April 27, 2012
Ahmad Raza

ISLAMIC banking has grown reasonably fast in the last decade in Pakistan. People invest religiously trusting the fatwa of the so-called Sharia boards of these banks. Are these financial instruments really riba-free (interest-free)?


Do these instruments conform to the juristic and ethical frameworks laid down by the Quran, the Holy Prophet (PBUH) and the imams of the leading schools of thought?

If the analysis shows otherwise, then why not do ‘modern’ banking instead of labelling riba-infested products as ‘Islamic’ and selling them as halal and riba-free?

The theoretical problem arises out of our inability to comprehend the meanings of two words ‘riba’ and ‘ba’ah’ used in the Quran to strictly prohibit the former and clearly permit the latter. There are two verses in the Quran which deal with the concepts of riba and ba’ah and adjudicate reasons for their subsequent prohibition and permission.

The Quran clearly refers to the inherent psychological nature of men, which ordinarily thrives on boundless greedy profiteering and moneymaking without personal labour and effort. So the Quran clearly describes in a verse this human weakness and declares that those who approve of riba are “possessed by Satan” (2:275). It is strictly forbidden and instead one should engage in ba’ah which requires personal labour and effort.

The second verse of the Quran explains the economic rationality of riba and declares that it is forbidden because it leads to profiteering and moneymaking in a multiplication mode of economic exchange (3:130) which does not involve labour and effort by the owner of the economic resources.

Therefore, one should engage in socially and ethically permissible economic activity of ba’ah. On the other hand, the practice of riba leads to unprecedented social and economic inequalities which create an unjust society, which the Quran and the Prophet disapprove of in manifest words.

Ba’ah is permitted because it is based on rational, ethical and mutually agreed contracts of economic exchange, sharing risks, benefits and liabilities and profit (land, labour, capital, commodity or intellect). The law of riba and ba’ah applies equally and universally to both tangible and intangible economic resources. In simple terms, riba is an irrational, exaggerated, labour-less and unethical accumulation of wealth in a multiplication mode, while ba’ah is a rational and socially and ethically agreed economic exchange of labour and money.

The actual labour and work done by a person is weightier and considered a sacred trust, for according to a hadith the worker is a friend of God.

Now let us illustrate by an example to show what it means to accomplish a riba-free economic exchange. I own one acre of land and I give it for cultivation to a peasant on mutually agreed terms. A riba-free land-tilling agreement between me and the peasant would be something like this: the owner of the land should provide the water, seed, fertiliser and protection in case of natural calamity hitting the crop and distribute ushr forthwith.

The peasant would cultivate the land with honest labour, take care of the field, protect the crop against dangerous animals, sell it at a fair market price and distribute the profit equally with the owner of the land. This land modaraba and the transaction thereof will be a completely riba-free economic activity. The peasant shall be duly compensated for his labour in case he opts out of the transaction before the maturity of the crop.

Let us now analyse a so-called Islamic financial product offered by Islamic banks in Pakistan. The product is known as ‘car modaraba’. The Islamic financial product is a nomenclature shift from the routine banking sector offering the same product as ‘car-leasing facility’. All terms and conditions of the modaraba contract are analogous to the car-leasing agreement, favouring the Islamic bank rather than the end-user. It is a misnomer to call it modaraba because the Islamic bank is not the first owner (in this case the car maker/manufacturer is the true owner).

The Islamic bank thus does not fulfil the qualification of ownership required to enter into a ba’ah with the buyer (in this case end-user of the car). The bank is not a seller in principle, rather a supplier of the car as a middleman and making profit in a multiplier exchange mode from a product which is produced by another party in the first place.Now this Islamic bank imposes all sorts of conditionalities to secure this so-called modaraba contract with the car buyer — in fact a consumer of the car, not a worker as per Islamic framework. This includes car price, car rent (another term for mark-up), takaful (name change for insurance), processing fee, binding contract and capping on further usage of the car. Is this modaraba transaction fair to the parties, free of multiplier mode of economic exchange, sharing liabilities and benefits? The answer would be an emphatic ‘no’.

An economic transaction would be considered riba-free if it avoids multiplier mode of moneymaking, profit-taking and capital-creation. According to Islamic economic rationality, labour is mightier than capital because it creates economic value. On the contrary, Anglo-Saxon liberal economics rests on the reverse proposition (adhered to by banks in Pakistan, both ‘Islamic’ and ‘modern’), which holds that capital creates value and therefore the worker must lay in bondage to capitalistic domination.

The vicious cycle of capital accumulation is perpetuated by multiplier mode of economic exchange. No sector of the economy is exempt from this multiplier effect and hence infested with all the attributes of riba.

The writer is a social scientist and teaches at the University of Management and Technology, Lahore.

ahmadelia@gmail.com
-Dawn

Tahira Mansoor

The budget for the year 2012-13 will be presented in the National Assembly on May 25, which would be the fifth budget prepared by this regime which has failed to meet its budgetary targets in the previous four years.

The economic managers still insist that the budget deficit this fiscal would be within the target of 4.2 percent of the GDP, while the International Monetary Fund in its assessment predicts a budget deficit of over 6.7 per cent of GDP. As things stand presently, the assessment of the IMF looks realistic.
This government has already borrowed over a trillion rupees from the banking system to meet its expenditure needs and is all set to borrow another Rs. 250-300 billion by the end of this fiscal. Its revenues have increased this year to Rs. 1,358 billion during the July-April period, which is 24 per cent higher than the collection of Rs. 1,198 billion during the corresponding period last fiscal. However, the expenditures have increased at a more rapid pace than the revenue collection that continues to increase the gap between the available resources and the total government expenditure. This is an election year and the government will try to be as lenient in taxation as possible which would further burden the economy. The economic managers have already announced that there would be no new taxes in the next budget. They have also stated that a proposal to provide tax relief to salaried taxpayers is also under serious consideration. The prime minister has publicly announced that the next budget would provide relief to the common man. How could a government provide relief to its citizen if it does not have the resources to even fund its recurring expenses? It will again think of ways to generate resources through borrowing. That would be extremely risky as further borrowing would unleash uncontrollable inflation. It would make the lives of poor unbearable. They are already living in misery. Food alone accounts for most of their monthly income. They are left with no resources to take care of the health, education and transportation needs of their families.

