Economic Business Review 070909

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Economic & Business Review [Mon, 07 Sep, 2009 | Ramazan 16, 1430 ]

20pc less charity this Ramazan

By Afshan SubohiMonday, 07 Sep, 2009 | 01:31 AM PST |

Initial donations trend for this Ramazan indicate that philanthropists will pay 20 per centless than last year for charitable purposes. The total quantum of givings during thecurrent year is reckoned to be Rs150 billion. At this rate, the disposable assets, liable forZakat, in private hands works out to be a whooping Rs6 trillion.

A 1998 study by a committee of experts commissioned by Aga Khan Foundationprojected the total value of charity at Rs70 billion. In absence of any fresh study, theamount has been doubled keeping in view the increase in value of everything-- fromminimum wage to the worth of assets.

Initial indicators of an informal survey in Karachi point to a shrinkage of about 20 percent in donations by the faithful this Ramazan to various philanthropic institutions. Thereis no method to gauge direct flow of Zakat funds to needy individuals.

There is nothing to suggest that the trend would be any different in direct giving from

institutional giving as nothing has happened over the last one year that could have led to asizeable shift in the pattern of giving. The proportional share of direct to institutionalgiving has not changed which means increase or decrease would probably be about thesame in both the categories.

With a huge Muslim population, the quantum of annual giving may cross over Rs150billion. Experts endorse that more than 90 per cent of this amount is contributed bypeople as Zakat, a mandatory deduction on savings, both in cash and kind. Islam requiresMuslims to give to the needy at least two and a half per cent of their accumulated wealtheach year. It is believed that the act cleanses savings and protects them from an evil eye.

According to a common belief, Zakat is deductible on all accumulated wealth that is not apart of running business including rolling funds that have been in possession over a yearand can be liquefied on a short notice.

By applying simple mathematics the figure of Rs150 billion throws up an astonishingamount of Rs6 trillion disposable assets to be in possession of individuals, if it is assumedthat every eligible Muslim pays Zakat judiciously. (Rs150 billion is two and a half percent of Rs6 trillion) There are high net worth individuals who might be paying many


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times more than Zakat but this does not apply to everyone. There may be many more richpeople too engrossed in their business to spare a thought for the less fortunate. Majority,however, comprises middle class people who apply their own interpretation of theobligation but give away something in name of Zakat during Ramazan each year. This ineffect implies that the real value of private disposable assets would still be higher.

The fact that people seem to be spending more during this Ramadan than earlier indicatesthat the financial capabilities of spending classes are intact despite inflation and risingunemployment. Why are they not inclined to care more for the poor and increasedonation then? There is no clear explanation.

An expert on consumer behaviour could give a more credible comment but a possibleexplanation that comes to mind is that probably people tend to seek Gods mercy bygiving more when under stress. As law and order and the economy improves, people getmore involved in worldly affairs.

A more plausible explanation would possibly be the erosion of asset prices in the last oneyear which saw the bursting of property and capital market bubble. It must havemoderated the value of fixed disposable assets on which Zakat is due.

Syed Tariq Ali, research head at the Centre of Philanthropy told Dawn from Islamabadthat impulse of charity in Pakistan is higher as compared to many other countries. Heconsidered estimate of Rs150 billion as annual value of charitable donations ratherconservative. It is safe to double the Rs70 billion projected 11 years back. I find Rs150billion a very moderate figure, he told this writer from Islamabad over phone.

Anwar Kazmi, an old associate of Maulana Edhi, helping him in charitable network ofEdhi Foundation told Dawn that so far donations this year are on the lower side. EdhiFoundation is the biggest, the most effective and highly respected philanthropicorganisation, known for its work around the world. It receives massive donations eachyear.

Workers of several other organisations endorsed Kazmis views. He said, Maulana Edhibelieves that middle classes are most generous. The rich evade Zakat as they evade taxes.They prefer to open their own charitable outfits with the money they want to set asidefor the needy. It serves dual purpose of social work and earning tax credits in this worldand a reward from God in the life hereafter.

In 1947, Pakistan inherited reputed charitable institutions like Ganga Ram Hospital,Gulab Devi Hospital, Janki Devi Hospital, Sindh Madressatul Islam, and Hamdard Trustto name a few. In the recent past, individual philanthropists set up large-scale publicbenefit institutions such as the Edhi Trust, Shaukat Khanum Memorial Hospital, theLayton Rehmatullah Benevolent Trust (LRBT), the Fatmid Foundation and the QarshiFoundation and several hundreds more for the benefit of millions of people.


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Will price controls on sugar work?

By Nasir JamalMonday, 07 Sep, 2009 | 01:31 AM PST |

The Lahore High Court ordered the Punjab government Thursday to keep retail sugarprice at Rs40 a kilo Rs7 less than its current level across the province.

