June 1, 2012
By Dr Abid Qaiyum Suleri

The people and the government of Pakistan are going through troubled times and the forthcoming budget would be yet another manifestation of the same. The budget has lost its relevance for many people, who are more concerned about prices of electricity, gas, petroleum products and food items etc. None of these are part of the federal budget anymore. (Highly politicised) independent regulatory authorities determine energy prices, whereas prices of commodities are determined by (highly distorted) markets. Thus, the budget cannot address the problems of the masses. On the other hand, the PPP-led government is also losing its popularity due to the economic miseries being faced by the people of Pakistan. Hence, to me, ours is a classic lose-lose situation where both the people as well as the government of Pakistan seem to be net losers.

If the people of Pakistan were really meant to suffer, then it would have been better to implement the so-called ‘home grown agenda’ that Pakistan agreed with the IMF during the last Stand-By Agreement (SBA). Bringing about power sector reforms, restructuring state-owned enterprises, documentation of the economy through the reformed general sales tax and conversion of non-targeted subsidies into targeted subsidies would not only have brought macroeconomic stability in the country, but would also have pleased the IMF, whom we may have to contact for another SBA very soon.

Budget preparation in itself is an extremely tough exercise, especially when in the current fiscal year, almost all economic targets, including economic growth, investment, saving, exports, imports, tax to GDP ratio, current account deficit, inflation and fiscal deficit will not be met. Fiscal deficit for the current year would be around eight per cent, which is double the target of four per cent set for the period. The country is also facing a current account deficit and a balance of payments problem. In the wake of expensive import of oil, edible oil, fertilisers and repayment of $1.2 billion to the IMF, our foreign exchange reserve dropped from $14.8 billion at the end of June 2010-11 to $10 billion by the end of current fiscal year. The current account deficit may shoot up to $4.5 billion against an official forecast of $1.4 billion. Moreover, our performance in the energy sector is extremely disappointing. Energy has not only become expensive but is simply not available and the existing energy mix is highly skewed towards thermal power, which may be a good option for the oil-rich Gulf countries but not for a cash-strapped Pakistan.

Ideally, the budget should take care of these imbalances. The Public Sector Development Program (PSDP) in the budget is the main instrument to channelise funds for the socioeconomic uplift of the country. In fact, the PSDP is a medicine, policymakers are the physicians and the prescribed medicine is simply not meant to treat our problem so the end result is more pain and agony for the patient (the people of Pakistan) waiting for some relief. This is not something peculiar to the current government only, but rather it is a systemic problem that we have been seeing for many decades.

Let us review the priority areas for four vital ministries: human rights, climate change, food security, and petroleum and natural resources.

In order to improve the situation of human rights, the total budget of Rs30 million would be spent on the construction of two hostels in Islamabad for working women. There is a forecast for floods during the monsoon but none of the Rs150 million schemes from the ministry of climate change cater to disaster preparedness. Further, Rs200 million would be spent on constructing a petroleum house out of the Rs235 million PSDP budget for the ministry of petroleum and natural resources. The Annual Plan Coordination Committee turned down the prime minister’s instructions to allocate funds for a Zero Hunger Programme, under which children in the most food insecure districts were to be provided free lunch at public schools and special ready-to-use nutritious food supplements were to be distributed among breast feeding mothers and pregnant women in these districts.

This is how we are working for pro-poor growth in an election year. The federal budget may not provide any concrete answer to the plight of common Pakistanis either, but the minimum we expect in the run-up to the election is a commitment from political forces that the people’s agenda is close to their hearts.

The Express Tribune

June 1, 2012
By Zubair Faisal Abbasi

Recently, the prime minister claimed that the government could steer the economic engine in such a way so as to obtain a growth rate of 3.4 per cent for the last two years. While the crafty rebasing of the GDP is a moot point, ours is still the lowest GDP growth rate in South Asia and is even lower than the 5.5 per cent GDP of sub-Saharan Africa.

What has caused this dip in Pakistan’s economic performance? Reasons can be attributed to the poor way in which the economic relations amongst the country’s citizens have been governed to the breakdown of the law and order situation and the decay of institutions. The cause of this poor performance can also be credited to the unique geopolitics of the region, with the much-empowered Deep State only adding to the complexities that Pakistan’s economy faces. The low growth that our economy has faced can also be linked to the lack of availability of credit for the private sector, which is instead gobbled up by the government to meet its non-developmental expenditures. Some analysts have attributed the staggeringly low growth rate to the inability of the ruling party to plan and execute reforms in state-owned enterprises such as the PIA and the Pakistan Steel Mills.

At the same time, the low growth performance also shows that the Planning Commission’s growth strategy has failed to deliver anything substantial. Any crafty economist can say that the strategy was not ‘fully’ implemented. However, the fact remains that the Planning Commission did not have a sound strategy to begin with and relied only on rehashing old ideas based on neoliberal economics.

Looking at the components of whatever little growth we have achieved in the past, it seems that the agriculture sector and more specifically the livestock and fishery sub-sectors, have actually been performing well for the last many years. However, the crop sector has consistently been shrinking despite an increase in support prices which has been associated with inflationary pressure on the food basket of the urban poor.

