Profit 12th December, 2011

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China export and import growth slows, surplus narrows Page 5 Stimulating the cement sector Page 2 Mutual Fund Rating – Performance evaluation or statistical optimism?Page 8 Pages: 7

profit.com.pk

Monday, 12 December, 2011

Govt needs to take measures to reform economy: ICCI ISLAMABAD Staff RepoRt

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eyes $1 billion marble export g

Sindh Govt forms SSTDC to develop marble sector g Much awaited Marble City to be inaugurated in January 2012 KARACHI

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GHULaM aBBaS

akISTan eyes over $1 billion worth of marble export in next few years as government vies to inaugurate the much awaited ‘Marble City’ by January 2012. Sindh Government has finally provided 300 acre land for the project which is aimed to have almost 200 value added industries of marble. To run the important project under public and private ventures the provincial government has also formed a new company ‘Sindh Stone Development Company (SSDC)’ which has the responsibility to develop the much neglected marble sector of province, said Mohammad Younus Dagha, Secretary Sindh Coal and energy department.

Referring to the first meeting of the new company which was held on Saturday, he said work on the delayed project was started soon after forming the com-

pany which includes members from both public and private sectors. The already approved project was facing delays since 2006. The master plan of the project, he said, would be completed within next one month while the whole project would be completed within two years.

Zubair Motiwala, Chairman Sindh Board of Investment, was elected as chairman of SSDC, he informed.

Younus Dhaga, Zameer ahmed Secretary Commerce Sindh, Shahid Gulzar Sheikh Secretary Mines and Minerals Sindh were elected directors on part of the provincial government while Sanaullah khan former chairman all Pakistan Marble Mining Processing Industry and exporters association, amin haswani and haroon Rashid were representing private sectors. Secretary Investment, Mohammad Younus Dagha said Government of Sindh has allocated 300 acres on the northern by-pass with availability of

fresh canal water from hub Dam. Dagha said that our prime objective is to facilitate the existing middle class entrepreneurs by providing them with technical assistance and one stop facilitation to enhance export oriented productivity of this sector and to avoid wastage of raw material. he further said the project shall have tremendous investment and growth potential for entrepreneurs being based on high end technology, innovation and services.

The concept is based on cutting edge technology, common facility, training institute and most technologically advanced industrial park for Marble and Granite sector in karachi.

SSDC intends to engage consultant firm for master planning and infrastructure development. Sindh Land Management Development Company has offered to share their expertise in topographical survey and master planning of the zone. They have been requested to

submit a proposal for fast track implementation of the project.

Talking to Profit, Sanaullah khan said the project is very important for enhancing production and supply of marble and granite made ups. The association, he said was demanding early completion of the project since it was proposed in 2004.

Welcoming the fresh move on the part of provincial government, he said that the location soon after completing infrastructural development should be handed over to marble companies as they need early shifting of their units which are mostly located in the city. It is worth mentioning here that there are small and medium-scale units of marble processing scattered along Manghopir Road (Qasba Colony), Pak Colony, SITe area and environs. These units that largely cater to local construction industry complain about the poor law and order situation and power outages.

he worsening situation of governance, power, infrastructure, political turmoil, meager planning and deteriorating law and order situation, are contributing to the decline in economic activity and investment in the country.

Government needs to take aggressive measures on priority basis to improve the fragile foreign investment condition and to put the country on track of economic growth and development.

Islamabad Chamber of Commerce and Industry (ICCI), President Yassar Sakhi Butt, in a statement said image of Pakistan needs to be improved to encourage foreign investors. “Media can play a proactive role in positive image building, as our country is highly ranked among the most lucrative destinations for profitable investments,” he added.

President said negative growth in foreign investment would adversely affect the country’s economic growth. he said that while reacting to World Bank’s report on foreign investment which stated that foreign investment in Pakistan has declined by 60 per cent against just 2 per cent decline in India and 20 per cent in Sri-Lanka; while, China, Indonesia and Bangladesh, have achieved phenomenal economic growth by attracting foreign investment. he also added that economic managers should also device and implement growth oriented strategies to attract foreign investors for bringing the country out of the current serious economic turmoil. he said government could better cope up with the problems of poverty, unemployment, fiscal deficits and slow pace of development, by attracting investment. More FDI would create jobs, improve productivity, promote businesses, push up forex reserves and ultimately strengthen economy. Government should maintain continuity of policies like, other countries in the region, and also develop a close liaison with businesses, industries and chambers within the country to increase investment opportunities.

Impact of depreciating rupee on industry g

Rupee to depreciate by 7 per cent against dollar till June 2012 g Foreign exchange reserves to decline to $16.7 billion KARACHI

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Staff RepoRt

akISTanI rupee has come under considerable pressure against US dollar on account of more than expected weakness in the current account while, financial account has also failed to provide any support. Resultantly, the country’s foreign exchange reserves have declined to $16.7 billion for the week ending on December 02, from the high of $18.3 billion touch in mid-July.

In addition, IMF’s loan repayment of $1.2b due in 2hFY12, with government showing intentions of not seeking new loan, is also weighing its weight on rupeeUSD parity. “Resultantly, rupee has depreciated by 4.0 per cent against the green back in FY12YTD,” observed the analysts at Topline Research. In this scenario, the analysts said their initial assessment of rupee depreciating by 4-5 per cent against the US dollar in FY12, had turned out to be on the lower side. “We are revis-

iting our rupee-USD parity assessment,” they said.

Incorporating the recent developments that is more than expected, weakness in the current account (due to adverse commodity price shock), strained finance account (reduce FDI, outflow in portfolio investment and debt repayments particularly, towards 2hFY12). “We believe, rupee would depreciate by 7 per cent in FY12 to close the year around the levels of rupee 92 per USD in June, 2012. This is inline with last 20-yrs (FY91-11) average depreciation of 7.1 per cent, while it is above the last 10-years average of 4.1 per cent,” the analysts said.

POSITIVE IMPACT ON E&PS, IPPS, TEXTILE AND CHEMICALS SECTORS: With the dollar dominated revenue stream, we expect Oil and Gas e&P sector to benefit from the prevailing phenomenon. Within the sector, Pakistan Oilfields Limited (POL), stands out to be the chief beneficiary on account of higher portion of oil in its revenue mix, while positive impact on PPL remains on the lower side. Similarly, IPPs’ ROe component is indexed to

rupee-US$ parity and thus, rupee depreciation would yield positively for listed IPP sector.

Furthermore, rupee-US$ parity, Pakistan’s textile exports would yield better returns in absolute terms benefiting export oriented companies.

With product prices and margins based on USD (PTa), LOTPTa would benefit from decline in rupee. however, this impact would be limited as PX, the primary raw material for PTa, would also be imported and exchange losses on $30 million foreign loan.

NEUTRAL TO NEGATIVE ON OMCs, AUTOS AND CEMENT SECTORS: For OMCs, sector would enjoy higher absolute margins on deregulated products like, furnace oil rendering into improved gross margins. For refinery sector, rupee depreciation would render into higher deemed duty in absolute terms. however, for both the sector exchange losses on account of higher reliance on imports will offset the incremental benefit. after continuous rise in Japanese Yen, rupee deprecation would further increase the im-

port bill for auto assemblers, thus, adversely impacting the sector gross margins. Moreover, sector’s ability to pass on the cost pressures to final consumer would remain under question in heightened regulatory risk environment. Thus, we expect the phenomena to have a negative bearing on the sector. The recent depreciation of Pak rupee against USD would have a negative impact on cement sector as coal, major component, is an imported commodity. however, this impact would nullified for companies like Lucky, having higher export share in the revenue mix.

NEUTRAL IMPACT ON FERTILISER SECTOR: For fertiliser sector, rupee devaluation will have no major impact on urea manufacturers since, local urea prices are at approx 35 per cent discount and are primarily a function of local gas prices and curtailment. For producers, having DaP in their product mix (FFBL), the devaluation would slightly augment its profitability, given higher cost on imported phosacid will be more than compensated, by the gain on DaP prices.

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Monday, 12 December, 2011

debate

ISMAt SABIR

n one hand, many industrialists are worried that giving MFn status to India will ruin their business, as local markets will be flooded by cheap Indian products while, on the other hand, cement manufacturers are optimistic that it would boost cement export to India. Perhaps, this is the only industry that is happy with granting MFn status to India.