It also directed the government to procure the sweetener from mills at Rs36 a kilo insteadof Rs45, the ex-factory price fixed by the federal government for the entire country lessthan a couple of weeks ago, to ensure that its retail price did not exceed in Punjab beyondthe court-fixed level.

The millers refused to accept the order because it meant a loss of Rs9 a kilo to them.

They intend to appeal. Stockists and dealers too got worried because they had purchasedthe product at the federally fixed rate and stood to suffer huge financial losses if the courtorder was implemented.

The Punjab government pledged to implement the order and deployed on Friday revenueand police officials at the mills to seize stocks and prevent the millers from removing thesame. But its food minister told a TV channel that it would take a couple of days toenforce the court order. He seems to be buying some time for the dealers and retailers toexhaust their existing stocks before the court-fixed rate is enforced.

But sugar had already begun disappearing from the retail markets at many places inPunjab by that time as retailers did not want to risk arrests and penalties on charges offlouting the court orders.

In less than two weeks the consumers were once again facing shortages and running fromone place to another to purchase the sweetener for their use during Ramazan and on eidulfitr.

Sugar has been at the centre stage of what millers call as politics for almost a month.Initially it was the federal government that asked provinces to take action againststockists and mills for allegedly hoarding the product to make windfall in view of itsrising global prices due to worldwide shortages.

The government soon realised its folly as administrative actions caused the sweetener todisappear from the market. After talks with the government,the millers agreed to lowertheir maximum prices to up to Rs49.50 a kilo inclusive of sales tax. The federalgovernment thought it to be good bargain as imported sugar would cost consumersaround Rs65 a kilo.

In the meanwhile, the Punjab government continued its crackdown against the mills toforce them reduce their price to Rs45. The millers refused to oblige and the provincial


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government deployed its officials at their warehouses and seized their stocks. The matterwas resolved after the prime minister waived 50 per cent sales tax on sugar and re-fixedthe millers price at Rs45.

The market was functioning quite smoothly and the product was available for Rs47 s kilo

in spite of reports that some millers were delaying the release of their stocks when thecourt decision came in to topple the market upside down once more.

Price controls have always been very popular with governments worldwide includingPakistan because of their mass appeal. The possibility of political fallout of higher pricesmakes governments to frequently institute controls to regulate prices, particularly in timesof soaring price inflation and shortages.

Before 1990s when Pakistan began to pursue free market policies, governments usuallytried to control the general level of prices, regulating the prices of a whole range ofcommodities and products. But the trend changed after the country embarked upon the

path of economic deregulation and liberalisation with successive governments selectivelyimposing price control on specific food and drug items.

Some times producers and suppliers are forced to lower their maximum prices to certainlevel called price ceiling. On other occasions, governments intervene in the marketthrough state agencies like the Trading Corporation of Pakistan to remove the supply anddemand imbalances for keeping prices down, though at a heavy cost. In a few casesgovernments subsidise the producers cost of production to prevent prices from risingabove the desired levels, although not all consumers consider the official determinationof that price level as fair to them.

Price controls are meant to prevent prices from exceeding a certain maximum level. Theidea is always to protect the segments of population that cannot meet price increases.

But do they work and produce the intended results?

Price controls never work, insists Shahid Kardar, a leading economic expert. It is asupply and demand issue. Do you think that a shopkeeper will sell you a product for Rs10if another customer is ready to pay Rs12 for it? he asks.

Experts argue that price controls fail to protect most consumers. At the same time, thesehurt others.

The negative implications -- temporary and long-term, direct and indirect -- of institutionof price controls far exceed its benefits to the consumers, contends an economist.

The artificial pricing mechanism never succeeds. It always results in shortages due tosudden increase in demand owing to panic buying as we recently saw in case of sugar andwheat flour in Punjab, he says.


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They should be able to decide whether they want to buy flour or sugar or somethingelse, he contends.

Fall in bank profits

By A.B. ShahidMonday, 07 Sep, 2009 | 01:31 AM PST |

The January-June 2009 operating performance of commercial banks reaffirms theeconomic slow down and the consequences of overlooking its build-up beginning July2007.

No one expected the banking sector to grow in a recession that engulfs the world.However, what now must engage banks attention is the contraction in their creditportfolios that led to a drop in their earnings. The question that needs addressing iswhether this drop is justifiable or could banks do better.

The sectors earnings declined by 31 per cent compared to their June 2008 level but itwasnt wholly the result of lapses by banks; it was the combined effect of inflation(averaging 20.8 per cent till June 2009) that raised banks operating expenses, payment ofminimum five per cent per annum on saving deposits (53 per cent of total deposits) thatwere virtually cost-free earlier, and higher investment in low profit-yielding public sectordebt.