A two to three per cent growth rate is termed as the ‘natural rate of growth’, which can take place without any growth-inducing interventions by the state. So any pride that the government may express over the controversial 3.4 per cent GDP growth will be more for the purpose of meeting political goals, rather than it being a statement of economic progress.

It was argued in a recent seminar on the budget that the Public Sector Development Programme (PSDP), which forms the core of government expenditure, has become extremely politicised. Amongst the different criteria for selection of development schemes, one criterion for release of funds has turned out to be the location of the cities of Multan and Larkana. This is a blatant disregard of the rights of people of other cities while the real growth results of the expenditures meant for Multan and Larkana are yet to be seen.

Dr Kaiser Bengali, a renowned economist, argues that Pakistan should spend at least 10 per cent of its GDP on infrastructure development for the next 10 years. It should be spent on improving the country’s railways, ports and shipping, energy sector and the communication system. This will improve the business environment in the country. While research is needed in this area, a major reason for the higher GDP growth in Punjab compared with other provinces can be attributed to the emphasis that the Punjab government has put on spending on public infrastructure, ranging from transportation to education and health services.

The upcoming federal and provincial budgets and annual development plans need to spend money on physical asset-building and refurbishing of decaying infrastructure. Efforts also need to be made to facilitate the manufacturing sector, which can help eradicate poverty while creating jobs and generating positive externalities for the service sector as well.

The Express Tribune

June 3, 2012
By Dr Pervez Tahir

Anticipating the destabilising tactics of the Opposition at the budget session of parliament, Finance Minister Hafeez Shaikh attempted to make the best of his opening remarks at the launch of the Pakistan Economic Survey 2011-12 on May 31. As for the ‘Ladies and Gentlemen of the press’, they were less noisy than last year, when they had to fight over the limited copies of the document.

The minister began with an assurance of a plentiful supply. This was all there was plenty of, given a low GDP growth of 3.7 per cent, a full percentage point of which resulted from twisting the arms of the ‘autonomous’ Pakistan Bureau of Statistics. It would have been higher, he lamented, had last year’s growth not been revised upwards to three per cent. Agricultural growth would be higher, had there been no floods. But for the misbehaving oil prices and energy demand, industrial growth would have brought overall growth into the desired range of 5-6 per cent. Had there been no National Finance Commission award, the federal government would have had enough resources to augment energy supply and keep it affordable. And if only the government departments were not stealing electricity and paid their bills!

Inflation, the minister said triumphantly, was on the decline: tight monetary policy and a 10 per cent reduction in civilian government expenditure had done it. The fact is that the non-debt and non-military current expenditure of the federal government is the smallest part of the pie. Government borrowing was twice the size compared to the previous year and the State Bank of Pakistan has been on the path of monetary easing. At 11.1 per cent, food inflation is higher than non-food inflation. A 25 per cent increase in tax collection was attributed to the great efforts made by the Federal Board of Revenue. Double-digit inflation, high prices of oil and the depreciation of the rupee to the extent of 3.2 per cent made no mean contribution to it. At any rate, the tax-to-GDP ratio remains stagnant. The minister blames it on the rich and the powerful refusing to pay their share of the tax.

He is no more talking about reforming the failing collectors or expanding the tax net.

It was amusing to see the re-elected senator, Minister Sheikh, maintain that the economy is a source of worry to all; and that this is not a political issue. He seems to have understood that political power will never be deployed to implement economic reform. The word ‘reform’ was uttered not even once. The new growth strategy of the Planning Commission downplays the role of investment and capital accumulation in achieving high growth. Its emphasis is on what it calls the ‘software’ of economic growth — issues of economic governance, institutions, incentives and human resources.

By giving up on reform, the finance minister has served a deathblow to the Planning Commission’s software of growth. On the other hand, the Commission has achieved the objective of dethroning investment. Fixed investment has made a negative contribution to growth since 2008-09. Not only is GDP growth low, its composition is worrisome too. In the overall growth of 3.7 per cent, 2.2 percentage points is contributed by the services sector. Within the services sector, the fastest-growing subsectors are finance, insurance and social and community services. In other words, growth is being driven by consumption. Investment is dead.

Long live the Planning Commission.

The Express Tribune

June 3, 2012
By:Imran Husain

A gentleman asked me to state in one word my thoughts on Pakistan’s economy. “Great” was my response. But my response caused a twitter of negatives amongst others in the group. The truth is, I was neither joking nor being facetious. In the last year, despite having received no payments from the Coalition Support Fund and not taking part in the IMF program, the government has met its repayment obligations. And even after all this, reserves have increased slightly to remain higher than $16 billion. So, kudos to good fiscal management.

The government’s performance is criticised across the board and, regrettably, no one stands up to acknowledge the successes. They are limited, I won’t argue that. What is forgotten is that the government has been forced to provide over a thousand billion rupees as power subsidies. And FDI remains static due to negative perceptions. Despite this, the economy has continued to grow. Maybe not the kind of growth the government or the people would like to see, but under these very trying circumstances an upward trend must be met with applause.

