Hanging in the balance Dr Ashfaque H Khan Tuesday, February 04, 2014 From rint !

dition Pakistans overall balance of payment position has deteriorated sharply in the first half (JulyDecember) of the current fiscal year (201 -1!) as compared "ith the correspondin# period of the last year$ %he current account deficit has deteriorated to &1'()* million as a#ainst a deficit of merely &) million' despite the release of over &1$1 billion under the ne" +,- pro#ramme$ .hy has Pakistans balance of payments deteriorated so much/ .hy have e0ports #ro"n at much faster pace (21 percent) in December 201 ' as compared "ith a decline of nine percent in the previous month (2ovember)/ 3as somethin# e0traordinary happened in the month of December as far as e0ports are concerned/ Pakistans e0ports in the month of December 201 sur#ed by almost 21 percent over the same month of the last year$ 2o e0planation has yet been provided re#ardin# the sudden 4ump in e0ports either by the #overnment' the 5tate 6ank of Pakistan or by the Pakistan 6ureau of 5tatistics (P65)$ %here is a #eneral consensus amon# market analysts and economists that nothin# special has happened in the month of December$ 7eaders "ould recall that Pakistans e0chan#e rate came under severe pressure' fallin# as lo" as 7s110 per dollar in December$ %he finance minister took note of this depreciation' met e0porters and industrialists in 8arachi and 9ahore' and "arned them of dire conse:uences if they failed to brin# their e0port proceeds home at the earliest$ 3e also offered a carrot to the te0tile e0porters by #ivin# assurances of re#ular supply of #as to the te0tile mills so that they could benefit from the likely a"ard of the ;5P Plus status' provided they brou#ht back their e0port proceeds ur#ently$ .hen e0chan#e rate comes under pressure and e0pectation of further depreciation of the rupee #ains momentum' e0porters' in #eneral' become reluctant to brin# their e0port proceeds$ ,ost probably' this "as the case durin# 2ovember<December 201 ' as everyone "as e0pectin# a massive depreciation in the e0chan#e rate$ %he threat hurled by the finance minister appears to have "orked very "ell and the e0porters brou#ht some &(00 million of their parked e0port proceeds back home = "hich "as reflected in Decembers e0ports number$ Despite one-off inflo" of e0port proceeds' the trade balance deteriorated to the e0tent of &!00 million in the first half of the fiscal year' as compared "ith the correspondin# period of the last year$ 5ervices balance also deteriorated to the e0tent of &1' ) million in the first half as opposed to a surplus of &10 million in the same period last year$ %his deterioration has been caused by the non-release of the >oalition 5upport -und "hich played an important role in "orsenin# the current account deficit$ %he current account deficit has "idened to &1$? billion in the first half of the fiscal year$ 3ad Pakistan not received additional one-off e0port proceeds in the month of December' Pakistan "ould not have "itnessed a current account surplus in December and the current account deficit "ould have stood over &2$0 billion in the first half$ %he overall balance of payments also deteriorated to &1$)?2 billion in the first half as opposed to a deficit of &? 1 million = a deterioration of &1$2 billion$ -orei#n Direct +nvestment (-D+) amounted to a mea#re &!1? million in the first half as a#ainst &( 1 million in the same period of the last year' thus re#isterin# a hefty decline of 21 percent$ %he political leadership as "ell as the 6oard of +nvestment (6@+) have been claimin# day in and day out that Pakistan is an ideal destination for forei#n investment "hile meetin# visitin# Aforei#n

investors$ Despite these claims' the -D+ continues to e0hibit a declinin# trend$ .hat is more "orrisome is the fact that the country is "itnessin# a massive outflo" of -D+$ -or e0ample' the inflo" of -D+ stood at &*( million in July-December 201 ' but the outflo" in the same period amounted to &( 1 million' resultin# in net -D+ of &!1? million$ + "ould ur#e the political leadership as "ell as the officials of the 6@+ to at least stem the outflo"' if they cannot succeed in attractin# -D+$ 5everal multinational companies have e0ited Pakistan in the last fe" years$ -or e0ample' 5in#apore %elecom' 6ritish Petroleum' >hevron' BC5 >orporation' ;D- 5ueD' and the 7oyal 6ank of 5cotland (765) have already left Pakistan and 356> and 2oor +nvestment are in the process of leavin# the country$ .hat kind of messa#e has been conveyed to the #lobal investors as a result of their e0it from Pakistan/ Do "e think that mere statements from the political leadership as "ell as officials from the 6@+ "ill chan#e the vie"s of #lobal investors for Pakistan/ .e need to do some soul searchin#$ Bre "e talkin# to local and forei#n investors/ +s our economic team capable of talkin# "ith forei#n investors/ 3o" many senior level officials' includin# ministers and private-sector representatives from Pakistan attended the .orld Cconomic -orum meetin# in Davos/ .hat have "e done thus far in improvin# the countrys infrastructure' reducin# corruption' improvin# #overnance' reducin# la"lessness' stren#thenin# re#ulatory bodies' appointin# people in key positions on merit' pursuin# consistent policies' reducin# dependence on forei#n assistance by mobilisin# domestic resources/ ,ere talkin# "ould not "ork$ .e have to convert ourselves from talkers into doers$ -inally' + "ould like to dra" the attention of the readers to"ards the current state of the forei#n e0chan#e reserves$ Pakistans forei#n reserves stood at & $2 billion durin# January 2!' 201!' "hile commercial banks reserves "ith the 56P stood at &!$) billion$ .hat is "orrisome is that the #overnment has been usin# dollars of commercial banks (from -C 2( account) to finance import in order to protect its o"n reserves and hence stemmin# pressure on rupee$ %he utilisation of -C 2( account for import financin# stood at &1*0 million in Bu#ust 201 ' but it sur#ed to &)0! million by end-December 201 $ +n other "ords' had this amount not been used for financin# import' Pakistans fore0 reserves "ould have been less than &2$( billion today = &?1! million less$ Bccordin#ly' the commercial banks reserves declined from &($ billion in end@ctober to &!$) billion by end-December = a decline of &(00 million = "hich is very much in line "ith the used-up &?00 million from -C 2( account$ %his is a dan#erous development and must be stopped forth"ith' lest' ;od forbid' "e may "itness reoccurrence of the 1**0s situation "hen the then successive #overnments used up all the money from the forei#n currency deposits (-C 2( account) for financin# imports$ .hen the crunch came' Pakistan had &1$0 billion in reserves "ith &10 billion of liabilities (the deposits of people)E the country had no option but to freeDe the forei#n currency accounts$ Bccordin# to the +,-' the outlook of Pakistans balance of payments has "orsened and firm action is re:uired to address the critically lo" fore0 reserves$ .hat the country re:uires is less talk and more "ork$ +t needs to take the economy seriously' avoid #immickry and destruction of key economic statistics to achieve +,- tar#ets' and appoint people on merit$ %he #overnment also needs to avoid bein# misled by those "ho are feedin# it incorrect statistics and paintin# a rosy picture of the economy$

The first re"ie#

Dr Ashfaque H Khan Tuesday, $anuary 14, 2014 From rint !dition %he much a"aited but belated staff report for the first revie" of the on#oin# +,- pro#ramme "as released in early January 201!$ %he revie" took place from @ctober 2) to 2ovember )' 201 $ %he staff report "as completed on December 11' 201 $ %he board approved the report on December 1*' 201 and the report "as released on January !' 201!$ %he report contained information up to @ctober 201 $ 5uch a belated report may be useful for official purposes for both the +,- and the ,inistry of -inance but is of no use to those "ho have an interest in Pakistans economy$ +t is su##ested that the +,- may consider reducin# the time #ap to make the report more interestin# and meanin#ful for all and sundry$ %he report itself is hi#hly confusin#' uses unkind "ords' is contradictory at times and thus #ives a conflictin# messa#e on the current state of the economy$ 6y readin# the report' one #ets the impression that the +,- itself is not clear about the direction of the economy$ .hile statin# that Pakistans economic performance "as Amostly satisfactory durin# the first :uarter of the year' it also paints a bleak picture by pointin# out that the risks to the outlook are Atilted firmly to the do"nside$ .hat messa#e is the +,- conveyin#/ Blthou#h the +,- report covers the period up to @ctober 201 ' it has added a one-pa#e supplementary note on the recently announced ta0 amnesty scheme$ +t has taken a serious note of the packa#e of investment incentive offered by the prime minister$ %he packa#e provides immunity from audit for those ta0payers "ho pay 2( percent more than "hat they paid in the previous year and that it also provides immunity from ta0 scrutiny of the sources of certain ne" investment in specific sectors$ %he +,- considers this ta0 amnesty scheme somethin# that undermines the principles of selfassessment and poses risks to the inte#rity of the ta0 system$ %hey "ill raise this issue "ith the Pakistani authorities durin# their second revie"$ 6y offerin# such an amnesty scheme' the #overnment has admitted its inability to ta0 those "ho refuse to pay their due ta0es$ 5uccessive #overnments in the past offered such ta0 amnesty schemes but failed to broaden the ta0 base$ %he +,- appears to be at a loss about the direction Pakistans economy may be movin# in durin# the comin# months$ @n the one hand' it ar#ues that Pakistans #ro"th prospects remain modest' inflation is likely to be close to double-di#it' and current account deficit is e0pected to remain lo"' "hile on the other hand it paints a bleak picture of the economy by statin# that risks to the outlook are firmly to the do"nside$ 5ecurity conditions in Pakistan remain difficult' "ith alarmin# terrorist activity' sectarian violence and criminal activity that are keepin# investment and #ro"th depressed$ 5uch ne#ative statements should not have been a part of the report since they surely undermine the #overnments effort to attract forei#n investment and discoura#e investors in #lobal debt and e:uity markets$ Pakistans economy "as in dire straits and as such it sou#ht balance of payments support from the +,-$ 3o"ever' instead of helpin# Pakistan' it has decided to condemn the country by paintin# a bleak future$ +s this "hat the +,- does "ith its member states/ ;ranted that the Pakistani team is professionally "eak and as such they have failed to read the draft carefully' this is not the "ay to treat a member state$ @n balance of payments' the +,- is of the opinion that the outlook has "orsened and there are si#nificant risks for a severe crisis$ +t has ar#ued in favour of firm actions on the part of the 5tate 6ank of Pakistan (56P) to build forei#n e0chan#e reserves$ +t "ould not be out of place to

