during the last week as compared to 9.9262 billion dollars a week earlier. While the reserves held by banks increased by 301 million dollars to 2.3597 billion dollars from 2.3296 billion dollars.

__________________
~~We JuDgE OurseLves By What we feeL CapabLe Of doing,While OthErs JudGe Us By whaT we have already DonE~~

LONDON: Oil dropped below $145 a barrel on Friday, but was still within sight of record highs reached in the previous session when traders bought into the market ahead of a holiday weekend in the United States.

US crude oil was down $1.40 at $143.89 a barrel, below an all-time high of $145.85 hit on Thursday. The contract has risen more than 50 percent this year.

London Brent was down $1.19 at $144.89. Prices fell more than a dollar after Iran said it would make a response later on Friday to proposals from six world powers to try to resolve a long-running dispute over its nuclear development programme.

Investors have rushed into crude oil ahead of the US independence day holiday on July 4, because they are wary of any escalation in tensions between Iran and Israel that have contributed to oil’s rise to a record of $145.85 this week.

Oil has risen about 50 percent this year, driven partly by the tensions over Iran’s nuclear programme, plus expectations that global oil supplies will not be able to cope in the long term with strong demand growth from newly industrialising China and India.

The price spike has caused fuel protests worldwide and has begun to dampen demand in consuming nations, including the United States, the world’s biggest energy consumer. The next milestone is $150 a barrel, which some analysts had predicted the market could reach by July 4.

The weak US dollar has also played a part in boosting oil, which is priced in the US currency. The dollar drew some support on Friday after European Central Bank President Jean-Claude Trichet appeared to play down chances of further interest rate rises.


KARACHI: Dollar weakened against the national currency, as its demand plummeted in the inter-bank on Friday. The greenback shed by 19 paisas in the inter-bank during closing hours trading at Rs 69.59 for buying and Rs 69.64 for selling compared to 69.78 in the previous session.

An analyst in his comments said dollar failed to maintain its strength and its demand has fallen in the inter-bank. Pound streling also weakened against the national currency as it closed at Rs 137.96 at buying and Rs 138.14 at selling compared to 138.52 in the previous session making the national currency weaker by Rs 0.56 paisas. Euro also weakened against rupee as it closed at Rs. 109.24 at buying and Rs 109.44 at selling compared to Rs. 110.78 in the previous session thus the national currency shed Rs 1.54.

Open market: The American dollar gained strength against the national currency in open market on Friday, as it closed at Rs. 69.60 at buying and Rs. 69.90 at selling compared to Rs. 69.50 in the previous session gaining 10 paisas. Pound Sterling weakened against the national currency in the open market as it closed at Rs 136.50 at buying and Rs 136.90 at selling shedding 30 paisas. Like pound sterling, euro also weakened against the national currency. It closed at Rs 108.20 at buying and Rs 108.60 at selling compared to Rs 109.10 in the previous session losing paisas 0.90.



BRUSSELS: The dollar’s fall is a source of global concern and the European Union wants a better balance between the US unit and other major currencies, European Commission President Jose Manuel Barroso said on Friday.

Speaking to a group of journalists before departing for the annual Group of Eight industrial nations’ summit in Japan next week, Barroso endorsed the European Central Bank’s decision to raise its key interest rate despite warnings from some EU governments, notably France.

“I believe it is important we show at European level that we are committed to fighting inflation,” he said. “Inflation is a real threat,” he said, adding it would have been very difficult to understand any other decision by the ECB, which raised its key rate by 25 basis points to 4.25 percent on Thursday.

In an indirect rebuke to French President Nicolas Sarkozy, who had warned publicly that a rate hike would harm a slowing euro zone economy, Barroso said: “When it comes to inflation, I have more confidence in the positions of the central banks than of politicians.”

The head of the European Union executive said he did not expect the G8 leaders to take a stand on currencies but added: “This is a matter of global concern, the falling dollar.

“We would like to see a more balanced relationship between the dollar and other major currencies, including the euro.”

Climate change and soaring fuel and food prices are likely to be the main themes of the G8 summit at a luxury hotel in Hokkaido, northern Japan.

Barroso also said he hoped U.S. President George W. Bush would show more ambition than in the past about curbing emissions of greenhouse gases blamed for global warming.