Banks operating expenses went up by 20 per cent in line with inflation in spite of thefact that, in their efforts to cut expenses, several banks went to the extent of laying-offsizeable chunks of their staff. But for smaller banks the burden created by networkexpansion well into 2008 (despite visible signs of the on-set of a slow down) provedexcessive; it contributed to higher declines in their profitability.

But, despite the cost cutting measures adopted by banks, their overall performance wentdown. One indication is that while diminution in the book values of investment in sharescost banks over Rs290 billion during January-June 2008 (courtesy the stock marketcrash), these losses were just Rs3.2 billion in the first half of 2009. Yet the sector

profitability declined by 31 per cent over the corresponding period in 2008.

Another factor squeezing bank profits, though not much was the drop in income fromtrading in currencies. Of the 26 banks whose results have been declared, compared to firsthalf of 2008, only seven banks increased their earnings from this activity; drop inincomes of the other 19 add up to around Rs2.35 billion, with two of them losing largeamounts (partly recoverable if the rupee appreciates) on sale of derivative contracts.


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Share of non-performing loans in total loans, although still high, didnt rise over itsMarch level of 11 per cent partly because banks had provided for bulk of their consumerloan losses in the first quarter. But the view that losses have peaked, is overoptimistic.Besides, risk aversion will cause profits to dip more if the high-yield private sector creditdeclines further over its 2008 level instead of rising by about Rs200 billion by end-2009.

Negative private sector credit off-take root cause of weak performance by the bankingsector accentuated the economic slow down. What banks and the economy as a wholeare going through now is a vicious circle that begins with loan losses rooted in rashlending, risk aversion, credit rationing, and lower growth a trap that needs breaking tostop the recession in its tracks to sustain civilised existence by millions everywhere.

While it is imprudent to ask banks to take on unmanageable risks, it is worth askingwhether banks have got their lending priorities right. It wont add much to anybodysknowledge to repeat that Pakistans bigger problem is not its inability to export enoughbut its inability to cut its imports; the baffling figures of annual trade deficits of the recent

years undeniably manifest this reality.

Yet, we consistently refuse to accept this reality. While oil imports cant be cut in thenear future because of consistently flawed oil and gas exploration policies of the state,but to cut other imports, we failed to develop a large enough industrial base to produceimport substitutes a distortion for which the blame lies squarely with the private sector its visionaries, economists, consultants, investors, and last but not least, bankers.

Subsidised lending rates and lower export tariffs remained the focus of our efforts to raiseexports. Now the economic slow down, squeeze on tax revenue, and steady rise in fiscaldeficit, has forced us to commit to the IMF that by September 2011 mark-up on exportfinance (presently subsidised by about 5.5 per cent) will be brought at par with marketrates; it isnt hard to imagine its impact on the efforts to increase exports.

In such a scenario, with cutting imports not a priority, where shall we end up? Had theprivate sector and banks adopted self-reliance as the prime national objective, Pakistanwould not have been where it now is. Ayub Khans decade of development was oftencriticised for the right reasons. That was also the decade in which focus was ondeveloping an industrial base that could make Pakistan increasingly self-sufficient.

The temporary relief provided by IMF credit isnt the solution. IMF-imposed deficit-cutting priorities will weaken the industrial sectors competitiveness. With higher fueland energy costs, nothing else can be expected. In this backdrop, setting up new importsubstitution industrial units to achieve ever higher self-sufficiency would become twiceas difficult as today. But thats the only alternative which could deliver.

For too long, banks pursued profit as the sole objec

tive; it led them and the economy nowhere. No proofs are needed to accept this failure. Itis time banks devised attractive loan packages that encourage setting up of import


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substitution industries that initially begin assembly (under franchises) using importedinputs, and then through a rapid process of indigenisation, become full-fledgedmanufacturers (and exporters too).

Thats the route to economic revival, and long with it of the banking sector and its

earnings. Falling profit shouldnt be as worrying as the past misallocation of resourcesand the urgent need for policy correction. Banks and the private sector can still fill thegaps created over the years by flawed objectives e.g. irrational but profit-yielding growth(the number game), skewed vision and planning, and execution thereof suiting banksconvenience.

Sea buckthorn: a source of herbal medicine

By Mohammad Niaz

Monday, 07 Sep, 2009 | 01:30 AM PST |

THE sea buckthorn (Hyppophae rhamonides) is a multipurpose hardy shrub, 2-4 metersin height, which produces valuable orange berries. The plant is mostly found in theNorthern Areas including Gilgit, Ghizar, Ganche, Astore, Skardu, Baltistan, and Hunzabesides Kurram Agency, Chitral and upper Swat.