mention that Pakistans fore0 reserves stood at &($1 billion at the time of si#nin# the +,pro#rammeE the reserves declined to & $2 billion on January ' 201! = a loss of almost t"o billion$ Partly the 56P but lar#ely the +,- itself is responsible for the fore0 reserve crisis in Pakistan$ .hile the 56P sold the limited dollars it has in its purse in the market to prevent further depreciation of rupee' the +,- continued to receive more from Pakistan than it released$ %he current +,- pro#ramme is nothin# but a Aself-servin# pro#ramme$ +t has forced the 56P to purchase dollars from the market and borro" from "hatever sources it can to build its fore0 reserves to repay the +,- loan on time$ %he report has once a#ain reminded the 56P that its fore0 reserves are critically lo" and that firm actions are re:uired to avoid ne" balance of payments difficulties$ +t has ar#ued that the 56P has failed to #ive sufficient priority to rebuildin# reserves$ +n the comin# months' Fthe 56P must unhesitatin#ly use every policy fool at its disposal to boost reserves' includin# ad4ustin# the policy rate' intervenin# to purchase reserves from the spot market' and allo"in# #reater fle0ibility of the e0chan#e rate$G -rom the +,-s perspective' the above stated policy tool is still not sufficient$ 5uch measures must be supplemented by #overnment initiatives to increase forei#n inflo"s throu#h borro"in# from #lobal markets' steppin# up privatisations' as "ell as acceleratin# disbursement of e0istin# official loans and #rants$ .hat is most surprisin# in the report is that even "ith the full implementation of the above measures includin# action from the 56P and the ,inistry of -inance' Fthe reserves situation "ill remain very ti#ht over at least the comin# 2- :uartersG$ +t is indeed painful to see the attitude of the +,- to"ards Pakistan$ @n the one hand' the 56P is bein# asked to buy the dollar a##ressively from the market and take a hit on the e0chan#e rate "ith all its adverse conse:uences' raise discount rate to prevent capital outflo" or encoura#e inflo"$ @n the other hand' the finance ministry is bein# asked to float all kinds of bonds (euro bond' sukuk' ;D7s etc)' speed up privatisation to #et dollars' and ask multilateral development institutions and the H5 to accelerate disbursement of loans and #rants$ Cven "ith full implementation of these measures Pakistan "ill continue to face a fore0 crisis in 201! as stated by the +,-$ .hat is the responsibility of the +,- then/ +f Pakistan has to do all these thin#s to build reserves on its o"n' do "e even need an +,- pro#ramme then/ .hat kind of balance of payments support is this/ %o meet end-June fore0 reserves tar#et' the 56P "ill have to add one billion dollars per month to its reserves$ +s this possible' #iven the lan#ua#e used in the report re#ardin# the security conditions and policy implementation risks (para#raph 10)/ %he +,-s attitude to"ards Pakistan appears to be discriminatory$ Bt the back of the policy recommendations of the +,-' the entire economic policy of Pakistan "ould circle around buildin# fore0 reserves "ith the sole purpose of repayin# +,- loans on time$ .ho "ill then take care of #ro"th and 4ob creation in Pakistan/

%n to the second re"ie# Dr Ashfaque H Khan

Tuesday, $anuary 21, 2014 From rint !dition 9ast "eek (January 1!) + "rote on the staff report for the first revie" of the on#oin# +,pro#ramme and hi#hli#hted the contradictory statements of the +,- pertainin# to Pakistans economy$ Dr 3afiD Pasha' an outstandin# economist and a former finance minister of Pakistan' also noted the same in his recent article and ar#ued' Fthe time has come to stop the double speakG$ +t is absolutely clear that the current +,- pro#ramme is all about buildin# forei#n e0chan#e reserves and payin# off the +,- loan on time$ Dr ,uhammad Ia:ub' the former #overnor of Pakistans central bank' called this pro#ramme a Aself-servin# pro#ramme and my #ood friend Dr Chtisham Bhmed = a former senior official of the +,- = termed this as Adevelopment lendin#$ Dr Chtisham believes that the #eo-political environment has chan#ed dramatically "ith the a#reement of the ma4or po"ers "ith +ran "hich opens up an alternative e0it strate#y from Bf#hanistan$ Bs such' Pakistan is losin# its strate#ic importance and' therefore' should not e0pect much leniency from the +,-$ Perhaps' the chan#in# #eo-political environment is dictatin# the vie"s of the +,- viD Pakistan' a development on "hich + have no e0pertise to comment$ + have al"ays kno"n the +,- as a professional institution' supportin# the member country financially in a period of distress$ %he +,- mission is e0pected to arrive in Pakistan by the end of this month for a second revie" of the pro#rammeE ma4or issues pertainin# to fiscal balance "ill come under serious discussion$ %he first a#enda item is likely to be the recently announced ta0 amnesty scheme$ %he +,-' like many of us' considers this ta0 amnesty scheme as somethin# that undermines the principles of selfassessment and poses risks to the inte#rity of the ta0 system$ 6y offerin# such an amnesty scheme' the #overnment has admitted its inability to ta0 those "ho refuse to pay their due ta0es$ 5uccessive #overnments in the past offered such ta0 amnesties but failed to broaden the ta0 base$ %he +,- is likely to discuss the investment incentive packa#e "hich provides immunity from audit for those ta0payers "ho pay 2( percent more than "hat they paid in the previous year$ +t also provides immunity from ta0 scrutiny of the sources of fund' if invested in specific sectors$ 6oth schemes are anti-ta0 reforms and should have been avoided$ %he third issue that is likely to come under discussion is the recently published report A%a0ation by ,isrepresentation' "hich ar#ues that nearly half of the la"makers did not pay their ta0es "hereas 12 percent did not even possess a 2ational %a0 2umber$ %his is a serious issue and has brou#ht a bad name to the country$ ,any "orld leaders have casti#ated Pakistan for its failure to ta0 its o"n rich and po"erful classes$ Blthou#h the finance minister has committed to publish the ta0payers directory by -ebruary 201!' "hich should be appreciated by all' is this enou#h/ 2o$ 6rin#in# the total income of the parliamentarians under the direct ta0 net "ill be the real test of the +,- mission$ %he fourth item of discussion "ill be the lo"er-than-tar#et ta0 collection$ %he -ederal 6oard of 7evenue (-67) has collected 7s1020 billion in the first half of the current fiscal year "hich is 1!$1 percent hi#her than the correspondin# period of the last fiscal year$ +n order to achieve the tar#et as #iven by the +,- = of 7s2 !( billion (as opposed to bud#eted tar#et of 7s2!1( billion) = the -67 re:uires collectin# 7s1 2( billion in the second half$ +n other "ords' ta0 collection must increase by 2($! percent in the second half as a#ainst 1!$1 percent in the first half$ %his appears to be a tou#h tar#et to achieve$ ,y calculation su##ests that in the absence of additional ta0 measures the -67 may collect 7s22(0 billion at the most' up by 1?$2 percent over