Let’s be absolutely clear: Pakistan’s economy is not easy to manage. The demands of a developing country with a vast population are enormous. Added to this is the massive expense of fighting an apparently endless war on the borders and in cities. It would be enough to burst most treasuries. Resource mobilisation and deployment is crucial.

At this point, the other factor that accounts for my optimism is the downward trend in prices we are experiencing in major imports, petroleum and edible oil. A significant drop in edible oil prices (almost forty percent) and a substantial lowering in oil prices will have a positive impact on the import bill creating the fiscal space badly needed. The worst may not be completely over yet but there is finally a positive light visible at the end of the tunnel.

I was talking yesterday with a major player on the financial scene and he, too, expressed very positive views. He went to the extent of saying that the world’s economies may face pressure but for Pakistan that time is over. So the feel good factor appears to be returning. On the flip side, you have the permanent skeptics whose complaints never end.

These are those who have made so much money from Pakistan that the next ten generations don’t have to work. They flood the cocktail party scene, the “chattering classes”, complaining bitterly how it is impossible to work in this country.

With the budget due at the weekend, all ears and eyes are focused on ‘Q’ block. This is election year for a government that has been embroiled in issues that are typically not encountered. The fragility of the ties with the US would probably figure as the most significant. It is imperative in all aspects, including in financial terms, that a resolution is quickly found. Objectively viewed, both sides have valid points but the US having a bigger audience finds more support. This puts Pakistan in the proverbial ‘spot’ with the rest of the developing world especially those in the NATO coalition. So with sources ‘drying up’, resource review attains greater importance.

There is concern about the stagnant tax-to-GDP ratio. As far as the bureaucracy and its patrons are concerned, the 26% increase in revenue collection allows them to rest on their laurels. However, as the FM emphasises, after the 18th amendment Pakistan is a five-government country; thus there are, or should be, five resource mobilisers. So why are Lahore and Karachi not mobilising for an improvement in the ratio? There could be a potential uptick of 35% and impact the ratio positively. Is it lack of will or is it their psyche?

Ask them to think reform and they will go around in circles and come back to the same point: tax those that are already taxed. Fortunately, the FM does not subscribe to this line of thought. However, he still has not been able to work out two crucial aspects: First, the expansion of the tax net and second, the evasion by certain privileged sectors in collusion with authorities and stakeholders.

The economy is undoubtedly buoyant. A retail outlet in Karachi has a turnover of PKR 4 billion per annum. 75,000 prime designer garments are sold within 90 minutes of launch. There is a run on almost anything new. This is an encouraging trend that the government must support. But the government and the people must also benefit from government’s policies.

When a family buy-out runs into billions of dollars, the question asked is where did the money come from? From the business, of course! But did the business declare enough for these amounts to be kosher? That is the million-dollar question. When the owner of the business is richer than the business, it doesn’t take rocket science to figure out what’s happening.

The mind has focused and it has meaningfully delivered. It is time to take the heart into confidence and believe that real solutions not only exist but also can and must be achieved. That is when the response “Great” will be met with a nodding of heads rather than a flurry of negatives.

The writer can be contacted at imranmhusain@me.com.

June 4, 2012
Hussain H Zaidi

It’s going to be a classic case of borrowing afresh to work off the current debt. If the State Bank governor is to be taken at his word, Pakistan will again be knocking at the door of the International Monetary Fund sometime in the coming financial year to ward off the balance of payment (BoP) problem, including repayment of the Fund’s debt. The present government had started off by borrowing from the IMF (October 2008). In all probability, it will close its term by going back to the Fund. T S Eliot once said, “In my beginning is my end.” The English poet’s famous line befits Pakistan’s economic predicament.

An open economy, in contrast with a closed one, can consume more than it produces. It can import more than it exports (trade deficit) and it can spend more than it earns (deficit financing). The trade deficit is financed by capital inflows from abroad in the form of foreign investment, loans and grants and remittances from citizens working in foreign countries. The deficit financing is done by borrowing either at home or from foreign donors.

For developing countries like Pakistan it’s quite normal to have trade deficits. The problem starts when capital inflows from outside dry up depleting foreign exchange reserves, pushing the exchange value of the domestic currency down and forcing the country to go to multilateral donors, such as the IMF. This is what happened in Pakistan in the second half of 2008: Trade deficit went up to a record $20.74 billion, current account deficit exceeded $14 billion-8.47 per cent of GDP. External debt rose to $46.16 billion (31 percent of GDP) and foreign exchange reserves went down to $11.4 billion. The exchange rate, which had remained relatively stable for the preceding five years, also underwent sharp deterioration, and in October 2008 the average rupee-American dollar parity was recorded at 82.37 compared with 64 at the end of April 2008. With bilateral economic assistance hard to come by, there was no alternative to petitioning the IMF for capital inflows.

