The implications for Pakistan

BY ALIZEH KHATTAK,
ON APRIL 18TH, 2011

In a meeting of Nato heads of state in Lisbon last November, it was decided that foreign forces would withdraw from Afghanistan by the end of 2014. The meeting envisaged the handing over of security duties to Afghan forces.

We will analyse this briefly later; we have as yet not thought about what implications this decision has for Pakistan. What will be the impact of this change? What will be the effect of the handing over of security duties to the Afghan National Army (ANA) in the Pakhtun belt of Afghanistan when its current recruitment pattern creates ethnic imbalances?

Continue reading The implications for Pakistan

Law and order, power shortage impeding GDP growth, says IMF

By: Amer Sial | Published: April 13, 2011

ISLAMABAD - The International Monetary Fund on Tuesday released a programme note on Pakistan, saying the real GDP growth was unlikely to exceed 2.8 percent during the current fiscal year due to adverse security developments which continue to hurt domestic and foreign investor’s confidence, while electricity shortages continue to prevent the economy from achieving its potential. The IMF programme note said the fiscal policy had been affected by low economic activity and a difficult security environment. 

Delays in tax and expenditure reform and the impact of the floods were expected to keep the fiscal deficit high in current fiscal year. Pakistan’s real GDP growth during the current fiscal year would remain at 2.8 percent of GDP as compared to 4.8 percent in the last fiscal. Inflation was estimated at 15.5 percent as compared to last fiscal level of 11.7 percent. 

Finance Minister Dr Abdul Hafeez Shaikh along with the finance team is on a week-long visit to Washington to attend the spring meetings of the IMF and World Bank. Pakistan is likely to seek a new bailout package after scraping the existing $11.3 billion Standby Arrangement programme.

Currency swap: President stresses swift progress

Published: March 11, 2011

Zardari emphasises the need for early finalisation of a currency swap agreement with China.
ISLAMABAD: President Asif Ali Zardari has emphasised the need for early finalisation of a currency swap agreement with China, saying such arrangements should also be made with Turkey and Sri Lanka to promote trade.
He was speaking during a meeting at the President’s House on Thursday. Briefing the media, the president’s spokesperson Farhatullah Babar said that State Bank Governor Shahid Kardar gave a briefing on progress made so far on currency swap arrangements with China.
Talking about Turkey and Sri Lanka, he said that Turkey has responded positively to such arrangement, adding that a Pakistani delegation recently visited Sri Lanka and held meetings with the State Bank of Sri Lanka governor.

Curse of the ‘almost elite’

Curse of the ‘almost elite’

THEY speak English well, often with an accent that suggests time spent abroad. They’ve attended private schools and most have done their ‘O’ and ‘A’ levels. They dress with care, displaying designer labels on purses and jeans back pockets with the requisite nonchalance.

They watch the latest movies, skim through the latest books, eat at the hippest restaurants and make appearances at the trendiest parties. On a lucky weekend, their smiling faces may appear in the pages of a weekend society magazine.

These are Pakistan’s ‘almost elite’ — the people who hover around Pakistan’s landed class and coddle the delusion of belonging with painstaking persistence. They know the real rich well, perhaps better than the rich know themselves, having gone to the same tony schools.

Lacking largesse the real elite gather from acres of land or bevies of steel and textile mills, they compensate by the careful cultivation of personas that are somehow inherently invested with a degree of panache. These are the local executives of multinational companies, fashion designers, public intellectuals, doctors, hair-stylists and writers. Toting these identities, the ‘almost elite’ fulfil the necessary function of providing the admiring human haze that the truly rich require for the nourishment of their formidable egos.

But the ‘almost elite’ are not haunted by the demons of worthlessness that may beleaguer the wealthy. This is because, perhaps unlike the rich, they do have talent; arguably it is the very presence of an intellectual or artistic gift that has landed them into the coveted orbits of the wealthy. The tragedy of the ‘almost elite’ lies instead, in their cherished delusion that they are in fact the elite.

With each passing day, they assess the trinkets of belonging, the house in an affluent area (so what if they only have one), the cook and the driver that comes with it (so what if they’re not from the ‘native’ village) and the carefully preserved Dior purse, Vittadini tie and Versace jeans. Surrounding themselves with these testaments of affluence, they say ‘we are not the middle class … we are the elite’. This then is the tragedy that confronts Pakistan: the middle class, that bastion of strength which ensures stability and progress in any nation, is in this country unwilling to embrace the burden of their responsibility.