the last year$ %o achieve even this lo"er ta0 revenue tar#et' the -67 "ill have to collect 7s1 2( billion or 1?$! percent more in the second half$ -ifth' the re-emer#ence of circular debt to over 7s200 billion "ill be another point that "ill come up$ Bfter clearin# the circular debt "ith 7s!)0 billion' the #overnment "as supposed to move to"ards eliminatin# the sources that caused circular debt to #ro"$ %he #overnment increased the po"er tariff by an unprecedented proportion in one #o "ithout addressin# the many loopholes that contributed to the upsur#e in circular debt$ -or e0ample' little or no effort has been made to curb po"er theft' reduce technical losses' increase recovery of electricity bills (in fact' recovery has declined from )) percent to 1( percent)' stop free electricity provision to .apda employees' undertake technical audit of po"er plants and' most importantly' to chan#e the heads of ;enco and Discos$ .ithout addressin# the core issues listed above' the unprecedented hike in po"er tariff "as bound to #ive rise to circular debt$ %his "as nothin# but "ron# se:uencin# of po"er sector measures in the +,- pro#ramme$ 5i0th' #iven the revenue-e0penditure trend emer#in# thus far' bud#et deficit may reach 1-1$( percent in the current fiscal year$ %o achieve the bud#et deficit tar#et as a#reed "ith the +,- (($( percent of ;DP)' the #overnment "ould have to cut the development e0penditure drastically' ensure that it receives >oalition 5upport -und from the H5' and mana#es to sell ; licences$ +f the last t"o sources of funds are not materialised' Pakistan may face serious bud#etary problems even "ith drastic cuts in development spendin#$ 5eventh' the P5Cs continue to bleed and remain a heavy burden on the national e0che:uer' destabilisin# the bud#et and addin# to public debt$ %he present #overnment has embarked on an ambitious privatisation pro#ramme "hich is in dan#er and is likely to be derailed for t"o reasonsJ first' there appears to be little support for privatisation from the ma4or political parties of the country$ %hey "ill certainly oppose the privatisation pro#ramme$ 5econd' the #overnment itself "ill be responsible for its derailment$ -or e0ample' in an earlier article (@ctober 1(' 201 ) + "rote very clearly that for transparent privatisation the #overnment needs to stren#then the Privatisation >ommission by inductin# chartered accountants' le#al e0perts' bankin# and financial sector e0perts' etc$ %o the best of my kno"led#e' no efforts have been made in this direction as yet$ + also "rote that the Privatisation 6oard must be stren#thened "ith competent and professionally clean personalities and that the #overnment must refrain from inductin# those "ho are even remotely ali#ned "ith the rulin# party$ @n the contrary' the #overnment appointed all those as members of the Privatisation 6oard "ho are politically linked "ith the rulin# party$ 2o matter ho" transparent the privatisation process may be' in the presence of a politically connected board' such transactions are liable to become controversial = particularly in the presence of a vibrant media and an active 4udiciary$ %he current Privatisation 6oard must be chan#ed before any privatisation is undertaken$ .e "ill "ait for the +,- to speak on this sub4ect durin# the second revie"$ Trans&arent &ri"atisation Dr Ashfaque H Khan Tuesday, $anuary 2', 2014 From rint !dition Public-sector enterprises (P5Cs) are #enerally considered inefficient all around the "orld' primarily because they serve as employment bureaus for the political leaderships that control them$

%he privatisation of these P5Cs is then considered to be the best solution under the belief that the private sector produces' distributes and trades #oods and services more efficiently and at lo"er costs than the #overnment$ %he role of #overnment should' therefore' be limited to policymakin# and creation of conducive environment for businesses in the country$ Bs part of the +,- pro#ramme' the present #overnment has ri#htly embarked on a time-bound strate#y for privatisin# ?( P5Cs$ Privatisation has been the hallmark of this #overnments macroeconomic policies in its earlier stints as "ell$ .hy should these bleedin# P5Cs' like Pakistan 5teel or Pakistan +nternational Birlines (P+B) be privatised/ +n simple lan#ua#e' these P5Cs are not only inefficient and poorly mana#ed' but are a heavy burden to the national e0che:uer as "ell$ %hey are costin# 7s!00-7s(00 billion annually' "hile at the same time destabilisin# the countrys bud#et and addin# burden to the national debt$ 3o" can a financially poor country like Pakistan continue to pay such a hu#e amount from the bud#et to keep these institutions afloat/ %he issue at hand is the financial viability of these P5Cs$ >an they survive "ithout bud#etary support from the #overnment/ Does it make sense to add thousands of "orkers to already bankrupt institutions/ 5hould "e continue to oppose privatisation or restructurin# of these institutions/ .ill the status :uo "ork in a financially starved country/ Bnd for ho" lon#/ +t is absolutely clear that Pakistans financial health is not in a position to support these bleedin# institutions anymore$ Pakistan needs resources for educatin# its people and providin# them healthcare' safe drinkin# "ater' roads' hi#h"ays' electricity' and security$ Privatisation is' therefore' a necessity for prudent economic mana#ement and hence to brin# Pakistans finances in order$ %he :uestion is ho" to privatise the P5Cs in a transparent manner$ 6ased on my discussion "ith some key members of political parties opposin# privatisation' + have inferred that the reason for their resistance is not political ideolo#y but the #overnments capacity to conduct privatise in a transparent manner$ %hey have no confidence on the capacity of the Privatisation >ommission to undertake such lar#e-scale privatisation$ %hey have also no faith on the ne"ly appointed members of the Privatisation 6oard to conduct privatisation in a transparent manner or in a manner that is free from any conflict of interests$ 3o" should "e then move for"ard/ %he #overnment may like to consider the follo"in# steps for transparent privatisation$ 5tep 1J %he se:uencin# of privatisation has to be correct (rememberJ "ron# se:uencin# of po"er-sector reforms resulted in the re-emer#ence of circular debtE "e paid 7s!)0 billion to various private-sector po"er companies "ithout brid#in# the loopholes that #ave birth to the circular debt)$ Bs a first step' the #overnment must stren#then the re#ulatory bodies like the 56P' 2epra' @#ra' P%B' >ompetition >ommission' PP7B and 5ecurities and C0chan#e >ommission "ith professionals' before undertakin# any privatisation$ -ailure to do so "ill #ive birth to ruthless private monopolies' replacin# inefficient public monopolies$ 5tep 2J %he number of units to be privatised or restructured must be consistent "ith the capacity of the institution(s) undertakin# or involved in the privatisation pro#ramme as "ell as the availability of technically sound manpo"er to run the privatised institutions$ 5tep J +t should be to us "hy "e are undertakin# the privatisation pro#ramme$ 6ecause these P5Cs cannot survive "ithout bud#etary support' they have become a burden on the national e0che:uer$ %herefore' "e should select those P5Cs for privatisation "hich cannot survive "ithout bud#etary support = like Pakistan 5teel or P+B$ .hy should "e privatise @;D>9 and PP9' "hich are makin# a net profit of 7s*1 billion and 7s!2 billion' respectively (-I201 ) and "ith a combined e:uity of 7s!1 billion "ith Dero debt/

5tep !J Privatisation is a comple0 e0ercise$ +t is in this perspective that the #overnment must stren#then the Privatisation >ommission by inductin# thorou#h professionals like chartered accountants' le#al e0perts dealin# "ith the intricacies of transactions' bankin# and financial e0perts' etc$ %o the best of my kno"led#e' the Privatisation >ommission is "eak and cannot handle such transactions in a professional manner$ 5tep (J %he Privatisation 6oard' bein# the most important component of the "hole transaction' must consist of competent and professionally clean personalities$ %he #overnment must refrain from inductin# personalities that are even remotely ali#ned "ith the rulin# party$ 2o matter ho" transparent the privatisation process may be' politically close personalities' if inducted on the board or seen to be active behind the scenes and passin# sensitive information durin# the privatisation process' "ill make the transaction controversial$ +n the presence of a vibrant media and an active 4udiciary' such transactions are liable to become controversial and hence "ill derail the entire privatisation pro#ramme$ 3o" do "e address the issue of appointin# credible members to the Privatisation 6oard/ .e must bear in mind that the assets "e intend to sell do not belon# to any political party' rather these are national assets$ %he current Privatisation 6oard has already become controversial as most of its members are associated directly or indirectly "ith the rulin# political partyE this board must be chan#ed before any privatisation is undertaken$ + "ould propose the follo"in# in the lar#er interest of transparent privatisation$ .e must reconstitute the Privatisation 6oard by invitin# t"o to three ma4or political parties to nominate one professional each for the board$ %his "ill #ive them confidence and most likely they "ill not oppose the privatisation process$ .e must include a retired 4ud#e of the 5upreme >ourt as member of the board to take care of the le#al matters$ Preferably' "e could ask the chief 4ustice of the 5upreme >ourt to nominate one 4ud#e for the board$ .e must also include one person from the electronic or print media' "ell versed in economic matters as a board member besides selectin# non-political professionals' successful corporate leaders' and men and "omen of inte#rity in the board$ Bnythin# short of this "ill make the transaction controversial and derail the entire privatisation pro#ramme$ 9et us be very clear = the #overnment has no capacity to run the rotten P5Cs anymore$ %ransparent privatisation is the only solution$ .e must support the #overnment in this national cause' provided the above steps are follo"ed$ %he #overnment' on its part' should be careful "hile selectin# institutions for privatisation$ >ertainly' institutions like @;D>9 and PP9 must not be in the privatisation list$ %he #overnment can use the resources (profits and e:uity) of these t"o institutions to undertake various po"er-sector pro4ects$ +t is in the interest of the #overnment and the privatisation process to keep political personalities out of the privatisation process$ Cven a sin#le transaction becomin# controversial "ill derail the entire privatisation pro#ramme$ .e must treat the privatisation pro#ramme as a pro#ramme for economic recovery and not as a party manifesto$