They would not be able to tolerate another wave of hyper inflation. This government has already created a sort of record by maintaining inflation in double digits for four straight years and the fifth year would be no different. The reliefs provided during the election year would be temporary. The Musharraf regime tried the same policy in the election years on the hope that it would be able to contain the inflation till the general elections. However the inflation started rising with every passing month and by election date was already in double digit. Any plan (if it was there) to manage the economy after general elections fizzled out as the ruling party lost elections.
This time around the ruling party is again hopeful that its sins of past five years would be forgotten on the relief it provided in its last budget. But it could backfire. The government would not be able to control the excessive power outrages even in election year because it did nothing to reduce the supply demand gap during its rule. The electricity charges would continue to increase with increase in rate of global crude oil. Most of our power generation capacity is based on furnace oil run generators.

The crude oil prices are expected to continue increasing and impact the ability of the government to arrange for payment of furnace oil bill. This regime has added Rs. 1.3 trillion in circular debt and the bleeding in the power system is still going on. The energy crisis is there to stay for the next government. The tolerance of the people of Pakistan is waning and people might not wait for the time needed by the next government to revamp the power system.
No government in Pakistan has the capability to reduce the budget deficit to a tolerable limit within two to three years. The improvement would come in a sustained way over a long period. The investors would not come to Pakistan immediately after the election if this government is defeated. The issues of terrorism, infrastructure deficiencies, corruption and bad governance would not go away immediately. It would require the patience and confidence of the electorate and sincerity and dedication of the next elected government to put the affairs back on right track. The political leadership therefore should prepare the people mentally for the long period of visible improvement.

The next government would have to be realistic. It will have to prove its sincerity. It will have to first ensure that the rot that has gone for five years would have to stop. Stopping further deterioration in the economy should be the first priority of any government that comes to power after the elections. The present regime would ensure that the economy remains in turmoil till the next election but people do get relief through budgetary measures and arranging the money by printing notes, increasing interest rates on national saving schemes to gather money and raising money through central bank auctions.

The economy would be in similar turmoil as was when the Musharraf regime was booted out of power. The present regime has looted the country on will and now is striving to get another term by cementing ties with regional parties. The next government could either be a coalition composed of present partners or coalition formed by the PTI or the PML-N with some of the coalition partners in the present set up. The sailing would not be smooth for anyone that assumes power after election.

The only thing that would benefit the country would be vast improvement in governance, getting rid of loss making public entities transparently at any cost. A full accountability without favour and fear should be the top priority of the next government. The non-development expenses would have to be reduced drastically to create space for the development programs. The new government would have to choose between the sustainable and beneficial development schemes and politically motivated projects having no impact on the lives of the people of Pakistan.

-cuttingedge

April 30, 2012
S. Akbar Zaidi

ELITES are taxing in any context and in any environment. In Pakistan, however, their behaviour makes matters doubly worse.

They are taxing for the sort of values they manifest, always out of line and out of tune with how the rest of the country envisions itself and its future. And also because of their enclave mentalities disconnected to local realities, their globalised mobility with multiple passports and identities, and few deep commitments to Pakistan, except to extract as much personal wealth as possible. Pakistan’s problem is not its middle class, but its elite.

The recent discussion about Pakistan’s middle class in newspapers has been trivialised by the fact that different individuals have spent far too much time counting those who might constitute a category of the middle class. It matters little, at least from a social science and/or political economy perspective, whether they are 40 million or 42 million, whether they drink Coke or Tapal.

What has been lost in the discussion is the politics, social composition, values and ideology of this so-called class. There is ample evidence to support the claim that bigger is not necessarily better. For this reason, one must also emphasise, that there is no ‘single’ middle class, but there are numerous people who constitute differing groups and strata who may belong to this class, broadly, and yet be extremely diverse. In fact, there is no homogenous notion of a middle class in Pakistan, or perhaps anywhere.

The purpose here is not to count how many individuals or families constitute a category called ‘the elite’, or even to define it in any stringent manner. Nor is an argument going to be made about how this category is also not homogenous. The focus is narrower and less ambitious.

It deals with the economic or moneyed or propertied elite, those who ought to, but, for reasons that are explained below, do not need to pay their taxes. This narrow definition of the elite — or the ruling class as it was called some decades ago — excludes many of those who form the elite in Pakistan, but not on the basis of property owned or income received. Clerics, come to mind, and so do many civil servants who are part of the elite primarily because of their location to power and influence, outside the narrower binding constraint of just having wealth.

The question which many economists have been asking of how to raise the tax-to-GDP ratio which has fallen to a mere 8.6 per cent is actually the wrong one. We need to understand why it is that Pakistan’s elite have no interest in raising the tax-to-GDP ratio.

The answer is not as simple or crude as stating that the ruling class — of which this economic and propertied section is an important component — simply refuses to tax itself. While this is certainly true in the Pakistani context, not only is this an insufficient and lazy explanation, the ample evidence of why the elite in other countries do tax themselves, is of more significance. What are the circumstances which make a section of the Pakistani economic elite so different from other countries, and why and how does this elite govern and run such a large country without raising revenue? One reason is that, increasingly, Pakistan’s non-taxpaying elite have disengaged themselves from their need for the state, and are no longer dependent on state resources. The elite have their own schools, hospitals, generators and security. Why should they pay taxes voluntarily to a government whose resources they don’t use? They even contribute to charitable causes and probably even pay zakat to the needy.

Building an international-standard hospital here or a business school there, both of which feed into the enclaved world of the elite, providing essential services primarily to themselves (the elite reproducing themselves) is as far as they are willing to invest. They have no need to invest in public services. Here too, they privatise their contribution to society. If they felt a need to invest in the social capital in Pakistan, they would pay their taxes. The elite live privatised lives.

But they do benefit from the state and extract their private wealth from Pakistan as well, often to deposit it elsewhere. This line of argument would mean that if the state had more resources (taxes) to invest and improve, say, public infrastructure, the elite would benefit even more. However, it seems that without having to contribute very much, the elite make sufficient profits.

