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Special Report: Architects of a currency in crisis Page 02
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HAmmAd mAlik
With the US dollar trading above the Rs90 mark in the open market, there is always room for fresh funds to enter the market
T seems as if there will be no quick recovery in the investor confidence that was shattered post 2008. Volumes had dried up and a revamp had seemed improbable under the prevalent circumstances, but appreciatively, sense prevailed! Securities and exchange Commission of Pakistan, showing compassion for the investors, raised their concerns with the highest authorities in a bid to reinstate the lost hope of redirecting funds towards stock markets. although a reactive correction has been witnessed, it remains to be seen how long this prevails. The measures taken are due to be effective post-april and the current upsurge might as well prove to be a masquerade, if anything. advocates of Bulls are strongly presenting a case of an uptrend in the index, with predictions citing the 14,000-points mark as the short-term target. Not to forget, we are still in Pakistan and a week of healthy activity will not suffice for the business lost in the preceding years. However, there are horizons which are still to be re-tested by the investors. I emphasis the term ‘re-
I
Syed ASAd HuSSAin
H
agler Bailly, a global management consulting firm had warned Pakistan in 2006 that gas shortfall to start in 2007 and it would continue to grow. If alternative sources were not sought in the next two decades it could lead crippling of the economy. Here we are now. according to Pakistan energy Year Book 2010, the country produces nearly 4,000 MMCFD of natural gas. The largest consumers of gas are power (29 per cent) and industrial (26 per cent), followed by domestic and fertiliser (17 per cent) and transport (eight per cent). The book predicts that, gas demand is projected to increase to 13.27 Bcfd against the supplies 2.17 Bcfd thus a shortfall to nearly 11 Bcfd is expected by 2025.
Testing the futures market
tested’ because this tactic was used abundantly by investors previously, but has failed to gain attention as of late. For activity to increase, it is highly important for players to test the ‘futures’ market more frequently to benefit from the advantages that follow. although future contracts are not available for every listed company, the list does entail all major components of the benchmark index. The current economic scenario does not allow investors to oblige tons of cash at the bourse and thus the dried-up volumes in the ready market. Buying shares in the ready market will require a full payment within two days of the transaction, after which the delivery is called. Short selling, on the other hand, is not an option in the ready market! This is where trading in futures becomes beneficial. even though the prices being offered are at a premium, because of various factors including mark-up and time value of money, the opportunities that are swathed above the premium. Foremost, the cash-starved investors only have to deposit a margin against the entire amount of the contract undertaken; relieving
Looming energy crisis It is suggested that until new reserves are discovered or Thar-coal reserves or Pak-Iran/Tajik gas pipeline projects get operational, existing if shrinking gas reserves have to be used with care. government needs to priorities distribution of gas as per the socioeconomic needs of the country and all stakeholders must get convinced that there is no other way out except capitulating own rights. Media can play an instrumental role and instead of stoking fire they should try educate and convince all stakeholders. To me, come first the industrial and power sectors because in order to reduce penury, unemployment and social unrest, industry should keep growing fast. Pakistan’s exports and the overall economic growth and thereby jobs are largely dependent upon the industrial growth. and
Monday, 30 January, 2012
them of the burden of holding their most precious asset is an era where liquid assets are considered to be the most precious investment. With only a minimal percentage of the total contract value being held by the broker, the investor can unreservedly sell or buy contracts, which will be settled on the last Friday of every month. The last full week of the month will open space for investors to settle their current contracts and take a new position for the subsequent month. The premium prices on offer can always be used to an advantage by the investor. If, for example, after including the weekly commission of the broker and the relevant taxation charges, there is still enough gap in the value being offered in the ready market and the futures contract, a quick-witted person will sell the scrip in the future and buy it in the regular market, guaranteeing a profit. However, both positions will need to be settled separately. This situation does not arise often, and is usually on offer when there are extreme or unforeseen movements in the market. This situation can also be referred to as ‘arbitrage’, but the reason I did not use this term was because of the inability to short sell in the ready market. Plowing this tactic minimises the risk involved because of the co-relatedness of both markets.