The ()

lus status

Dr Ashfaque H Khan Tuesday, $anuary 0*, 2014 From rint !dition

%he Curopean Hnion has #ranted the ;eneraliDed 5cheme of Preferences (;5P) Plus status to Pakistan in December 201 $ %his status is likely to increase access to the CH market throu#h duty free imports of ;5P-eli#ible products$ %he #rant of the ;5P Plus status is effective from January 1' 201!$ %his is indeed a positive development and all those "ho contributed to achievin# this status must be con#ratulated$ %he CH is not only one of the lar#est tradin# partners of Pakistan' but is actively en#a#ed and contributin# effectively to socio-economic development of Pakistan$ %radin# relations have' ho"ever' "eakened over the years$ @ne-third of Pakistans e0ports used to #o to the CH in 1**(*?$ %hese declined to one-fourth in 2000-01 and further declined to almost 10 percent by 201011$ %he slo"er pace of economic activities in Pakistan since 2001-0) and the emer#ence of the Curopean debt crisis in the aftermath of the #reat recession appear to be the reason behind the "eakenin# of trade relations$ .hile appro0imately 12 percent of Pakistans remittances come from the CH' forei#n investment from there has declined rapidly in recent years$ Blmost ( percent forei#n investment ori#inated from the CH in the mid-1**0s$ +t increased to ! percent in 2000-01 but declined drastically to 11$( percent by 2010-11$ -actors like the economic slo"do"n' less than satisfactory security environment' ener#y bottlenecks' and poor #overnance since 2001-0) appear to have contributed to"ards makin# Pakistan a less desirable destination for forei#n investment$ Curopean countries introduced the ;5P in 1*11 "ith a vie" to helpin# developin# countries develop and diversify their e0ports$ Hnder the ;5P' the Curopean countries either eliminated or reduced import tariff on specified products e0ported by approved developin# countries' includin# Pakistan$ %his tariff preferential re#ime has been e0tended to ;5P Plus throu#h additional tariff reductions to vulnerable developin# countries$ %he ob4ectives of ;5P Plus have been to assist developin# countries in reducin# poverty' improvin# #overnance and promotin# sustainable development$ %he tariff advanta#es provided by the ;5P Plus status are po"erful and must be e0ploited by our e0porter and #overnment$ 3o"ever' they are not the only factor that can make Pakistan more competitive in the CH market$ %ariff preferences under ;5P Plus are sub4ect to :uantity restraints and safe#uards$ %hese instruments are not applied to e0ports under ,-2 rates (more than onehalf of all ,-2 tariff lines are set at Dero percent and another one-:uarter are belo" five percent)$ %he CH buyers' therefore' prefer imports cleared under ,-2 because they are more reliable and sustainable and are not sub4ect to :uantity restraints and safe#uards as "ell$ Blthou#h the prospects of duty-free under the ;5P Plus access for te0tile and clothin# su##est enormous scope for Pakistans e0ports e0pansion' the reality is some"hat different$ %he applicable :uantity threshold' that is' tariff preferences are not available to a country for a product "hose e0ports e0ceed si0 percent of the CHs annual ;5P imports of that product' means that Pakistans te0tile and clothin# e0ports "ill lar#ely remain sub4ect to ,-2 imports duties$ %he applicable safe#uard provision under "hich tariff preferences are "ithdra"n "hen imports of te0tiles increase by 1!$( percent and all other products by 11$( percent over a period of three years$ Bn authoritative research study has estimated that a total of &?00 million (that is' rou#hly & 00 million in te0tiles' &100 million in leather products and &200 million in all other products) can be additionally e0ported to the CH at Dero percent duty "ithout attractin# safe#uard action$ ,any non-te0tile products such as sports #oods' sur#ical instruments and 6asmati rice' copper and animal casin#s' already enter the CH duty free under either ;5P or ,-2 rates$ -or these products' the ;5P Plus tariff preferences "ill have no positive market access impact$ 2onetheless' the #reatest scope for e0pansion of Pakistans e0ports lay "ith te0tile and clothin# sector under the ;5P Plus packa#e$ %his preferential duty re#ime "ill not suffice to secure sustainable market access to the CH$ %hey

are merely a catalyst$ %he #overnment and industry need to invest in hi#her technolo#y' standards compliance' certification' :uality control and packa#in#' and demand-driven output$ %he ;5P Plus status "ill not be there foreverE therefore' investment must be made to make this sector competitive on a sustained basis$ +t is also to be noted that the ;5P Plus advanta#es perceived to accrue to Pakistan may attract stron# defensive action from CH competitors like +taly' Portu#al and ;reece in te0tiles and 7omania in clothin#E and offensive actions from non-CH competitors like 6an#ladesh' +ndia and >hina$ 3o" to face these defensive and offensive actions "ill be a real challen#e for Pakistan and its te0tile industry #oin# for"ard$ 5ome of the serious impediments to increasin# e0ports not only to the CH but to all markets are risin# cost of production' lo" productivity' volatile prices of ra" materials' difficulty in achievin# the re:uired market standards' costs of certification' lack of customer confidence inconsistent levels of :uality control and supply driven e0ports that are unresponsive to the CH market demand$ %he CH market is lucrative and hi#hly profitable' but at the same time it is also very sophisticated and competitive$ Pakistan must use its ;5P Plus advanta#es to improve upon the factors listed above$ %he ;5P Plus status #ranted to Pakistan is conditional on the ratification and implementation of 21 international conventions in the areas of human ri#hts' labour standards' environment and #ood #overnance$ Bdoption of these conventions "ill assist Pakistan in inte#ratin# into the crossborder supply chain "hich "ill stren#then manufacturin# activity and further promote its e0ports$ Pakistan has ratified almost all the conventions$ %he most critical aspect of these conventions is that their compliance "ill be strictly monitored by the CH throu#h the unnamed third parties from civil society or 2;@s$ Bnother critical challen#e pertainin# to the compliance "ould emanate from the 1)th Bmendment to the constitution$ Bs a result of the 1)th Bmendment' there has been a shift of po"er relevant to the conditions of ;5P Plus = from the federal to the provincial #overnments$ .hile the federal #overnment has "orked hard to #et the ;5P Plus status and is responsible for monitorin# and reportin# of the 21 conventions' implementation of the correspondin# domestic le#islation is lar#ely the responsibility of provincial #overnments' perhaps not yet ready for compliance$ %he federal #overnment must establish a supervisory body to coordinate "ith provincial #overnments in this respect$ %he e0tension of the CHs ;5P preferences to Pakistan "ill certainly boost its competitiveness' but ultimately success in accessin# the CH market in #reater :uantities "ill depend on Pakistans ability to meet CH consumers demand both in terms of :uantity and :uality' to increase its production efficiency' to invest in technolo#ies and skilled manpo"er' and to be able to "ithstand its competitors defensive and offensive actions$ ;5P Plus alone "ill not suffice$ %he short-term advanta#es of tariff preferences under ;5P Plus must "isely be invested for lon#-term #oals' not short-term profit$ To the go"ernment Dr Ashfaque H Khan Friday, $anuary 0+, 2014 From rint !dition + am happy the #overnment issued a rebuttal in this ne"spaper' throu#h a letter to the editor' to my column' A5tatistical issues revisited (December 2!)$ +n response' + "ould like to make three points$ -irst' + "rote t"o articles (December 10 and 2!) on statistical issues$ +n my first article' + had

hi#hli#hted various distortions created by Pakistan 6ureau of 5tatistics (P65) pertainin# to data for national income accounts' inflation and unemployment$ %he distortions in national accounts "ere created as a result of rebasin# the ;DP from 1***-2000 to 200(-0?' as "ell as chan#in# the measurement from 5ystem of 2ational Bccounts (52B) 1** to 52B 200)$ + ar#ued that' "hile these e0ercises are hi#hly technical in nature' little or no consultation "as made "ith the users of these statistics or "ith those "ho have an understandin# of it$ Cven the officials of the #overnments key economic ministries "ere kept in the dark$ +n their rebuttal' the #overnment failed to respond to the issues raised in my December 10 article$ %hey only pointed out that Fthe procedures<methods and sources "ere presented to a committee appointed by the P65 ;overnin# >ouncilG$ + am a"are of the names of the committee members as "ell as the circumstances that forced the then finance minister to appoint the committee$ + "ould simply state that they "ere not the ri#ht people to e0amine the hi#hly technical e0ercise$ + had also pointed out the fictitious #ro"th numbers of many items produced under lar#e-scale manufacturin# durin# the :uarter$ 3o"ever' no mention "as made in the rebuttal to these unbelievable #ro"th numbers$ >an anyone believe that ve#etable #hee' deep freeDer' airconditioners' etc have re#istered triple di#it #ro"th in the month of 5eptember alone/ + also hi#hli#hted the "eaknesses in our inflation and unemployment numbersE no mention "as made on these issues in the #overnments rebuttal either$ +n my second article (December 2!)' + made an attempt to estimate :uarterly ;DP in li#ht of the number that appeared in the press "hich su##ested that Pakistans real ;DP #re" by ($1 percent in the first :uarter of the current fiscal year$ 2obody kne" ho" these numbers "ere calculated as the P65 did not release the numbers officially$ 5ince this "as P65 first attempt to estimate :uarterly ;DP' neither "as a technical committee formed to vet these numbers and methodolo#y' nor did the national income accounts committee (the competent authority) #ive its seal of approval$ +nstead of releasin# the :uarterly ;DP and methodolo#y' the #overnment :uestioned my e0ercise and attempted to find faults "ith my calculation$ +n doin# so' they have i#nored my caution for the readers that my numbers should be taken Fin the spirit of an effort "ith all its limitations of access to dataG$ +t is this limitation that compelled me to use e0penditure rather than the production approach to measure :uarterly ;DP$ %he rebuttal hi#hli#hts the Fthe ma4or "eakness of my computation that stems from a hefty 11 percent "ei#ht for private consumptionG$ +t is indeed surprisin# to see the #overnment failin# to find out ho" the 11 percent "ei#ht "as accorded to the private consumption$ %his is not somethin# + have invented$ 7ather' this can easily be calculated from the P65s o"n data as documented in %able 1$! of the 5tatistical Bppendi0 of Pakistan Cconomic 5urvey 20121 $ Bnyone can divide private consumption e0penditure by the ;DP at market price for the year 2012-1 to arrive at 11 percent$ -urthermore' the rebuttal pointed out that + have used different sources of data for e0ports and imports of #oods and services$ Cverybody kno"s that both the P65 and the 5tate 6ank of Pakistan publish data for these variables$ + have used data from these t"o sources to arrive at a better #ro"th number$ +nstead of appreciatin#' the rebuttal points this out as a "eakness in my calculation$ + do not "ant to d"ell more on the data issue$ + think + have made my point clear that the first :uarter ;DP #ro"th is far lo"er than ($1 percent as reported in the press$ ,y sources in the P65 have' ho"ever' confirmed that the e0ercise of measurin# :uarterly ;DP is bein# undertaken on an e0perimental basis$ %hey "anted to estimate the :uarterly ;DP and compare it "ith the annual number at the end of the fiscal year' to #ain confidence in their :uarterly estimates$