Nevertheless, there has to be a tipping point where the elite realise that they need to contribute a greater share in order to continue to retain their privileged position. Clearly, that tipping point, or crisis, has not arrived.

The non-taxpaying elite will only collectively think of saving the system when they see the system collapsing, when it is in a crisis which affects them directly. Until then, to expect those who are Pakistan’s economic and propertied elite, and do not pay taxes, to contribute to increasing the tax-to-GDP ratio, seems improbable. Pakistan’s elite — barring some honourable individual exceptions — is not that forward-looking or vested in Pakistan’s future beyond a certain point.

The need for better public services, hence a better Pakistan, is felt by those who are dependent on the state to provide resources and services, and who are less mobile to move either themselves or their assets abroad. It is the working people of Pakistan, as well as the middle classes, who have to gain political power to force the non-taxpaying elite to do so.

This elite will not voluntarily contribute to public revenue, although given the extent of tax evasion, they need to do so far more than anyone else. The only way one can expect Pakistan’s tax-to-GDP ratio to improve, is through the concerted and collective political action of those who are vested in Pakistan.

The writer is a political economist.
-Dawn

Shahid Khalil

An International Food Policy Research Institute report for the year 2011 has highlighted ongoing challenges to global food security, from food price volatility, extreme weather shocks and famine to unrest and conflicts.
After many years of neglect, agriculture and food security are back on the development and political agendas. Both China and India continued to expand their spending on food security and agricultural production. Some 20 African countries have adopted national agricultural and food security investment plans, in which they will devote 10 per cent of their national budget to agriculture to achieve the agricultural growth of 6 per cent a year.

The US Agency for International Development (USAID) moved forward with its Feed the Future Initiative, begun in 2010, and the World Bank Group maintained its recent increased annual commitments to agriculture and related sectors at about US$6 billion. The Consultative Group on International Agricultural Research (CGIAR) - a global partnership for sustainable development, of which IFPRI is a part - initiated an array of large, innovative research programs in 2011. And the Bill and Melinda Gates Foundation revamped its agriculture strategy with a strong focus on agricultural development in Sub-Saharan Africa and South Asia.

More broadly, agriculture was increasingly seen as part of a larger context. It is becoming clear that agriculture contributes not just to food production, but also to human nutrition and health - conditions that, in turn, can affect agricultural productivity and overall economic growth. Agriculture is also an important element in a number of other interlocking systems. It has strong ties to water, land, and energy, which are, like agriculture itself, under increasing pressure. And many of the events of 2011 underlined how food security - that is, availability of and access to sufficient, safe, nutritious food to maintain a healthy and active life - is linked to other notions of security.
These include economic security (related to employment, incomes, and gender), socio-political security (related to inequality, governance, and conflicts), and environmental security (related to natural resources).

Global food prices rose during the first half of 2011, and fell during the second half of the year. The food price index of the Food and Agriculture Organization (FAO) of the United Nations, which measures monthly change in the international prices of a basket of food commodities, reached a record high in February, but moved steadily downward from June to December, ending lower for the year. Still, food price volatility remained high in 2011.

The factors that pushed up prices during the 2007-08 food price crises were again at play during the 2010-11 crises, including high oil prices, bio-fuel policies that promote the expansion of bio-fuel production, increased weather-related shocks such as droughts and floods, and growing demand from emerging economies. Further, the world remains vulnerable to food price swings because grain reserves are extremely low and staple grains are exported by just a few countries. However, favourable harvests in major producing regions and a stronger US dollar induced a fall in dollar-denominated prices during the second half of the year.

Volatile food prices harm both consumers and producers by increasing uncertainty and making it difficult for households to budget for food consumption and to plan for production. Still, more needs to be learned about the specific impacts of price volatility on the diets of the poor, particularly women and children. In Ethiopia, for example, research on the 2007-08 food price crises found that female-headed households were especially vulnerable
to food price shocks.

The world saw some of the most severe natural disasters on record in 2011. The 9.0-magnitude earthquake and tsunami in Japan; the severe floods or storms in Brazil, Pakistan, the Philippines, Thailand, and the United States; and the drought in the Horn of Africa imposed large economic losses during the year. According to the International Disaster Database, more than 200 natural disasters, affecting nearly 100 million people around the world, occurred during the year.

The record-breaking extreme weather events of 2011 suggested that climate change will put additional pressure on world agriculture in the coming decades. The year provided more evidence that greenhouse gas emissions are rising and that climate change is already affecting agricultural productivity.
Bio-fuel policy changes in 2011 were dominated by the European Union, the United States, and Brazil. In the United States, the Bio-fuels Market Expansion Act of 2011 came into law, and debate centered on whether the Volumetric Ethanol Excise Tax Credit - a tax credit for blending ethanol into gasoline - should be repealed.

The environmental impact of bio-fuel production was an important topic of investigation in the European Union during 2011. As of December 2011, the European Commission had not released its report on bio-fuel impact, but once the research provides more conclusive impact findings and policy options, the region should be able to move forward with adjusting its Renewable Energy Directive.

The links between food, water, and energy also gained attention in late 2011 with the conference, The Water, Energy, and Food Security Nexus, in Bonn, Germany. The Food and Agriculture Organization of the United Nations (FAO) launched a new addition to its State of the World report series with a report called The State of the World's Land and Water Resources, examining the availability of cultivable land, the state of land degradation, and institutions for managing scarce land and water.

A rising world population, growing demand for food, fiber, and bio fuels, and recent spikes in global food prices have placed increased pressure on land, resulting in more land degradation and increasing land prices, particularly in Sub-Saharan Africa, East Asia, and parts of Latin America.

Several initiatives - specifically, the FAO's Global Soil Partnership as well as the Economics of Land Degradation initiative undertaken by Germany, the European Commission, and the United Nations Convention to Combat Desertification - were launched as mechanisms for strengthening sustainable land management through knowledge building and sharing. More should be done to assure the availability of fertilizers in areas where additional fertilizer use is needed and appropriate to improve soil fertility.

