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BUSINESS Sunday, 5 May, 2013
And while the law of competition may be sometimes hard for the individual, it is best for the race, because it ensures the survival of the fittest in every department. — Andrew Carnegie
( UNDERSTANDING CIRCULAR DEBT
How I Met My Budget E
Muneer says caretaker govt did nothing to rescue economy KARACHI: The caretaker government has done nothing to rescue the economy, overcome energy crisis or control law and order, said IndiaPakistan Chamber of Commerce and Industry President SM Muneer. Addressing a dinner hosted by Defence Residents Society (DRS) in honour of Sindh Minister for Information Technology Mian Zahid Hussain on Friday night, Muneer said that while all economic indicators were going down and the situation was worsening, the caretaker government was just sitting on the fence watching the economy deteriorate. He pointed out that foreign exchange reserves have gone down to dangerously low levels while the government would also have to arrange the loan installment due to the IMF next month. He said that anti-Pakistan forces were trying to sabotage the forthcoming elections. This, he said, would ruin the country’s economy. He urged the government to act before it was too late. Muneer called on the army chief to deploy troops inside each and every polling station in the country in order to hold free and fair elections. Speaking on the occasion, Mian Zahid Hussain said that the first phase of Arfa Siddiqui IT City is in completion phase and spread over 200 acres of land, the IT city would be a state of the art project. He said the IT City would be established on two blocks of 100 acres each. NNI
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01
MuhaMMad usMan Khan
very morning I wake up, go for a walk and on my way back pick up a newspaper from my local stand. As soon as I open the newspaper I am bombarded with a wide array of economic jargon. Analysts tell me that Pakistan’s budget deficit is ballooning, tax revenues are missing estimates, expenditures are overblown, subsidies have exceeded budgetary allocation, government borrowing has reached unprecedented levels and debt payments are unsustainable. When I share some of the highlights of the daily with the stall owner he replies nonchalantly by saying “Pata nahi sahib kya matlab hai isska” (I don’t understand what this means). It’s an unfortunate fact that a majority of our population doesn’t understand these problems. If they don’t understand the problem than surely they can’t figure out the solution. These are the very people who hold the key to change but are sadly lost in translation. Little effort has been made to explain our economic situation in a more easyto-understand language. This article is an attempt in this direction. The article will compare the government’s budget with that of a typical Pakistani family. For simplicity we take Pakistan’s budget figures which are in trillions and convert them to thousands. The figures are in the same ratio as they are in our annual federal budget.
Aslam's Family Budget Annual Family Income Annual Family expenditure (spending) New Annual Loan Total Loan Outstanding
100,000 137,000 37,000 580,000
The budget will be explained through the story of atypical Pakistani named Aslam who owns a grocery shop at your local market. His dependents include a wife and three children and he lives in a small house in a colony. Aslam’s annual income is rs 100,000 (government tax revenue) while his annual family spending is rs 137,000 (government expenditures). This means that he spends rs 37,000 more than what he earns. To spend more than what he earns, he has to take a loan or use a credit card to make up for the gap of rs 37,000 (new debt added by government in a year). This is not the first time he has taken a loan; in fact he has been over-spending for a few years and owes to his lenders a whopping
rs 580,000 (loan that government already owes to lenders – outstanding debt). The problem with Aslam’s budget is evident - he borrows money to meet his needs. Taking a loan would be justifiable if a large portion of the loan of rs 37,000 was invested in his shop i.e. expand his shop or add new in-demand items to enhance his revenue. Aslam, however, borrows money to buy expensive clothes, shoes and jewelry; most importantly Aslam borrows money to pay interest on these very borrowings. The Pakistani government faces a similar problem; it spends its borrowed money on unproductive activities like subsidies, defense and interest payments. Surprisingly, Aslam spends only rs 2,049 on the education of his three children. It would be wise for him to cut expenses on extravagances like clothing, jewelry etc. and instead spend money on his college going children. In the long run the children will be able to better contribute towards the family revenue if they are educated rather than by working in a mechanic shop or standing on a shop counter. That’s what Pakistan must do – invest in its children so that they and our country can have a brighter future. Aslam also shows unwarranted benevolence towards his part-time employed brother by giving him up-to rs 9,000 annually (subsidies to power sector, PIA, railway and Pakistan Steel Mill). The brother can easily find a full-time job but Aslam’s continuous financial help has made him lazy and unwilling to find a full-time job. The most substantial figure in the table above is the amount of loan Aslam has accumulated over the years. To satisfy his extravagant spending needs he has borrowed a whopping rs 563,000 from his Uncle Akbar (State Bank of Pakistan) at a high interest rate. What’s worrying is the fact that the uncle has continued to lend money despite knowing that most of it is spent on unproductive activities. Uncle Akbar has come to a point where he wants to tell Aslam to borrow
less from him. But since Aslam is his beloved relative, Uncle Akbar directs his son Naveed (Banks) to lend money to Aslam. Naveed is an intelligent person and lends to Aslam at a slightly higher cost/interest