%hey never intended to release the numbers since the "ork is in pro#ress$ 6ut' someho"' these numbers found their place in print and electronic media and our political leadership started o"nin# them$ %he P65 should not have presented the "ork-in-pro#ress-numbers to the finance minister$ +n doin# so' they have put the minister and other political leadership in an a"k"ard position$ + "ould once a#ain ur#e the finance minister to form a hi#h-level technical committee of professional economists' statisticians' academicians and users of these statistics to thorou#hly e0amine these statistics and methodolo#ies$ %he finance minister should also seek assistance from the H2 5tatistical @r#anisation to assist the committees "ork$ %his "ill be a #reat service to the nation$ !,ternal "ulnerabilities Dr Ashfaque H Khan Tuesday, December +1, 201+ From rint !dition %he li:uid forei#n e0chan#e reserves of the 5tate 6ank of Pakistan stood at & $1* billion durin# the "eek endin# on December 20' 201 $ %he 56Ps fore0 reserves declined by &21( million compared to the previous "eek (December 1 ' 201 ) on account of e0ternal debt servicin# includin# a payment of &() million made to the +,-$ %he purpose of this article is to see "here Pakistan is likely to be by end-,arch 201! in terms of fore0 reserves$ Pakistan has lost some &12 billion fore0 reserve since July 2011' "hen they stood at &1!$) billion$ +t has lost &2$0 billion reserve since the si#nin# of the +,- pro#ramme$ %he last five years of economic mismana#ement brou#ht the country to the ver#e of default$ %he present #overnment sou#ht the assistance of the +,- to prevent that$ %he +,- approved a ne" pro#ramme amountin# &?$?) billion on 5eptember !' 201 $ %he +,- pro#ramme "as e0pected to bolster market confidence' open the door for e0ternal inflo"s from other sources' help build forei#n e0chan#e reserves and prevent the country from defaultin# on its e0ternal payment obli#ations$ Disappointin#ly' the ne" +,- pro#ramme has not improved anythin# on the #round "ith the e0ception of preventin# Pakistan to default$ %his pro#ramme has failed to restore market confidence or build fore0 reserves = in fact it has declined by &2$0 billion$ %he threat of default continues to loom lar#e$ +n short' Pakistan remains even more vulnerable today than it "as prior to the pro#ramme' despite the #overnment takin# some unpleasant decisions to meet the pro#rammes re:uirements$ %he overall balance of payments position has deteriorated durin# the first five months (July2ovember) of the current fiscal year as compared "ith the correspondin# period of the previous fiscal year$ %he current account deficit has "idened to &1))( million as a#ainst &?)! million in the same period last year$ -urthermore' the deficit "as ! percent hi#her than the +,- pro4ection of &1 1) million for the entire fiscal year$ %his "as nothin# but a deliberate attempt on the part of the +,- to understate the deficit to sho" a lo"er financin# #ap and build a case for smaller tranches$ +t is this smaller tranche that has emer#ed as the principle source of deterioration of Pakistans balance of payments and thus a ma4or source of its vulnerabilities$ .hy has Pakistans balance of payments deteriorated so much/ C0ports have contracted by almost one percent durin# the first five months (July-2ovember) of the current fiscal year$ +mports' on the other hand' have #ro"n by three percent durin# the same period$ Bs a result of

these developments' the trade balance deteriorated by nine percent and current account deficit stood at &1))( million durin# July-2ovember 201 as a#ainst &?)! million in the same period last year' implyin# a deterioration of 11( percent$ 7emittances are an important component of the current account balance' "hich has been #ro"in# at a hi#h double di#it rate until the last fiscal year$ ,y vie" has al"ays been that this "as not remittances alone but contained the re-routin# of ille#ally ac:uired money as "ell$ 7emittances have no" returned to normal #ro"th and are contributin# positively in keepin# the current account deficit lo"$ Pakistans current account deficit is lo" by normal standards and does not pose any serious threat to the economy$ %he capital and financial accounts have emer#ed as a serious threat to the overall balance of payments' "hich remained in deficit at &201 million$ %his deficit has been financed by dra"in# do"n forei#n e0chan#e reserves$ -orei#n investment' a ma4or component of non-debt creatin# inflo"s has not sho"n any si#ns of improvement durin# July-2ovember' 201 despite an a##ressive campai#n from the political leadership$ 2et forei#n investment has declined by 1 percent to & ** million compared "ith &!(? million in the same period last year$ 5o "here do + see our forei#n e0chan#e reserves by end-,arch 201!/ -ore0 reserves stood at & 1* million on December 20' 201 $ Pakistan received &((! million on December 2 after the successful completion of the first revie" and in the meantime made yet another payment amountin# &1!1 million to the +,- on December 21$ %his leaves net fore0 reserves at & $? billion by end-December 201 $ Pakistans overall balance of payments has deteriorated at an avera#e rate of &!00 million per month over the last five months$ Bssumin# the same trend continues durin# January-,arch 201!' depletion of reserves to the e0tent of &1$2 billion may be e0pected$ %he country "ill also be makin# a payment of &?!0 million to the +,- durin# January-,arch 201!$ 3ence by end-,arch the fore0 reserve is likely to stand at &1$1? billion$ .hat are the possible sources of inflo"s durin# January-,arch 201!/ %hey may include the >oalition 5upport -und (>5-) amountin# &?00 million' Ctisalat makin# payment to Pakistan to the e0tent of &)00 million' sale of ; licences materialisin# and &1$2 billion bein# deposited in the #overnments account' Pakistan successfully floatin# a soverei#n bond amountin# &(00 million' the #overnment borro"in# &2(0 million from a consortium of forei#n banks led by >redit 5uisse' and the +,- releasin# &((0 million after the successful second revie" of the pro#ramme$ .hat are the chances that these inflo"s "ill materialise durin# January-,arch 201!/ %he >5and Ctisalat money are not e0pected to be achieved$ %he finance minister' "hile talkin# about buildin# fore0 reserves a fe" days back' did not mention these t"o sources of inflo"s$ %he probability of the sale of ; licences materialisin# is very lo" and even if it is materialised' the desired amount (&1$2 billion) may not be available to Pakistan$ Bs far as soverei#n bond is concerned' Pakistan may successfully float durin# the current fiscal year but there is lo" probability that it can be materialised durin# January-,arch 201!$ -inally' the country is most likely to borro" &2(0 million from the >redit 5uisse-led forei#n bank consortium and the +,- releasin# &((0 million after the second revie"$ 6ased on the above analysis' Pakistan may #et about &1$0 billion from different sources "hich "ill take the countrys fore0 reserves to &2$) billion by end-,arch 201!$ .ith the lo" level of reserve' the e0chan#e rate may remain under pressure in the January-,arch 201! period$ .hat needs to be done/ %he first thin# Pakistan must do is en#a#e "ith the +,- to increase the siDe of the upfront payment$ %he countrys vulnerability to the fore0 crisis is due mainly to the

repayment of the +,- loan$ Bn upfront payment of &2$0 billion may substantially ease pressure on the reserves$ 5econd' the country needs to compress its imports by cuttin# non-essential imports by raisin# duty or cash mar#in re:uirement$ %hird' "e need to a##ressively pursue a privatisation pro#ramme to attract non-debt inflo"s$ -ourth' the country needs to attract forei#n investment throu#h a##ressive marketin#$ %he finance minister is makin# an effort to build fore0 reserves$ 3e needs to redouble his efforts$