Reports on the issue in 2011 by the FAO, the World Bank, and the International Fund for Agricultural Development all highlighted the need for governments to ensure responsible investment in agriculture and to strengthen land administration systems that respect the rights, livelihoods, and resources of all citizens.

In 2011, these new players became more entrenched in global food policymaking processes. For example, the G20 is quickly claiming a growing role, next to the G8, as a principal forum for managing global economic problems. The action plan of the G20 agriculture ministers also emphasized the importance of strengthening the engagement of non-state actors, especially the private sector, in global food security efforts.

Other 2011 initiatives demonstrate the private sector's increasing involvement in global food security efforts. The World Economic Forum released a Roadmap for Stakeholders as part of its New Vision for Agriculture Initiative.

Still, the opportunities presented by these new players have not been fully harnessed. For example, the private sector's presence in many global food security platforms is essentially limited to multinational corporations, and there is no real platform for engaging smaller companies. And until recently, the traditional aid donor community - represented by the Organization for Economic Co-operation and Development's Development Assistance Committee has not involved new players.

To improve household food security, governments in the region will need to adopt policies that stimulate inclusive growth, such as employment generation for the young and poor, as well as expanded and well-targeted safety nets.

In India, Parliament introduced the National Food Security Bill, which would provide rice, wheat, and coarse grains at low prices to more than half of India's 1.2 billion people, making it the world's largest anti hunger program. China announced plans to boost agricultural productivity through increased public investments in water conservation and irrigation. Its water conservation investments will total about US$630 billion over the next 10 years.

In Central America and the Caribbean, high and volatile prices and natural disasters raised concerns about "a hungrier" region. In October 2011, the ministers of agriculture of the Americas approved a declaration emphasizing the importance of increasing investment in agriculture to reduce hunger and poverty and help improve social stability in the hemisphere.

-cuttingedge

May 4, 2012
Sakib Sherani

AT this time of the year, Q block in the Pakistan Secretariat is the epicentre of budget activity (along with the FBR HQ).

Year after year, the budget exercise invariably follows a well-set routine: projected revenues are overestimated by a significant margin, expenditures are underestimated by an even wider margin, and some items on the spending side are best not recognised — even when they are staring budget-makers in the face.

The resulting flight of fancy is termed the federal budget for the upcoming year, both a historic reform budget as well as a pro-poor budget all at the same time, the bureaucracy collects its honorarium, and everyone prepares for another ‘business as usual’ year — 365 days of fire-fighting on a daily basis without an economic policy, reform vision or even a broad plan to stem the rot.

This year the annual flight-of-fancy exercise appears set to soar higher if the finance minister’s somewhat bizarre statements on the economy are anything to go by. On the day the Pakistan Bureau of Statistics (PBS) unveiled the confusing and controversial latest national accounts data, depicting a real GDP growth of 3.2 per cent for 2011-12 (or 2.8 per cent more accurately), the finance minister was issuing statements that economic growth will come in at around four per cent.

Expressing his satisfaction at the ‘strength’ of the economy, he cited the sharp increase in tax receipts and exports as further evidence of an economy that is on the mend. On a previous occasion, he referred to the decline in the public debt-to-GDP indicator as proof that the economy is not facing a rising debt burden.

Since macroeconomic data provides the context for budget-making and economic planning, it is critical for budget-makers to have access to up to date, credible and accurate data. It is equally important that policymakers analyse and report the data impartially and honestly. Clearly, if the finance minister believes there is nothing to worry about on the economic front, his budget is likely to reflect that.

For example, if the belief is that the public debt is not imposing a burden on the fiscal framework, one important implication would be that the size of the fiscal deficit is of little consequence. While this line of thinking could be used to justify an election-year budget with its likely heavy emphasis on salary increases for public servants, generous subsidy provisions (or non-provision, for all that it matters in the current scheme of things) and lack of emphasis on tax reform, it is clearly inappropriate for an economy deeply mired in a fiscal and economic morass that has worsened over the past three years.

The fact of the matter is that the finance minister is viewing the economy through rose-tinted, ‘jiyala’ glasses. The bitter truth is that he has presided over an economy whose condition has never been worse, in aggregate terms, in Pakistan’s history. Economic activity and growth in per capita income are anaemic at best, while investment has plummeted to historic lows. Exports, after benefiting from a spike in international commodity prices during which period they declined in quantity terms, have now reversed course sharply in line with global economic conditions. Inflation appears to have ‘reset’ to a new double-digit base, largely connected to the inaction of authorities on the fiscal front, spelling unending misery for millions. In terms of fiscal space, the budgetary squeeze is best exemplified by one statistic: total debt service payments as a percentage of net revenue (after transfers to provinces). For fiscal year 2010-11, this has ballooned to over 80 per cent, reflecting the effects of a generous NFC award. With only 20 per cent of the revenue available, the centre has to manage the largest expenditure items in the budget — debt servicing, defence, salaries and wages, pensions and subsidies.

While the seventh NFC Award is responsible for worsening the fiscal woes of the centre, placing the entire blame on its door is nothing short of self-serving. This is so for the simple reason that while the transfers to the provinces have increased sharply under a binding constitutional arrangement, there is nothing that should have prevented the finance minister and his team from focusing even more aggressively on broadening the tax base. In a three-year period, the tax-to-GDP ratio should have been raised from an abysmal 8.6 per cent of GDP to closer to 10 per cent with a more genuine effort, with the incremental revenues so raised used to finance the NFC transfers without placing a greater burden on the budget.

That is the other question the finance minister should be asking — but clearly is not: what is the source of the increase in tax receipts, and how sustainable is it? As noted by the Federal Tax Ombudsman’s office (FTO), the practice by FBR of withholding legitimate refunds to taxpayers in order to report larger tax collection has become increasingly more pervasive in the past three years.

The FTO has begun a welcome investigation into this practice, which also formed the basis of the alleged wilful fraud committed by the former FBR chairman in deliberately misreporting tax collection for the previous fiscal year (also under investigation). The FTO should widen the ambit of its investigation to include whether the finance minister was complicit in this farce or ‘just’ sleeping on his job, ignorant of what figures FBR was preparing to report publicly. The blame for FBR’s incompetence and/or wilful misreporting should rest with the head of the division — the finance minister.