They said, Pakistan has enough surplus capacity to meet Indian cement demand of construction sector. Therefore, it is likely to enhance its exports manifold to the neighbouring country.

CapaCity of Cement industry: Cement and concrete are supposed to be synonymous regarding the union of materials, but they are different in nature.

The cement is a powder ultra fine ties rock and sand inside a concrete mass and is the main ingredient of concrete. The average annual global production of concrete is about 5 trillion yards or 1.25 trillion tonnes per annum. The local cement industry has a capacity of about 44.217 million tonnes as against demand of about 31 million tonnes consists of 30 per cent exports and 70 per cent domestic consumption, leaving around 10 to 13 million tonnes of surplus capacity that can be utilised for export.

HistoriCal baCkground: 3000 BC, Egyptians used mud mixed with straw to bind dried bricks. They also used gypsum mortars and mortars of lime in the pyramids. Chinese used cementitious materials to hold bamboo together in their boats and in the Great Wall.

In 1900, Basic cement tests were standardized; 1903, the first concrete high rise was built in Cincinnati, OH and in 1936, the first major concrete dams, Hoover dam and Grand Coulee dam, were built. In 1947, Pakistan inherited four cement plants with a total capacity of 0.5 million tonnes. Some expansion took place during 1956-66, but could not keep pace with the fast economic development and the country had to import cement in 1976-77 and continued to do so till 1994-95. During 1948-58, two more cement units were set up and the capacity reached 1,036k tonnes. The number of unit further rose to 9 during 1964-69 and the capacity also rose to 2,162k tonnes. Up to 1986-87, about 20 cement units were producing 7,072k tonnes cement. In 1997-98, 24 cement units were manufacturing 9,364k tonnes cement. Later on by expansion in capacity the production rose to 44,070k tones, with 25 units, and estimated to reach 50,000k tonnes in 2011.

The industry was nationalised by Mr Z A Bhutto in 1972 and privatised in 1990 by General Zia-ul-Haq, which encouraged setting up new plants. The increased capacity resulted in severe competition between cement manufacturing companies led to price war, particularly among the units situated in the same region. top Cement produCing Countries: In 2006, world total production was2,540 million tonnes and top 6 cement producing

countries were Italy, South Korea, Japan, USA, India and China. per Capita Consumption: The average per capita cement consumption in different countries in 2008 was as follows: Bahrain 300, Kuwait 659, Oman 1,678, Qatar 4,710, Saudi Arabia 1,625, UAE 5,098 and GCC average 2,345 kg. export: Low cost Chinese cement has captured a large portion of Asian markets.

The world’s leading cement exporting countries, such as China, Thailand, Japan, Taiwan and Pakistan are located in the same region. Therefore, in future, only those manufacturers could survive, in the long run, who are benefiting from low cost energy resources selling high quality cement at low prices. According to economic survey, presently, Pakistani cement is being exported to Afghanistan, India, Africa, Middle East and Central Asian countries. The country has already exported bulk of cement to Afghanistan, but export to India was only a fraction of it. taxes and duties: Export of cement is exempted from the sales tax and Federal Excise Duty (FED). However, the domestic sale has to pay the sales tax at the rate of 17 per cent and Federal Duty (FED) Rs700 per tonne.

The import of cement and coal used as fuel for the cement plants is allowed at zero per cent customs duty and 17pc sales tax. As per investment policy of the government, the import of plant machinery and equipment for manufacturing sector is allowed at 5 per cent customs duty. However, in spite of all these concessions, average retail price of cement in the domestic market is gradually increasing since June 2010. Average prices in Pakistan are around Rs417 per 50 kg bag in the northern areas and Rs401 per bag in the southern region.

Cement prices in Indian market ranged IRs270 to IRs280 per bag; however, if cement is imported from Pakistan, the landed cost of import is lowered to Rs235 per bag i.e. 16 per cent less than local price. As opposed to Pakistan, India has a differing supply and demand situation. The cement industry in India is facing challenge of bridging demand and supply gap. India has 300 small and 130 large units with a capacity of 234 million tones, but produced 167 million tonnes. There has been an acute shortage of cement in the Indian market, but importing cement from Pakistan takes at least 15 days for delivery, which is sold on cash basis.

Local cement manufacturers are exporting cement to India through trains only.

Therefore, only a limited quantity of cement could be exported to India. If India allows cement imports from Wagah border, it would be more beneficial for the units of northern area, like DG Khan, Lucky, Maple Leaf, Gharibwal, Bestway and Pioneer Cement.

These units would bear less transportation cost, which would result in improving export margins. The cement exports to India through Gujarat port would benefit southern cement units Pakistan as they are located near to the sea port.

Out of the total, 44.217 million tonnes capacity, 80 per cent is situated in the north and 20 per cent in the South of the country.

During 2010-11, domestic demand was only 22.002 million tonnes and exports were 9.419 million tonnes, thus leaving substantial capacity to be utilised. The production of cement during Jul-Mar 2009- 10 was 23.1k tonnes and in 2010-11 was 20.8k tonnes, showing a change of -9.7pc. apCma demands payment of inland freigHt subsidy: All Pakistan Cement Manufacturers Association (APCMA) has demanded that the government should clear payments of inland freight subsidy claims and facilitate the industry in exporting cement. They said local demand is stagnant for the last many months and units are working below capacity showing 12.796 million tonnes idle capacity.

Chairman APCMA, Aizaz Mansoor Sheikh, said that the manufacturers had contacted the government in 2009 to give 50 per cent inland freight subsidy to boost cement exports by sea. The inland freight cost is quite high made impossible for the units to export, especially located in the northern region are unable to compete in the international market, if cement is exported by sea. After wasting six months, Economic Coordination Committee (ECC) and Trade Development Authority of Pakistan (TDAP) allowed inland freight subsidy at the rate of 35 per cent for cement exports by sea but only for the period of March 26, 2010 to June 30, 2011.

Chairman pointed out that after fulfilling all conditions, claims were filed for subsidy to TDAP, but till now claims of Rs269.293 million have not been cleared. It was learnt that the Ministry of Finance has not released any funds for paying the claims. APCMA said they were demanding subsidy to maximize exports via sea and especially to help the cement units located in the north zone.

Presently, Pakistan is exporting cement to Afghanistan and Central Asian States at very competitive prices. However, there are vast opportunities exist to increase exports through sea they could get more export orders, provided the issue of high inland freight cost from upcountry is resolved. It is very crucial that export by sea route should be encouraged, and inland freight subsidy may be extended to the current financial year.

This would help not only to earn foreign exchange but would also assist the cement units to solve their financial crisis. APCMA indicated that the loss making mills in the northern zone of the country may not be able to survive for long if they are not facilitated in increasing their exports.

HigH profitability: However, an analyst indicated in his report that the rising prices have helped cement industry to earn huge profits, besides covering losses. The industry posted Rs1.619 billion profit after tax in the first quarter of FY12 as compared to the after tax loss of Rs1.056 billion in the same quarter in FY11.

During the first quarter of Y12, cement units improved their financial health significantly, both prices and dispatches were in favour of the manufacturers as they rose 25 per cent and 8 per cent, respectively the analysts said.

Companies like Flying Cement, Gharibwal, Kohat, Cherat and Fauji Cement remained on

the top five positions in the sector. They grew 383 per cent, 164 per cent, 82 per cent, 66 per cent and 61 per cent, respectively. On the other hand, Lucky Cement contributed 94 per cent to the sector. Lafarge Cement and Maple Leaf shared cumulative loss of Rs536 million.

Due to high prices in the domestic market, manufacturers were interested to sell more in the local market, showing a growth rate of 12 per cent in local dispatches. The exports increased only by 0.21 per cent, said Invest Cap. The report shows that out of 18 companies, 10 were in profit, seven posted losses while, one was non-operational. These companies have a share of 98 per cent of the market capitalisation. The overall growth of the cement sector was 38 per cent to Rs35 billion as compared to Rs25 billion in the same period last year. The total gross margins improved by 674bps to 23.5 per cent mainly due to the higher retention prices during this period. However, rising cost restricted sector to expand. The cost of cement went up by 27 per cent per tonne because of higher coal prices in international market, up 28 per cent as against to last year, besides energy prices in the country.