than his father does, making money for himself in the process. Since Aslam needs that money to fuel his spending habits he borrows that money at the higher cost. This is exactly what the SBP is doing by giving money to the banks (OMO injections) who in turn pass this on to the government at a higher rate. Aslam has also borrowed rs 17,000 out of rs 580,000 from his friend Jamil (IMF). The thing with Jamil is that he gives a loan to Aslam at a cheaper rate than his Uncle Akbar but in return asks Aslam to mend his ways rather than waste it on his lazy brother (power sector, PIA, railway, PSM) or other non-essential items. Aslam doesn’t like Jamil’s poking into his life (deep down he obviously knows that Jamil is giving the right advice). Lastly but most importantly, Aslam pays rs 40,000 as interest on his total accumulated loan (rs 580,000). remember that he earns only rs 100,000 a year! What’s worse is that next year his loan would have increased from rs 580,000
to rs 617,000 because he borrowed rs 37,000 this year. And because the total loan would have increased, his net interest payments would have also increased. There would come a time when Aslam would be borrowing money from his creditors only to pay back the interest (debt trap); every year this amount will increase to a point when he would be spending everything he has to pay interest on his debt. That would be the day he would file for bankruptcy (Government going bankrupt). Unfortunately, Pakistan is heading towards this very debt trap. To make matters worse, Aslam’s annual borrowing of rs 37,000 is in the form of short term debt. This means Aslam has to pay back the interest and the principal amount within the year. It is better for Aslam to borrow long term (2, 5, 10 year) because that way he can delay the principal re-payment. The only cost of taking a long term loan is that he would have to pay a slightly higher interest rate on it. This is obviously a lot less stressful than having to pay the loan interest and principal within a year. As for the solutions, Aslam obviously needs to increase his annual family income. For starters, he can tell his 25-year-old son to find a job and start contributing to his annual family income. This means that the Pakistani government has to increase its tax base. Specifically, it’s time for the rich citizens, politicians and the agriculture sector to start coughing up some much needed tax money. Another step he should take is stop paying rs 9,000 to his lazy and part-time employed brother. Aslam should borrow money long-term and it should be invested in his shop (government spending on infrastructure and creating useful resources) or on his children’s education. Most importantly, he needs to stop fighting with his neighbors and save the rs 23,500 he spends on defense. There are a number of other remedies as well but those listed here would be a good start. The writer is a research analyst at Muslim Commercial Bank
CORPORATISATION, DEMUTUALISATION ACT 2012
Front, apex regulators in the dock over ‘irrelevant’ orders KaRaChI ISMAIL DILAWAR
The front and apex regulators at the Karachi Stock exchange (KSe) and the Securities and exchange Commission of Pakistan (SeCP) have been dragged in the court by a Modaraba firm for issuing orders that the plaintiff claimed were “irrelevant” to the prevailing corporatisation and demutualisation laws. The Sindh High Court (SHC), in response to lawsuit of the First equity Modaraba (FeM), ordered on April 30 the two regulators to take no coercive action against the petitioner and maintain status quo till the next hearing on May 21. The FeM had moved the SHC against the KSe and the SeCP for neither recognising it as a corporate entity nor allowing it to form a subsidiary to comply
with Sub Section (8) of Section 16 of the Stock exchanges (Corporatisation, Demutualisation and Integration) Act 2012. Detailing the weeks-long correspondence between the company and the regulators, the court quoted the petitioner’s counsel as contenting that the Modaraba was a corporate member of KSe since June 25, 2002. The front regulator, through a letter on March 18, advised the company to convert, under the above Act, its legal status as a corporate Tre certificate holder latest by May 7. In case of non-compliance, the petitioner’s counsel said the company was to wash hands from its Tre certification. “The learned counsel for the plaintiff urged that the said notice was replied by the plaintiff and requested to consider the plaintiff as a corporate
entity,” reads the SHC order. The KSe then issued a new letter to FeM on April 8 clarifying that it never had doubted the company’s status as a corporate entity. “Defendant No 2 (KSe) has always treated and represented the plaintiff (FeM) as corporate entity before regulators,” the court observed. The exchange recommended to the company some “necessary required action” that it said would help it avoid any adverse consequences on its Tre certificate. Alternatively, the KSe suggested the FeM to approach the apex regulator, SeCP, directly “for any relief”. However, when the company approached the Commission, through a latter on April 19, and detailed the options that it may either be considered as a corporate entity or allowed to create a subsidiary in the name of equity Brokerage Services (Pri-
vate) Limited, the court said. The SeCP in its written response on April 24 mentioned what the company’s counsel called it “irrelevant regulation” and declined to allow the plaintiff formation of a subsidiary. The counsel submitted that the objections of the regulator’s rejection of its request for a subsidiary was “patently baseless and misleading” as the company already had equity Textile Limited as its wholly-owned subsidiary. The SHC, acting upon the petitioner’s arguments, directed the two regulators to take no coercive measures till next hearing against the complainant. The Stock exchanges (Corporatization, Demutualization and Integration) Act 2012 was promulgated on May 9 last year.