LONDON: Gold inched lower in Europe on Friday as the dollar held onto the last session’s gains against the euro and as oil prices eased. Concerns over rising inflation are firmly underpinning the metal, however. Trading is set to be light on Friday with New York closed for the Independence Day holiday, potentially leading to increased volatility in the market. Gold eased to $931.00/932.00 an ounce from $932.70/934.70 late in New York on Thursday. Nonetheless traders expect to see the metal well supported above $930 an ounce, as inflation fears driven by high energy prices boost the precious metal’s appeal as a hedge. Gold dipped one percent in New York on Thursday as the dollar rallied against the euro, benefitting from a less hawkish than expected outlook on interest rates from the European Central Bank and firmer-than-forecast US payroll data. Among other precious metals, spot platinum fell to $2,003.00/2,023.00 an ounce from $2,017.50/2,037.50 late in New York. Spot palladium slipped to $452.50/460.50 an ounce from $460.50/468.50 an ounce, while silver eased to $18.04/18.10 an ounce from $18.21/18.31.

Copper slips, lead falls to 17-mth low: Copper prices slipped on Friday as worries about supply disruptions in Peru receded and as the market fretted about a slowing of demand in China, the world’s largest consumer. Lead traded down at $1,565 per tonne in official rings on the London Metal Exchange from $1,610 at the close on Thursday. Earlier the battery-making material lost 4.9 percent to $1,531 — the lowest since February 8 2007. Copper for three-month delivery traded lower at $8,500 in open outcry trade, compared with $8,655 at the close on Thursday. Lead extended the previous day’s losses, when it dropped 6 percent, as investors worried about oversupply in the market. Lead stocks in LME warehouses rose by 175 tonnes to 100,675, more than double the level in January and the highest in almost two years. Zinc was untraded in the rings, but was bid at $1,761 a tonne compared with $1,783 on Thursday’s close. Earlier, it traded at $1,750, its lowest level since December 2005. Nickel slipped to $20,650 a tonne against $20,850, hovering above a two-year low of $20,625 reached on Thursday. Aluminium traded at $3,154.5 a tonne from $3,184. On Thursday it reached $3,229 — the highest level since March 7. Tin was bid lower $22,450 a tonne from $22,850.



How to get high oil prices down will top the agenda as leaders from the Group of Eight rich countries meet for a summit in Toyako, on Japan’s northern island of Hokkaido, from July 7-9. Here are some facts about the issue:

Prices

* Global oil prices doubled in the past year and have risen by 50 percent since the start of 2008, triggering fears over inflation and slower economic growth.

* The record run set a new high over $145 a barrel on July 3, well beyond the previous inflation-adjusted peak of $101.70 in April 1980, a year after the Iranian revolution.

Reasons

* Rising demand and growing investor interest spurred by worries about the global economy and the weaker dollar have been identified as factors.

* Daily demand of roughly 86 million barrels is almost the same as supply. Growing demand from emerging economies such as China and India is stretching supplies.

* Sanctions, then war, have disrupted Iraq’s output for years. Sanctions have also limited exploration in Iran and violence has interrupted flows in Nigeria. Meanwhile high prices have fuelled a trend for resource nationalism.

* Even with plentiful crude there may not be enough refined diesel and gasoline, due to a lack of refining capacity.

Impacts

* European truckers and fishermen have led street protests from London to Barcelona. Several Asian nations have scrapped controls and hiked prices, angering consumers.

* Commercial airlines in the United States and Australia have cut routes and staff. US automakers have reported slowing sales.

* Above $4 a gallon gasoline has become a major campaign theme for Democrat presidential hopeful Barack Obama and his Republican rival John McCain for the US Nov election.

* Lost consumer spending power is hurting retailers, as people cut back on non-essentials. Company profits are being eaten up by the huge rise in energy costs.

Responses

* World leaders and policy-makers are under pressure, but effectively powerless to control the price of oil.

* In June G8 energy ministers pledged domestic cuts through energy efficiency and the development of green alternatives.

* Led by Italy, the G8 wants new curbs on speculators to subdue prices, a move the US Congress also discussed and the International Monetary Fund may report on later in the year.

* Saudi Arabia, the world’s biggest exporter, raised output to near 9.5 million bpd in June, up from around 9.1 million bpd in May, and has promised 9.7 million bpd in July.

* The Organization of Petroleum Exporting Countries (OPEC) has not officially increased output since a meeting last September and has no plans to meet formally until Sept 9.