Is the current economic situation as bad as it was in 2008? On the face of it not. According to State Bank data available for the current fiscal year (July-April), the trade deficit has reached $12.68 billion, while current account deficit is $3.4 billion (1.7 percent of GDP). Foreign exchange reserves were $16.3 billion as on May 18, 2012. That said, a few factors make one less optimistic. One, the rupee is fast depreciating and its parity with the dollar has exceeded 93. Two, in the coming financial year $4 billion debt repayment will be made to the IMF, which will put enormous strains on the BoP position. Oil prices are on the increase, which will further worsen the current account balance. The precarious security situation will continue to hold foreign investment back. Already in the first ten months of the current fiscal year, foreign direct investment inflows have come down to $668 million, compared to $1.29 billion for the corresponding period of financial year 2011. Finally, even if the relations with Washington improve and the American assistance resumes, the assistance is likely to be too small to make a substantial difference. All this will probably make another agreement with the IMF a “necessary evil.”

From external account we come to the domestic balance. Pakistan’s economy operates within three perennial constraints: (a) the massive public debt both domestic and external, (b) the need to maintain a huge military establishment, and (c) the lack of a tax culture. The first two constraints dictate that a large portion of the public expenditure is invariably allocated to debt servicing and defence, while the third constraint ensures that the public revenue, particularly from direct taxes, lags behind increase in government expenditure. The result is not only enormous fiscal deficit but also misallocation of resources. Add to these the war on terror, which is telling upon the economy for the past decade.

Pakistan has one of the lowest tax-to-GDP ratios-nine percent-and there’s no way economic turnaround can be brought about without pushing that level up. In a population of 180 million, the number of taxpayers is only 1.7 million, the majority of whom are the salaried people whose contribution to the national exchequer is deducted at source. Most of the eligible taxpayers either wholly evade taxes or the amount they pay is peanuts. These include several of ours frontline political figures. The governments-past and present-have been remarkably consistent in their failure to widen the tax net and milk some holy cows (the landed gentry, for instance). It was the failure to undertake the agreed fiscal reforms that led to Pakistan’s premature exit from the IMF programme in September 2011.

Over the years, the revenue-GDP ratio has gone down. For instance, in financial year 2008, the revenue-GDP and tax-GDP ratios were 13.7 percent and 9.9 percent, respectively. At the end of financial year 2011, the ratios had come down to 11.7 and 8.9. Direct tax-GDP ratio came down to 3.2 percent from 3.9 percent in financial year 2008.

Raising tax revenue is, above all, a matter of political will in which our ruling class, past and present, is markedly deficient. Not long ago, all political parties of note had joined hands in getting the 18th, 19th, and 20th constitutional amendments through parliament. It’s a pity they can’t agree on shoring up public revenue. Not surprisingly, on average the economy has posted fiscal deficit of around 6.5 percent during last four years.

In the absence of adequate external budgetary support, the government has mainly relied on bank borrowing-from both the central bank and commercial banks-as the main source of deficit financing. The borrowing from the central bank takes the form of printing of currency, which is very convenient but highly inflationary. The high inflation then forces the central bank to maintain a rather high interest rate, which discourages productive investment. The commercial bank borrowing crowds out private sector investment, which hampers the growth momentum. Hence, not surprisingly, for quite some time the economy is in low growth/high inflation equilibrium-stagflation, as it is commonly called.

Even if the country goes back to the IMF, it will, if the past is any guide, provide at best a respite, and not a credible solution, to the country’s economic woes. Such a solution consists in setting our own house in order. For this the foremost step is that everyone is made to contribute his or her due share to the national exchequer. No more tax evasion please.

The writer is a freelance contributor based in Islamabad. Email: hussainhzaidi@gmail.com
-The News

June 4, 2012
By Akmal Hussain

Let us give credit where credit is due. This government, during its tenure, was faced with an extremely difficult international economic environment, which included the most severe global recession in a century and a steep rise in commodity and fuel prices. The domestic circumstances are also acutely challenging with the threat of religious extremism, nationalist militancy in Balochistan and an ethnic war in Karachi. These fractures combined with two devastating floods. Yet, despite these unprecedented adverse circumstances, the government managed to gradually increase, albeit marginally, the GDP growth rate from a historic low of 2.2 per cent three years ago to 3.7 per cent this year. Despite the brave economic firefighting by an embattled government, let us face it: Pakistan’s economy continues to stagnate at a per capita income growth of less than one per cent, while the inflation rate remains high at 10.9 per cent.

The prospect of intensified pressures on the economy and society in the future flows out of this basic fact. The principal parameters of these pressures in the real economy are high and rising levels of poverty, unemployment and a large-scale manufacturing industry that is at a virtual standstill: a dismal 1.1 per cent growth compared to its historical trend rate of over 10 per cent. Agriculture growth, even though it has picked up, will not help prop up the crumbling financial edifice through tax revenues in the absence of an effective agriculture income tax. It will also have a limited role in supporting the balance of payments through export earnings, due to the present low value-added nature of exportables in this sector.

Stagnation in the real economy has generated a range of financial pressures, which in the absence of deft governance can trigger an economic meltdown. The shortage of revenues associated with slow GDP growth has induced the government into imprudent borrowing of a kind that has not only doubled the stock of debt over the last four years but has also changed its composition towards high cost short-term debt. It is self delusory to take comfort in the fact that debt as a percentage of GDP is only 60 per cent compared with 124 per cent in Greece. The key issue here is that the debt servicing cost is unbearable at 40 per cent of government revenue. These debt servicing pressures are pushing the government into a vicious cycle of short-term borrowing and rising budget deficits.