)tatistical issues re"isited Dr Ashfaque H Khan Tuesday, December 24, 201+ From rint !dition %his article is in continuation of my previous article' A5tatistical issues (December 10)' in "hich + had hi#hli#hted various distortions created by the Pakistan 6ureau of 5tatistics pertainin# to data for national income accounts' inflation and unemployment$ ,y analysis indicated that somethin# has #one "ron# "ith Pakistans key macroeconomic statistics and + had ur#ed the finance minister to form a hi#h level committee of professional economists' statisticians and academicians to thorou#hly e0amine the measurement of these statistics$ + had also su##ested that the #overnment must re:uest international a#encies like the H2 to send their e0perts to assist the committee$ +nstead of addressin# these issues by formin# a hi#h level committee' the #overnment created further confusion by releasin# :uarterly estimates of the ;DP "hich su##est that it has #ro"n by ($1 percent in the first :uarter (July-5eptember) of the current fiscal year over the correspondin# period of last year$ Blthou#h no one kno"s ho" the P65 estimated ($1 percent ;DP #ro"th in the first :uarter' sources in the P65 su##est that a#riculture "as up by 2$( percent' and industry and services #re" by ($1 percent and ($1 percent' respectively$ +t is important to kno" that the :uarterly estimates of the ;DP have not been approved by the competent authority = the 2ational +ncome Bccounts >ommittee$ %he P65 cannot "ait till the end of the fiscal year to #et its approval$ Kuarterly accounts re:uire :uarterly approval before their release$ %here is no "ay to check the authenticity of the :uarterly estimates$ Bn attempt is made' nevertheless' to calculate the first :uarter ;DP on the basis of available information and in cooperation "ith 67 7esearch$ %hree thin#s need to be noted$ -irst' measurin# :uarterly ;DP throu#h the production approach is hi#hly risky o"in# to the fluctuations in a#ricultural valueadded$ 3ence' a better "ay to measure :uarterly ;DP is throu#h the e0penditure approach$ 5econd' it is "ell kno"n that #ro"th in services sector is a derived demand = derived out of the activities in a#riculture and industry$ %herefore' #ro"th in services is most likely to fall in bet"een the #ro"th rates of a#riculture and industry$ Data from the last seven years indicate the same "ith the e0ception of the last t"o years$ +nterestin#ly' the estimates as reported by the #overnment sho" hi#hest #ro"th for services follo"ed by industry and a#riculture in the first :uarter$ %hird' the #ro"th rate for lar#e-scale manufacturin#' as released by the P65' sho"s a #ro"th of 12$) percent in 5eptember 201 and )$! percent durin# the first :uarter$ 5uch Aimpressive #ro"th is based on apparently fictitious #ro"th in the production of several items of the sector$ -or e0ample' ve#etable #hee re#istered a #ro"th of 1 1 percent' foot"ear (!?$1 percent)' deep

freeDers (222 percent in 5eptember and 100 percent in first :uarter)' air-conditioners (2! percent in 5eptember and 101 percent in the first :uarter)' %L sets ()?$! percent)' diesel oil (1 ( percent)' to mention a fe"$ >an anyone believe these numbers/ Bn attempt is made to calculate ;DP for the first :uarter usin# e0penditure approach in cooperation "ith 67 research$ %he ;DP throu#h e0penditure approach consists of private and #overnment consumption e0penditures' private and public sector investment plus chan#es in inventories' and e0ports and imports of #oods and services$ C0ports and imports of #oods and services are measured by the P65 as "ell as by the 5tate 6ank of Pakistan$ .e have taken the numbers that #ive better #ro"th$ -or e0ample e0ports of #oods and services as reported by the P65 sho" a ne#ative #ro"th of ?$1 percent in the first :uarter as compared "ith the ne#ative #ro"th of 11$ percent reported by the 56P$ .e have taken the number of the P65 "hich sho"s a lesser decline$ 5imilarly' imports of #oods and services as reported by the P65 sho" a decline of 2$2 percent as a#ainst a positive #ro"th of ($) percent released by the 56P$ .e have taken the 56P number "hich reports positive #ro"th$ @n the investment side' "e have used the federal and provincial public sector development pro#ramme (P5DP) as released by the ,inistry of -inance (see -iscal @peration Data) for #overnment investment$ -ederal and provincial P5DP are do"n by )$2 percent and ?0$ percent respectively durin# the first :uarter$ %otal P5DP therefore sho"s a ne#ative #ro"th of !$ percent$ .hen ad4usted for inflation ()$1 percent) to arrive at real #overnment investment' #ro"th rate turns out to be a ne#ative !2$! percent$ -or private investment in o"nership of d"ellin#s' "e have used the sales<production of cement as pro0y$ -or other sectors' the pro0y used is imports of machinery and e:uipment$ Private sector investment at current prices is up by 1)$1 percent$ 3o"ever' "hen ad4usted for rate of inflation and added "ith real #overnment investment (-!2$! percent)' the overall #ro"th rate for real ;ross Domestic >apital -ormation (;D>-) is estimated at 2$1 percent only$ %he #overnments real consumption e0penditure is estimated from the data released by the ,inistry of -inance under Afiscal operations$ ;overnment consumption e0penditure (e0cludin# interest payments) is up by 1 $( percent in nominal terms$ .hen ad4usted for rate of inflation' the real consumption e0penditure is up by ($! percent$ Private consumption e0penditure on non-food items measured throu#h the sales ta0 (ad4usted for the increase in ta0 rate)' e0cise duty and petroleum levy is up by 12$? percent in nominal terms$ .hen ad4usted for rate of inflation' the real private consumption e0penditure is up by !$( percent$ -ood e0penditure is likely to have sho"n less real #ro"th due to the hi#h inflation in food prices$ 3avin# calculated the #ro"th rates of the components of real ;DP' the only task remainin# is to multiply these #ro"th rates "ith different "ei#hts of each item in the ;DP$ %he "ei#hts of these items areJ private consumption e0penditure (11 percent)' #eneral #overnment consumption e0penditure (10$1 percent)' #ross fi0ed investment (1 $2 percent)' chan#es in inventories (1$? percent)' e0ports less imports of #oods and services (11$) percent and -1!$ percent' respectively)$ Bfter multiplyin# these "ei#hts "ith the #ro"th rates of each component of ;DP' the #ro"th rate of real ;DP in the first :uarter of 201 -1! is estimated at 2$)? percent' much lo"er than ($1 percent as reported in the press$ + "ould caution readers to take the number in the spirit of an effort "ith all its limitations of access to data$ 3o"ever' a #ro"th of appro0imately three percent is consistent "ith the avera#e of the last five years$ %he P65 is re:uested to release the :uarterly ;DP estimates to remove any confusion$ .e "ill be the first to ackno"led#e if P65 fi#ures are correct that the economy is revivin# stron#ly$

%he P65 has done a #reat disservice to the #overnment' the finance minister and prime minister in particular$ %hey should not have presented the numbers to the finance minister "ithout presentin# them before the technical committee as "ell as the 2ational Bccounts >ommittee$ +n so doin#' they have put the finance minister and the prime minister in an a"k"ard position$ %here is no doubt that the finance minister is makin# serious efforts to revive the economy but this process takes time and depends on a series of structural reforms$ .hat is re:uired is hard "ork and patience$

)tatistical issues Dr Ashfaque H Khan Tuesday, December 10, 201+ From rint !dition 5tatistics speak all lan#ua#es' affect all policies and touch all aspects of peoples lives$ %he si#nificance of critical statistics for policymakers cannot be overemphasised$ +n recent years' si#nificant chan#es have taken place in Pakistans statistics "hich have not only distorted some key macroeconomic statistics but made researchers lives miserable$ 5uch distortions need to be understood and addressed ur#ently$ 2ational income accounts' employment<unemployment and inflation are amon# the most vital statistics for any economy$ Pakistans national income accounts have "itnessed structural chan#es in the year 2012-1 $ +t has seen its national account (;DP) rebased from 1***-2000 to 200(-0? "hile the measurement of national accounts chan#ed from the 5ystem of 2ational Bccounts (52B) 1** to 52B 200)$ .hile the rebasin# of ;DP "as hi#hly desirable' the movement to"ards 52B 200) "as premature and inconsistent "ith the level of e0pertise available at the Pakistan 6ureau of 5tatistics (P65)$ %he rebasin# of ;DP "as re:uired because every country "itnesses structural chan#es in production' consumption and investment over the years on account of continuous development and innovations$ Practice around the "orld su##ests that some countries rebase their ;DP after five years and others after ten years$ Pakistan rebased its ;DP from 1***-2000 to 200(-0?' the results of "hich "ere released in 2012-1 $ %he 52B 200) is hi#hly sophisticated and measures ;DP by complicated techni:ues$ Bs such' hardly any developin# country like Pakistan has adopted 52B 200)$ -urthermore' our statistical information #atherin# system is not stron# enou#h to #ather all the information re:uired for 52B 200)$ %he "hole e0ercise of rebasin# of national account from 1***-2000 to 200(-200? and movin# a"ay from 52B 1** to 52B 200) "as led by ,r$ 6ernd 5truck' a ;erman 2ational Bccount e0pert "ho spent seven years in P65$ 9ittle or no consultation "as made "hile undertakin# this e0ercise "ith those "ho use' or have any understandin#' of the national accounts$ Cven the staff of the finance ministry' Plannin# >ommission' and the >entral 6ank "ere out of the picture durin# the "hole e0ercise$ %hey only came to kno" about the chan#e "hen the results of this e0ercise "ere presented to them$ 5uch an e0ercise has created enormous difficulties for researchers and has at the same time posed challen#es for policymakers$ %he reliability of the data has become a serious issue$ %here e0ist no consistent time series data for national account prior to 200(-0?E hence no meanin#ful economic research could be undertaken$ Cvery researcher #enerates his<her o"n consistent series of national account usin# different methodolo#ies$ +n particular' investment numbers are totally distorted$ +n the "ords of a reno"ned economist' Dr 3afiD Pasha' the investment numbers