verisimilar is; industry cannot run on intermittent power supply. Domestic or household sector comes next. Cooking and heating are perhaps the two major ends where gas is consumed and unless there is no immediate substitute available, this priority cannot be further negotiated. The economic managers of the last government were imprudent and blatantly encouraged the use of CNg in the transport sector. They didn’t foresee the supply demand disequilibrium that to come soon. Thus as a cheap and best substitute fuel of oil and diesel, consumption of CNg in vehicles shoot up exponentially. In a recent survey of gallup Pakistan, it is discovered that more than three fourth of car owners (77 per cent) in Pakistan claimed to have used CNg fitted cars. Hence, the nation is now caught in a severe energy crisis and there is no way out in the short run. It is also said that Pakistan is now the largest consumer of CNg (vehicles on CNg) and has the largest number of CNg (2941 in 2009)
Usually, at the settlement date or close to it, prices in both markets converge to a fair price, reflecting that the movement in both is proportional. There are occasions, but rare enough, when futures contracts are being offered on a discount. although making use of arbitrage will not be possible here due to the current rules of the exchange, where selling without taking a position in the ready market is forbidden, the investors have the option of taking a long position with only blocking a minimum amount and then settling the position as per the defined target, or the best price. The element of risk is minimised again because, rest assured, the offer price for a futures contract cannot persistently stay below of what is being offered in the regular market. The need to find new horizons, or unexplored areas, is immense and with the US dollar trading above the rs90 mark in the open market, there is always room for fresh funds to enter the market. The Index is trading at its low levels and the prices being offered are attractive. With defined levels of risk, investors can always play it safe.
refueling stations in the world. Ironically speaking, domestic gas consumers pay around rs500 per month (gas bill on avg.), whereas a vehicle consumes rs500 per day of CNg (on average). Imagine the amount of energy and the money burnt in the air can be saved if the use of CNg is discouraged in the short run. Hence, someone has to sacrifice to keep the wheels of industry rolling and cooking stoves alive. The transport sector should shoulder the burden then. The flip side of it, the poor commuters can become unhappy but there is a tradeoff when setting the priorities because choice for us is limited in the backdrop of fast depleting gas reserves. equally, CNg crisis should not take away our eyes from looming power crisis. Managing demand and distribution of electricity is perhaps the biggest challenge that the government faces today. line losses are perhaps one of the highest in the world. WaPDa, KeSC, PePCO and other public sector enterprises are
The writer is head of strategy at first national equities. He can be reached at hammadmalik@fnetrade.com riddled with corruption and incompetent staff which is backed by strong union mafia. Whilst the nation has been asked to pay electricity bills which are hitting the roof now, the issue of free electricity to WaPDa employees cannot be ignored and must be dealt with diplomatically. This disparity must go at all cost. The growing list of defaulters should be cut to a minimum to reduce the circular debt burden. association of architects, Pakistan engineering Council and town planners should help, encourage and introduce affordable construction technology which could save both construction cost and use of energy. We as a nation have to tighten our belts if we are determined to fight the crisis. government alone cannot fight the case. The author is an Islamabad based freelance contributor and Director SZABIST, Islamabad campus. Views expresses herein are personal. He can be reached at asad.syedd@yahoo.com.au
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Monday, 30 January, 2012
news
SPECIAL REPORT
Architects of a currency in crisis PARiS
T
ReuteRs
eN years ago Saturday, the european Union celebrated the launch of the first euro coins and notes with fireworks, parties and solemn speeches. Today, several members are on the edge of bankruptcy. First-world europe is reduced to asking the IMF and China for help. The euro itself is at risk of unraveling.