In short, this is the difficult overall context the budget should be seeking to address. Going by the past three years’ budgets, however, that appears to be expecting too much.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.
-Dawn

May 6, 2012
Frank-Jurgen Richter

Last May the OECD noted “Millions of workers lost their jobs in the recent economic crisis. And with the global economy still subdued, the OECD expects unemployment to remain high. One lesson from the crisis has been the importance of skills in today’s workplace: job losses among skilled workers were much lower than among the unskilled.

In a globally competitive, knowledge-based economy, having a skilled workforce is necessary to ensure productivity and sustainable growth”.

Years ago it was sufficient to sit at the feet of masters and to be examined by them during the course of conversations to achieve a graduation: at that time knowledge did not change much and many of their theories live on today developed, for instance, by Pythagoras or Hippocrates. Now we demand our children are polymaths, but they rarely achieve their potential due to poor teaching, which we have inherited from our complacency over several generations.

Schools in Europe and America were set up by generous benefactors sometimes with a religious backing and the curricula reflected the Board’s ideas. Those passing with honours often returned as teachers so promoting the early aims… and the cycle continued. As the Board members saw success they did not think to change the curricula. Even just a few years ago as the knowledge base expanded fast the curricula did not look ahead — it was still locked into ‘learn this and repeat it to me in examinations’, which may have satisfied the teachers, but not the industrialists. They said, as they do now ‘… these young people know nothing relevant to the jobs they seek’.

We must ask if it can be done better. The failure of modern education has occupied, at least, two generations, and its rescue will take another two. So what might an interim solution be?

Through my recent travels and meetings I have been informed often of the growing crisis of unemployment, especially of the youth. Various ministers were aware of this but shrugged it off, saying it was an aspect of the financial crisis… ‘later we will re-employ these people’. But they forget that the idle lose their skill set: they need to exercise their brains and work a full day otherwise they atrophy and virtually die. Further, as time passes, new techniques are developed elsewhere and their machinery is changed confounding the failed managers in these countries who now have little capital remaining and thus their out-of-work have no hope, especially the young.

All however is not gloomy. Several trends are apparent. First is that Asia, especially China is looking to re-develop its workers’ skill set to add much more value to its export products (and to sell these items also to their own growing middle class market). Second is that logistics researchers sense a trend of retrenchment as manufacturers, hit by supply chain disruptions caused by large scale disasters, attempt to shorten their own supply chains and to negotiate multiple local sourcing.

The flooding in Thailand and the Fukushima Daiichi disaster in Japan caused direct and indirect chaos to supply chains, halting assembly of vital sub-components that were thus not able later to be incorporated into finished products so whole supply chains had to be closed. If new local supplies are to be sought, new factories have to be created, and new training schemes have to be instigated.

And that brings us full-circle to education again. Obviously, we cannot wait for 20 years for new school children to graduate and enter the job place — though we ought to agitate to have their curricula altered to look to the future. We must act in the short-term to bring youngsters back into a learning environment in conjunction with the once grumbling employers who could create suitable apprentice schemes that would offer diplomas in three to four years and which would train precisely for a given occupation. Critical thinking courses are still a requirement, but more stress will be laid upon skills training that ‘re-engineer and re-focus’ youth to do a good job of work in the near future.

This is not a panacea for these times. Nor should retrenchment be seen as a failure of globalisation, but rather it is an acceptance that the global/local needs a rebalance. Now is probably the right time to begin this change as we see our way to evolve out of the financial mess.
Frank-Jurgen Richter is chairman and founder of Horasis, a global business community
Source: Khaleej Times

May 8, 2012
Dr Muhammad Yaqub

The next budget will be presented to the National Assembly within a month. It will be rubber stamped by parliament without any meaningful debate or critical appraisal. Soon after its passage, it will stand shelved in the ministry of finance and the fiscal affairs and economy will be managed as before without any regard to what was presented to, and passed by, the NA.

The budget will represent a continuity of the failed policies of the last four years rather than a fundamental shift in policies towards sound economic management, particularly keeping in view the fragile political environment that prevails at present and the weight of the forthcoming general election. There are, and will be, a lot of pre-budget activities, meetings, seminars and consultations but the forthcoming budget will be based even more on short-term political rather than long-term economic considerations. In the deafening noise of political sloganeering at the budget time, people should be prepared to face the music of another year of increasing economic hardship and misery.

In a parliamentary democracy, the finance portfolio is usually held by an effective and senior political leader of the ruling party. With the help of technocrats and bureaucrats, he makes a professional assessment of the state of the economy and the budget relying on accurate statistics, and presents sound economic policy proposals to steer the economy clear of any impediments to the realisation of its growth potential while ensuring relative price stability, budget sustainability and balance of payment viability. By sheer weight of personality in the political setup and soundly developed economic and budgetary policies such a finance minister can provide an effective leadership in economic matters to a government and a nation.

The present Pakistani government suffers from two fundamental flaws. First, while we have a parliamentary form of government on paper, the government is effectively being run by an individual residing in the presidency, in spite of the fact that constitutionally he is merely a figure head, as in India, and personally has no background in economics. Second, the PPP has always relied on “imported” finance ministers reflecting their naïve belief that technically more qualified imported finance team will be able to find politically convenient economic solutions to the difficult economic problems of the country, hoping that it will have a magic wand with which to solve economic problems without painful structural reforms on a sustained basis.

The imported finance team, having no political clout and no long-term vision, has followed rather than led the politicians in economic matters, and has ended up with statistical trickery, fiscal irresponsibility and short-term patch work landing the country in a deepening whirlpool of economic misery and chaos. The current finance minister, who has led the economic team for the last three/four years, has been engaged in precisely such a politically futile and economically irresponsible exercise.

The present economic team has indulged in several unpardonable professional sins during its tenure. Some of those are summarised below:

• The economic statistics have been “doctored” and defaced to the extent never witnessed before.

• The budget has been financed by printing of notes by the State Bank of Pakistan (SBP) at a scale never witnessed in the economic history of the country and by pre-emption of commercial bank credit by the public sector to the detriment of the private sector economic activity.