* China, India and other developing Asian nations have raised domestic fuel prices to curb rising subsidy costs, potentially helping slow future demand growth by passing on some of the surge in global prices.

Forecasts

* Global demand for crude is forecast to rise from the first quarter’s 85.98 million barrels per day (bpd) to 87.69 million bpd in Q4, the IEA said in a June report.

* The IEA’s mid-long range forecast is for tight world supplies to 2013, with capacity at 95.33 million bpd by 2012.

* Reuters’ latest oil poll found analysts expect more price rises for the foreseeable future. Previous polls said US crude would stop rising in 2008 and fall in 2009/2010.



SAPPORO: Between surging oil prices, food inflation and a credit crunch that's depressed global growth, leaders from the Group of Eight economic powers face the gravest combination of economic woes in at least a decade when they gather on 7 July.

The outlook has darkened dramatically since last year's summit in Germany, when the leaders declared the global economy was in "good condition" and oil cost $70 a barrel, which seemed high at the time.

Since then, the US subprime mortgage crisis has erupted, roiling markets and battering financial firms. Oil has doubled to above $140 and food prices have jumped, hurting the poor in particular and raising the threat of political instability.

"Things have changed for the worse across the board," said Robert Hormats, vice chairman at Goldman Sachs (International) Corp. in New York.

Hormats argues that the economic problems now are more serious and widespread than during the Asian financial crisis of 1997-98, where the pain was largely limited to emerging markets.

"Now you have a financial disorder where the epicenter is the US," he said. And fuel and food inflation "are serious matters that affect large numbers of people."

Host Japan had put global warming at the top of the summit's agenda, but the dilemma of how to respond to accelerating inflation and slowing global economic growth could grab the spotlight.

Prime Minister Yasuo Fukuda has said he hopes the July 7-9 meeting at a hot springs resort in Hokkaido, Japan's northern island, will "show some direction" in tackling oil and food prices but stressed it was only "one step" in a longer process.

On oil, analysts are skeptical that the G-8 leaders, representing the US, Japan, Britain, France, Germany, Russia, Italy and Canada, will come up with much beyond urging major petroleum producers to boost output, reiterating the message of their finance ministers, who met last month in Osaka.

Foreshadowing possible disagreement among the leaders, the finance ministers were divided on where to assign blame for the run-up in oil prices. Germany, France and Italy held speculators largely accountable, while the US and Britain said the focus needed to be on boosting production capacity that has barely kept up with growing global demand.

Soaring crude prices have already forced India, Malaysia, and Indonesia to cut subsidies and raise state-set prices on gasoline and other fuels. Last month, China hiked fuel prices as much as 18%.

At the same time, prices of corn, wheat, rice and soybeans and other farm goods have surged due to changing diets, urbanization, expanding populations, extreme weather, growth in biofuel production and speculation.

Spiraling fuel and food costs could drive millions into poverty, the Asian Development Bank has warned. In India, inflation has jumped to a 13-year high of 11.63%.

On the food front, the G-8 leaders may announce an aid package or pledging agricultural investment in poorer countries, experts say.

The credit crisis and global market turmoil are sure to be discussed, but with central bankers absent the leaders will most likely avoid saying anything specific about interest rates and currencies. The European Central Bank raised its benchmark interest rate a quarter point Thursday, suggesting it saw inflation as a greater threat than slower growth. Overall, the summit's main goal will be demonstrating confidence that they can "work through the oil crisis without causing the global economy to melt down," said Tom Cooley, dean of New York University's Stern School of Business.

"The key thing is not what they do at these meetings but what they do at home," he said. Oil and energy have remained recurring themes at the annual summits, said Hormats, who participated in several of the first meetings, which started in 1975. That initial gathering came after the 1973-74 oil embargo, when fuel prices surged after Middle East oil producers cut off the US and other countries supporting Israel.

"We now have another oil crisis," Hormats said. The summits were originally meant to focus on economic issues, but the agenda has expanded to include terrorism, Africa's development and the environment.

The group's membership also has grown from six to eight, adding Russia in 1997. But many argue that it should be expanded to include China, the world's fourth-largest economy, and other emerging powerhouses like India and Brazil, especially to tackle global issues like energy and climate change.




http://dailytimes.com.pk/default.asp?date=7/5/2008

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