Instead of embracing their middling status and promoting the cult of merit that would ensure their own ascent, they live immersed in self-hatred focusing on the trappings of denial. The result is a denunciation of the value of work itself and the need to do it an embarrassment.

What a society emulates and anoints as the basis for power and importance is what in that context becomes sacred. It is not that Pakistanis are unique or isolated in their devoted paeans to the wealthy, an exercise found throughout the ages in all parts of the world. The inability to create a definition of success that originates solely from within or is the product of hardship is tied not only to an obsession with inherited wealth but also to mythologised ideas of historical origins.

The same effort put into the pretence of revelling in inherited wealth is also invested in the claiming of Arab, Persian or similarly exotic ancestry. Not being actually South Asian, then, is crucial to being good or privileged or socially viable, announcing to all that your presence in the current milieu is a fact not of your peasant origins but the conquering vigour of your ancestors.

Consequently, one victim of this self-hatred has been the languishing legacy of the Dravidian civilisations whose 1,000-year existence on the banks of the Indus has all but been eliminated, decried and devalued for its inability to establish itself as part of some lost ruling elite.

In the midst of terrible uncertainty, when Pakistan is plagued by assassinations and suicide bombings, the curse of the ‘almost elite’ spells doom. These are Pakistan’s best and brightest, educated aRafia Zakaria
(13 hours ago) Todaynd hungry for opportunity but whose inability to transcend self-hatred and claim their own ordinariness has translated into a national inability to conceptualise or celebrate the concept of a self-made Pakistani.

The bourgeois of any country are its greatest repository of talent; not poor enough to be embroiled in the brute demands of survival and not rich enough to nurse the affectations of disenchantment. It is this middle class, currently languishing in the futile project of denying its own ordinary origins, that must reinvigorate the value of the normal, the everyday and commonplace.

In a Pakistan where the ‘almost-elite’ ditch their illusions and embrace their own value, procuring a good bargain would be worthy of boasting rather than be seen as an embarrassment; cleaning your own house would celebrate the intrinsic value of self-help and acknowledging that you’ve never been abroad or weren’t born singing nursery rhymes in English will all be just fine; all a collective celebration of middling resourcefulness.

Pakistan then needs not some cataclysmic change that uproots this or that abstract evil; what it needs is a celebration of the ordinary, a wilful casting aside of the myths of our fantastic origins or the superiority of hereditary pedigree.

The renaming of the ‘almost elite’ as the ordinary but proud middle class is the first step in this process, a recognition that the hungry resourcefulness now wasted on the self-hating endeavour of pretending to be wealthy or foreign or Arab or landed can all be directed towards developing a love for the actual over the imagined.

Such a reinvention of a class desperately integral to Pakistan’s future can only be led by those whose position in the ever-precarious middle leaves them neither the resources of the rich who can flee nor the fatalism of the poor who silently perish.

Rafia Zakaria

The writer is a US-based attorney teaching constitutional law and political philosophy.

rafia.zakaria@gmail.com

To Spend or Not to Spend

The challenges that Pakistan faces today are colossal; however, what lies ahead is much worse. Reform is needed desperately, but it seems like a lot of the people who had been trying to implement reforms have fallen victim to the callous politics of our country. Reports of several top officials at different institutions in Pakistan resigning as a result of politicians prying into their daily affairs have stripped our country of many sincere leaders. Moreover, inefficient spending is on a rise and certain issues that need to be tackled on a crisis basis have been ignored by our leadership time and again. Their solutions have been sought in policies that have caused Pakistan more harm than good.

One such policy measure has been the Benazir Income Support Program (BISP). It accounts for 1.5% of the total budget and although this might seem small, it is equivalent to Rs. 50 billion (compared to Rs. 34.5 billion for education). The project entails giving away Rs. 2000 cash grants every alternate month to poor families until their livelihoods bounce back. At a time when the economy is being trampled under the debt burden, I feel concerned about such a prolific spending that only adds to the fiscal deficit and fails to achieve its indented goals. Although the ‘intended’ goals of the project are definitely noble, one also has to analyze the effectiveness of such a project in achieving those goals and its impact on the economic growth. While some might be more concerned about the short-run, one also has to consider the medium and long-run.

