GSP PLUS: Does Pakistan have critical mass?

Majyd Aziz

Pakistan’s exporters, as well as the Commerce and Foreign Ministries, went through an anxiety mode in the first week of December 2013 and erupted in a sense of euphoria when the European Parliament announced that Pakistan would also be a beneficiary of the GSP Plus status from January 01, 2014 subject to governing regulations as stipulated under Regulation 978/2012 of October 2012.

Pakistan has met the eligibility criteria of vulnerability (less than 2% market share), low diversification (less than seven products constituting more than 75% of its exports to the EU), and sustainable development and good governance commitments (ratification and promised implementation of 16 human rights and labor rights conventions, plus 11 conventions covering environment, anti-terrorism, anti-narcotics etc). The status also boosts the position and image of Pakistan not only in Europe, but more importantly, it sends a positive message to the global marketplace.

Pakistan’s exporters and policymakers must understand that complacency would no more be a cop-out and that strict adherence to the regulations must be the key objective. The initial benefit is only for three years, extendable to ten depending on Pakistan’s performance within the prescribed framework. These could be withdrawn if Pakistan is unsuccessful in pragmatically implementing any of the 27 conventions. It is important to note that the scheme also defines a specific role for third party umpiring to ascertain strict compliance. Pakistani exporters must also keep in focus the fact that unfair trade practices could trigger negative evaluation. Moreover, global requirements of Sanitary and Phyto-Sanitary and Technical Barriers to Trade would weigh heavily in future decisions. All in all, Pakistan must develop the mindset of benefiting from GSP Plus and must ensure that this is not vitiated due to incautious, intentional or inadvertent actions by the stakeholders. The dice is loaded against Pakistan, and to even out the odds, the country must be seriously ready to pluck the ripe fruit.

The ecstatic phase is now over. Everyone who needs to be patted on the back has been given the bear hug and the usual sycophantic plaudits. The media hype, the applause from Stock Exchanges, the self-congratulatory statements of Ministers and party faithful, and the usual bragging and boasting of extra billions to be earned have all been highlighted and projected. This is the time to indulge in introspection and get into the real time mood. Does Pakistan have the critical mass to achieve the national objectives of maximum benefits from GSP Plus?

This is the time to take stock of the ingredients that make the foundation for achieving these formidable benefits. This is the time to spotlight the crucial physical infrastructure. In the textile sector, for example, Pakistan has ample spinning, weaving and stitching capacity but needs to develop the dyeing and printing sector. The deficiencies in textile processing are more a result of shortages of electricity, gas, and in some areas, water. This here, then, hangs the proverbial Damocles Sword on the textile industry. The braggadocio emanating from the portals of the Commerce Ministry or from the offices of some business leaders, who crave every opportunity to make a statement, belies the ground reality. The oft-touted figure of increased exports of $2 billion is, for some years, a pie-in-the-sky projection. Conventional wisdom puts the number within the $500-$550 million range, atleast for 2014, and a promising increase by $750-$800 million in 2015.

There would be many who would term this as pessimism oozing out of the honey pot, but facts are facts. Power is the prime ingredient. According to a report compiled by the Swiss Consulate General in Karachi, “Due to a fast growing demand, high system losses, fuel supply limitations and seasonal reduction in the availability of hydropower, the gap between the demand and supply of electricity is resulting in routine load shedding. Inadequate power generation capacity is just one of the factors affecting power supply. The present average short fall in the supply demand gap is between 4,500-6,000 MW.” The installed capacity is around 22,000 MW although generation is less than 60%. Moreover, corruption, theft, and mismanagement are debilitating causes. Heavy reliance on fossil fuels and sluggishness in developing alternate renewable energy further compound the situation. 175 billion tonnes of Thar coal reserves are still years away while Kalabagh Dam continues to be a staple source of war of words among vested provincial interests. New initiatives are announced and umpteen MOUs signed. Net-net, Pakistanis bear loadshedding, more so in the rural areas. 

Pakistan also faces the natural gas crisis. Liberal use of gas, without an eye to the future, is depleting the strategic reserves. Where industry should have been accorded priority, the policymakers allowed CNG filling stations to be set up all over the country. Fortunately, better sense has prevailed and there is now a managed closure of these stations on designated days. Even today, captive power plants installed in various industrial units have to suffer one to two days of closure. Per capita gas consumption has increased from 150 cubic meters per person to 230 cmpp during the last ten years. The proven gas reserves have registered a dip in the last year by about 100 billion cubic meters. Meantime, the Iran-Pakistan Gas Pipeline is still nothing but a pipedream. And, import of LNG has become a political shuttlecock instead of an imperative alternative.