Sea buckthorn has been used over centuries as an herbal medicine to relieve cough, aiddigestion, invigorate blood circulation and alleviate pain. The sea buckthorn is not widelytapped for its multifarious benefits despite an estimated natural cover of 7,000 acres with

annual production of about 160kg per acre. Earlier, in 1977 the Pakistan Council forScientific and Industrial Research (PCSIR) had developed, introduced and promotedvarious products of sea buckthorn and also conducted capacity building programmes totap the resource in Skardu district.

At local level it is used as firewood, hedges, fodder and compost while its potential asmedicine, food as well as an income-generating source are limited and has not beenrealised holistically. The Pakistan Agriculture Research Council (Parc) has beenpromoting various products of the plant in the Northern Areas quite recently throughdifferent projects.

Because of its severe weather resistant nature and huge root system fixing nitrogen in thesoil, sea buckthorn is regarded as an environment friendly plant. It adds to the soilfertility and helps in reclamation of barren lands. Moreover, it also serves as a nurse plantfor other vegetative growth. Its strong and extensive root network helps control landslides. The wide adaptation, fast growth, strong coppicing and suckering habits make theplant well adapted for soil conservation, soil improvement and marginal landreclamation. Observations and surveys show that many birds and animals depend on theplant for food and shelter.


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Its significance is not only restricted to ecological importance, water conservation andsoil stability but has also economic, biochemical and nutritional value with its fruits richin vitamins. Studies have shown that its fruit is 5-16 times rich in vitamins C than anyother fruit and vegetable. Its pulp has high medicinal value because of oil. Preparations of

sea buckthorn oils are recommended for external use in case of burns and other skincomplications induced by treatment with X-ray or radiation.

Recently, clinical studies on anti-tumor functions of sea buckthorn oils conducted inChina have been positive. The oil, juice or extracts from oil, leaves and bark of the planthave been used successfully to treat high blood lipid symptoms, eye diseases, gingivitisand cardiovascular diseases such as high blood pressure and coronary heart disease. Itsfocal medicinal applications include cancer therapy, cardiovascular risk factors,gastrointestinal ulcers, skin disorders, and liver protection.

The seed of the plant having iron and phosphorus contents matures in September and

October. The flavonoids of sea buckthorn which is mainly found in the fruit pulp as wellas in leaves and oils of sea buckthorn which are obtained from its seeds and fleshy part ofthe fruit have medicinal value and application.

A variety of key products such as jams, jelly, syrup, squash, shampoo, can be preparedfrom the plant. Moreover, its leaves also serve as fodder having 23 per cent proteins. Theresidue obtained in wake of the processing method applied can also be utilised asvaluable animal feed. The leaves are also being used for making a beverage tea.

In Northern Areas local communities are reluctant to tap this resource successfullybecause of time consuming harvesting technique, high labour cost, and high productprices and this has been one of the prime hurdles in proper marketing. Manual harvestingof berries is difficult due to their dense arrangement among thorns on each branch andfarmers cant afford advanced fruit harvesting techniques that are currently applied indeveloped countries.

As there is plenty sea buckthorn untapped in its core regions of the country, they can becollected and exported to European countries besides America and Canada. There is alsogreat need to launch awareness campaigns for adopting sea buckthorn as an economiccrop.

Farmers who raise the plant should be given incentives in terms of purchasing theirproduce at subsidised rates. There is also a great need to conduct extensive research andstudy to qualify the plant on grand scale use to benefit the local communities. Seabuckthorn plantation can be raised and promoted which would generate income andprovide fuel wood. Its tapping can prove effective not only in alleviating poverty inNorthern Areas but also help people in having access to a variety of its useful products.


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Tharparkar peasants in debt trap

By Saleem ShaikhMonday, 07 Sep, 2009 | 01:30 AM PST |

POVERTY in Tharparkar district continues to rise as livelihood sources of poor familiessuch as agricultural lands and livestock are fast shrinking owing to low rains and animaldiseases, and absence of alternative means of earnings.

Although a number of development programmes and microcredit facilities were launchedto improve the socio-economic conditions of the people of the drought-hit district, thelevel of poverty in this backward area has worsened.

Over 70 per cent of the poor in Tharparkar were provided with microcredits to boost theirmeagre income, but it did not make any difference, it was learnt during a visit by this

writer to this south-east arid district of Sindh.

The visit revealed that a majority of the beneficiaries of the microcredit programme haddescended into a vicious circle of poverty on account of their inability to pay back thedebt.

The borrowers used loans either for buying kitchen items or for livestock fodder or seeds.They held the NGOs responsible for the failure of the microcredit programme.

A local philanthropist Ali Khaskheli in Nagarparkar town said: Instead of givingmicrocredit to these unskilled and uneducated poor people, it would have been better to

first create awareness among the potential borrowers about prudent utilisation of themicrocredit.