HOW COULD IT HAVE GONE WRONG? In a series of interviews with architects of the euro - a former president, a former prime minister, two former finance ministers, a former central banker, a former eU commissioner and a former eU affairs minister - common explanations emerged. The single currency would not have sparked the euro zone debt crisis, they argued, if the pro-european dynamic that led to its creation had continued into its first decade. But instead of launching an economic and political integration of europe, the low interest rates and easy money that arrived with the euro led peripheral states on a path of profligacy, widening the gap with frugal, export-oriented economies of the north. Meanwhile, as rapid enlargement made eU decision-making more cumbersome and as citizens’ enthusiasm for europe waned, eU leaders hollowed out the authority of the european Commission, the union’s chief executive body and guardian of its treaties and of fiscal probity. Most of all, some of the architects now admit that after the first few euphoric years, it became clear the euro itself was a flawed concept, laying a single currency over a group of countries that stuck to national sovereignty over their economies. The euro was a dare from the get-go. Former British Prime Minister Margaret Thatcher famously spurned the currency as unworkable and a threat to sovereignty; Sweden stayed out, too. euro boosters themselves pushed ahead with the project despite sharing misgivings about its inherent political and economic flaws. “One thing was evident to me from the beginning,” said guy Verhofstadt, leader of the european Parliament’s alliance of liberals and Democrats, Belgian prime minister from 1999 to 2008, and one of europe’s most federalist politicians. “a state can exist without a currency, but a currency cannot exist without a state.”
FROM UNION TO DISUNION One of the driving forces of european integration is former French President Valery giscard d’estaing. Now 85, he resides in a stately Parisian townhouse filled with museum-quality 18th-century furniture. as president from 1974 to 1981, giscard, with german Chancellor Helmut Schmidt, helped create the european Monetary System and the european Council summits of eU leaders. early last decade, he chaired the drafting of the european Constitution that later became the lisbon Treaty, which governs eU institutions as they function today. For giscard, one of the key reasons for today’s euro zone debt crisis is the eU enlargement of the past decade, in particular in 2004, when 10 countries - mostly former east Bloc nations - joined the european Union. “By the time the euro was introduced, the group was no longer homogeneous,” giscard said in an interview. The european Union now counts 27 members and is set to receive a 28th - Croatia - in 2013. enlargement has made the european institutions hard to govern, he says, notably the executive european Commission, which has a commissioner for every member country.
WALKS WITH A LIMP On the other side of the French political spectrum is Michel Sapin, 59, who was finance minister in a Socialist government from 1992 to 1993 and dealt with europe’s foreign exchange crisis of the
early nineties. He is likely to hold a senior office if Socialist Francois Hollande beats conservative incumbent Nicolas Sarkozy in the april-May presidential election. To Sapin, the euro zone’s problems stem from a fundamental design flaw in the 1992 pact that created the european Union and led to the euro, the Maastricht Treaty. “The Maastricht Treaty was built on two pillars. The monetary pillar has been an extraordinary success, because, say what you want, there is no monetary crisis - the euro is strong,” he said. “The second pillar was the economic government. We knew from the start we had to build a second pillar for economic, budget and fiscal matters, because countries cannot share the same currency if they have divergent economic policies.” european Investment Bank President Philip Maystadt, a veteran of eU monetary integration, could not agree more. He took part in the Maastricht Treaty negotiations as Belgian finance minister from 1988 to 1998. He recalls that germany at the time was suspicious of unified economic government, fearing it would impinge on the independence of the future european Central Bank. But protecting the bank’s independence was not a good reason to abandon the concept of economic governance, he said. “(Former european Commission President) Jacques Delors said the single currency walked with a limp - it had one strong leg, the monetary part, and one weak leg, the economic governance,” he said. “Clearly, this ersatz economic government was utterly insufficient.”