Rapidly rising current expenditures are fuelling this vicious cycle as the government tries to manage subsidies on electricity, widespread violence by armed militant groups and the ‘Draculas’ of public sector entities as they bite into the financial arteries of the state with Rs500 billion annual losses. Then, of course, there is the economic cost of maintaining political power in a rent based social order where state resources are handed out in myriad forms to various factions within the power structure.

To add to its financial woes, the government is continuing to confront its principal aid donors on the issue of an ambiguous security policy. This has not only reduced foreign aid inflows but has also increased Pakistan’s risk rating thereby making borrowing from the global capital markets more expensive.

Faced with fiscal pressures, the government, instead of reducing non-productive expenditures, has drastically reduced development expenditure. This has not only deprived the economy of much-needed stimulus, but has also constrained expenditure on electricity generation, gas production and improvements in irrigation efficiencies, which constitute physical constraints to economic growth.

The key issue to understand is that a growth policy and not economic contraction is the path to financial stability. It is through higher revenues which a higher GDP growth provides, that the budget deficit can be reduced. At the same time, what we need to worry about is, not the size of the budget deficit, but its composition. If a budget deficit of even seven per cent is being caused by productive expenditure that creates employment, incomes and a revenue stream in the future, it ought to be acceptable. But not if the budget deficit is derived from unproductive expenditure that only lines the pockets of the elite.

The Express Tribune,

Tahira Mansoor

Pakistan would have to depend on its own resources to develop its economy on a sustainable basis as foreign assistance is always attached to strings that create domestic unrest and nullifies the impact of foreign aid through internal strife.

Pakistan is caught in a bind as its national interests collide with the requirements of the lone superpower, the United States. Currently, the United States calls the shots at the IMF and World Bank on distribution of assistance to needy countries. It wields power in the European Union as well.

Our rulers should realize the gravity of the situation as foreign aid would now come on complete surrender only. Pakistan, no doubt, is a weaker state than the United States but then there are even weaker states like Sudan, Iran, Cuba and many others that have resisted the unjust demands of the US government successfully. Pakistan is a nuclear power and no sane country in the world would like to destabilize this country. They would exert full pressure but in the end would back away and come to a reasonable deal. Pakistan can still survive without foreign assistance provided we set our priorities right. Austerity from the highest level would pave the way for austerity at the lowest level. If there is load shedding in the country it should be equally shared by the president, prime minister, top bureaucrats and all those who enjoy high office. The austerity should be visible. The domestic consumers would accept long outages if the leaders face the same suffering. The energy thus spared should be provided to the industries so that the industrial wheels never stop.

Our rulers should act sensibly. There is no need to confront United States or NATO but at the same time we should be firm on principles and not succumb to unjust pressure. Our strategic importance is known to our so called allies and they would remain within their limit if we showed our resolve. Financial assistance is one tool that they currently have. If we showed them that we can survive without their assistance they would back away from unreasonable demands. We simply have to take some prudent steps at domestic level to ensure that the economy sails smoothly.

Our import bill is double than our exports. We need to curb all unnecessary imports particularly that of luxury goods. Slapping high duties is not the answer. Outright ban on luxurious items is the answer. Smuggling is not possible would the connivance government functionaries. This is a dangerous phenomenon because the smugglers besides bringing in consumable or durable goods also bring lethal weapons that create law and order fiasco in the country. The customs and the border security forces would have to tackle the problem of smuggling from this angle. It has to be stopped totally and at all cost. This measure would bring peace in the country besides providing immense relief to the domestic manufacturing sector.

Under invoicing could be curbed effectively by placing all invoices of the consignments to be cleared on an easily accessible website daily. The custom officers involved in duty evasion or under invoicing should be given exemplary punishment. Fair trade is possible only if all players have equal opportunities. The importer indulged in under invoicing denies level playing field to the honest traders and manufacturers.

It should be made mandatory all shuttered shops to display the national Tax Number in the shop. Moreover the tax officials should be authorized to ask for the tax return filled by each of these shopkeepers. To keep the element of corruption at bay the shopkeepers may display the actual tax return in their shop even if they paid zero tax. The civil society could then play its role if an affluent shopkeeper files zero tax or low tax return.

All exemption and SROs should be withdrawn. All incomes should be taxed equally. If a house owner is subjected to property tax a similar tax should be imposed on land. When a land owner leases his agricultural land to someone he earns similar profit as that earned by the house owner on his house rent. There would be a stiff resistance to such measures but if the high ups in the ruling elite abide by this rule honestly all others would be forced to follow.

The government should withdraw unlimited telephone, mobile and petrol facilities from all bureaucrats, ministers and advisors. The maximum limit for all types of phone calls should range from Rs. 1,000 to Rs. 4,000 per month, while the petrol expenses should not be more than Rs. 6,000-Rs. 12,000 per month. This measure alone would save the government over Rs. 5 billion.
Austerity at all levels would help save around Rs. 50 billion and exemptions would net in over Rs. 900 billion if effectively applied on all segments including capital market. Privatization of loss making state own entities even at zero value would save around Rs. 500 billion annually. The electricity subsidies and inefficiencies would continue for some time but could be reduced gradually in next four years through dedicated planning.