Operating cost was also rose 49 per cent while financial cost rose by 2 per cent.

The details further revealed that the government aims to increase bilateral trade between Pakistan and India from $2.6 billion to $6 billion that would surely increase cement export.

However, construction activities in winter, nov-Jan 2011 would be slowed down reducing less quantity of cement import by India. But reduction in export would be compensated by the local demand of Pakistan.

FY11 was a difficult year for cement industry, especially the former half of it, due to the floods of 2010. However, the current fiscal year depicted some improvement in local cement demand because of reconstruction activities while the export side remained weak.

The total cement dispatches for four months of 2011-12 recorded a six per cent increase over the same period last year. A decline in export in this period is being attributed to higher local supply, particularly in the southern region. The government is also focusing on development work as elections are fast approaching that has increased demand of cement.

Export dispatches from the south fell by 23 per cent evaporated the effects of the improvement in the north, and dipping the total exports for the period of Jul-Oct 2012 over 2011.

Manufacturers said that exports have been declining due to low export prices, meeting only variable costs. Consequently, manufacturers have diverted their attention towards selling cement in local markets than exports.

The performance of cement industry in October has been the best in FY12 in terms of both export and domestic demand higher than the previous three months. In spite of a 13 per cent slump in exports via sea to India, the over all exports increased as compared to September 2011.

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Monday, 12 December, 2011

EDITORIAL

State of competition in Pakistan

Back to the deficits

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F november’s 10 per cent year-onyear decline in exports and 19 per cent surge in imports fail to sound alarm bells in the finance ministry, the middle and lower income groups should brace for a particularly hazardous runup to the elections. That the trade gap widened by 55.5 per cent in the previous month despite a healthy rise in remittances underscores the perilous fiscal state the government is about to send itself head first into. normally, we’d take the usual argument at face value, that unusually amplified imports owe to increased raw material demand for manufacturing sector expansion in the wake of monetary expansion by the central bank. But as we have often questioned in this space, as has our panel of experts, it is difficult to expect current monetary easing to stimulate expansion when industry is operating well below capacity.

Unless existing capacity is amicably utilised, there can be no question of expansion. Plus, the interest rate regime has turned into a doubleedged sword. What advantages a declining borrowing rate can deliver the private sector

with the government so heavily present in the borrowing market is questionable.

Furthermore, it turns out that our fears regarding international commodity prices falling, thus removing the exogenous support our exports got last fiscal, were all too real.

Unfortunately, for some reason such concerns were not appreciated within the finance ministry, hence the deficit quagmire Islamabad has sleepwalked into.

It is not just exports, the government’s position is compromised on most issues concerning its fiscal breathing space. Promised tax reforms are nowhere to be seen and provincial powers granted by the 18th amendment have so far been wasted. PSes continue to unnecessarily bleed the government of billions every year, with few chances of addressing the problem. and the export base is still unimpressive, far from adequately tapping our comparative advantages. Judging by the trend, it seems the finance ministry should prepare for another round of embarrassment come budget time, when actual achievement is compared to projected targets.

Syed Asad Hussain

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O meet the challenge of maintaining a buoyant economy and well being of consumers, promotion of the concept of free economy is a must. Domestic markets which form the basis of the economy must be ready to compete at home for integrating effectively in global markets. Ironically, factors limiting competition in domestic markets are growing in size thus the case of effective enforcement of competition laws in this setting becomes more important in Pakistan.

Broadly speaking, in the absence of effective competitive environment, Pakistani firms are apparently slow to adjust, yield low levels of productivity, lack energy to innovate and are painfully highly concentrated ones which have led to anti-competitive behaviours on the part of firms.

In the recent past, the Competition Commission of Pakistan (CCP) has conducted a number of investigations into alleged cases of anti-competitive behaviour on the part of firms. These cases mostly belonged to firms operating in sugar, cement, vegetables ghee, poultry, aviation, banking, automobiles and telecom sectors.

If Pakistani firms want to be sturdier, they must demonstrate a high level of efficiency, innovate aggressively and improve firm-level productivity. These are all prerequisites to prepare for global competition. Large sized private firms and SMes represent the seeds for growth for the Pakistan economy and hence should be the centerpiece of every policy framework.

That being said, government’s role becomes even more important if Pakistan wants to compete globally. Policymakers’ primary focus should be on

Ironically, factors limiting competition in domestic markets are growing in size

Ufone, ‘Teri mehrbani’!

Three new airlines

The writer has made a very comprehensive analysis; I totally agree that consumers cannot be persuaded through just humorous advertisements. This phenomenon always seemed to surprise me and I am glad, someone wrote about it and actually did a great job. Ironically, I am a Ufone subscriber too, but the advertisements never drove me to choose Ufone as a network. I also know that Ufone adverts are mostly for VaS, but then again, there is a reason why Ufone also comes up with new adverts every now and then. Obviously, it is looking forward to enhance its sales in wake of extreme competition, which is why it comes up with such brilliant campaigns every time.

The three new airlines Indus air, Bhoja air and Pearl air that are on the horizon bode well for the future. There is a precipitous ascent in the numbers of people traveling by air, and as things stand the service provided has not been sufficient to cater all possibilities and cover all the bases. The three airlines taking off next year would not only enhance competition – in turn ensuring a rise in the quality- it would also enhance options for the passengers. all eyes would undoubtedly be on Bhoja, who would want to come back strongly after their demise in 2000.

HARRIS ALI

SAnIyA WASIM

increasing efficiency of factor markets, market governance and infrastructure services. as a consequence, we expect thriving markets which reward innovation and punish inefficient firms engaged in anti-competitive behaviour.

To deepen the competition level in Pakistan, active policy formulation and its implementation along with institutional reform is the need of the hour.

Government’s role should become limited to facilitating rather than regulating the markets.

The robust and modern structure of the CCP in partnership with active and independent judiciary can help ensure protection of competition. The flaws in judicial system should be improved which is a major barrier in punishing the culprits and creasing out market irregularities. The CCP claims to have imposed fines of up to Rs7.3b on various firms for violating anti-competitive laws but they are yet to receive single penny due to flaws in our judicial system. The alleged firms are given stay-orders by courts when they are fined by the CCP; hence around 140 cases are pending in the courts.

The era of heavy protection regime (for example automobile, aviation and textiles sectors), subsidies and tariff concessions has to go if Pakistani businesses want to compete both nationally and internationally. Indeed much has been said and written about giving MFn status to India but I think if Pakistani businesses were efficient, innovative and able to produce at lower costs, then the huge market of 1.2 billion Indian consumers awaits us. To be able to compete in the Indian market, cost of doing business at home has to be lowered in the first instance. a World Bank survey of ‘ease of Doing Business’ placed Pakistan at the 96th position (out of 183 economies) in 2011 which has now slipped to the 105th rank in 2012. higher barriers such as dealing with construction permits (104), getting electricity (166), paying taxes (158) and registering property (125) are some kick-starters which need to be improved to enable the entry of new firms easier and markets competitive.

Pakistani businesses can only compete globally if domestic markets encourage competition and innovation; businesses demonstrate high level efficiency and equal opportunities are provided to all the players.

The author is an Islamabad based freelance contributor, researcher and a trainer. He can be reached at syed311@hotmail.com

LaHoRe

GUjRat

Of plight and provincial disparity

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Sakina Husain

T seems that the terrorism smog has successfully subdued separatist sentiments. Or maybe the terrorist coterie has provided an umbrella to all those with grievances, with a promise to satiate once the bigger ‘war’ is won. In any case, no one complains about Punjab hegemony these days; like all energies eventually converge into one energy, the enemy now is also a consolidated mass. The ironic bit is that the hate although strongly targeted is towards an intangi-

ble, unnamed unknown demigod.

In an effort to deconstruct, re-examine and open all the knots like many martyrs before, the first and the most important woe is the inequity in everyone’s take-home, disposable return. all understand that the provincial brawl is historically centered on the distress pivot of “why am I poor when you are not”? If unofficial numbers are considered good approximations, then Punjab’s share in the country’s GDP stands at about 56-59 per cent, Sindh’s at a little more then 30 per cent, kP generates 10 per cent and Balochistan about 4 per cent for about the last two decades.