are FrubbishG$ %his e0ercise has produced some stran#e numbers$ -or e0ample' "hile real ;DP #re" at an avera#e rate of 2$* percent per annum over the last five years' a relatively unkno"n component of the ;DP "ith the name of Aother private services has #ro"n at an avera#e rate of nine percent per annum and accordin#ly emer#ed as the fifth lar#est component of ;DP after a#riculture' manufacturin#' "holesale and retail trade and transport and communication$ 5imilarly' investment in this sector "as only one-third of the investment in manufacturin# in 2001-0)E "hereas' it has no" surpassed the investment in manufacturin# durin# 2012-1 $ Does that make sense/ %he P65 has released the data of the lar#e-scale manufacturin# for the first :uarter (July5eptember) of the current fiscal year$ 9ar#e-scale manufacturin# has #ro"n by 12$) percent in 5eptember and by )$! percent in July-5eptember this year and over the correspondin# period of the last year$ 5uch an impressive recovery in lar#e-scale manufacturin# is based on fictitious #ro"th in the production of several components of this sector = for e0ample' ve#etable #hee re#istered a #ro"th of 1 1 percent' foot"ear (!?$1 percent)' paints and varnishes ( ?$2 percent)' air-conditioners (10?$1 percent)' electric bulbs (! $! percent)' %L sets ()?$! percent)' diesel (1 2$1 percent)' billets ( 2$( percent) and so on$ Does that make sense/ +n particular' these statistics "ere distorted in the month of 5eptember 201 $ +nflation is another important statistic for any country$ %his statistic has also under#one considerable chan#es since 2011-12$ -irst' the base year measurin# >P+-based inflation chan#ed from 2000-01 to 2001-0)E its results are bein# reported since Bu#ust 2011$ Bs a result of chan#e in the base year' the "ei#ht of food items declined from !0$ percent to !$) percent$ 5ince inflation in developin# countries like Pakistan is' to a lar#e e0tent' driven by food and fuel prices' it has been understated to that e0tent and also rendered non-comparable "ith previous years$ 5econd' natural #as price distorted >P+ since July 2012' "hen reduction of the number of slabs for domestic consumers "as interpreted by the P65 as !* percent reduction in tariff$ .ith 1$(1(? "ei#ht of #as in >P+' such a lar#e Areduction understated inflation for the year 2012-1 $ %hird' the P65 data for electricity prices apparently account for the increase in base tariff only "ith no ad4ustment for monthly fuel ad4ustment char#es paid by the consumers$ -ourth' house rent inflation has been avera#in# ?$( percent for the past 1( months prior to ,arch 201 and is measured ?$* percent in ,arch 201 and 1$* percent in 2ovember 201 $ .ith property prices risin# steeply in ma4or urban cities' such lo" house rent inflation is not reflectin# the #round reality$ -ifth' money supply and domestic credit have been #ro"in# at an avera#e rate of 1( percent and 20$( percent respectively over the last t"o years$ -urthermore' borro"in# directly from the central bank to finance fiscal deficit has been on the rise for the last t"o years and has accelerated "ith unprecedented pace in the past fe" months$ 5urprisin#ly' inflation e0hibited a declinin# trend in the midst of risin# credit e0pansion$ +nflation has sur#ed in recent months o"in# to food prices$ %here appears to be a disconnect bet"een risin# money supply and >P+-based inflation$ Cven if "e double the supply of money' inflation may rise only mar#inally$ Hnemployment is yet another key macroeconomic variable$ Pakistans unemployment rate does not reflect the #round reality$ %here appears to be a total disconnect bet"een economic #ro"th and unemployment$ %he Pakistan Cconomic 5urvey 2012-1 saysJ Funemployment rate decreased mar#inally from 1$1 percent in 200 -0! to ($* percent in 2010-11G (PP$ 1?2)$ Does it make sense/ 6ased on the above facts' it is abundantly clear that somethin# has #one fundamentally "ron# "ith Pakistans key macroeconomic statistics$ Bny policy measures taken on the basis of these statistics are fla"ed$ + "ould ur#e the prime minister and the finance minister to look into the matter and take ur#ent measures$ %hese measures must include formation of a hi#h level

committee of professional economists' statisticians' academicians and the users of these statistics to thorou#hly e0amine these statistics' the "ay they are measured and compiled and the technical capabilities of the P65$ %he finance minister must re:uest the +,- to send e0perts from its 5tatistics Department to assist the hi#h level committee in its "ork$ %he sooner' the better$

Declining fore, reser"es Dr Ashfaque H Khan Tuesday, December 0+, 201+ From rint !dition Pakistans total li:uid forei#n e0chan#e reserves stood at &)$) billion on 2ovember 22' 201 of "hich the 5tate 6ank of Pakistan and commercial banks accounted for & $!? billion and &($ billion' respectively$ >ommercial banks forei#n e0chan#e reserves are essentially the deposits of both residents and non-residents under the -C >ircular 2o 2($ %hese reserves are' therefore' not usable by the #overnment for balance of payments purpose$ 3o"ever' trends in the commercial bank reserves did convey some messa#es for the state of the economy$ %he 56Ps forei#n e0chan#e reserves declined to a dan#erously lo" level of & $!? billion on 2ovember 22' 201 $ Pakistan also made a payment of & *? million on 2ovember 2?' 201 to the +,-$ +f this payment is accounted for' it "ould mean that the 56Ps forei#n e0chan#e reserves stood at a mere & billion by end-2ovember 201 $ %his is the lo"est level of reserves of the country in the last t"elve years and is sufficient only to finance three "eeks of import$ Pakistans forei#n e0chan#e reserves have been on the decline since July 2011 "hen they stood at &1!$) billion$ Pakistan has lost &12$0 billion reserves in 4ust 2* months = by end-2ovember 201 $ +t has lost &2$2 billion reserves in 4ust four months (since July 201 ) and &1$1 billion since si#nin# the +,- pro#ramme$ %he country is scheduled to pay another &200 million to the +,- in December' 201 and &1$2! billion durin# January-June 201!$ Hnless massive inflo"s are in4ected fairly soon' "e may "itness a currency crisis in December 201 $ .hy has the country landed in such a vulnerable situation/ 5ta#nant e0ports' declinin# forei#n inflo"s o"in# to the suspension of the previous +,- pro#ramme in ,ay 2010' rapidly declinin# forei#n investment' little or no privatisation proceeds' failure on the part of the #overnment to raise dollars from international debt capital market and declinin# #rant assistance are the principle reasons for the rapidly declinin# forei#n e0chan#e reserves$ ,oreover' risin# debt repayments and #ro"in# imports in con4unction "ith the fact that Pakistan is continuin# to finance all its e0ternal payments out of its o"n reserves have also contributed to the sharp decline in reserves$ 7apidly depletin# reserves create nervousness in the market and encoura#e capital fli#ht' "hich' in turn' puts do"n"ard pressure on the e0chan#e rate$ %he Pakistani rupee' accordin#ly' has lost almost 1) percent of its value a#ainst the dollar since July 2011$ ;iven the state of the economy that evolved over the last five years' Pakistan reached the brink of defaultin# on its e0ternal debt repayment obli#ations by June 201 $ %he ne" #overnment had little or no choice but to seek yet another +,- pro#ramme to prevent the country from defaultin# on its e0ternal debt payments$ %he +,- approved a ne" pro#ramme amountin# &?$?) billion on 5eptember !' 201 $ +t "as e0pected that the ne" pro#ramme "ould bolster market confidence' help build forei#n