The United States asserted its hegemony when it succeeded is getting Rayman Davis released through arm twisting the heirs of the youths killed by the US operative in broad daylight. The US government was immune to the pleas of the entire Pakistani nation to release Dr. Afia Siddiqui. The US courts sentenced Dr. Fai on the ground that he was operating as the agent of Pakistani spy agency and pleading the cause of the people of Kashmir in the US. The United States is furious on jail term awarded to Dr. Afridi when it was proved that he was a CIA agent.

At the same time, United States showed its ruthlessness by massacring 24 Pakistani soldiers at Salala check posts despite the fact that Pakistani is a ally in fight against terrorism. It conducted unilateral raid on the compound of Osama bin Laden in Pakistani territory without informing the government of Pakistan. Despite this naked aggression it took back the debris of a high tech US helicopter destroyed during the raid as the Pakistan government complied with the demand.

-Cuttingedge

Raza Khan


In the recently concluded Chicago Summit of NATO on the future of Afghanistan, Pakistan remained on the sidelines due to its present disturbed relations with the US. Nonethless, making use of the opportunity, Islamabad and Kabul agreed to extend their transit trade agreement to the Central Asian Republics.

The resolve of Pakistan and Afghanistan to open their respective territories to each other for carrying out trade beyond one another’s land is a welcome development. However, this resolve needs to be given practical shape.
Because, only in this case would Pakistan be able to conduct large-scale trade with the Central Asian states, while Afghanistan could have regular trade with India. However, keeping in view the relatively unsatisfactory progress on the Pakistan Afghanistan Transit Trade Agreement (PATTA), one is not very optimistic about extending the transit trade network between the countries to other states of the region.

The advocates of increase of international trade, apart from mentioning other benefits of business relations between and among states, argue that such ties lead to political stability by subsuming political conflicts between the concerned states. When Pakistan and Afghanistan, in 2010, signed an agreement for establishing a new bilateral trade regime, it was anticipated that growing economic interdependence would lead to better political ties.
However, this could not be put to test because the new transit trade regime called Pakistan Afghanistan Transit Trade Agreement (PATTA) has not been implemented as yet. In fact, the agreement seems to have been lost somewhere between the political issues between the two countries. Pakistan and Afghanistan were able to reach a new transit trade agreement that was aimed at replacing the old Afghan Transit Trade (ATT) truce signed between them in 1965. The new agreement, PATTA, had to come into force once the competent forums of both countries, the Afghan parliament and the Pakistani federal cabinet gave it the go ahead. This approval was subsequently given. The PATTA signing, after several rounds of threadbare parleys between Afghan and Pakistani officials, as expected, turned out to be ceremonious because the key issues were not addressed before reaching the agreement. Even its ratification by the parliaments of both the countries has not made the agreement a workable framework to facilitate the transit trade between the two states. Even on the ATTA of 1965, both Afghanistan and Pakistan have had serious reservations.

However, the nature of objections of both countries had been fundamentally different, but mutually reinforcing. Afghanistan had been complaining that the ATTA of 1965 gave undue leverage to Pakistan for restricting the trade of Kabul with the rest of the world. These restraints by Pakistan, as believed by Kabul, came in the shape of limiting the number of items Afghanistan could import via Pakistan and outright rejection of exports from certain countries like India. For Pakistan the problem with ATTA has been the landing back through smuggling of a colossal amount of goods imported by Kabul and meant for local consumption in Afghanistan. The smuggled goods imported under ATTA have been inflicting huge damage on the Pakistani economy in the form of huge revenue losses of around $5 billion a year. The damages to the local manufacturing sector have been apart from the revenue losses. The unending huge smuggling through ATTA has been the reason behind Islamabad’s protective measures of limiting the number of items Afghanistan could import through Pakistan and denying of India a trade corridor through Pakistan for Afghanistan.

Pakistan has been fully justified in rejecting Indian and Afghan requests for giving both a trade corridor. Because, on the one hand, war-ravaged Afghanistan, with the limited writ of the central government, has never been in a position to check the landing back of ATTA goods into Pakistan. Thus, giving Indian goods access to Afghanistan would have been suicidal, as Pakistani markets would then have been flooded with Indian goods and due to their low manufacturing cost and relatively good quality, would be the choicest consumer items in Pakistan.

Pakistan has also been hard-pressed to deny Indian goods access through its territory to Afghanistan, because in this way New Delhi would increase its political influence in Afghanistan. Remember the old maxim, “The flag follows trade.” Obviously, Indian political influence in Afghanistan would be at the cost of Pakistan. Therefore, the analysis of PATTA must be done in the above-mentioned historical context regarding transit trade. The most important feature of the proposed PATTA is the denial by Pakistan to India for use of its territory for carrying out trade with Afghanistan and onwards with the Central Asian states. Although, the Afghan government, besides the United States, demanded for years from Pakistan to give India access to Afghan and Central Asian markets through its territory, Pakistani authorities refused to budge from the old stand of not giving any concessions to its arch-rival, India, in Afghanistan.

