Saturday, May 7, 2011


The aftermath of 9/11 has had an extraordinary effect on Pakistan. The nation has been propelled once again into a position of a frontline state, this time in a war against terrorism. This has led the G-7 countries to radically shift their priorities for Pakistan. The sanctions imposed after the May 1998 nuclear blast were lifted and the issue of CTBT is dead for all purposes. The multi-lateral lending agencies have suddenly found themselves agreeing with the facts and figures given to them by the Finance Ministry. There is less heart burning by the developed countries on any increase in defense allocations. Nevertheless, the ghost of Al-Qaeda is still overshadowing all endeavors undertaken by the country.

The paradigm shift in the banking policies in North America, Europe, and Japan has brought about a re-thinking in the utilization of their banking facilities by foreigners. Pakistanys who maintain accounts in these countries suddenly felt uncomfortable when the central banks of these countries, in response to new legislation, started probing these accounts and, in many cases, freezing them outright. This led to a panic situation for many Pakistanys because the emphasis of these probes was primarily directed to accounts having Muslim-based names.

The outcome of this new policy resulted in the withdrawal of money from these accounts and a gradual transfer to a "safer haven", i.e. "home". The past months have witnessed an upsurge in home remittances. Pakistanys in USA have taken a lead in sending money home. The available official figures from State Bank of Pakistan show that home remittances thru official banking channels were as follows:
Million US$
Total 1999-00 2000-01 2001-02 July-September July-October
2002-03 2001-02 2002-03 2001-02
FCBC 983.73 1086.57 2389.05 1052.89 340.05 1430.66 528.98

Moreover, the net inflow of foreign private investment was as follows:
Million US$
Type 1999-00 2000-01 2001-02 October July-October
2001 2002 2001-02 2002-03
Portfolio 73.50 -140.40 -10.10 10.80 07.50 -36.40 04.60
Direct 469.90 322.40 484.70 50.50 228.90 119.60 399.10
Total 543.40 182.00 474.60 61.30 236.40 83.20 403.70

The foreign exchange reserves held by State Bank of Pakistan as well as by other banks have exceeded US$ nine billion. The pragmatic forecast is that by the end of year 2002, the reserves could attain double figures. This means that the government has money for financing imports of more than 11 months. The export trend also reflects the achievement of the target of ten billion dollars by June 30, 2003. This would, of course, be a major achievement because this has always been an elusive target for the government as well as the exporters.

In view of the above, it is evident that there is a huge pool of cash resources that is available for utilization. The banks are overflowing with excess liquidity. The SBP has reduced the discount rate and the banks are ready to lend at single digit figures to blue-chip clients. The export refinance scheme may be refined and the mark-up rate may be scaled downwards. This would be a boost for exporters. Right now, the SBP is still undecided about this reduction. At the same time, the banks, with the active support of the government and SBP, have also embarked on the scheme of lending for consumer items. The banks are financing the purchase of home appliances, automobiles, and other such needs. Furthermore, the government has also encouraged the banks to increase loans for housing. All in all, there are some new channels that are being adopted by the banks to enhance their exposure to individuals too.

It is to be noted that in the past couple of years, there has been a move by many business establishments to go from interest-based to non-interest-based financing modes. There are many factors that led to this approach. First of all and the main reason being the Islamic injunctions that has enabled the businessmen and industrialists to adopt this route. There is a gradual move towards the Islamization of the economy and the result is very obvious. Secondly, the downturn in the economy led to a re-thinking in the strategies of the business community because the "meter" of interest always ticked on inspite of the decreasing economic activity in the business establishments. In order to offset this ticking, many businessmen curtailed their dependence on external financing and preferred to rely on internal financial resources. Thirdly, the imposition of GST has also made many businessmen afraid to bring their business activities into the limelight. Thus many of them have diverted their sales and purchases into non-documented methods and prefer not to use banking channels for these transactions.

The inflow of money into the country's economy should have many ramifications. The country's burgeoning foreign exchange reserves resulted in a strutting posture by the economic managers in the government. This is understandable because the citizens wanted good news and at the same time, the positive macro economic indicators were to be displayed for all the world to see. The money that was saved from the account of debt-servicing because the external loans were waived off, re-scheduled, or re-profiled by the foreign countries and lenders, the money that was sent by expatriates who had in the past used non-banking channels (Hawala or Hundi) or kept their funds in foreign banks, the money that was remitted by the exporters who had previously waited for the dollar to be stronger, and the money that was transferred by those who took part in the plundering and looting of this nation, began to make their presence felt in the local scenario. The “self-fulfilling prophecy” and sentiments always play dominant roles in this type of a situation. The citizens, who kept their money in dollar accounts due to the dwindling rupee value over the past many years, began to convert their dollars into rupees when the rupee appreciated. The conventional thinking that the rupee would become stronger in the near future and their dollars would fetch less rupees triggered this decision. Thus the almighty dollar is out of fashion for some times to come. The following are some areas where this money has been utilized.