As the locals are mostly dependent on agriculture or livestock breeding for theirlivelihood, more than 85 per cent of the microcredit receivers failed to repay their loansowing to persisting drought that damaged their farmlands and killed their cattle, informeda local social worker of the Thardeep Rural Development Programme (TRDP) in Mithitown, which is also involved in microcredit disbursement.

Microcredit borrowers in Mithi, Diplo, Islamkot, Umerkot, Chachro and Nagarparkarnarrated their appalling stories how the microcredit had deepened their financial woes.

A villager in Mithi town said: Last year I borrowed Rs15,000 from an NGO andpurchased seed worth Rs5,000, fertiliser for Rs7,000, and two small goats for Rs3,000each. Owing to the three-year-long drought, not only the seed was destroyed, but I alsolost the goats due to some unknown disease.

To repay my loan, I had to move to Badin, where I worked on a farm land and managedto pay back my debt in three years. But, by then the high interest on the principal amount


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of the loan had increased the debt to Rs38,000, he said.

There were cases of manhandling of loan defaulters, particularly those from lower caste,in the area by some NGOs with the help of local police. The houses of poor defaulterswere raided early in the morning for loan recovery.

Dewan Meghwal, resident of village Golio in Islamkot town, told this scribe that he wasimplicated in a case by TRDP recovery officials after he failed to repay his loan.

Some other members of the Meghwal caste in Nagarparkar also alleged that those whohad defaulted were forced by the NGO to borrow fresh loans from it on a heavy interestrate to pay their previous installments.

Approached by this scribe, Jai Parkash, TRDP senior manager for microcreditprogramme in Mithi, denied such reports. He said: Although they had sought help oflocal police for recovery but they never resorted to coercive methods.

A social worker Haneef Khoso in Nagarparkar told this scribe that those who invested themoney in their small enterprises were able to repay their loans and the rate of defaultamong such borrowers was zero.

On the contrary, those who used microcredit for agriculture and livestock breedingpurposes posted high rate of default as these two major activities in this arid zone dependon rain, which was now rare in the area, he observed.

The latest rains, received in last July after three years, have brought life to the desert areaof Tharparkar. The drought during the last three years caused havoc to agriculture andkilled thousands of cattle, he said.

Such a terrible situation pushed thousands of microcredit beneficiaries into a squeezingpoverty circle having no tangible assets to repay their loans. While, there were otherswho had either to mortgage or even sell their precious ornaments, surviving livestock orthe arable lands to pay back their loans, observed Haneef Khoso.

According to some studies of the local civil society organisations, 80 per cent of the Tharihouseholds in the district are in debt to local money lenders.

Quoting one of the studies, a local social worker told this scribe that almost 70 per cent ofhouseholds in the area were under debts of over Rs15,000-25,000 each and 78 per cent ofthe households paid 10 per cent (some times 15-20 per cent) per month as interest ontheir loans.

About 80 per cent of the households had borrowed money for food as well as cattlebreeding and 15 per cent for other needs.

The average yearly earning of each household in the district is hardly Rs25,000, and


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about 35 per cent of each households earning is spent on food and 55 per cent on health.Given the spending, there is no way that these debts could be repaid, according to asurvey.

Dr Sono Khangarani, chairperson of TRDP, agreed that microcredit had not yielded the

desired results in the area as the living standard of the locals remained at a low ebb.

There was lack of income-generation related skill development programme in the areawhich needed to be introduced to boost the local cultural products, Dr Khangarani said.He said negotiations with the provincial government and some donors were in progress inthis respect. Simply giving out money as microcredit to locals would make no difference,he said.

He said some efforts were being made to extend Sindh governments union council-basedpoverty reduction programme to create employment opportunities through arrangingskilloriented training. This programme would include disbursement of income

generating grants in kind to the destitute in the

shape of livestock, agriculture equipment and machinery and initiate vocational trainings,particularly in embroidery and handicraft sectors.

An official in the Poverty Alleviation and Public Private Partnership Unit (PAPPPU) ofthe provincial planning and development department, said this year Rs3,000 millionUnion Council-based Poverty Reduction Programme, implemented in Shikarpur andJacobabad districts on experimental basis, would also be extended to Tharparkar district.

Once the skill-based programmes were put in place, efforts would also be made toprovide market access to these skills locals of Tharparkar district for their home-madecultural products, he added.

Issues in date production, exports

By Essa JalbaniMonday, 07 Sep, 2009 | 01:30 AM PST |

IN recent years, the annual date production has ranged between 6,00,000-6,20,000 tons.Date markets of Therhi, Khairpur, Karamabad and Agha Qadir Dad Khan on the left bankof River Indus are the hub of date processing and packing for export.