Karachi’s industrial areas suffer from water shortages. This, of course, is manna for the tanker mafia who extract their pound of flesh from the hapless industrialists. Although skilled labor is available, there is a pressing need to impart training to new workers and to re-train the existing workforce to operate the latest machinery and equipment. Another factor that has made life miserable is the law and order situation that just does not allow a peaceful environment. The depreciating Rupee, escalating inflation, pathetic roads network, high-handedness of government bureaucracy, fear of rising discount rate, and ever-changing government policies are other disconcerting factors that ensue into an unbridled upsurge in the cost of doing business. Growth in exports depends on a favorable domestic environment. Exports must have national ownership as is the case in Bangladesh and China. All stakeholders need to be on the same page, especially if the GSP Plus benefits are to be reaped for a decade. Dennis Hastert, former Speaker of US House of Representatives, very correctly stated that “Trade creates jobs and lifts people out of poverty. And when that happens, societies stabilize and grow. And there is nothing like a stable society to fight terrorism and strengthen democracy, freedom and the rule of law.”

Challenges for Economy and Banks Beyond 2014

Majyd Aziz

(Former President Karachi Chamber of Commerce and Industry and Chairman SME Bank Ltd)

(Presented at the Seminar organized by Daily PAK BANKER at Carlton Hotel Karachi – 20140206)

PAKISTAN is one of those countries that are for decades mired in an intricate economic quagmire and it is frustrating and tough to extricate the country from this difficult situation. Heavy reliance on financial resources from international development institutions, unbridled imperialistic spending extravaganza, and maintaining a pathetic Tax-to-GDP ratio has always compounded the dire economic scenario. Moreover, the inability of economic managers, whether they are plucked from the domestic environment or imported from abroad, has also intensified the dire situation. At the same time, it has also been a disturbing concern of economic stakeholders that the banking sector has been less of a facilitator and more of a lending channel to government to balance the unmanageable budget deficit. This narrative, in short, will continue as the status quo during 2014.

The present government has highlighted three E’s as its priority. Energy, Economy and Extremism. In reality, the three E’s should be Energy, Energy and Energy. The chronic and insurmountable energy deficiency is today Pakistan’s biggest challenge, not only for 2014 but for some years hence. Projects have been announced and there is the usual urgency demonstrated, but the fact of the matter is that every new and high-profile energy project is still years away. The launching of Thar Coal was done recently and again the hype has been created as if the coal would be extracted in a few months and energy would be flowing from the area. At the same time, Pakistan’s position was damaged when the erstwhile government, in its last weeks, staged an extravaganza at the Iran-Pakistan border and announced the launch of the Iran-Pakistan Gas Pipeline. Both the governments knew that the international sanctions on Iran precluded any progress on the Pipeline. Last year, according to CIA World Report, Pakistan’s gas reserves depleted by about 100 billion cubic meters. Precious gas resources have been wasted on CNG and providing it to domestic consumers. The European Union’s decision to grant GSP Plus status to Pakistan was applauded by all as the answer to  Pakistan’s economic ills. But what no one cared to mention was that Pakistan does not possess the critical mass to take maximum advantage of this trade facility. The energy shortage is and will be the main roadblock.

The second challenge critical for the country is the rapid decline in the foreign exchange reserves. The stagnation in exports and the burgeoning import regime has played havoc with the foreign exchange reserves. The government continues to include the foreign exchange held by banks and private accounts and this naturally does not reflect the actual disastrous scenario of the foreign exchange regime. Pakistan’s Forex reserves continue to slide down and as on January 24, 2014 had gone below the $8 billion threshold. The dependence on the loans from international development institutions such as IMF, World Bank and ADB, is proof positive that the economic management of the country is a compound of fiscal indiscipline, wasteful expenditure, unbridled outlay on populist measures that are routinely misused, gross incompetence of the Federal Board of Revenue, and drain on the country’s scarce resources by the losses of the state-owned enterprises. As has been the case in the past, the government again entered the portals of IMF to negotiate another bail-out. However, the inflow of remittances from the expatriates does allow ammunition to the government to handle the foreign exchange requirements. Pakistan’s Debt Servicing scenario is a matter of great consternation too. The external debt and liabilities of the country as on September 30, 2013 was in excess of US$ 60 billion while Public Debt was over Rs 15 trillion. The government has also violated the provisions of the Fiscal Responsibility and Debt Limitation Act 2005 by breaching the limit of Debt-to-GDP ratio as Public Debt exceeded the limit of 60% as on June 30, 2013 and reached the level of 62.70% of GDP.  In 2010/11, the country paid Rs 807 billion as interest and Rs 210 billion as principal. In 2011/12, the amount was Rs 972 billion and Rs 294 while in 2012/13 the Treasury paid out Rs 1053 billion in interest and Rs 489 billion out of outstanding principal. Moreover, it is estimated that during this fiscal year, the government’s import bill would consist of 39% for petroleum products, 18% for agriculture and chemicals, 13% for machinery and 12% for food.