If money is the centre of everyone’s problems, then it must be understood that the solution only lies in increasing the supply of money! If the government is to be brought under scrutiny first, then with a tax to GDP ratio of about nine per cent, about six per cent of the GDP, or two-thirds of the government’s

revenue amounting to Rs1.2 trillion was budgeted to be shared with the provinces. Of this amount, 48 per cent was deemed to be transferred to Punjab, 27 per cent to Sindh, 16 per cent to kP and 9 per cent to Baluchistan.

The essential problem lies with the fact that public spending in sectors, localities, etc, acts as a catalyst for confidence creation, reduction in uncertainty and hence risk. Low levels of formal financial sector’s penetration in Baluchistan and kP, where infrastructure deficit quite eminently prevails, prove this. according to data by the SBP, out of Rs3 trillion disbursed under credit to the private sector, Rs1.6 trillion and Rs1.4 trillion were bagged by Punjab and Sindh respectively. With the major chunk gone, the non-existent and unheard of private sector in Balochistan and kP were advanced Rs14 billion and Rs49 billion respectively. This is lower than advances to the questionable pri-

ShahaB JaFRy Business Editor

KunwaR KhulDune ShahID Sub-Editor

BaBuR SaGhIR Creative Head

alI RIZvI News Editor

Maheen SyeD Sub-Editor

haMMaD RaZa Layout Designer

It’s about surviving this time!

vate sector in Islamabad only which was able to borrow more than Rs240 billion as of Dec-10. The numbers have not changed much since.

Moreover, in terms of public spending, Balochistan is the worst hit, as in real terms, the government has in fact been divesting from the province; the budgeted transfer for FY12 was 11 per cent higher on YoY basis whereas inflation is expected to go up by 12 per cent during the year. and so to say, this is perhaps the most resource rich centre of the country, the epicenter of the next phase of growth in the economy, if there is going to be any. numbers for federal spending on the remaining provinces show a real increase of 12 per cent for Punjab, nine per cent for kP and only four per cent for Sindh.

So one can predict where the next wave of dissent is likely to emerge

from given that this trend continues.

Miners and others with some common sense of would prudently understand that to use coal or any other natural resource, one has to extract them first. The common lament of policy makers is that the economy lacks funds to invest in the extraction process.

In disbelief, one may exclaim, “Reallly?”, because the last time anybody checked the government has been borrowing more than hundreds of billions rupees every quarter,which is only a ‘portion’ of what the financial system has to offer.

If the most corrupt are the richest in this country, then let’s concede to giving them a large cut. But let’s progress…it’s about surviving this time!

The writer is an economic researcher and freelance financial journalist. She can be reached at sakina.husain@gmail.com

For comments, queries and contributions, write to: MuneeB eJaZ Layout Designer

email: profit@pakistantoday.com.pk Ph: 042-36298305-10 Fax: 042-36298302 website: www.pakistantoday.com.pk

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Monday, 12 December, 2011

We have increased our retail footprint in the rural areas significantly and that has fuelled our growth

news

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CeO unilever Pakistan, ehsan a Malik

KCR PROJECT REFERRED TO EXECUTIVE BODY Team of JICa experts from Tokyo, Japan working in KuTC Office g JICa agrees on 60 years lease for Row land g notification to be issued by Sindh govt g

KARACHI WaQaR HaMZa

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he case of revival of karachi Circular Railway Project will be referred back to executive committee of the national economic Council (eCneC) as keeping it outside Public Sector Development Program (PSDP) is not feasible. This was disclosed in a briefing given to the Prime Minister last month that after a series of meetings at various forums Secretary Finance Chaired a meeting on 4th november, 2011 and recommended that case may be referred back to eCneC that keeping the project outside PSDP is not feasible.

Moreover, other recommendations made by the secretary include that loan to be on-lent with minimal economic burden on kCR Project; loan from Japan International Cooperation agency (JICa) to economic affairs Division (eaD) may be on-lent to Ministry of Railways for kCR as development project of Ministry of Railways to avoid re-lending charges; in case of any recurring operational losses, the same should be borne by share holders of karachi Urban Transport Corporation (kUTC) proportionate to their shares in kUTC; and inclusion of kCR in PSDP of MOR without disturbing its portfolio.

While present status of the project is

Textile industry rebuts baseless propaganda FAISALABAD faRaKH SHaHZaD

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eXTILe industry and exporters have rebutted the false and baseless propaganda by some vested interests in the garb of agricultural sector that fertiliser industry had priority over textile industry. Textile industry, they said is backbone of the country’s economy and is the largest provider of employment, foreign exchange, and revenue. Textile sector was employing over 40 per cent of the working population, generating 65 per cent of the foreign exchange earnings, and contributing 8.5 per cent to the nation’s GDP vis-a-vis fertiliser which did not earn single dollar rather spent huge forex on imports. Briefing the newsmen Rana arif Tauseef, Chairman Pakistan Textile exporters association said to sacrifice the most important labour intensive and forex earning industry of the country at the altar of low employment and cost intensive industry was an unreasonable and unpatriotic demand. The advice of diesel for textile industry was misleading argument as the same foreign exchange should be spent on fertiliser import, he said.

Furthermore gas use in stentor machines of textile processing mills was not replaceable by any other means similar to its use in fertiliser manufacturing. The current economic situation demands that government’s priority should be to save millions of jobs and ensure availability of gas to keep the wheels of industry running, he added. PTea Chairman said gas was imperative to run the wheel of industry. But without its availability, no one could even think to run industry. Textile industry was working on thin margins and cannot afford to continue production on alternate fuel.

Government had cut gas supply to textile industry from three days initially, followed by four days a week at present.

that a team of JICa experts from Tokyo, Japan are working in kUTC Office since September 2011 for Study of SaPROF-II on kCR Project, while feasibility study of resettlement site is in process and would be completed by 30th December, 2011. however, one of the pending issues of the project is the issuance of notification for legal coverage, as at present compensation to PaPs (Project affected Persons) and non title holders PaPs are not covered by law because national Resettlement Policy Ordinance March-2002 has lapsed. It is to be noted that in the sixth meeting of Board of Directors of kUTC held on 29th november, 2010 chaired by Chief Secretary Sindh/Chairman kUTC Board. It was decided that a notification is to be issued by government of Sindh with consultation of provincial Secretary Law, and Secretary Imp. (SGa&CD) will be the focal person for the same. and Secretary Law, Sindh, after vetting the notification (June 14, 2011) returned it to Secretary Imp. (SGa&CD), so the matter of issuance of notification is under process with government of Sindh. another pending issue is the confirmation of transfer of Pakistan Railway land to kUTC required for kCR from PR to kUTC. executive Committee of Railway Board decided (March 22, 2010) for transfer of 100 acres land along UP Mainline from karachi City to Drigh

Road Station; along kCR Loop entire PR land (225 acres); Suit land at Jumma Goth will be utilised by kUTC for Resettlement of PaPs and balance suit land will be utilised by PR for operational purposes.

Ministry of Railway in a meeting with JICa on 16th June, 2011 agreed to transfer the required land to kUTC on lease basis after signing of loan agreement. On JICa request, MoR issued “Letter of Comfort” to transfer the required Pakistan Railways land to kUTC on 60 years lease on concession rates. JICa agrees on 60 years lease for RoW land but desires 99 years lease period for Resettlement Site and Real estate Development, the briefing stated.

HISTORY OF KCR kCR was constructed, opened and operated for traffic by Pakistan Railways in the year 1964 and was patronised till 1984. Due to lack of investment in infrastructure, etc the operational efficiency was marginalised resulting in reduction of passengers and eventually was closed in December 1999.

REVIVAL OF KCR

15 per cent respectively. kUTC has been incorporated with SeCP on 8th May, 2008 with nine directors and Chief Secretary Sindh is ex-Officio Chairman of kUTC board. President during his visit to karachi on 20th april, 2009 had very kindly consented to the execution of Revival of kCR Project with International help. President further directed that a Resettlement action Plan (RaP) should be prepared immediately for Project affected Persons (PaPs). Only 20 per cent of the Right of Way of kCR has squatters (4653 household unit)

and release on approval by JICa, Tokyo, and project monitoring and evaluation. according to the time line of the project, appraisal by JICa will be received by December 2011/January 2012; pledge/loan agreement by april/May 2012; and project commencement by June 2012. The completion period will be comprised after 3 years after the completion of Resettlement of Project affectees.