Processing of dates involves several stages. The fruit is examined and sorted outmanually. The selected dates are fumigated and sterilised for four hours. These are thenplaced in refrigerator/cold stores, where they can be kept for about two years. Optimum


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temperature and humidity levels are maintained in accordance with each varietysrequirement. On demand, the dates are taken to automated washing process and sent toprocessing and packing areas.

At present, there are over a dozen date factories and processing facilities in and around

Thehri, where thousands work. Moreover, many thousands males and females fromneighbouring districts as well as southern parts of Punjab and Balochistan come to workin date palm orchards in Kairpur Mirs from May to September every year. As many as5,000 container-loads of dates originate from this place for export. About 90 per cent ofexport varieties is Aseel of Khairpur Mirs.

Pakistan entered the international date trade by sheer chance in early 1980s when Iranand Iraq went to war, and became the number one date exporting nation in the world byselling over 78,000 tons of dates in 2004. But, unfortunately it gets the lowest per unitvalue for its fruit: $36 per metric ton (MT).

Overall export of dates has witnessed a steady growth. In 2006, date exports were valuedat $37.65 million rising to $38.69 million in 2007 and to $38.8 million in 2008. Themajor markets are India, Germany, the UK, Denmark, US, Canada, South Africa,Bangladesh, Nepal, Sri Lanka and Australia.

In 2006-07, Ramzan-related export of dates was slightly less than $5 million. In 2007-08it went down by 30 per cent to $3.1 million. And, in July-June (FY 09), earnings fromdate export declined to $1.64 million from $2.01 million in 2007-08 (July-January),sliding by 18 per cent. Moreover, exports of dried dates to India are highly under-invoiced.

Pakistan imported dates worth around $4.45 million annually during 2004-08. Thisimport was made in spite of domestic production of over 6,00,000 tons a year. WhenRamazan will precede date of harvesting season, import of this fruit will increasemanifold.

Iran and Iraq are again getting ready to re-capture their lost market. To compete in theglobal market, suitable measures need to be taken on urgent basis.

Implementation of the following suggestions would improve the competitiveness of ourdates in international market.

Date harvesting season coincides with monsoon rains which often causes heavy loss todate growers. Shah Abdul Latif University, Khairpur, has identified bituminised paperwhich protects date bunches from rain at the time of maturity. Bituminised paper bagsmay be quite expensive, but losses by monsoon could be huge. The government shouldprovide bituminised paper bags to date growers free of cost.

Solar dehydrating system: After harvest, dates are placed in open fields for drying. Aheavy downpour can damage the entire crop. Therefore, introduction of solar system for


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up and inferior quality of breed, the average yield per lactation in the province stands atjust 900 litres for cow and 1200 litres for buffalows.

Officials of the directorate of breed improvement, NWFP, said that lactation per anaverage American cow has been increased to 9,000 litres from 3,000 litres in the last 30

years. They attributed it to artificial insemination (AI) of animals which played asignificant role in the improvement of livestock breed.

If more semen production units (SPUs), nitrogen plants, breed improvement farms andAI centres are opened, the objectives of more milk and meat can be achieved, said anofficial in the Directorate of Breed Improvement.

Livestock provides livelihood to majority of the rural population and utilises about 60 percent of the rural women in livestock raising practices such as grazing, feeding, andmilking. The sector could lead to economic emancipation of rural women if properlydeveloped , he said.

According to the livestock census 2006, there were six million cattle and 2.78m buffalosin the province. Of these, 3.03m female cattle and two million female buffalos were ofthree years of age which could be covered by AI services. But at present, AI programmeis covering only 10-15 per cent of the livestock population in NWFP. There is a need toincrease this ratio.

Common milk yield per animal per day in NWFP is one to two litres. Animals bredthrough artificial insemination yield 15-20 litres in cattle farm while farmers themselvestake up to 12 litres from these animals, said the official.

He said indigenous cow breeds had comparatively short lactation period -- just 200 daysas against the well-bred cows that provided over 5,000 litres of milk for over 300 days.

The indigenous animals attended puberty very late, in double the period than the AIanimals did. AI also helps prevent viral diseases which are common. Also, theelimination of danger of hardship by unruly bulls is reduced. The premature use of bullsis avoided. Early detection of infertile, old or crippled bulls is also possible, he added.

Sperm/semen obtained from local bulls at SPU or imported one is utilised forinsemination of 300 to 1,000 cows. The department distributed around 3,000 semen unitsto farmers per month till now but the sale and provision of semen has dropped by 50 percent in recent months due to various factors such as law and order, said another officialin Mardan.

He said that AI was an easy, cheaper, healthier and safer mode of reproduction. The AIstraw is given to farmers for Rs50. Progeny level is better which means more money forfarmers. This is a sure recipe for farmers empowerment and economic revival, said theofficial.