Two of BISP’s stated goals are to provide short term food security, by increasing the recipients’ purchasing power, and to alleviate long term poverty. Whereas the purchasing power of the recipients does increase, to the extent that inflationary pressures as a result of the stimulus do not counter it, one must ask themselves whether such a mechanism is a solution to the problem; more importantly, whether it is the lack of liquidity or the lack of infrastructure that has resulted in the poor’s plight.

I believe that for a country like Pakistan, which is on the bottom rungs of development, the issue is that of infrastructure rather than liquidity. With a huge population living under the poverty level and inflation rampant, the impact of a project like BISP gets diluted. Nations are not taken out of poverty by giving away money. What reduces poverty is economic growth that results in urbanization, capital growth and empowerment of the poor by integrating them into the economic system. This phenomenon is most clearly observable, in China and India, two of our next-door neighbors. Gross capital formation in Pakistan, as shown in Fig. 11, has been the lowest in the region and has trended downward in recent years.

Investment in infrastructure provides the necessary tools to be productive and efficient enough for a sustained growth that allows rural areas to be urbanized and also integrates more of the poorer population into the labor force of the economy. In countries with high population, this can add to the growth inertia. Availability of adequate infrastructure is also necessary to avail the demographic gift – positive effects of falling fertility rates, resulting in an increase in the labor to total population ratio of countries that previously had a high population growth rate. Lack of infrastructure investment results in lack of employment opportunities for a growing labor force, which can have enduring negative effects on the future productivity and growth of an economy.

Fig. 1. Pakistan’s gross capital formation as a percentage of GDP has been the lowest in the region, indicating a lack of investment in fixed assets/infrastructure.

The effectiveness of stimulus money in increasing the purchasing power and spurring growth is very limited. Firstly, such a spending could add to the inflationary pressures if it persists. That, I believe, is going to be the likely case as BISP does not have the potential to move people out of poverty, which is the requirement for such support to stop. Secondly, at times when people do not have confidence in the economy, they tend to hold back their spending. Hence, we see people putting that extra money in their safes rather than using it to improve their standards of living. The opposite might also be true, as people with low incomes have a higher marginal propensity to consume and with inflation high, people have more incentives to consume the money today rather than tomorrow. Finally, many analysts believe that such grants add to the disincentive to work. This has been observed in the US where jobless claims under the extended and emergency unemployment compensation programs have increased due to the extension of emergency benefits.

The reasoning that goes behind the belief that such stimulus packages promote growth follows the Keynesian school of thought. According to this approach, demand falling short of the potential supply can trigger a contraction in the economy and governments need to stimulate demand by increasing spending. This as a result is expected to increase the consumer spending, which fills the demand shortfall.

Anecdotal and empirical evidence have shown that this does not happen. Stimulus money was ineffective to stir the stagnant economy of Japan in 1990 and the US in the current recession.

Although Pakistan’s annual average CPI for FY 2010 (11.7%) has been brought down significantly from the level in FY 2009 (23.7%) and it must be complimented that the wheat prices (as of August 19) have been significantly reduced from those last year (price of wheat on August 19, 2010 was 2.7% lower than the price last year and that of flour was 9.4% lower than the price last year), the inflation level is still high and the wheat prices are going to change drastically in the next few months. A quick look at the domestic commodity prices shows that as of August 19, 2010, the sensitive price indicator (SPI) was 16.2% higher than the level at the same time last year. Global wheat prices are expected to rise as a result of Russia, the third-largest wheat exporter in 2009, banning the export of wheat due to a severe drought this year.

Although some economists believe that wheat prices are not yet a threat to trigger global food inflation, the same does not apply for Pakistan as its own wheat crops have been destroyed due to the floods and speculators have rarely missed a chance as good as this one to make a few bucks at the cost of the poor of our country. The industry of Pakistan which is already in shambles as a result of the energy crisis is expected to get another blow by the growing cotton prices, which are up 97.7% from the previous year.

Pakistan’s textile sector is expected to import $900 million worth of cotton to fulfill its immediate needs.2
Our leaders must realize that chronic dependence on foreign aid and short-term methods of solving issues by giving away money are only going to make things worse. A fallacy in this approach is that in order to spend that extra dollar, the government has to borrow. This adds to the fiscal deficit and further exacerbates the inflationary pressures that are already damaging our economy and motivating such projects in the first place. Cash grants like the ones proposed in BISP are not the most efficient way of using the already limited funds. Giving grants to communities to start self-sustaining businesses can be one way of empowering the poor; however, that is not the goal of BISP.