TURNING POINT european leaders were aware of the shortcomings of Maastricht. They spent two years negotiating the 1997 Stability and growth Pact, which threatens escalating sanctions on states that fail to limit annual deficits to three percent of gDP and outstanding debt to 60 percent of gDP. But the focus on these two indicators meant that other measures of economic health, such as private debt, wage costs and the current account balance, were ignored. as a result, eU finance ministers overlooked the build-up of tensions in the Irish and Spanish economies. Their public finances looked to be in excellent shape by Maastricht Treaty standards, until Ireland’s banking crisis and the Spanish real estate collapse. Those implosions forced authorities to turn private debt into public debt, wrecking their nations’ finances. Imperfect as it was, the Stability Pact was the one mechanism that could have kept the single currency on the rails. But it was discarded the first time it was tested. When the 2002-2003 economic crisis pushed French and german public finance indicators beyond Maastricht limits, the two big eU nations cast it aside. exceptions were made, and in 2005 the pact’s provisions were watered
down further. “That was a real turning point. When the other finance ministers saw what France and germany were getting away with, that’s when they said, ‘ah, ok, we don’t have to respect the Stability Pact’,” Maystadt said. In the debt-fueled prosperity of the first half decade of this century, this did not seem to matter. euro zone interest rates were low, growth was fast, stock markets went up. at the start of the decade it looked like the lack of policy coordination would only cause member states’ economies to be a bit out of sync. From around 2004 that changed. It became obvious that two very different models were cutting europe in two: export-oriented manufacturing with strong wage control in the north, and debt-financed consumption in the south. Books have been written about this trend, but a picture says more than a thousand words: the charts of net foreign assets and current account balances in north and south look like mirror images. The combined net foreign assets of germany, the Netherlands, Belgium, austria and Finland grew more than four-fold to nearly two trillion euros by the end of the decade, as their current account surplus swelled to more than six percent of gDP, according to figures from Thomson reuters Datastream and French investment bank Natixis. But net foreign debt in France, Italy, Spain, greece, Portugal and Ireland grew to more than 1.5 trillion euros as the southern zone’s current account deficit widened to around four percent. “When we voted the Maastricht Treaty, it was with the firm intention to continue on the path of political integration. Then there was a sort of sigh of relief when we saw that, actually, the single currency could work without it,” said Sapin, the former French finance minister. “It has taken us ten years to understand that it could not.” after a decade of defying common sense and with their countries’ credit ratings crumbling, euro zone leaders are finally admitting that Maastricht was flawed. In a letter to european Council President Herman Van rompuy before the December 9 eU summit, French President Nicolas Sarkozy and german Chancellor angela Merkel made a remarkable admission: “The current crisis has uncovered the deficiencies in the construction of (european monetary union) mercilessly.”
COMMISSION DEFANGED The letter does not mention how Sarkozy and Merkel, and their predecessors Jacques Chirac and gerhard Schroder, gradually undermined the foundations of economic governance that earlier generations of eU leaders built. One of the oldest debates in the european Union is over who should drive eU affairs: the supranational body that is the european Commission or by
the heads of state or government of its member nations, represented in the european Council. First created as an informal discussion forum in 1974, the Council formally became an eU institution in 2009 as part of the lisbon Treaty reforms. During the long reign of Jacques Delors - three successive terms, from 1985 to 1994 - the Commission played a leading role. With the backing of socialist French President Francois Mitterrand, under whom he had been a finance minister, Delors drove a strong federal agenda, often clashing with eurosceptic eU leaders, most famously with Margaret Thatcher. The Delors Commission created the single market, shepherded the Maastricht Treaty and set the continent on track for the single currency. None of his successors would have that kind of influence again. “after Delors’ departure, the eU leaders did not want such an active Commission president again. They wanted someone who would not bother them,” said Yves-Thibault de Silguy, who was commissioner for economic, monetary and financial affairs in the 1995-99 Jacques Santer commission. Santer, then prime minister of luxembourg, was chosen after the UK had vetoed the candidacy of Belgian Prime Minister Jean-luc Dehaene, saying he represented an outdated tradition of centralism and “big government”. “What happened was a progressive loss of confidence in the very thing that had made europe successful: the community method,” de Silguy said. Under this method, an independent european Commission makes proposals to the Council and the european Parliament, and implements them once they are approved. But in the past decade, governments clipped the Commission’s wings year after year, in favor of an “intergovernmental” approach whereby governments make decisions for the Commission to execute, often in ad-hoc summits that rubberstamp decisions prepared in an even closer circle of French and german leaders. Intergovernmental decision-making itself is a source of delay and dilution, as it requires unanimity, giving each member state a blocking veto. De Silguy said the intergovernmental approach explains a lot of today’s problems and is particularly inappropriate for economic matters. “europe needs fluid and homogenous markets, with a policeman to make sure the rules are obeyed, and that policeman is the european Commission. The entire european construct is based on that premise,” he said. In October 2001, a group of elder statesmen led by Delors and including former german chancellors Helmut Kohl and Helmut Schmidt raised the alarm, criticizing their successors’ growing tendency to bypass the Commission and micro-manage eU affairs. To no avail. giscard sums it up like this: “The Commission murmurs in Brussels and nobody listens.” after
Maastricht, pro-european feeling fell off a cliff, with the number of people considering their countries’ eU membership a good thing falling to an all-time low of 46 percent in the spring of 1997. The launch of the euro as an accounting currency in 1999 and the arrival of the euro notes and coins in 2002 restored good feeling for a few years. But the rejection of the european Constitution in French and Dutch referendums in 2005 showed the tide had turned again. Pro-european feeling slid from 59 percent in a Continent-wide poll in autumn 2004 to 50 percent in autumn 2005 and to 47 percent in spring 2011. It will likely hit a new all-time low in the next wave of measurement, according to an official involved with the poll.