• The skyrocketing prices of individual items reflecting excessive money creation have not been allowed to reflect in price indices through changes in their base and commodity weight and use of below market prices of commodities in their construction.

• The national income statistics have been manipulated to show a rate of economic growth that suits the economic team in presenting a favourable picture of the state of the economy.

• The rising nominal GDP that basically represented a high rate of price inflation has been used to work out ratios that are selectively applied to conceal the underlying deterioration of economic and budgetary situation. For example, when rising debt-servicing was eating up a large part of the share in revenue of the federal government, it was stated by the finance minister that the country had no debt problem by relying on debt/nominal GDP ratio as an indicator of debt sustainability.

• When the federal revenue fell short of the targets, statistical jugglery and outright fraud were used to falsely show a higher revenue collection. Payments were held back to show lower expenditure. Wasteful government current expenditure was sustained by diversion of development expenditure towards politically popular current expenditure. All this jugglery served short term political purposes but undermined long term economic prospects.

• The country’s economic institutions have been be given to incompetent/corrupt hands and losses of public sector enterprises financed through government guaranteed bank borrowing has not been shown in the budget deficit. It gave a deceptive picture of the public finances but the underlying economic and financial situation has gone from bad to worse.

• The foreign exchange reserves have been inflated by including foreign currency deposits of commercial banks in official reserves. Whitening of black money by allowing their transfer through home remittances has been paraded as a great policy achievement. Foreign exchange reserves are kept at a high level by excessive borrowing from the IMF that is due for repayment in the next three years.

• Subsidies being provided to bank owners and private power companies owned by the politicians and their business associates have gone to the rich and powerful financed by the consumers and small savers leading to transfer of income from the poor to the rich and adding to economic inequality. The number of people below the poverty line has increased enormously without capturing them in poverty statistics.

The result of all this statistical trickery, fiscal gimmickry and economic manipulation is that the official economic statistics no more represent the true picture of the state of the economy.

It is such a distorted statistical setting and the state of the economy on which the next budget will be based and presented to parliament. It will be loaded with slogans with no substance in policy proposals and it is likely to leave behind an economy that is on the verge of external debt default and internal hyperinflation.

But the budget documents and the budget speech of the finance minister will have no resemblance with the actual situation and will revolve around false assertions. The budget will over estimate revenue from the existing taxation, understate expenditure, show a low budget deficit target, and make no mention of the massive losses of the public enterprises and in commodity operations. Such a presentation will be professionally false but that will not bother the professionals who will make those statements.

There will be no mention of bringing the agricultural sector, service sector and conspicuous consumption under the tax net. It will have a lot of implicit and explicit subsidies to the rich and hidden taxation of the poor but those will not be revealed in the budget.

It will promise lower interest rates and a stable exchange rate without explaining how it would be attained in an inflationary environment and with increasing balance of payment vulnerabilities.

There will be a boastful statement of reduced reliance on foreign aid and increased reliance on “domestic sources of financing” but without mentioning that those sources will basically be larger borrowing from the SBP and commercial banks which will fuel inflation further.

It will be declared a pro-poor and business friendly budget with no additional taxation, a lot of additional expenditure and less reliance on foreign assistance. The budget will boast of no new taxes, a number of tax concessions to business and industry, a number of dressed up economic relief measures for the poor, a high level of development expenditure, a falling inflation and satisfactory balance of payment outlook. Whether all these boastful statements will have anything to do with reality is another matter.

Such a deceptive budget will take the country to a state of high inflation and the potential of external debt default by the end of FY13.

The finance team of the next government, if it is different from the present one, will have to have professional competence, personal integrity, commitment to national interests, political support and good governance to steer the sinking ship of the economy out of deeply troubling waters.

The writer is a form
-The News

By Syed Mohammad Ali
Published: May 10, 2012

The writer is a development consultant and a PhD student at the University of Melbourne syed.ali@tribune.com.pk

Amid reservations over Pakistan’s ability to take tough decisions in an election year, and broken promises of the last financial package, Pakistan and the IMF held discussions in Washington on the state of the economy and the financing required for averting a fiscal crisis next year.

The finance ministry claims that it has managed to secure commitments to the tune of $5.27 billion from the US, the UK and international financial institutions over the next four years. No further details were reported, however, concerning this supposed financial influx. For instance, what proportion of this money will be in the form of aid, or else in the shape of loans adding to our existing debt burden, is not clear. According to a recent IMF report, Pakistan’s external financing requirements will be much higher in the even more immediate future. In the next fiscal year, Pakistan’s estimated requirement to help manage its fiscal deficit is $10.5 billion. Out of this amount, $4.3 billion will be needed just to pay off prior IMF debts. Being an entity which is primarily in the business of lending money, the IMF does have an evident motivation to lend us more money, even if to pay back its earlier loans. The details of the new IMF lending programme are still not clear though. Perhaps, the IMF will approve fresh credit or else it may rollover repayments.

The last government had claimed with much fanfare that our nation had managed to finally break the begging bowl of IMF loans. However, the incumbents were compelled to return to the IMF when the Friends of Pakistan began dragging their feet on provision of promised aid. But then the PPP-government-requested IMF programme worth $11.3 billion also ended prematurely with $3.4 billion not being disbursed. This was because the PPP failed to ensure central bank autonomy, as well as failing to reform the energy sector and ensuring implementation of the reformed general sales tax. All these unimplemented conditions will probably be reasserted as conditionalities within any new financial assistance package.

Yet our finance minister maintains that the international financial institutions have confidence in the Pakistani economy, since the World Bank has approved an unprecedented lending surge for financing development projects. This is despite the less than enthusiastic IMF and World Bank assessments, which do not consider Pakistan’s short- and medium-term prospects to be looking too good. The rising commodity prices, a probable surge in oil import costs, and impending deadlines on the payment of external debt are expected to sharply diminish the existing foreign currency reserves, which the government keeps boasting about. Rather than a newfound faith in the capability of our financial planners, perhaps a more relevant reason for Pakistan securing a fresh IMF package may be the softening stance of the US towards our government. The IMF lending will probably give a signal to the World Bank to continue extending loans to Pakistan as well.