Another challenge faced by the country and which keeps on impacting negatively on the country’s progress is the unending threat of domestic as well as foreign terrorists and extremists. The Global War on Terror persists to erode the country’s economic resources with no end in sight. The recent initiative to hold parleys with Taliban may introduce a lull in the dastardly acts but there is no guarantee that the truce, if it occurs, would be longer lasting. The secessionist movement in Balochistan and the rumblings in other areas of the country would also affect the country’s march towards prosperity.

The year 2014 also promises to be a challenging time for the banking sector. 2014 would again see the banks becoming the proverbial piggy bank for the government to finance its budgetary deficit and to finance the various populist measures announced by the government. The banks will oblige the government because of the safety mode of lending to the government but this would be detrimental to the financial needs of the private sector. The financing of the populist measures, such as the Youth Scheme, may take a heavy toll for those banks that have been mandated by the government to finance the scheme and advance the required loans. So far, none of the private banks have indulged in this adventure except of course National Bank as well as First Women Bank. The latest situation is that the investment of scheduled banks as well as non-banks, such as insurance companies etc, in Pakistan Investment Bonds is Rs 1380 billion, GOP Ijara Sukuk is Rs 370 billion and Market Treasury Bills is Rs 3181 billion. The breakup is Rs 3815 billion by scheduled banks and Rs 1116 billion by non-scheduled banks. Moreover, the tough inter-bank competition for deposits would compel the banks to conjure up new products and announce new attractive offerings to the depositors. According to the State Bank of Pakistan, savings by the lowest income group has virtually vanished apparently due to the high food cost and other inflationary reasons. The middle class is also constrained by inflation from becoming a major saver. This may impact on the profitability as well as on the cost of borrowing. The percentage of Non-Performing Loans would bear heavily on banks and it would continue to be a hard nut to crack. The NPL of NBP rose from Rs 4.5 billion in the first nine months of 2012 to Rs 12.14 billion in the first nine months of 2013.

The micro-finance banks as well as leasing institutions are going to have a tough 2014 and in the future. It just does not make good business or economic sense to finance projects in SMEs and micro or cottage industries through borrowing from micro-finance banks and paying a high mark-up. Thus most of the lending is to the agriculture sector. The advent of what is referred to as mobile banking has enabled the micro-finance banks to attract good deposits. Yet, much more needs to be done to broad-base the lending and this can best be done by revisiting the mark-up rates by making it more feasible and easier to bear.

Takeaways:

•          There will be more reliance on online banking and use of cell phones for banking purposes would see a marked increas
• ·         Banks would enhance their Islamic banking activities as there would be more reliance of Islamic financial instruments primarily due to those borrowers who at present are wary of conventional interest-based banking but now need to finance their business activities.
• ·         Banks must collectively invest in setting up a security force that is highly trained, is proficient in handling arms and ammunition, and is better remunerated than what the private security agencies are paying the guards
•          Banks must ensure that the branches have latest security apparatus unlike the ones used presently that do not provide the desired images and CCTV coverage
•          Banks must be ordered to clean up their infected portfolio starting from this year and ensure that efforts are made to recover stuck-up or dormant loans
•          Expenditure on bank branches would result in a substantial cost to the banks and many branches would maintain their cost-wise negative impact on the balance sheet
•          It should be made obligatory on banks to improve their services, make their staff more productive, boost up staff efficiency and aptitude, and provide the staff with soft skills to deal with the customers
•          Government would continue to be the biggest borrower and banks would be inclined to lend more to the government
•          It must be made mandatory that State Bank of Pakistan hierarchy refrains from attending too many conferences and seminars around the globe as the presence of the hierarchy is more crucial at home rather than networking to boost up personal career portfolios. This has been the normal practice of SBP hierarchy to frequently attend time-wasting and meaningless conferences and junkets
•         The State Bank of Pakistan must have autonomy in the true sense to carry on its designated functions and to actually become a Central Bank rather than an auxiliary division of the Finance Ministry
•        2014 would be another demanding year and the onus would lie on the Finance Minister to present a revolutionary Federal Budget rather than the mandarin Budget that has been a routine affair since the days of Ghulam Ishaq Khan when he would take hours to read the whole Budget speech  in the Assembly