The recent past had seen a huge decline in land prices all over the country. The exodus of many people to so-called greener pastures in North America accelerated the decline in real estate prices. The Defense Housing Authority in Karachi that had seen an upsurge in prices due to either speculative reasons or because of the shift from law and order sensitive areas to its more serene environment, saw prices plunge in the couple of years prior to 9/11 and continued till just a few months ago. A 2000 yards plot in Phase VIII that was valued at Rs 7 million in 1999 plunged to less than Rs 5 million and stayed that way till just a few months ago. Today it has rebounded with a vengeance and is quoted above Rs 10 million. Apartment buildings, which were lying vacant, are suddenly in demand and the buying prices as well as rent rates have skyrocketed. The real estate agents are active once again and it seems that there is a mad rush to buy property wherever it is available.

Usually about 39 different sectors get involved in construction. Thus the housing industry is essential for the economic revival of any country. Lately there has been an increase in housing construction. A survey of DHA Karachi reveals that the vacant plots are buzzing with construction activity. There is lot of economic movement in cement, steel, sanitary fittings, paint, furniture, and other sectors. The inflow of remittances has ensued into this increased activity. It is, of course, not limited to areas such as DHA or Clifton. Construction activity has also commenced in other areas of Karachi also. However, there is still less movement in construction of commercial buildings. The understanding is that after the advent of a democratic government, there would be more relaxation in the rules and the city would again see the construction activity that was in vogue just a decade ago.

Karachi Stock Exchange has in the past couple of months been buzzing with intensive trading in various scrips. The KSE Index, which was a dismal 1300 just a few months ago, has shot over 2500 and the ebullient stockbrokers and analysts are shooting for the moon. The daily transactions that were less than 100 million are now over 150 million shares. Market capitalization, which was just Rs 296 million on December 31, 2001, is over Rs 565 million. The return of democracy, the upgrading of the Standard & Poor ratings for Pakistan, the pledge to continue economic policies, the desire to speed up the privatization process, the positive changes in certain rules and regulations, the increase in foreign exchange reserves, and other good news has brought back investors into the stock exchanges. Yet, the major contributor has really been those who have sent money to Pakistan. These people are becoming strong players in the market and they are helping push up the prices and the trading figures. Over the past year, there has been an increase in the issuance of Term Finance Certificates instead of any new listings. This is a more profitable investment mode for companies as well as investors. Hence, a lot of investment is also being made in these TFCs as can be seen from the successful launching of these certificates. There would be more dependence on these financial instruments in the years to come as the performance of these instruments exhibit extensive demand from individuals as well as financial institutions.

The automobile manufacturers were having a lean period these past few years. Inventory was high, sales were down, red ink was at the bottom of the balance sheet, and the rupee was sliding down. However, since the last one year. There has been an unprecedented demand for new cars. The car-makers are taking upto six months to deliver and they are demanding full payments in advance. The new cars are being sold by dealers at a premium of upto Rs 200,000 per car, especially Toyotas. Suzuki sold more than 65,000 vehicles in one year. Even Dewan Motors sold over 20,000 vehicles. The car-makers are rolling in money and there is still plenty of demand. A Toyota booked in December 2002 will be delivered in June 2003. A lot of the home remittances are also being transferred into buying new cars for self or sale. Inspite of the increase in rupee value, the car-makers are reluctant to reduce prices and are enjoying the best of everything. This has fueled demand for allowing reconditioned vehicles to be imported. Nonetheless, the government has ignored this demand outright.

Notwithstanding the fact that the money coming in is being spent or invested in real estate, stocks, vehicles, and in building houses, there is very little that is being channelized into industrial activities. The funds are not diverted into industrial ventures because of many factors. The people who are remitting the money do not live in the motherland and it is difficult for them to be absentee entrepreneurs because the culture of professional management is still in its infancy. Secondly, there is still uncertainty about economic policies and whether these would continue on a positive note. Thirdly, there is this draconian system still prevailing in the country where it is an onerous task to get utility connections, where there is plenty of red-tapism, where corruption in the lower cadre is still legendary, and where innumerable agencies are out to get their pound of flesh. On top of all this, there is no guarantee that the project would work profitably in the months to come. Thus, it would still be a far-fetched proposition for expatriates to invest directly into industrial ventures at this moment in time.

The inflow of funds into the country has ballooned up the foreign exchange reserves. The economic activity has yet to commence that would really bring about prosperity thru poverty alleviation, income generation, and strong public and private spending. The government that over the past three years was strengthening the macro economic fundamentals has now been succeeded by a democratic regime. The citizens are waiting for good news from this government. The Cabinet has announced a 12-paisa reduction in power rates and there has been a decrease in prices of petroleum products. Gas rates are expected to be brought down very soon. Other populist measures would be announced as the weeks pass by. This is one way to make people happy but it really does not solve the core issues.