APPROVALS AND STUDIES n

FUNDING JICa will arrange 93.5 per cent cost of the project ($1457.7 million) through Soft Term Loan at a markup of 0.2 per cent repayable in 40 years including 10 years grace period and remaining 6.5 per cent cost ($101.1 million) will be borne by stakeholders of kUTC (PR, GOS and CDGk) as per their respective equity share. It is to be noted that release of funds by stakeholders for FY 2011-12 includes Rs1237.2m from Pakistan Railway, Rs515.5 million by government of Sindh, and Rs309.3 million by CDGk out of total Rs2062 million.

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In December 2004, government of Pakistan decided to revive kCR as modern commuter system for the citizens of karachi. It was also decided that kUTC will be formed with Ministry of Railways, government of Sindh and City District government. karachi (CDGk) as shareholders in the ratio of their equity sharing 60 per cent, 25 per cent, and

PUBLIC PRIVATE PARTNERSHIP n

a consortium of international Consultants will be engaged for design, drawings, preparing tender documents, appointment of consultants and contractors, certification of payments by JICa/experts at karachi

Agri forum optimistic about MFN to India

Donor agency JICa, sponsored a study named SaPROF (Special assistance for Project Formation) for Project and the final report was received in May-2009 at estimated cost $1558.8Ml. environmental Impact assessment study approved by environmental Protection agency (ePa), GOS on July 4, 2009. eCneC approved PC-I of the Project on 3rd September, 2009 cost: $1.558 billion. (Rs128.6 billion at 1US$=Rs.82.50).

Iee Report of Resettlement Site for PaPs of kCR Project approved by ePa on 26th May, 2010.

Satellite Imagery of kCR route has been completed by SUPaRCO on 26th October, 2009.

RaP Study of PaPs (4653 nos.) prepared in conformity with World Bank, aDB, IFC guidelines and finalised to the satisfaction Donor agency JICa. approval received by Donor agency JICa, Tokyo on 28th July, 2011.

‘Biotechnology – a solution for food security’ LAHORE Staff RepoRt

Pakistan has world renowned buffalos g Rate of agriculture produce much higher in India g Rs7 billion worth of merchandise imported from India g

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heRe is no need to worry about awarding most favoured nations (MFn) status to India as 1,936 items are already importable from India. Some 800 products are on regulatory list offering protection to domestic industry for a certain period to reinforce domestic industry. This was the crux of the speeches of various speakers who addressed at a seminar on “Impact on Pakistani agriculture and livestock sectors after declaring MFn status to India” – organised by Pakistan agriculture Scientists Forum (PaSF). These speakers included Jamshed Iqbal Cheema, Safdar Saleem Sial, Ibrahim Mughal, Mustafa kamal, Syed Baber ali and hafiz Wasi Muhammad khan.

They underscored that by opposing trade with India, Pakistan had only promoted profiteering in the country instead of strengthening domestic industry. They said that almost all economists in the country had consensus liberal trade regime with India would reduce pressure on escalating inflation, where government borrowing from the banking system had become a gigantic problem. noted entomologist Chaudhary Mushtaq ahmed Warraich underlined that huge borrowing from the banking system was fuelling inflation and government was left with no option to deal the worse situation. Disparity between income and expenditure had

forced the government to rely on bank borrowing. By granting MFn status to India Pakistan could arrest spiraling inflation, he maintained.

Pakistan was importing around Rs7 billion worth of merchandise from India of which Rs5.5 billion worth of products were being traded via Dubai and Singapore. Malpractices in the country’s international trade were increasing the cost of doing business in the country. he suggested that Pakistan should go for joint ventures with Indian companies in IT sector. he indicated that India had significant demand for Pakistani horticulture products, including kinnow and mango, due to their better quality. In addition, local cement industry was more competitive, which could attract huge foreign exchange through cement exports.

Prof Dr Muhammad nawaz said we are self-reliant in food, stressing the need for good governance and better policies to compete not only with India but also with european countries. he said Pakistan has the world’s best quality buffalos and a huge amount of foreign exchange can be generated by exporting the cattles. he said presently medicines are being manufactured in the country but raw material is imported. he said UVaS has started several programmes on biological medicine. To bridge gap between industry and academia the UVaS is establishing a vaccine plant with the finance of Rs100 million. he regretted that Pakistan imported poul-

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try vaccines of over Rs6 billion, which can be manufactured in the country through public-private partnership.

Ibrahim Mughal said if government is eager to enhance its imports from the rival nuclear state, first it should import cheaper fertilisers, diesel and electricity from there, as our manufacturers are looting the masses by selling their products at much higher rates, experts said.

“Diesel is Rs94 per liter in Pakistan while in India it is available for Rs77 per liter. electricity is being provided to Indian growers at Re1 per unit and in Pakistan it is not less than Rs8.38 per unit,” they said. Rate of agriculture produce is much higher in India than Pakistan while their cost of production is very low, as Pakistani farmers spend Rs321.33 billon more on agricultural inputs as compared to Indian growers.

Some speakers were of the view that Indian exports were rising without MFn status whereas Pakistani exports have a downward trend despite having MFn status, as Pakistani exporters cannot get access to Indian markets because of the non-tariff barriers created by Indian bureaucracy.

Indo-Pak bilateral trade particularly through Wagha border route is only benefiting to India, as 31,897 truckloads worth Rs21 billion reached Pakistan while only 4,664 trucks, having goods of Rs1.33 billion, were sent to the nuclear rival state during fiscal year 2010-11, they added.

nVeSTMenT in biotechnology research, strengthening of regulatory framework and adoption of genetically modified technologies in agriculture are inevitable for national food security of Pakistan. another agriculture revolution is required to feed the exploding population that would touch 335 million by the year 2050. noted agriculture biotechnologists made these observations at a seminar organised

by Pakistan Biotechnology Information Centre (PaBIC) in collaboration with agriculture Journalists association (aJa), Lahore. The seminar was attended by biotechnology researchers and aJa members from print and electronic media. addressing the seminar, Pakistan atomic energy Commission’s Director General (agri & Biotech) Dr Yusuf Zafar underscored that the country was facing multiple food security related challenges, which required equal attention from both public and private sectors. he pointed out that in per capita term; Pakistan had 7,400-cubicmeter water available in 1947, which dropped to 1,000-cubic-meter in 2005.

Similarly, land availability had shrunk from 0.7 hectare to 0.4 hectare during the same period. On the other hand, population had been busting on a rapid pace, which would touch 335 million by 2050, he maintained. he pointed out that in the wake of new WTO laws and regulations, including agreement on agriculture (aoa), Trade-Related aspects of Intellectual Property Rights (TRIPS) and Sanitary and Phytosanitary (SPS) measures, were hurdles in transfer of new technologies, but government and public sector could play a vital role in these areas.

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Corporate social responsibility and socially responsible development are not marginal to our foreign policy, but essential to the realisation of our goals

news

uS Secretary of State, hilary Clinton

Worries grow over IMF loans to Europe WASHInGtOn

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ReUteRS

he prospect of european heavyweights like Italy or Spain turning to the IMF for rescue loans is worrying the United States and other nations that fear they could suffer losses on funds they have extended to the IMF. The International Monetary Fund cannot be expected to step in as a substitute for a stronger commitment by europe which needs to assume the brunt of any losses on emergency loans, a senior US official said on Friday.

Despite the International Monetary Fund's stable record - no borrower has ever defaulted on an IMF loan and no country has ever lost money lending to the IMF - there are concerns about the IMF's growing exposure to the euro zone.

That exposure could take a quantum leap if Italy and Spain need bailouts, a level of assistance that would almost certainly dwarf the loans already approved for Greece, Ireland and Portugal in deals engineered with the european Union. emerging markets, which are contemplating lending more money to the IMF -- which couples monetary assistance with tough conditions that seek to ensure a country does not default -- have also raised concerns in the IMF about the risks to the fund's capital, officials from emerging nations told Reuters. a crucial european Union summit ended on Friday with a historic agreement to draft a new treaty for deeper integration in the euro zone in an effort to rein in a debt crisis that started in Greece two years ago and has continued to spread.