BRIDGE OF DISCORD With a flawed single currency, an emasculated eU Commission, and an increasingly eurosceptic public, the euro zone would have hit a bump sooner or later. But there was one euro side-effect that magnified all the other problems. Besides being a medium of exchange, an accounting unit and a store of value, a currency is also a feedback mechanism for economic policy. If a country’s policies are lax, and spending and wages are out of control, then its currency weakens and its interest rates rise, forcing the government to correct course with a devaluation or austerity programs. With one currency for many states, devaluation is no longer an option. The introduction of the euro brought a stable exchange rate, low interest rates and a flow of money to southern european countries that for decades had used devaluation as their main policy adjustment factor. This caused speculative bubbles in real estate and banking, pushed up wages to uncompetitive levels, and led to a build-up of debt that in 2010 began to collapse. One of the few founding fathers to have clearly articulated the euro’s flaws was Otmar Issing, the german former european Central Bank chief economist and board member. In a 1996 paper, he warned that inherent in the currency was the potential for requiring transfers of cash from wealthier states to poorer ones. That could spark political tensions, he warned. “There is no example in history of a lasting monetary union that was not linked to a state entity,” Issing wrote. Fifteen years later he recalls that the warning signals appeared very early in the euro’s life - divergences in labor costs among euro members, the violation of the budget-deficit cap. “What I didn’t foresee was the dimension of the crisis,” he told reuters. another thing few forecast was the degree of discord the euro-zone crisis would engender: the eU flag being burnt in athens, greek street theatre portraying german leaders as Nazis, and a French socialist politician comparing angela Merkel to Otto von Bismarck, who unified germany by waging war on France. In this climate, europe’s far-right parties have flourished, and few more than France’s Front National, led by Marine le Pen. She is running for president in the 2012 election on a pledge to take France out of the euro. With an acute sense of history, le Pen organized a little ceremony at the river Seine. On September 6 this year, le Pen and activists of her party threw fake 500 euro notes off the Pont de la Concorde, which connects Place de la Concorde, site of the guillotine used for public executions during the French revolution, to the French parliament. “I will put an immediate end to all bail-outs of countries that have fallen victim to the euro,” said le Pen in front of a wall of cameras. “It is time for France to rediscover its national interest.” In the months ahead, as today’s leaders hammer out a new treaty for deeper integration, they will have the voices of their predecessors ringing in their ears. “The call for a more federal europe has never been stronger than today, not out of conviction, but out of necessity,” said Verhofstadt, the former Belgian prime minister. “I hope we make the jump. If we dither, we’ll end up in the ravine.”