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According to official documents, income from AI services has been falling. In 2006, thedirectorate provided 0.28 million AI services which declined to 0.25m and 0.23m in nexttwo years. Again, semen production stood at 0.34m, 0.33m and a meagre 0.19m dozes inthe said period. The income realised from AI services also went down from Rs16 millionin 2006 to Rs14m in 2007 and Rs12m in 2008. However, the production of liquid

nitrogen increased to 0.1 million litres from 0.01ml in 2005.

Another area for urgent attention of the government is the high demand for semen. Thereis only one SPU at Harichand that provides semen to AI centres and farmers in theprovince and tribal belt for insemination purposes. It too has just 31 bulls for gettingsemen from. Mardan earlier had an SPU which is closed now. More SPUs are neededespecially at Mardan which could help cover the livestock-rich Malakand division.

There is one cattle breeding farm (CBF) at Harichand, one buffalo farm in Dera IsmailKhan and a sheep breeding farm in Mansehra. More farms should be established in eachdivision and more projects for breed improvement should be started.

Imported semen is kept under minus 196 degree centigrade in liquid nitrogen. Accordingto the Mardan-based official, the nitrogen plants are a prerequisite for the AI programme.There is only one nitrogen production plant in Peshawar. To minimise the shortage ofsemen and early and easy delivery, more nitrogen plants must be established, he said.

A private veterinarian Imtiaz Ali however said that AI programme also had somedisadvantages which should be guarded against. Success of AI depends to a great extenton the ability to detect heat in female animals. It requires more labour, facilities,management skills and properly trained staff. Also, utilisation of few sires for the AIservices can reduce the genetic base. To avoid this, the cattle breeding and dairy farmsshould assemble as many young and healthy sires as possible, he said.

Another important issue is that though the conception rate for AI is 60 per cent for cow, itis considerably lower in buffaloes.

Imported semen is better but its maintenance and preservation requires hefty amounts. Toovercome this problem, imported semen should be utilised at the CBFs. Then thegovernment can distribute the semen produced there to farmers.

The existing cattle farms are all milk-oriented. There is not a single beef-oriented cattleor buffalo farm in the province. There should be beef based breeding farm like the one inSibbi in Balochistan. Animals born through AI can help meet the growing milk and meatshortage in the domestic market as they are heavier than local ones, he said.

Unemployed veterinary graduates and assistants should be given special AI training, andprovided necessary inputs to enable them open private AICs.


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How to end power theft?

By Aftab AhmadMonday, 07 Sep, 2009 | 01:27 AM PST |

ELECTRICITY theft is a chronic problem in which many in the domestic, commercialand industrial sectors are said to be involved. The problem may be attributed to rampantcorruption, widespread poverty and increasing cost of electricity. Only half-heartedefforts appear to have been made so far to check power theft.

Electricity theft reduces revenue of power distribution companies and they areperpetually faced with financial difficulties and cannot bring about improvement in theirpower distribution system. The current circular debt of billions of rupees, which couldnot so far be repaid to power producers and has been hindering power generation, is alsopartly attributable to lower receipts of power distribution companies.

Electricity theft also leads to waste. If those who steal electricity were asked to pay for it,they would obviously economise on the use of electricity. By effectively checking powertheft and minimising transmission losses the current loadshedding could be considerablyreduced.

According to the US press reports, in the recent past, more than 50 per cent of powerdistributed by the North Delhi Power Ltd. in India was not paid for by the consumers. Butthe company succeeded in reducing the theft to 15 per cent during the last seven year. Itshowed that the problem of theft could be solved if addressed effectively.

Poor and rich alike, together with businesses, have been stealing electricity in India. Thepoor consider free electricity as their right, since for someone with a monthly income ofRs3,000-4,000 it is hard to pay monthly electric bills ranging between Rs600-700. Thepoor use electricity to run their water-heaters, refrigerators and other appliances throughillegal connections.

North Delhi Power Ltd. rewards the people informing the company about power theft intheir neighbourhood. Besides, the company backed by police conducts raids in areaswhere electricity theft is supposed to be on a large scale.

In case of large industrial customers, the company had to introduce an automated meter-

reading system, making use of wireless technology, in a bid to prevent these high-value customers from bribing the meter readers to get their electricity bills reduced to theminimum.

To train its employees in anti-theft techniques, the North Delhi Power Ltd. runs a trainingcentre in Northwest Delhi, where the employees are taught how meters can bemanipulated; powerful magnets can deactivate meters mechanism etc. and, above all,what can be done to check such illegal and immoral practices. In


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order to keep power thieves from tapping power directly from overhead lines, theemployees are taught to replace wires with insulated cables.

Attracted by training programmes, utilities across India are reportedly sending their

employees to the North Delhi training centre to learn how losses from electricity theft canbe controlled.