Worries about the IMF's risk are also brewing among congressional lawmakers. Four U.S. lawmakers who met with IMF chief Christine Lagarde this week expressed unease over the risk the fund would take on

with a bigger role in europe. a request for a big IMF loan for Italy or Spain would put the United States, which holds veto power over most IMF lending decisions, in an uncomfortable spot.

The american public is still stung by the U.S. government's big bailouts for banks during the 200709 financial crisis and fears that mounting U.S. debts imperil the nation's future.

With President Barack Obama facing a tough battle for re-election in november, the White house is not keen to appear as europe's savior, and the administration's message to europe has consistently been: Put more of your own money on the line. Indeed, Republican lawmakers are seeking to yank a $108 billion loan the United States approved for the IMF in 2009, a move that would undercut Washington's ability to influence the conditions attached to IMF loans.

"If the United States wants to help europe find a way out of its current debt crisis, we must be a strong, world economic leader, not merely the lender of last resort," Republican Senator Jim DeMint wrote in The Wall Street Journal on Friday. "Members of the Obama administration must focus all of their efforts on strengthening the U.S. economy and balancing our budget, rather than on continuing to borrow from China to pay for europe's outof-control debts," he added.

DeMint said he would seek to force another vote to stop U.S. Treasury Secretary Timothy Geithner from supporting more european bailouts. The Senate voted 55-44 in June against a proposal by DeMint to repeal IMF loan authority.

Domenico Lombardi, a former IMF board official now at the Brookings Institution in Washington, said even if the U.S. Congress rescinded the loan, it would not prevent the IMF from lending to europe. he said the international community has a

stake in ensuring the euro zone crisis does not spread further.

PREFERRED CREDITOR The IMF enjoys an understanding among its members that borrowing nations will always pay the IMF back ahead of private creditors. however, the scale of borrowing troubled euro zone countries might need raises the specter that one of the nations could default on an IMF loan. The IMF has about $380 billion available for lending, a figure outstripped by Italy and Spain's debt refinancing needs. Italy needs to roll over 340 billion euros (290.5 billion pounds) in debt next year, while Spain needs to refinance 120 billion euros.

"The problem with some of these countries now is you're getting to a point where (debt) is large enough that defaulting on the IMF is attractive enough if you want to reduce your debt," said Raghuram Rajan, a former IMF chief economist now at the University of Chicago's Booth School. "I'm not saying the euro area will act at cross purposes with the fund. But when it comes to writing down the debt, will the euro area respect the (preferred) status of the IMF?" european leaders agreed at a summit on Friday to provide 150 billion euros in bilateral loans to the IMF to tackle the crisis, with another 50 billion euros coming from non-european countries. national central banks in the euro zone would pump the capital into the IMF. The funds would not count as a contribution toward europe's IMF quotas, which determine its voting power in the fund.

WHOSE MONEY IS THIS ANYWAY? There are two ways of channeling the money to the IMF, either through the fund's general re-

sources or a so-called IMF-administered account. any lending from the IMF's general resources would spread the risk across the entire IMF membership. In an administered account, the countries contributing would take the losses in the case of default.

Thus far, europe has indicated it is legally easier for its funds to be part of general resources.

When it comes to additional resources to battle the euro zone debt crisis, the United States prefers the second option, which would put most of the risk on europe and none on the United States. The Obama administration has argued for months that europe needs to put more capital on the line.

"The key point is that official funding must also bear losses if necessary," Rajan wrote in a recent column. "Consequently, if support is channeled through the IMF, the fund will need a guarantee from the euro zone that it will be indemnified in case of a (debt) restructuring."

Mario Blejer, a former argentine central bank governor, argues that europe should take care of its own and bear the full risk of any default. "The IMF's seniority is an unwritten principle, sustained in a delicate equilibrium, and high-volume lending is testing the limit," Blejer and eduardo Levy Yeyati, a senior fellow at the Brookings Institution, wrote recently.

"From this perspective, the proposal to use the IMF as a conduit for eCB resources -- thereby circumventing restrictions imposed by european Union's treaties -- while providing the eCB with preferredcreditor status, would exacerbate the Fund's exposure to risky borrowers," Blejer and Yeyati said.

"This arrangement could be seen as an unwarranted abuse of Fund seniority that, in addition, unfairly frees the eCB from the need to impose its own conditionality on one of its members."

China export and import growth slows, surplus narrows

Beijing Reuters

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ROWTh in Chinese exports and imports slowed in november, further evidence of the faltering demand abroad and at home that is pushing Beijing towards a more explicit pro-

growth policy.

Customs data on Saturday showed exports expanded 13.8 per cent year on year in november, the lowest in nine months, but it was the most sluggish performance since november 2009 when the traditionally volatile month of February is stripped out. Imports increased 22.1 per cent in

the year to november, weaker than a rise of 28.7 per cent in October, but stronger than September's 20.9 per cent. economists in the benchmark Reuters poll forecast annual export growth of 11 per cent in november and a 19 per cent rise in import, with a trade surplus of $14.3 billion. The surplus turned out to be $14.5 billion, narrowing from October's $17.0 billion and the same level as in September. The trade data reinforced a slowing trend in the world's no. 2 economy, after key indicators on Friday showed a serious risk of a sharp industrial slowdown -- accompanied by an easing of inflationary pressure -- that is prompting Beijing to provide more support for growth and jobs. The Communist Party's top leaders said in a statement hours after the data deluge on Friday that they would ensure stable and reasonably fast economic growth in 2012, fine-tuning policy in tandum with changes in the global economy.

The central bank surprised the market on november 30 with an earlier-than-expected cut in banks' required reserves, the first such move in three years, signaling a policy shift, although in words, China has so far kept its official line of sticking with a "prudent" monetary policy.

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CORPORATE CORNER Teradata sponsors 10th annual national IT excellence awards KARACHI: Teradata, the leading analytic data solutions company, has announced nominations for the 10th annual national IT excellence awards, being accepted until January 6th, 2012. Winners will be recognised at a gala event to be held in March 2012. To maintain neutrality and transparency in the nomination and evaluation process, Teradata has engaged kPMG Taseer hadi and Co, as an independent auditor to receive and compile nominations. pReSS ReLeaSe

Bahria College holds annual prize distribution day

ISLAMABAD: Bahria College, Islamabad held an annual prize distribution day. admiral Mohammad asif Sandila hI (M) Chief of the naval Staff graced the occasion as chief guest. The students staged a spectacular performance through a variety of skits, plays, songs, tableaus and dances. While giving away prizes to the students excelling in academics and co-curricular activities, the chief guest, appreciated the prize winners for their splendid performance and emphasized that we have to evolve an education system that should cope up with the cyber tech age and new challenges. pReSS ReLeaSe

nationwide poverty survey of BISP wins international praise ISLAMABAD: The step of conducting the nationwide first ever poverty survey in the history of Pakistan, has won international praise for following best international practices, maintaining transparency and conducting the entire process in highly efficient manner. It has been learnt that various international organisations contributing in social safety programme world-over including, World Bank, has appreciated BISP for the successful process of conducting nationwide door to door poverty survey. The survey was launched in October 2010 in all districts of the country, including aJk and Gilgit-Baltistan to provide equal opportunity to every Pakistani who holds a Computerised national Identify Card (CnIC) to get registered with BISP regardless of caste, creed and religion. pReSS ReLeaSe

Coca-Cola moves its secret formula to the world KARACHI: Coca-Cola Company has moved the125year-old secret formula for Coca-Cola, to a new home at the world of Coca-Cola in atlanta. as the capstone to the 125th anniversary year of Coca-Cola, the company is sharing the rich history and timeless appeal of its secret formula in a brand new exhibit where visitors can experience the world’s most recognised brand like never before. pReSS ReLeaSe

KaRaCHI: Commerce Minister, Makhdoom amin fahim, snapped with Uae Consul General, Sohail Bin Matar al Ketbi, Chief Minister Sindh, Syed Qaim ali Shah, Speaker Sindh assembly, Nisar ahmad Khuhro and provincial Minister Sindh, adil Siddiqui, at the 40th National Day Celebration of Uae. PRESS RELEASE

LaHoRe: prof Sohail afzal, executive Director, punjab Group of Colleges and allied Schools, signed MoU with Dr abdul tawwab Khan, president of Rising Sun education and Welfare Society, on behalf of USaID, for Inclusive education teachers’ training. PRESS RELEASE

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Pakistan’s cellular service coverage is one of the best in the region as the number of cellular subscribers has crossed 100 million mark

Markets

Chairman Pakistan Telecommunication authority (PTa), Dr Mohammed yaseen

weekly review

Political volatility, rupee dollar parity negatively affects bourse

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Staff RepoRt

ITh merely 15‐days remaining before the year end, the year to date benchmark return is still in the negative territory at 4.4 per cent while average daily trading volume is hovering at around 81m shares lower by 33 per cent YoY. The investment arena seems fairly subdued, hence unable to attract investors. a number of stocks posted healthy returns. The global economic woes alongside local economic and political volatility continued to negatively impact the investor sentiment.