At a moment when there has been no reduction in the smuggling back of goods meant for Afghanistan into Pakistan and the intense Cold War between Pakistan and India in Afghanistan, it seems the most appropriate decision.
However, Pakistan failed to resist the US, Afghanistan and Indian pressure for giving access to New Delhi exports to Afghanistan, as under PATTA India has been allowed to transport goods through Pakistani airspace to Afghanistan. As the air travel time from India to Afghanistan is just minutes more than from Pakistan, India would still manage to ship a large amount of goods to Afghanistan by air if the land route is unavailable to it. But now that Pakistan has already announced to give India Most Favoured Nation (MFN) status, it automatically would lead to providing India a trade corridor to CARs. Because under the MFN, when India could send its goods to Pakistan then Islamabad should not worry about Indian exports to Afghanistan and CARs. The best available option for Pakistan is to get in return as many concessions as it can from Afghanistan for expanding its own trade with Central Asia. This would not only open new markets for Pakistani exporters but also importers could import a large variety of goods which cannot be produced in Pakistan at a lower cost.

In this way, Pakistan's dependence on Chinese goods could be reduced. It may be mentioned that at the time of signing PATTA, Islamabad was not able to gain for its traders access to CARs and the Pakistani government claims that Afghanistan had reciprocated Pakistani actions in PATTA and had given access to Pakistani traders to Central Asia was an erroneous perception. Thus, it is time for Islamabad to reclaim the losses which it made by signing PATTA.

-cuttingedge

hid Khalil

Now, even the industrialists realize that the way to go forward in Pakistan is to exploit the agriculture potential of the country. While they are setting up big corporate farms and dairy enterprises, the real improvement will come when poor farmers' incomes are increased.

Farmers' incomes in Pakistan are low because of low per acre yield. An increase is absolutely necessary, because after manufacturing goods, the world trade in agriculture is also opening up. We should devise strategies immediately to ensure that our farm products stay competitive globally. The farmers are already feeling the heat of vegetable and fruit imports from India through the Wagah border. The rates of these commodities are lower on the Indian side.

While one might argue that the Indian farmer gets higher subsidies from their government that keeps the cost of production low, then in that case, our government should invoke WTO countervailing rules to stop unfair pressure on our farmers. Another reason for lower Indian agricultural prices could be higher yields.

There are two ways of helping farmers, of which one is that of subsidy. The subsidies always distort the market and promote inefficiencies. Moreover the subsidies in Pakistan are not distributed fairly. Most of the fertilizer subsidies are simply not passed over to the farmers by vested interests that create artificial shortages to raise the prices very high and sell this important input in the black market.

The other way to help the farmers is to facilitate them in increasing their yields. If we look on our production averages of various agricultural commodities they are much lower than the global benchmarks. However, there are numerous instances when a farmer obtains yields higher than global averages while his real brother, having the adjacent farmland of the same quality, gets half the yield. This shows that the fault does not lie in the soil or the weather but with the way the crop is looked after and nurtured by the farmers.

It is a matter of record that the yields of all major crops in Pakistan are lower than world averages. Sugarcane yield is 40 per cent lower, wheat 20 per cent lower, non-basmati rice 40 per cent lower, cotton 20 per cent lower, milk per animal 90 per cent lower.

It is interesting to note that the farmers obtain from 20 maunds to 70 maunds per acre in Pakistan. The national average is only 30 maunds per acre. The farmers that obtain above 50 maunds per acre from their land are well off, while the farmer obtaining the national average yield hardly covers his cost of production.

Similarly, in cotton per acre, yield varies from 500 kg per acre to 1,350 kg per acre. It is obvious that farmers obtaining low yield remain poor and under debt while those with very high yield prosper.

Apart from per acre yield, there are many other flaws in the agricultural management system that adversely affects the income of the farmers. Post harvest losses in Pakistan range from 40-80 per cent. The global benchmark for tractors per square meter is 20-25. In Pakistan, it is 10 times lower. Water losses are as high as 40 per cent even before the water reaches the farm. Then there is another 20 per cent loss due to flood irrigation that could be eliminated by using water conservation technologies like drip irrigation.
The most pressing problem of the farmers is the availability of agricultural credit. Most of the farmers are forced to obtain credit from the informal sector at very high mark up. Agricultural credit disbursed to farmers declined from $3.4 billion in 2007-08 to $3.1 billion in 2010-11. During the same period the agriculture credit disbursement in India increased from $63.3 billion to $103.4 billion.

Agriculture credit availability from the formal sector is the key to higher productivity. It enables the farmers to buy the inputs of their choice on cash at market prices. In case they go to the informal sector, the credit first is provided at very high mark up and the inputs are arranged by the financer at higher than market price. The quality of inputs is also doubtful.

The commercial banks have valid reason to deny credit to the farmers. Since the amount of credit is low, they cannot take the risk of going to remote villages for recoveries if the farmers default. Instead of disbursing agriculture credit as per direction of the central bank, they prefer the penalty imposed on them for violating the directive.

Experts point out an inherent flaw in our agriculture is the absence of cooperatives. The banks would readily lend to the cooperatives as the size of the loan would be high and the collateral would be sufficient to cover the risk. Experts say that cooperatives were never tested in Pakistan. They point out that people have bad memories of the cooperatives in the 90's which, in fact, were financial institutions and had nothing to do with agriculture. Farm cooperatives were never formed in Pakistan.