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Everyone has an invisible sign hanging from their neck saying, 'Make me feel important.' Never forget this message when working with people. — Mary Kay Ash
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BUSINESS B Sunday, 5 May, 2013
Algerian envoy woos Pakistani businessmen
sIaLKOT App
KARACHI: Workers preparing panaflex and banners of different political parties at a printing press. oNLINe
Tax collection has increased significantly: ICCI IsLaMaBad oNLINe
I
CCI President Zafar Bakhtawari on Saturday said that tax collection had significantly increased from rs 400 billion in year 2002 to around rs 1,900 billion in the year 2012 but businessmen were still being accused of not paying their due taxes. Bakhtawari stated this while addressing a pre-budget seminar organised by Association of Chartered Certified Accountants (ACCA) Pakistan in collaboration with Islamabad Chamber o f Commerce and Industry (ICCI) with an aim to contribute its efforts towards healthy fiscal measures in the country. He said that revenue collection has also increased due to encouragement of self assessment schemes introduced by FBr. He said that our budgetary expenditures were around rs 3,000 billion and a huge amount of rs 1,100 billion was taken for debt servicing
RCCI to organise two exhibitions in Kabul, Manchester RaWaLPIndI INp
The rawalpindi Chamber of Commerce and Industry (rCCI) is organising two single country exhibitions in Kabul (Afghanistan) from May 28 to 31 and in Manchester (UK) from July 4 to 8 to promote Pakistani products in european and SAArC countries. The launching ceremony in this regard was held at Sialkot Chamber of Commerce and Industry (SCCI). President SCCI Sheikh Abdul Majid was the chief guest of the ceremony. Speaking on the occasion rCCI President Manzar Khurshid Sheikh said that rCCI’s prime objective behind organising such expos was to promote regional and international trade. He said that rCCI is the only chamber which organised 10 single country expos in a calendar year in SAArC countries. He said that now rCCI decided to conquer european trade market along with SAArC and to achieve this rCCI broadened its canvas to eU trade markets.
which needs to be controlled in the upcoming budget for better fiscal management. Bakhtawari suggested that the next fiscal budget should take emergency measures to deal with load shedding in the country. The budget should focus on providing alternate energy sources on emergency basis as Pakistan has huge coal reserves in Thar which could be exploited to overcome the energy crisis. He cited the example of India and China, who are producing more than 30percent of electricity from coal while Pakistan is not even producing one percent from this source. The ICCI president further said that the public sector entities, including Pakistan railways, WAPDA, PIA, Steel Mills and many other PSes are incurring a loss of over rs 600 billion annually. He said that enterprises should be immediately privatised or at least their 20 percent shares should
be offered to the private sector to check massive losses. He said that contribution of manufacturing, agriculture and services sector in the GDP were 26%, 20% and 54% respectively while their contribution in the tax collection is 66%, 1% and 33% respectively. Therefore, he emphasized to increase the contribution of agriculture sector in the tax collection as well as stressed to increase the tax base for significantly increasing the tax revenues. Addressing the seminar, Aftab Ahmed, Chief Commissioner Ir-rTO Federal Board of revenue, said that there is a misconception that the reduction in the tax rates would improve revenue collection. He said that there is need to improve compliance and expand the tax base for increasing tax collection. While boldly admitting deficiencies of the tax department and its limitations, he said that the tax policy must be driven by direct taxes but indirect taxes get more share in overall revenue collection and every citizen is contributing in indirect taxes in one way or the other. He categorically said that the frequent issuance of the SrOs is not only damaging the tax machinery but also affecting tax system. There is an issue with the tax laws which can only be amended at the time of budget through Finance Act.