Some recent press reports, citing undisclosed officials, have suggested that a new programme with the IMF may be signed before the end of the current year. This means that the present government will have to begin implementing reforms immediately after the coming budget. The question is, if the current government will be capable or even interested in implementing tough belt-tightening measures just before the general elections? Furthermore, the IMF will surely seek guarantees to try and ensure that the terms and conditions agreed and signed by the present government are implemented by the new government, and it may even wait to sign a new programme until then.
Besides the apparent underlying imperatives of using international aid to achieve geostrategic goals, and helping the present government keep the domestic economy afloat around election time, one wonders what greater good the IMF lending will achieve. Surely, a prerequisite for this latter objective is to transcend the myopic approach of international and domestic policymakers, and take a harder look at the actual prospects of maximising more equitable growth, even if that means contradicting typical neoliberal assumptions.

-The Express Tribune

Tahira Mansoor


The economic history of Pakistan is replete with crisis after crisis. Some of these crises were associated with the strains that the country developed in managing external accounts. This resulted in serious crisis at the end of the last century and then again in 2008-09.

Pakistan, however, enters the next fiscal year 2012-13 with a fiscal situation that is worse than any other situation the country has ever faced in its crisis-ridden history. The sharp decline in tax to Gross Domestic Product (GDP) ratio should be a matter of grave concern for the economic planners. After devolution of most of the power to the provinces, there is a need to generate more resources both for the provinces and the centre. The higher shares given to the provinces have weakened the federal system's fiscal authority.
The provinces, on their part, are in no mood to exploit their own resources. They still depend on federal transfers for most of their financial requirements. The inability of the federal government to increase taxes in line with the growth in GDP and reluctance of the provinces to exploit the tax potential in the services sector is playing havoc with Pakistan's economy.

The federal government has adopted a very non-prudent approach to meet the fiscal deficit, by either looking to the State Bank of Pakistan or seeking loans from commercial banks. Both these approaches have their drawbacks. The borrowing from SBP creates inflationary pressures and the borrowing from commercial banks crowds out resources for the private sector.

If the government cannot increase the tax revenues, the alternative is to reduce the expenses. The federal government every year tries to reduce expenses but not the non-development expenditures that go on increasing every year. The cut in expenses is made in the development side. This is taxing the infrastructure of the country that is deteriorating with every passing day.

One positive aspect in the on going fiscal year is the melting of ice with India. Trade with India is the hot topic of the day. Economists point out that if the normalization of trade process is not derailed it could add 2-2.4 in Pakistan's GDP growth. They say normalization of trade with India would profoundly affect the structure of Pakistani economy, moving it closer to its comparative advantage. Poor relations with the India have meant a fundamental departure in Pakistan's case. As the norm is that trading partners should be those that are close to the country and also have significant mass.

The structure of Pakistan's economy has changed substantially since 2005. Agriculture in 2005 used to be 22.4 per cent of the GDP which 011 to 20.9 per cent. In agriculture, the share of the major crops has also declined from 8.4 per cent of the GDP to 6.5 per cent of the GDP in 2011. Share of minor crops declined from 2.7 per cent of the GDP to 2.3 per cent of the GDP. Livestock though registered an increase from 10.6 per cent of the GDP to 11.5 per cent of the GDP in fiscal year 2011.

Manufacturing sector has also lost some weight in the GDP table declining from 26.3 per cent of the GDP in 2005 to 25.8 per cent of the GDP in 2011. This is not a good omen for the economy that is still dependent overwhelmingly on imports. There is huge potential for establishing industries in Pakistan, but various factors, including corruption, inconsistent government policies, high cost of doing business and law and order situation.

What is more depressing is that the share of large scale industries has reduced from 12.9 per cent of the GDP in 2005 to 12.1 per cent in 2011 and is still declining. In fact, in 2008 it was 13.4 per cent of the GDP which means a sharp decline of 1.3 per cent in a short span of four years. The share of the services sector has increased from 51.3 per cent in 2005 to 53.3 per cent in fiscal year 2011. There is large scope of revenue collection from the services sector that generates a small fraction of revenues compared with its weight in the GDP table. Doctors, engineers, lawyers and beauticians, designers etc. remain out side the sales tax net. These are the main revenue sources for the provincial government apart from real estate.

Some economists say that though the country is passing through its most difficult phase but one should understand that there has been a transition from military to democracy. However, despite expected recovery in the GDP growth rate from 2.4 per cent in 2010-11 the state of Pakistan's economy remains precarious. Strong agriculture growth this fiscal was marred by lower global commodity rates. The rise in global crude oil rates have coincided with the worst every energy crisis in Pakistan. The country is highly dependent of furnace oil for producing electricity forcing the government to absorb most of the increase at a time when it does not have any spare resources.

The declining textile prices had adverse impact on terms of trade for Pakistan. Economists estimate that it would impact 1.5 to 2.0 per cent of the GDP growth. IN the current scenario the spectre of macroeconomic instability hangs heavily the economy, with continued large fiscal deficits financed by borrowing from banking system, continued strong inflationary pressures, a growing external financing gap and a real danger of a large loss in foreign exchange reserves in coming months.

Investment in physical human capital is now at its lowest ever because of the financial constraints, security situation, political instability and grave persistent shortages in energy sector. Continued rent seeking and widespread corruption is deepening the income divide particularly in a situation where economic pie is not expanding much and the labour market is not robust enough to make a possible real wage increases.

Lax expenditure control and fairly irresponsible and large increase in public sector salaries across the board in 2010, and ineffective efforts to mobilize government tax revenue has resulted in a stagnant or declining tax to GDP ratio, further deepening the fiscal problems.

To increase the tax to GDP ratio the government needs to focus on three things. First is to plug avenues of tax evasion, to foster growth of above 6 per cent that would increase the tax to GDP ratio by one per cent and lastly to force the provinces to generate a substantial chuck of their expenses from provincial revenues that currently stand abysmally low at0.4 per cent of the GDP.

-cuttingedge

May 16, 2012
Dr Muhammad Yaqub

The country has witnessed a steadily declining economy, a weakening of the conventional defence capability and emergence of a directionless foreign policy during the last several years.