At times when the economic situation looks so grim, projects such as BISP that only provide temporary relief to a selected few, without really solving the issue of poverty itself, seem ostentatious. Such projects do serve the purpose of gaining political leverage; however, they also add to the crunching debt burden. Between 2001 and 2006 the public debt-to-GDP ratio of Pakistan fell from 81.4% to 56.1%. However, just before the recent floods, Pakistan’s debt-to-GDP rose to 61%3, which was above the 60% limit set by the Fiscal Responsibility and Debt Limitation Act. This is expected to rise even more in the coming months as a result of the floods. Hence, streamlining the economy and making effective use of the money by terminating projects like BISP and investing in infrastructure is imperative. Obviously the question then arises about the issue of corruption in infrastructure projects, but that is a question that we must ask our elected representative and for which they need to be made accountable.

BY SHUJAAT ALI KHAN ON 08 26TH, 2010
Shujaat Ali Khan is a research associate at the Fed. He is interested in the applications of deterministic chaos and complexity in the field of economics. He can be contacted at khan@alumni.middlebury.edu
The views expressed herein are solely those of the author and do not necessarily reflect the views of the Federal Reserve System.

The views expressed by this blogger and in the following reader comments do not necessarily reflect the views and policies of the Dawn Media Group.

Pakistan plans to impose 15 pct flood surcharge on tax

March 2, 2011
By Sahar Ahmed

KARACHI, March 2 - Pakistan will impose a flood surcharge of 15 percent on income tax in order to tackle the country's widening budget deficit, a government source involved in talks with the IMF said on Wednesday.

"Yes, we plan to impose the flood surcharge," the source told Reuters, declining to give details of when the surcharge might be levied.

Pakistan, whose tax-to-GDP ratio is around 10 percent, one of the world's lowest, is trying to show the IMF and other donors that it is working on ways to boost revenue.

The country is dependent on foreign aid, and riven with political instability and violence. On Wednesday, gunmen shot dead the only Christian in Pakistan's government, the second top official killed this year for questioning a law that mandates the death penalty for insulting Islam.

The struggling government, still contending with damage from disastrous floods last year, is desperate to raise money.

According to news reports, as well as the flood surcharge, it plans to increase a special excise duty by 150 percent soon after a National Assembly recess.

"The proposal to increase the special excise duty on nine luxury items has been with the National Assembly since last year," said another government source.

The two measures, according to media reports, would raise 46 billion rupees during the fiscal year 2010/11 and increase the revenue target to 1,630 billion rupees .

The measures will be presented to an International Monetary Fund team that arrived in Pakistan on Tuesday to conduct the fifth review and evaluate the country's performance for the possible release of a sixth loan tranche, delayed since August last year. The team is expected to stay until March 8.

The two measures could be an alternative to a key condition for the release of the sixth tranche: the implementation of a reformed general sales tax . The IMF and international donors are demanding Pakistan tax more of its economy.

Neither government nor IMF sources would comment on the RGST, which has stalled in parliament.

In December, the IMF approved a nine-month extension of Pakistan's $11 billion loan, which was due to end last year, to give authorities time to complete the implementation of key fiscal reforms.

The extension runs to Sept. 30, 2011.

Pakistan's widening budget deficit was 2.9 percent of GDP in the six months ending Dec. 31. In November 2010, Pakistan agreed with the IMF that it would keep its deficit at 4.7 percent for the 2010/11 fiscal year.

Analysts say Pakistan is likely to overshoot this figure.

Some forecast the deficit will be around 8 percent, higher than the central bank's prediction of between 6.0 and 6.5 percent, if fiscal reforms are not implemented, but the implementation of a RGST could deepen public frustrations with the unpopular government.

In May, Pakistan received $1.13 billion in the fifth tranche.

Source: http://asia.news.yahoo.com/rtrs/20110302/tbs-pakistan-tax-b8dd11d.html?
(If you have a query or comment about this story, send an e-mail to news.feedback.asia@thomsonreuters.com) (E-mail: sahar.ahmed@thomsonreuters.com; Reuters Messaging: sahar.ahmed@thomsonreuters.com; Karachi newsroom: +92-21 3568 5192)