PIA plans mango export strategy KARACHI: The national flag carrier Pakistan International Airlines (PIA) has chalked out a new strategy aimed at enhancing export of mangos besides providing exporters with the additional equipment that will help reduce the export losses of the past year. The share of the national carrier will be 15 percent and it will be brought at 25 to 30 percent in the running year. A seven-member team of PIA officials headed by General Manager Shahid Khoso on Saturday visited the office of Pakistan Fruit and vegetable Importers exporters and Merchants Association. The PIA team included GM Cargo Operations Pervez rafi, Manager Cargo Sale Mushtaq Shah, DGM Cargo Complex Kirtar, Manager Space Control Baqar Naqi, Cargo Sales Manager Karachi Abbas Zaidi and Manager Air Cargo Center PM Talpur. Shahid Khoso informed the leaders of the association about the steps being taken by the airline’s management with regard to the export of fruit and vegetables, particularly the mango season. The airline has fulfilled the cargo equipment required for the exports. Besides, a helpdesk will be established to facilitate the exporters to send their exports and to help in cargo over tracking. The reservations of the exporters with regard to heavy fares will be removed, the GM said, and assured the association that the current year will be exemplary in exporting the mango fruit worldwide. The chairman, Pakistan Fruit and vegetable Importers exporters and Merchants Association, Waheed Ahmed, stressed upon the need for providing facilities at par the charter of european Union cargo service.StAff RepoRt
Algerian Ambassador in Pakistan Dr Ahmed Benflis has stressed further enhancing trade ties between Algeria and Pakistan. Addressing members of the Sialkot Chamber of Commerce and Industry (SCCI) on Saturday, he called upon Pakistani business community to visit Algeria and explore areas of interest and develop trade relations for mutual benefits of the two brotherly countries. He said there was a bright scope for Pakistani businessmen to initiate projects in sectors such as construction, roads, bridges and cement factories in Algeria, adding that golden opportunities awaited the Pakistani business community in Algeria. “A fair in Algeria will be held from May 29 to June 3 and the Pakistani business community should participate in it and display their products. The Algerian economic and its social sectors are playing major role in the betterment of its people and we also offer great opportunities for investment in various industrial and agricultural sectors. “We have rich oil and gas reserves exporting LNG to different countries including Italy, Spain, Portuguese and France,” he added. The ambassador said Algeria was the largest Afro-Arab country and popular for its tourist spots. In his welcome address, President SCCI Sheikh Abdul Majid said that Algerian market had big demand for items produced in Sialkot like sports goods, surgical instruments, leather products, gloves, textile items, sportswear, martial art uniforms and accessories.
CORPORATE CORNER PACRA upgrades Pair Investment ratings KARACHI: The Pakistan Credit Agency Limited (PACRA) has upgraded the long-term entity rating of PAIR Investment Company Limited (PAIR) to "AA" (Double A) [Previous: "AA-"] and maintained the short-term rating at "A1+" (A One Plus). These ratings indicate a very low expectation of credit risk emanating from a very strong capacity for timely payment of financial commitments. The ratings of PAIR reflect management's well conceived strategy to improve business profile of the company, envisaging conservative growth in risk-based lending while strengthening risk management framework and improving technology infrastructure. To finance targeted growth in fundbased business, the company is pursuing diversification in funding base. Meanwhile, the management's focus to build sizeable non-funded revenue source, adding sustainability to its performance, is considered positive. Nevertheless, high-cost of funding and deteriorating asset quality remain key challenges. The ratings continue to derive strength from sovereign ownership structure of PAIR - jointly owned by the Governments of Pakistan and Iran. PAIR's ratings are dependent on the management's ability to sustain growth momentum while managing the associated risks. Significant deterioration in asset quality, thereby impacting risk absorption capacity, would have negative implication for the ratings. Upholding high governance standards remain important. pReSS ReLeASe