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Monday, 30 Januar y, 2012
Why money is flowing into dollar
EDITORIAL
New middle class
I
T’S interesting that the most senior government functionaries should visibly posture towards a creating a ‘new middle class’ as elections draw near. and while the waseela-e-haq program that the president inaugurated relates to one province for the time being, the focus on providing self-employment opportunities to unemployed persons between ages 19 and 35 is arguably the best medicine for Pakistan’s suffering middle class in present times, and should be extended to other provinces sooner rather than later. granted, safeguarding the future is imperative. But often in times of imminent collapse relevant authorities tilt more towards creating environments that avoid repeat downtrends, while doing little to avert immediate bust. So while protecting the development budget, making education policy more realistic and spending more on voca-
tional training are all essential to keep Pakistan from joining sub-Saharan nations in terms of economic profile, they do little to address the crisis building today – the insufficiently skilled millions adding to the unemployment burden with each passing year. Bolstering the middle class is also essential to protect democratic institutions. By its very nature, democracy needs a vibrant middle class, one that is most responsive to perspective policy toggling. Simply put, the more people the self-employment program touches, and improves, the more votes for the incumbent administration from an otherwise disinterested chunk of the electorate. The initiative will not only ease the strain on employment, it will also stimulate essential consumer spending, and engineer the subsequent multiplier in the economy. It is a semiisolated gain at best presently, but we have just gone from bad to better.
Missing the old Profit
Textile exports
I have noticed that the number of pages have been reduced in your publication, and I actually miss the earlier pages, when there were so many interesting articles and features to read than merely the news items. In my humble opinion, the views are what readers want to read and that was what Profit used to bring on a daily basis. I hope you revert back to the old format, because I don’t think Profit had a match in the market in terms of interest and popularity as far as business publications are concerned. The center spreads especially were truly remarkable, and spread information in an aesthetic and really enjoyable manner.
This is with regards to the news article, “Textile exports down by 19.2 per cent YoY”. It is a shame that textile – once an opulent sector for Pakistan – is now taking a nosedive into obscurity. Not only has our produce diminished, this has also led to a slump in exports and hence this is something that is really aggravating the economy. We need to boost our agriculture and create an environment of investment in Pakistan. The farmers must also be given incentives and proper opportunities to make sure that the output is at a level that is the need of the hour.
nOOR ZAHRA SHeR
nAmRAH Syed
LAHORe
LAHORe
Shan Saeed
I
N late October, I started noticing a tug-ofwar going on in the stock market. It shows up on the charts by forming a symmetrical triangle turned sideways on the chart. Triangles typically have five major pushes to each side of the triangle before breaking out. Some time ago, it was nearing the completion of the fifth pass, so I told my valued clients that a stock market breakout was likely coming within the coming week or two maximum. Well, sure enough just a few short days later, the stock market broke out of the triangle pattern on the daily chart of the S&P 500 and started heading south. This was a huge tip for currency traders. You see, when stock market breakouts happen like that, it illustrates currency traders which currencies will likely benefit and which ones will likely suffer from the breakout. In the industry, we call it the “risk on” or “risk off” trade. When stocks breakout southward the risk-off trade is in play and when stocks breakout northward on the chart, the risk-on trade is in play. Now as investors, you just need to know who’s in the risk-on and risk-off camps. The risk-on currencies are the ones that tend to track stocks and commodities closely and often carry higher interest rates. So some of the risk-on currencies are the australian dollar, New Zealand dollar, Canadian dol-
When stocks breakout southward the risk-off trade is in play and when stocks breakout northward on the chart, the risk-on trade is in play
lar and even sometimes the euro and the pound. emerging market currencies like the Mexican peso, South african rand, etc. are also risk-on currencies since they are influenced by commodities and have higher interest rates. The risk-off currencies are the defensive currencies like the U.S. dollar, Swiss franc and yen. The dollar is really taking the lead right now as the “defensive currency of choice” because the central banks of Switzerland and Japan have made the other ones essentially bad defensive choices because of these central banks intervening in their currencies to weaken them. So if you have an opinion on where stocks are heading, whether up or down…then you also have an opinion of whether the risk-on trade will be in play or if the risk-off trade will be in play. and knowing that, you’ll be able to know which currencies have an edge and which ones don’t. Then you can play them against each other. For instance, if the risk-off trade favors the dollar and hurts the aussie dollar and New Zealand dollars then you can sell-short aUD/USD or NZD/USD and benefit from both dynamics going on there. So keep an eye on what stocks [and even commodities] are doing and you’ll have a great take on what is going on in the currency market even though you may not have as much experience in the currency market. This is a great way to take your stock market experience and translate it into what that means in the currency market. as investors , you will find that transacting your trades in the currency market (rather than the stock market) can carry some distinct advantages such as: no commissions, just the spread to pay…less slippage, quicker fills on your orders, 24-hour a day trading, etc. Happy investing in the currency market Disclaimer: This is just a research piece and not an investment advice. all financial transactions carry a rISK. The writer is a financial market economist and commodity expert with 12 years of financial market experience. He graduated from University of Chicago, Booth School of Business, USA & IBA Karachi. He can be reached at. Blogs at www.economistshan.blogspot.com
A closed economy?