The resort to populism has always been perceived by the successive governments as a sure-shot means to garner public support. However, in the present scenario, it would be advisable to jump-start the economic activity by adopting policies that would benefit all strata of society as well as be prosperous for the nation too. The government has billions in reserves and in the past the country survived with less than 10% of what are in reserves today. It is therefore, proposed that the following steps be taken that would spur up massive economic activity and that would make judicious and pragmatic utilization of the reserves that are surely going to increase in the months to come.

There is an imperative need for a massive construction activity in the country. Housing, roads, infrastructure, canals, dams, industries, and so many more need to be built in a hurry. The country is already late in this sphere and as time goes by, the present structures would become unmanageable and unusable. The country must spend atleast one to two billion dollars on a priority basis in construction. Taking a thumbnail figure, there would be a multiplier effect of atleast nine times for every dollar expended. The rank of the unemployed, especially in rural areas, is too high and increasing daily. They could be inducted into working in building the country. A lot of young and able ex-servicemen are unsure of their future. They could be the right people to undertake this activity. Moreover, with 39-plus industries involved in construction, there would be economic activity galore all around the country. Investment in these industries would flow in and new capital created. The expatriates could also look into investing in these ventures. Moreover, foreign investment would surely be attracted if construction goes on in full swing.

The Jamali government could earn the applause and cooperation of all citizens if it reduces the GST rates from 15-18% to not more than 5%. On the face of it, it would seem that the government would lose revenue or that only businesses would benefit. However, the fact of the matter is that there would be a trickle-down effect that would greatly increase the disposable income of the consumers because the GST only adds more to the value of the items. It would bring more benefit than the meager reduction in utility rates. The CBR revenue would increase because lower rates would induce more businesses to get documented. The CBR has projected that the revenue from GST would be more than Rs 200 billion for 2002-03, i.e. nearly 45% of the projected revenues.

The past governments had set up organizations such as NEPRA, OGRA, and the Oil Companies Advisory Committee to fix petroleum prices, etc, in order to avoid being blamed for price hikes. The NEPRA and OGRA are like exclusive country clubs for retired bureaucrats and these are out to make life miserable for the citizens. The government must eliminate these agencies and evolve a reliable system that would monitor prices and rates instead of resorting to leaving it in the domain of these country clubs.

The government must declare a policy that special tax credits would be given to investors, whether domestic or foreign. Markup on loans is admissible as an expense for tax purposes. What if the investors want to utilize own resources rather than borrowing from bank? That investor should be allowed the same benefit in order to encourage more direct investment rather than relying on outside financing. Expatriates could set up joint ventures with financial institutions to invest in housing projects so that a safer, streamlined, and workable set up could spur up massive activity in this sector.

The home remittances alongwith other factors would definitely boost up the foreign exchange reserves. The issuance of foreign exchange bonds by the government would also bring in a lot of dollars. The decision of lenders to help Pakistan in the external debt syndrome would save dollars being spent on debt servicing. Of course, all these would make the rupee stronger and could be a challenge for the exporters. Imports would be cheaper and, in the short run, would also increase the smuggling into the country of foreign goods. Imported machinery would cost less too. The government would lose revenue with imports being cheaper and duties reducing every year. Documentation of the economy is still not at a desirable level. Industrial production needs to be increased on the fast track. Government paperwork and controls should be minimum and user-friendly. “One desk operation” should be as envisaged and not just a pipe dream.

Globalization is around the corner and the country’s industrial base must be ready for the future. Cutting edge technology is essential if industrialists want to be major global players. BMR is strong in the textile sector and is a good sign. A lot has to be done to make Pakistan strong. The impact of Kashmir, Afghanistan, Iraq, and the crusade against terrorism would be decisive factors in the months to come. Pakistan has still to battle the negative image that is hurting the country severely. Optimism should be the guiding force for all citizens. The country must adhere to cooperation and not isolation. And, all the political parties must unite in supporting the economic agenda of the country.

A word of caution. The government’s foreign exchange reserves are not lying in the vaults of SBP or hidden in any mountain in Balochistan. They are deposited in New York as have been always. What if USA is antagonized in the manner that happened with Iran two decades ago? Iran’s reserves in USA were frozen. Over US$ six billion are the reserves held by SBP. A shuddering thought would be whether US Congress would get peeved off with Pakistan as it did with Iran. And, what about the more than US$ two billion exports to USA? Just a word of caution, just a word.

Jo Is Sahat Mein Pinah Hai Ujala Hum Bhi Dekhayn Gay
Jo Farq-e-Subah Per Chamkay Ga Tara, Hum Bhi Dekhayn Gay
Faiz Ahmed Faiz

December 14-2002

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