World history is full of evidence that no country has been able to maintain and sustain a deterrent defence and an independent foreign policy with a weak economy that becomes increasingly dependent on foreign handouts. Pakistan had a great economic potential but its economic mismanagement has gradually driven it towards economic bankruptcy. Following the deep slide of the economy, vulnerability of defence and loss of independence in foreign policy were inevitable.

In the context of an all-round decay, there is public clamour for economic recovery, a strong defence and an independent foreign policy. However, there should be simultaneous recognition that a heavily indebted government, with the economy falling apart, is incapable of perusing an independent foreign policy and maintaining a viable defence posture. Accordingly, protection of territorial integrity and pursuit of an independent foreign policy have to be preceded by the strength of the economy. Without economic reforms and economic recovery, any attempt to pursue an independent foreign policy is doomed to fail.

Historically, the economic deterioration has taken place due to systematic economic mismanagement by opportunistic and insincere leaderships that indulged in widespread corruption. The first generation of Pakistanis that struggled to create the country, and sustained it in its infancy are perhaps turning in their graves over the performance of the subsequent generations that brought it to the brink of collapse. Since corrupt practices cannot coexist with strong state institutions and amid rule of law, the institutions were systematically destroyed and laws openly violated by those in power in order to create scope for self-serving economic decisions.

With institutional decay, the lawmakers became lawbreakers, the army lost its high moral ground by indulging in spheres beyond its jurisdiction, the custodians of the legal system began to endorse unconstitutional adventures, In terms of foreign policy Pakistan began to carry an economic begging bowls in its hands and, with less accountability, society in general became more tolerant of corrupt practices.

The nation lost its identity and cohesiveness and degenerated into an unwieldy crowd of individual engaged in self-service, with the government becoming an exclusive club of exploiters. The people of Pakistan are now paying the price for what the ruling class did for such a long time.

If the country has to recover and sustain itself as an independent entity, it must move in a new direction in proper sequence, starting with the cleaning up of the national leadership for the initiation of good governance practices. Whether it will change its direction or fall further in a deeper ditch depends on many unpredictable factors, the most important of which is the way the people use their voting rights in the forthcoming general elections.

The new direction has to begin with the emergence of a new and dedicated political leadership that gives first priority to saving the economy through better management and good governance, and at a later stage builds an independent foreign policy and viable defence on the basis of a strong economic foundation. Any other sequence is neither workable nor sustainable.

The first requirement for the recovery of the country from its present malaise, therefore, is an awakening of the masses for Pakistan to be rid of the corrupt political leadership. Interlocking of political, economic and social power will need to be broken. The existing order must be buried deep in the ground through ballot boxes by the third generation of voters, especially younger perople, who are in majority by now. A government of the majority, for the majority and by the majority of patriotic masses through the ballet box is the only way out.

Assuming that general public awakening will bring a new political leadership to the forefront, it will have to make a realistic assessment of the ground realities to liberate Pakistan from the tyranny of the rich and powerful, the shackles of the divisions in the society and the corruption at all the levels. The rule of law and strong accountability at all levels would need to be established simultaneously with economic policy reforms, including building up of state institutions.

It will have to take drastic economic reform measures to stabilise the economy and restore a respectable rate of economic growth with relative price stability and improving balance of payment outlook before rebuilding a deterrent defence and independent foreign policy. A reverse sequence will not work.

The revival of the economy itself will require proper sequencing in economic planning and its execution. It cannot be started with false promises of immediate prosperity and unrealistic expectations of economic boom. It has to be based on a long-term vision of exploiting the growth potential of the country through mobilisation of domestic savings and investing them in productive priority areas. The policies of patronage and privileges would need to be replaced by those that help improve employment, entrepreneurial efficiency and labour productivity and exploit the agricultural, mineral and industrial potential of the country.

Improving public finances through austerity in expenditure and mobilisation of additional revenue should be the first national economic priority. Reorientation of public sector expenditure, austerity in lifestyle of government figures and the people and habit of living within means at the government and individual level would need to be promoted. Prestige public sector projects and conspicuous consumption would need to be abandoned. The loss-making public-sector enterprises should be privatised and economic institutions allowed functioning professionally, without political interference. The government should concentrate on the development of infrastructure, in particular the availability of electricity and gas for industries and of water for agriculture. To pay for such projects, the governments at all levels will have to mobilise real resources.

The tax/GDP ratio has to be doubled from the present low level by dismantling the underground economy, improvement in tax collection, documentation of the economy, extension of tax net to untaxed sectors and transactions and ensuring efficiency and elasticity of the tax structure and horizontal and vertical equity in tax incidence. Monetary policy would need to be freed from the shackles of the ministry of finance to allow adequate flow of bank credit to the private sector at reasonable interest rates and mobilisation of private sector savings by providing a positive real rate of return.

Rising level of productive investment in the private sector would need to be financed by a similar level of domestic savings. The incentive structure would need to be recast to discourage private consumption and promote private saving. Corporate laws and regulatory framework requires strengthening. Inflation would need to be controlled both by supply enhancement and demand management.

The balance of payments will have to be strengthened by reducing dependence on imports and accelerating exports and home remittances. Reliance on foreign borrowing would need to be severely curtailed while foreign direct investment is encouraged.

The growth rate will have to be pushed up to the range of 7-8 percent and effective measures taken to reduce the population growth. Agricultural productivity will have to be enhanced and labour-intensive industrialisation encouraged to reduce unemployment and poverty.

On the social side, the glaring economic disparities would need to be replaced by a more egalitarian welfare state and national priorities would need to be shifted towards education, health and skill development.

It is a tall order of institutional, social and economic reforms but so is the depth of economic problems. Those cannot be tackled in a short time and by mere cosmetic changes. During the period of rebuilding of the economy and restructuring of the society a low-key foreign policy and a less expensive defence posture would need to be adopted.

In short, national reforms cannot start by focusing on foreign policy and building up of defence capability while the economy is neglected. Those areas have to wait for recovery of the economy from its present state of collapse the way China did in the last sixty years.

The writer is a former governor of the State Bank of Pakistan.
-The News