The FBS recently disclose the inflation number where CPI inflation stands at around 11.1per cent and MoM inflation of merely 0.29 per cent. The cur-

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eSPITe political and regulatory uncertainties, the kSe-100 index witnessed a 92 point jump (+0.8 per cent WoW). attractive valuations lured in local investors with average daily volumes increasing to 44m shares (+18 per cent WoW). nonetheless, in a week which saw three trading sessions due to holidays, the index fluctuations reflected the pressure of political instability in market sentiments. Foreigners continued with their cautious approach offloading a further USD 4.3m worth of equity holdings. Political complications started with the President’s sudden departure to Dubai on the back of health issues. This absence led to a rise in tensions between the parties with the opposition intensifying their stance for political upheaval. This added to the already flaring ‘memogate’ scandal which has brought Pak-US relations to a new low. In addition, regulatory issues – with SeCP’s surprise concept paper drawing minimum capital requirements of PkR 400m in pure equity for brokerage licenses – caused investors to adopt negative sentiments with concerns over the substantial quantum. however, SeCP in its paper proposed tax incentives for new listings, which was a positive for local investors.

Furthermore, talks over formalizing CGT collection rules initiated between SeCP and a kSe delegation that could potentially result in a formalised collection channel for the tax, mechanism of which remains ambiguous till now.

‘Continued gas supply’ fuels Karachi Stock exchange bulls 121 scrips advance, 90 decline, 102 remain unchanged of total 313 scrips traded KSe 30 index bags 173.95 points

Zardari resignation rumours rattle KSe 62 scrips advance, 143 decline, 107 remain unchanged out of total 312 scrips traded KSe 30 index loses 150.55 points

rent month inflation is the lowest inflation for the current fiscal year as well as the last few fiscal years.

The year to date monthly average inflation is around 1.09 per cent which is lower by 20bps over the preceding month. During the last monetary policy SBP disclosed that current account deficit, IMF payments, export growth and fiscal deficit were the major concerns. after revision of inflation base year from CY01 to CY08, we believe SBP may not consider inflation as a major problem. Furthermore the current slide in rupee parity against dollar also depicts the same concerns, said Bilal asif at hMFS. Over the last couple of months, the actual issue for the bourse is the senate elections rather anything else. PPP is likely to be the major beneficiary of the senate elections and this will definitely affect the upcoming regime policy making power.

aaHYaN MUMtaZ

OGDC leads buying frenzy 101 scrips advance, 102 decline, 96 remain unchanged of total 299 scrips traded eCC meting, the game changer

During the short week after ashura holidays, the Zardari issue impacted the market sentiment as on Wednesday the index registered a loss of 88 points, but soon after the benchmark recovered from the negative sentiment. The volumes remained thin as average daily volume was merely 43m shares. The index heavy OGDC provided the market the helping hand to recover. engro was unable to grow as gas issues and disruption hit the enven plant. With merely 15‐trading days left before the year end we may witness the same dull sentiment continuing.

MONEy MARKET ROUNDUP: Compression in nFa has contained the growth of money supply to 1.32 per cent despite unabated government borrowing bolstering the overall nDa. Seasonal accretion in private sector credit off-take further lifted the

nDa during the preceding week while stock of government borrowing for budgetary support has swelled to Rs3.3t. amidst absence of major inflows, hefty import payments and FPI outflows have resulted in reserves attrition whilst the Rupee has already eroded by 3.9 per cent against the green back even before the end of 1hFY12.

With panning out of base effect for 2hFY12, inflation numbers may be aggravated further with sharp depreciation of the rupee. after SBP kept the key policy rate unchanged for next two months, benchmark 6 month kIBOR has jumped back up by 17bps to 11.94 per cent. Yields in primary market are likely to hover around the same level in the upcoming auction as inflation remains a potent threat amidst weakening of Rupee, said Salman Vidhani at hMFS.

STOCK SPeCIFIC aCTIvITy

FORwaRD lOOKInG exPeCTaTIOnS

It was no surprise that fertiliser stocks came into the limelight once again given further gas issues which proped up. The gas supply to all fertiliser plants on the SnGPL network was cut indefinately; hardly a week after restoration of feed supply to enGRO’s new plant. as a result, a substantial urea price increase becomes imminent. however, as the curtailment period is not known, a sufficient price increase in itslef is difficult to calculate. as a result, enGRO fell 9 per cent as the chemical sector underperformed the market by 1.4 per cent. FaTIMa on the other hand reslted in ending up the beneficiarry as any price increase of urea would be supremely beneficial for its product (Can) given gas supply has been constant.

Resolution of the gas issue is critical for chemical stocks recovery.

Though the period of curtailment has not been specified, it is shared that the shortage has linkages with growing domestic consumption during winter seasons. Coupled with sovereign debt repayments, this is expected to pose a drag on FX reserves, in turn, exchange rate, which has already seen a new low of 89 against the USD. Further deterioration can be expected, which would favor export oriented companies in the coming few months. having said that, regulatory developments, especially with regard to the passing of minimum capital requirement for brokerages would have an overbearing impact in determining the way market sentiment moves in the coming week.

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It is essential that the mutual funds industry increases its outreach and penetration in both the urban and rural sectors, because mutual funds are an extremely easy and effective mode of investing for the masses

analysis

CeO JS Investments Rashid Mansur

Mutual Fund Rating – Performance evaluation or statistical optimism?

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Oil rallies with euro, equities on eu deal

nAWAzISH MIRzA

nEW yORK

he skills of mutual fund managers are evaluated by comparing their portfolio risks and returns. This risk reward relation is quantified using Sharpe ratio that compares average returns for the investment period with the standard deviation (risk) of these returns. In Pakistan, mutual fund industry has grown substantially in the last decade and consequently warranted an independent opinion on the performance of fund managers to facilitate investors. The local rating agencies provide a mutual fund rating (also called star ratings) employing quantitative comparison of returns based on net asset value and their standard deviations. Sharpe ratio is no doubt an important benchmark for assessing performance but there are some fundamental limitations that cannot be ignored especially when it is used for critical investment decisions. The rating agencies claim this quantitative measure to be free of estimation biases. Their methodologies describe the alleged superiority of this ratio but never disclose the limitations that will make use of this methodology questionable. It is worth noting that nobel Prize winning economist William Sharpe in 1994 acknowledged the estimation issues in use of Sharpe ratio that he developed some thirty years earlier. Therefore, it is important for investors, fund managers and regulators to understand the inherent deficiencies in this methodology to evaluate the opinions that are based on application of this technique.

The basic problem with Sharpe ratio lies in the use of standard deviation as measure of risk. If the risk parameter is not a true representative of risk, the resulting ratio could give us misleading conclusion about the performance. even if we ignore the statistical details, standard deviation in practice becomes controversial for at least two reasons. First, when we evaluate Sharpe ratio, apparently it will penalise managers for taking high risks with low returns. however, the anatomy of this ratio presents a different picture. Standard deviation represents the distance of each return from the mean value for the investment period. This implies that positive deviations from mean are treated similar to negative deviation. The positive deviations are penalised on the perception that there was an equal possibility of these becoming negative thus increasing the risk. Isn’t this ridiculous that while fund managers are enjoying bonuses on large positive deviations, their performance is being penalised by the Sharpe ratio? Similarly, in dynamic investment strategies where portfolios are continuously rebalanced, standard deviation cannot capture time varying volatility of returns.