India, our next door neighbour, is a shining example of farm cooperatives. The largest dairy supplier in India is a cooperative. Indian cooperatives contribute around 50 per cent of the total agricultural credit disbursement. More than 60 per cent of the sugarcane procurement is done by the cooperatives.
In France, 75 per cent of all agricultural producers are members of at least one cooperative and cooperatives handle 40 per cent of the food and agricultural production of that country.

Existing legislation in Pakistan allows formation of farmer cooperative bodies which can buy inputs, sell produce and obtain credit for member farmers. What is required is the commercial banks lending to the cooperatives and crop insurance for the cooperative sector.

Funding is also needed to develop physical infrastructure for the cooperatives; to pull farmers out of poverty, the government should encourage a network of standard warehouses across the country for agricultural produce. These warehouses should be linked to the commodity exchanges such as Pakistan Mercantile Exchange Limited.

There is a need to establish an authorized quality grading system for produce brought to the warehouses. Warehouse receipts given to the farmers and traders can then be used to get loans from the banks as commodity, as accessible collateral at warehouses, would be acceptable to the banks. These receipts could also be used to trade on commodity exchanges.

-Cuttingedge

Nasim Ahmed


In essence, the national budget is no different from an ordinary household budget. Although much bigger in size and scale, it has the same objective: to strike a balance between income and expenditure.

On the one hand, you try to increase income and, on the other, you reduce unnecessary expenditure, eliminate waste and cut corners where possible.

This is how you ensure the economic stability of your household. The same principle applies to the national budget-making exercise.

There are certain do's you need and some don'ts you have to follow for rational budget making.

Judged against these criteria, how does the new federal budget fare? Does it do the needful? Or does it violate the standard rules of budget making? So, let us examine the document authored by Dr. Hafeez Sheikh and analyse it on the anvil of standard do's and dont's.

First, the do's that needed to be done, but have not been.

One of the first do's was to adopt measures to curb inflation and reduce high prices which have decimated household budgets across the land. But no price control mechanism has been announced. Instead, the budget includes steps that are bound to fuel more inflation and push prices even higher.

This is best illustrated in the total budgetary outlay of Rs. 2.9 trillion showing a deficit of Rs. 1.1 trillion.

This is a big gap which will be filled by borrowing from banks and printing more notes, unleashing a new tsunami of inflation in the country.
The government was also expected to reduce the burden of taxes on the common man. But the budget does just the reverse. It has slapped Rs. 63 billion worth of new taxes on the people which will lead to further increase in the prices of many items of daily use.

A progressive budget taxes the rich in order to help the poor. Wealth tax and higher income tax for the super rich are two universally accepted fiscal tools to transfer resources from the privileged to the less privileged sections of society. But not only has wealth tax not been revived but the wealthy have been allowed to invest in the stock market without any question being asked about the sources of their income.

Another do that the people expected from the budget was some relief in electricity, petrol and gas prices which have become unaffordable for the common people. But no relief has been announced and, instead, the budget contains a veiled threat of further hike in their prices, given the wasteful ways of the rulers.

Again, to the great disappointment of the general masses, the government has announced no measures to rein in the monster of load-shedding. Similarly, the budget outlines no steps to reduce the ballooning government spending best illustrated by the lavish Mughal style expenditure being incurred on the maintenance of the Presidency and the Prime Minister's House which on an average gobble up over Rs. 2 crore of tax payers money on a daily basis.
Attracting foreign investment is the need of the hour to inject a new life into the economy. But no special incentive have been devised for this purpose. Similarly, Pakistani expatriates, who send home a monthly average of one billion dollars to sustain the national economy, have been offered no encouragement to increase the flow.

Now, the dont's of budget making which the government has violated with impunity.

Instead of setting things right in the state enterprises which have become a bottomless pit of corruption, the government in the new budget has once again allocated to them a big chunk of the budget in the name of subsidy.
That means the Railways, PIA, PEPCO and other state enterprises will continue to be a burden on the national economy. Similarly, the government was expected not to allocate more funds to the Benazir Income Support Program and gradually roll it back because of massive corruption in its implementation. But ignoring all criticism, the government has set aside a hefty sum of Rs. 70 billion for the program.

Transport is a basic need of the people and it must remain within affordable limits. But in the new budget the government tax on the seating capacity of passenger buses and goods transport has been increased 400 per cent. And what is the justification for spending tax payers' money to provide lifetime security to the president and prime minister? As it is, they already enjoy maximum security and protocol facilities and there was no need to divert more of our scarce resources for this purpose.

As compared to other countries, the minions of the Pakistani state enjoy unparalleled discretionary powers and have access to secret funds for which no accounts are rendered. While hiding details of where and how the discretionary funds were spent, the budget document shows that the size of these funds has been growing to the detriment of the larger public interest.

If the prices of items of daily use like atta, sugar, cooking oil, petrol, electricity, gas etc. are any indication, living has become about four times more expensive in the last four years. The new budget threatens to add further to the woes of people in the coming year.

-Cuttingedge