S
Sakina Husain
elF-PrOClaIMeD economists many a times lead one to experience a fatal cringing and a heightened need to claw. The latest argument encountered by the writer on what policy makers should and shouldn’t do proposed closing down the economy! The dissenting would agree that no matter how rhetorical, ‘blanket’ and ‘unheard of’ this argument seems, it is still intriguing. With chants of more and freer trade coming from all corners of the globe, the prospect of gliding
back and finding sustainable alternatives sounds alien. Introspection would object otherwise. The theoretical backing for trade and comparative advantage is consumer centered. If more and cheaper can be imported from abroad, one should put domestic resources to other productive ventures. applying this to the Pakistani or the emerging market scenario; without significant investments being made in technology or simply put ‘catching up’, the very theory of comparative advantage has led the economy to greater dependence on foreign inflows and agriculture for survival. Mixed with the country’s state directed corruption, very little remains in terms of tangible hope to allay apprehensions of implosion. Why then should the country trade, if no good is to come out of it? In the last five years (since FY05), the cumulative outflows on the balance of payments front have amounted to $1.2 billion (rs107 billion). Specific to trade, the cumulative cur-
rent account deficit has amounted to $42 billion (rs3.7 trillion). Identifying commodity classifications in the export/import list, textiles and oil emerge as the most prominent products. In the last three years, the former has comprised 51-2 per cent of the total export receipts while oil amounted to 32-4 per cent of the import bill. In simple magnitude terms, the economy has coincidentally imported/exported oil/textiles worth $11 billion on average in the last three years. However, upon close inspection of the import commodity bill (and much to the dismay of the messiah), one finds that most goods (besides oil) have an inelastic demand, and so circularly, to sustain the foreign reserve outflow, the export side is pressed to buttress. Thus for reasons beyond neocolonialism, the economy cannot be closed down! Nevertheless, given that the economy has been able to sustain net foreign currency outflow or deficit in the last five years and since independence, it clearly does not lack
SHAHAB JAFRY Business Editor
KUNWAR KHULDUNE SHAHID Sub-Editor
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Pakistan has sort of missed the bandwagon in terms of identifying its major sources of income
the ability to garner some millions of dollars to invest back home. If power and energy (and the oil bill) is what drags the economy down, then maybe ministers and other important whatstheirnames should really stop making shiny comments about 175 billion tonnes of coal reserves and actively direct whatever resources the economy has, to utilise this resource and save or redirect the $11 billion being spent on oil instead of plugging in just rs900 million or $1 billion for extraction of gas. If this vast resource is put to use, about 2000-2500 (conservative estimate) years can be spent without wondering which direction arab crude prices will take. and for once, inflation might as well take a step down! In all, Pakistan has sort of missed the bandwagon in terms of identifying its major sources of income. With India on the soft-
ware, hardware and industrial front, China another league and even Bangladesh banking heavily on the ready made garments segment and with a steady growth rate higher than Pakistan’s, the time to identify and prosper on behalf of a niche has probably departed. and thus, to save whatever is left and running, inputs have to be restored. Once again, if the country is flushed with abundance, the rulers might as well stop themselves or be stopped from creating delays and inefficiencies. One remembers Marx’s definition of capital as what regenerates itself. Surely sitting on liquidity and investing in land will not create more of either of the two. The writer is an economic analyst and freelance financial journalist. She can be reached at sakina.husain@gmail.com
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