e0chan#e reserves' prevent the country from defaultin# on its e0ternal payment obli#ations' and open the door for e0ternal inflo"s from other sources$ 2othin# has been achieved thus far from the pro#ramme$ +t has failed to bolster market confidence and forei#n e0chan#e reserves have declined to a t"elve-year lo"E the country has reached dan#erously close to default' and has failed to brin# inflo"s from other sources as "ell$ Pakistan remains as vulnerable as it "as prior to the pro#ramme$ +t is in this perspective that this columnist and other commentators have been hi#hli#htin# the "eaknesses of the current +,- pro#ramme$ @ne of the key "eaknesses is the siDe of the release of tranche itself$ Pakistan has received &(!1 million as the first tranche of the pro#ramme in 5eptember but repaid about &*1( million to the +,- durin# the period' implyin# a net outflo" of &!2) million$ +t appears the +,- "as more interested in securin# its o"n outstandin# loan by releasin# little resources and encoura#in# other multilateral development institutions to lend to Pakistan so as to enable it to continue to repay the +,- loan$ %he +,- deliberately understated the current account deficit to sho" a lo"er financin# #ap to build a case for smaller tranches$ %he +,- pro#ramme is also desi#ned in such a "ay that it forces the 56P to purchase dollars from the market and borro" from "hatever sources it can' "ith a vie" to buildin# its forei#n e0chan#e reserves and continuin# to repay the +,- loan on time$ +n the "ords of Dr ,uhammad Ia:ub' former #overnor of 56P' this is nothin# but a Fself-servin# pro#rammeG$ Pakistans forei#n e0chan#e reserves "ere already on the decline and it continues to follo" the same tra4ectory even "ith an +,- pro#ramme$ +snt that stran#e/ +s this the "ay the +,- provides financial support to its member states/ 5uch a self-servin# pro#ramme "ill cause more harm to the economy and the people rather than benefittin# the country$ .hile the countrys forei#n e0chan#e reserves are declinin# rapidly and reachin# a dan#erously lo" level' commercial bank reserves have been risin# steadily in recent years and reflectin# the #ro"in# dollarisation of the economy$ >ommercial bank reserves "ere only 11$2 percent of the 56Ps reserves in 200?-01$ %hey increased to !1$( percent in 2011-12' accelerated to ) $! percent in June 201 and reached 1(! percent on 2ovember 22' 201 $ .hile Pakistan has lost almost &12 billion from its reserves since July 2011' commercial banks on the other hand have #ained almost &2 billion in their reserves$ %he pace of dollarisation has #athered momentum in recent months as people are losin# confidence in their o"n currency$ %he e0pectations of further depreciation of the rupee are encoura#in# people to hold more dollars$ %he #overnment needs to restore the confidence of the people on its o"n currency by minimisin# its recourse to printin# money$ %his is not happenin# at the moment$ %he #overnment has borro"ed 7s1(1 billion in 1 1 days of the current fiscal year or 7s($1 billion per day or 7s2 * million per hour$ 5uch a pace of borro"in# is bound to "eaken the confidence of the people in the rupee$ %he #overnment should take the matter seriously$ %here are people sittin# in the 56P "ho mis#uided the previous re#ime and are doin# the same "ith the present one by ar#uin# that there is Ano forei#n e0chan#e crisis in the country$ 5uch statements are not in the interest of the country$ %he fact is that our forei#n e0chan#e reserves have declined to & billion by the end of 2ovember 201 $ 2o one can deny this fact$ %his is a dan#erous situation and needs the #overnments ur#ent attention$ + "ould ur#e the prime minister to take the economy seriously' stren#then the #overnments economic team' ask them to take another look at the +,- pro#ramme and listen to the people "ith kno"n credentials$ Bre "e "aitin# to taste the flavour of bein# a bankrupt nation/ 5ome country or institution may come for"ard to bail us out but at "hat cost/

The Human -a&ital Debate Dr Ashfaque H Khan Tuesday, .o"ember 2/, 201+ From rint !dition %he Population Bssociation of Pakistan' in collaboration "ith the 2ational Hniversity of 5ciences and %echnolo#y (2H5%)' or#anised a t"o-day conference "ith the theme' APopulationJ 2e" 7ealities and >hallen#es for 3uman Development on 2ovember 20-21' 201 $ %he conference "as held at the 2H5% campus in +slamabad and "as attended by senior #overnment officials' eminent social scientists' parliamentarians' representatives of 2;@s and civil society' demo#raphers' and faculty and students of 2H5%$ %his "as the second conference of its kind' held durin# the last three "eeks' on the broader areas of human development or#anised by 2H5% = reflectin# the universitys commitment to"ards human development in Pakistan$ %he purpose of this conference "as to sensitise the countrys political leadership and senior #overnment officials on the challen#es and opportunities that lie ahead on account of the risin# population$ +t is "ell-kno"n that a stron# human capital base makes a country more prosperousE the concept of human capital is thus more relevant to a labour-surplus country like Pakistan' as it is endo"ed "ith more labour o"in# to the hi#her population #ro"th rate$ %he surplus labour of Pakistan is its human resource "hich can be transformed into human capital "ith effective inputs of education' health and moral values$ Pakistan is a relatively youn# country "ith nearly (0 percent of its population belo" the a#e of 20 years$ Pakistans population at the time of independence "as millionE by mid-201 ' the population is estimated to have reached 1)! million$ %herefore' in rou#hly t"o #enerations' Pakistans population has increased by 1(0 million' "hich means it has #ro"n at an avera#e rate of 2$? percent per annum$ +nterestin#ly' Pakistan adds one 2e" Mealand to its population every year and one Bustralian in every five years$ 6y 20(0' Pakistans population is likely to increase to (0 million from the current level of 1)! million' of "hich over 2 ( million "ill be of "orkin# a#e (1(-?! years)$ ,ost importantly' Pakistan has over a hundred million youth today and this number "ill keep on risin# as "e move for"ard in time$ Pakistan stands to benefit from its lar#e population' provided that it transforms them into productive citiDens by investin# in education and health (popularly kno"n as the demo#raphic dividend)$ Pakistan stands to lose enormously if it fails to invest in its people because the lar#e population' particularly the youth' "ill then serve as hi#h-octane fuel' i#nitin# repeated cycles of social and political instability (popularly kno"n as demo#raphic disaster)$ ;iven its current demo#raphic structure' investin# in people = in education and health = is necessary for Pakistan$ Cducation develops the capacity in a country to absorb technolo#y and health is essential for increasin# productivity$ +t has been observed empirically that countries that invested heavily in people and built a stron# human capital base have "itnessed rapid economic #ro"th and prosperity (Cast Bsia as an e0ample)$ +t has also been observed that the causality bet"een prosperity and human capital indices runs in both directions$ .ith hi#her income' people and the #overnment can afford to spend more on education and health' thus improvin# human capital "hich leads to hi#her productivity and more incomes$ 6etter :uality of education and health services are also essential for empo"erin# people' enhancin# resilience to "ithstand adverse shocks' and reducin# vulnerabilities$ 6uildin# human capital base alone is not enou#h$ %he countrys macroeconomic policies should

be ali#ned "ith promotion of #ro"th and 4ob creation$ 6ut "hat kind of #ro"th should developin# countries like Pakistan strive to promote/ ;ro"th should be broad-based' inclusive and sustainable$ ;ro"th "hich does not benefit the ma4ority of the population is of little #ood to the country$ Hnfortunately' the future of our youn#er #eneration does not look promisin# because of the overly restrictive policies bein# pursued by the #overnment under the ne" +,- pro#ramme$ +t is "ellkno"n that Pakistans economy has been stuck in a lo" #ro"th mode (on avera#e percent per annum) for the last five years and it is e0pected to #ro" in the same ran#e in the ne0t five years as "ell' particularly durin# the +,- pro#ramme period (201 -201?)$ Durin# the last five years' its real per capita income #re" on avera#e by less than one percent per annum' "ith the population #ro"in# at an avera#e rate of 2$2 percent per annum$ %his is e0pected to #ro" more or less at the same pace in the ne0t five years as "ell$ .ith labour force #ro"in# at an avera#e rate of $( percent and economy #ro"in# at the rate of percent' more than one-half of the ne" entrants includin# the youth (over t"o million ne" 4ob seekers enter the 4ob market each year) in the 4ob market "ill 4oin the lea#ue of the unemployed each year in the ne0t five years$ 5imilar numbers of 4ob seekers have already 4oined the pool of the lost #eneration in the last five years$ 3o" lon# "ill these people remain unemployed/ 2aturally' they have been seekin# lo"-paid and vulnerable 4obs in the informal sector to survive$ %here is a limit to ho" many 4ob seekers this sector can absorb$ %his is one of the key reasons the country is "itnessin# an upsur#e in violence and crime in all ma4or cities$ %here are troubled areas in 8arachi "here youth unemployment is bet"een !0-?0 percentE educated youth are found to be involved in crime in various cities of Pun4ab as "ell$ %he #ro"in# frustration and an#er of the youth can be seen on the streets of Pakistan "here they try to burn "hatever comes in their "ayE this is an ominous development$ +t appears that demo#raphic disaster (as opposed to demo#raphic dividend) is already at hand because of our prolon#ed ne#lect of education and health on the one hand' and the economy on the other$ .e can still put a brake on the path of destruction' provided "e chan#e our thinkin# re#ardin# education and health$ +t is in this back#round that + have been criticisin# the heartless stabilisation policy under the dictate of the +,-$ B slo" #ro"in# economy like Pakistan "ill continue to face resource constraints and "ill be forced to cut spendin# on education and health' thus "eakenin# the countrys human capital base further$ B relatively poor :uality of human capital "ill further reinforce the slo"er economic #ro"th and hence a vicious cycle of deterioratin# human capital and sta#nant economic #ro"th "ill continue$ Pakistans macroeconomic policies cannot i#nore #ro"th and 4ob creation anymore$ %here is no short cut for a developin# country like Pakistan to attain the status = in terms of economic development = that the countries of Cast Bsia have$ %o do so "ill re:uire e0traordinary commitment from the countrys political leadership$ %he leadership "ill have to demonstrate their "ill or commitment by chan#in# the composition of bud#etary e0penditures = that is' by investin# heavily on education at all levels as "ell as on health services$ %he leadership must be seen throu#h their acts as committed to"ards human capital development$ ,ere slo#ans have not "orked in the past and "ill never "ork in the future$