Second, unlike returns, standard deviation is an estimate and not directly observable and calculated from a time series of returns using ending net asset value. Our local rating firms propose use of ending monthly net asset values

ReUteRS

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for a year to calculate returns and standard deviation. This estimate is not a measure of risk for the fund manager unless it is representative of all possible time series of returns.

Therefore, standard deviation can be a meaningful measure if underlying returns are stationary and they follow a normal distribution. The stationarity refers to the property where returns have constant skewness and kurtosis. For fund managers, this implies that they have consistent investment style throughout their investment period. The fund managers who demonstrate their skills by exploiting anomalies to yield high returns with little investment will make underlying returns non stationary making Sharpe style variation inappropriate. Therefore, given the dynamic nature of markets and increase in skills, investment style cannot remain constant and we cannot expect statistical characteristics to remain stable challenging the use of Sharpe ratio for performance evaluation.

The normal distribution of returns is the only situation where Sharpe style performance valuation will work. a simple violation to normal distribution will be an investment strategy that yields small returns for successive periods with occasional but large losses. The Sharpe ratio will overstate the performance in all periods before the loss has realised. hence, normal distribution violations will be violated if

volatility is varying over time. The last decade has witnessed extreme turbulence in asset returns with volatility clustering and speculative valuations. In such investment environment it is redundant to believe that normal distribution will prevail and standard deviation will reflect the risk for mutual funds. This discussion provides insight into the basic limitations of using one single measure for assessing the performance of funds managers. These limitations are relevant for practitioners as none of it is theoretical, rather these are the issues related to applying a theoretical concept to practice. The severity is magnified when rating agencies base their opinions on a technique which is fundamentally flawed in practice. The possible solution could be to develop appropriate statistical techniques that correlate with the returns distributions in a turbulent economy rather than assuming a heavenly Gaussian distribution. The central bank should be diligent about such flaws otherwise performance evaluation ratings will be no more than statistical optimism.

The author holds a PhD in Quantitative Finance from Paris Dauphine. He is Associate Professor of Finance at Lahore School of Economics and provides consultancy on risk management through Synergistic Financial Advisors.

IL prices rallied on Friday, after a choppy start, as an agreement for a closer euro zone fiscal union and news of a Chinese fund for US and european investment lifted the euro and equities markets. Brent and US crude futures both posted weekly losses, and sources said skepticism about the latest european Union agreement to tackle their debt crisis limited crude price gains on Friday, along with weak heating oil futures.

Low volume trading helped keep oil trading volatile, and oil did not get much of a boost initially from a report showing US consumer sentiment rose in early December to its highest level in six months. all 17 members of the euro zone and six other countries that aspire to join the bloc agreed to negotiate a new deal alongside the eU treaty with a tougher deficit and debt regime to insulate the euro zone against the debt crisis. “The oil complex proved less enthused about the eU summit agreement than was the case with the stock market,” Jim Ritterbusch, president at Ritterbusch & associates, said in a note.

ICe Brent January crude rose 51 cents to settle at $108.62 a barrel, recovering after dropping $1, but posting a 1.2 per cent weekly loss. US crude futures rose $1.07 to settle at $99.41 a barrel, recovering from a $97.36 intraday low and having lost more than 2 per cent on Thursday. It posted a 1.5 per cent weekly loss. Brent trading volumes were 22 per cent under the 30day average, and while US crude trading outpaced Brent, volume was 6 per cent below the 30-day average. US heating oil futures closed lower as unseasonably mild weather and rising distillate inventories weighed on prices, while gasoline futures ended higher. Crude oil and refined products stockpiles rose last week, the government reported on Wednesday. In the week to Tuesday, speculators raised their net long positions in US crude oil futures and options position, data from the US Commodity Futures Trading Commission showed on Friday.

CurrenCies Can Make an exit froM a union regiMe

Economic cost of leaving euro zone and the global impact e

SHAn SAEED

URO is not an economic currency but a political currency fighting for its survival. Visiting economic history, the possibility of the break up of the euro area was already being mooted even before the single currency existed in Jan-1999. Different countries can abandon the euro for various reasons. One can imagine a country like Portugal, suffering from high labour costs and chronic decline in GDP growth, reintroducing the escudo in the effort to engineer a sharp internal devaluation — reducing prices and wages to boost competitiveness.

I have analysed, that there are at least 77 examples of countries leaving currency unions and establishing their own money since 1945. In most cases establishing an independent currency allowed the country concerned to set more sensible interest rates and exchange rates to help them grow. In every case it gave them more independence, strengthening their ability to make their

own decisions free of foreign interference.

Depreciating currencies can help them with exports and increase the overall GDP size.

The euro remains under huge pressure. Decision makers are not willing to print money to buy back bonds. eCB is not willing to budge under pressure. The strategic role of central bank is to act as the lender of last resort. That means it acts as the lender who supplies cash to commercial banks in its jurisdiction if they are solvent but in need of temporary loans. They are lent money at a penalty rate to see them through. It is not the job of a Central Bank to act as lender of last resort to countries that have run out of credit and whose solvency is in doubt like Greece, Italy, Ireland, Spain and Portugal.

Saving the euro is ultimately a political decision for the leading countries in it. Saving it means finding a way of relieving pressure on the bond markets for the weaker countries. That in turn means the richer countries being prepared to send money to the

poorer parts as transfer payments and grants. alternatively the richer countries need to agree to use their more favourable credit ratings to borrow and lend the money on to the weaker countries at subsidised rates.

ECONOMIC HISTORy OF LEAVING CURRENCIES: There is a pervading feeling to allow Greece an exit from the eurozone since economically speaking it’s a weak country in europe. They fudged figures to get into euro single currency.

Within Western europe the Latin currency union led by France and the Scandinavian currency union both broke up without great calamity at the time of the First World War. Between 1945 and 2007 according to my research and talking to various key people at IMF/ World Bank, 69 countries have left currency unions. This figure leaves out a good number, including the break up of the rouble currency in the early 1990s. It also excludes the split of Czech and Slovak currencies in 1993. It includes the ones which left the sterling

area, like new Zealand in 1967 and Ireland in 1979. It happened by agreement with a relatively smooth transition. Some like Bangladesh left the Pakistan currency union. Others left former colonial unions: Mozambique for example left the Portuguese union in 1977 and algeria left the French franc area in 1969. again these changes caused so little disruption that most have forgotten they ever happened.

LATVIA SUCCESS STORy: It was with more sense of turmoil and crisis that the rouble broke up in the period 1992-5. Global economy thought, it would be a real mess for Central asian republic. 16 members of the Rouble union broke away forming their own new currencies. This includes Russia that established a new differently valued Rouble for herself. Latvia, for example, did it in two stages. First she created a Latvian Rouble, which started at a one to one exchange with the old common Rouble.

Then she launched a new currency, the lat, to replace the Latvian Rouble. It worked and allowed her economy to develop well

for the ensuing few years.

BREAKING NEWS: GeRManY anD FRanCe WanT PIIGS [PORTUGaL, IReLanD, ITaLY, GReeCe anD SPaIn] TO LeaVe eURO SInGLe CURRenCY Inside news is that Germans and French political players are in no mood to finance these PIIGS economies. The question is why the German tax payers should bail out Greece and Italian government for their economic mess.

Rationale is very solid. The German and the French want these sick countries to go bust, to start all over again, to mend their economic ways and to stand politically on their feet.

The decision rests with Germany and France to decide the fate of sick children of europe who are becoming parasites for them. Good news is that if the Germans along with the French make the strategic decision to change the membership, history shows it can be done and it need not be too disruptive. It is surprisingly common for countries to leave common currencies and continue economically.

Best or worst case scenario: What if Germany and France decide to leave euro zone? Is anybody prepared for that.

Shan Saeed is a financial market economist and commodity expert. A graduate from University of Chicago and IBA, he has 12 years of financial market experience. For comments and queries: For Blogs, visit www.economistshan.blogspot.com