Roughly 20 per cent of all power in India is stolen. If losses from faulty transmissionwere added, the percentage would jump to an estimated 38 percent. It is considerednecessary to address losses of such magnitude in order to keep the system viable.

In Pakistan, losses from electricity theft and transmission inefficiencies may even behigher. It is necessary to focus simultaneously on addressing losses from power theft andtransmission inefficiencies. Only then can we expect the system to become efficient,viable and start running on smooth commercial lines.

Initiating the white revolution

By Humair IshtiaqMonday, 07 Sep, 2009 | 01:27 AM PST |

IN the last few months, the government has shown some significant signs of giving thenational dairy sector the kind of attention it deserved. Prime Minister Yousuf Raza Gilani

has called for the formulation of a National Livestock and Dairy Development Policy,while the southern province has decided to set up the Sindh Dairy and Meat DevelopmentCompany (SDMDC) to harness the potential of a sector that rightly complains of officialnegligence.

Being the fourth largest producer of milk in the world behind India, China and theUnited States the potential of the dairy sector is beyond doubt. Eight million farminghouseholds produce around 35 billion litres of milk annually from around 50 millionanimals. According to a document released by the Lahore-based Institute of PublicPolicy, the milk produced annually is worth Rs177 billion and is the largest product in theentire agriculture sector.

Going a step further, the Pakistan Dairy Development Company (PDDC), which is apublic-private enterprise set up in 2005 by the ministry of industries, production andspecial initiatives, maintains that overall, the contribution of dairying to the nationaleconomy is as high as Rs540 billion, with 97 per cent of it being informal non-documented economic activity.

The irony is that the country, far from being an exporter of milk or dairy products,


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struggles to maintain fresh supplies to its urban centres. A delegation of potentialinvestors from New Zealand which had visited the country recently estimated that thedaily shortage in Karachi alone was worth four million litres.

This is so because despite huge production, the industry is hampered by the fact that it

has no sustainable Cool Chain which may ensure freshness at source before refrigeratedtransport may bring it to the cities.

Only three per cent of the milk is processed, while the rest is consumed internally. Thereare two ways in which the demand-supply gap at urban centres is bridged packed andbranded milk which is supplied by large-scale operators, and adulteration of the milk adding water or caustic soda by dairy farmers.

The impact of the missing cool chain can be seen by the fact that about 20 per cent of thetotal production gets wasted; a massive seven billion litres per year. A couple of yearsago, law and order situation had made it impossible to pick up the daily supply from

farms situated within Karachi. As a result, 10 million litres of milk had to be dispatchedto the drains in just two days. At the time, there were 800,000 cattle milking 2.5 millionlitres every 12 hours, but the farmers had no facility to store it. They dont have it eventoday and the story is worse in rural and remote areas except for farms that have been onthe roll of milk processing companies that have made arrangements along professionallines to ensure a cool chain.

The establishment of the PDDC better known as simply Dairy Pakistan has been amove in the right direction. Targeting what it calls the White Revolution, the PDDC hascharted out a three-phase strategy that aims at turning things around in a few years time.As part of the first phase, it has set up around 1,200 cooling tanks and 900 model farms inrural areas.

The next phase will basically focus on developing community farms, improving farmingtechniques and providing farm-to-market access to the farmers.

Industry sources maintain that without such initiatives, the potential of dairy farming inthe country will remain unrealised because the adoption of modern farming techniques isthe only way Pakistan can ever hope to increase its per-animal yield which today isabysmal.

According to PDDC data, the huge animal population of 50 million suffers from lowproductivity compared to global players. It is estimated that Pakistan has three times theanimals that Germany has, but yields are one-fifth of Germanys and one-third of NewZealands. For the US, the figure is one-seventh, representing a significant loss inpotential economic and social value.

The main cause of low yield is imbalanced feeding because of shortage of fodder andwater two to three times a year. In addition to shortages, feeding of animals is practisedaccording to the farmers experience and tradition, without any training or knowledge of


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ration formulation based on production levels. One last factor on this count is theprimitive milking technique still in vogue in most parts of the country.

The initiatives now being planned at the federal and Sindh levels, if executed properlyand professionally, will not only increase the national milk production, but will also take

a major stride towards inclusive growth and sustainable development because of themostly rural setting in which the sector operates. As many as 30 million people areassociated with the sector directly or indirectly nationwide.

The provincial government, according to a recent announcement, is setting up the SindhDairy and Meat Development Company (SDMDC) with an initial fund of Rs930 millionfrom the Annual Development Programme. According to the plan, the provincialgovernment would release Rs1 billion for each of the next three years to help thecompany stabilise its operations. From thereon, it would become a self-financing entity,which would generate business to run its operations.

While such steps tend to take a direct approach to the issues involved, they will have anautomatic impact on those living on the sectoral periphery which will make the intendedwhite revolution even more broad-spectrum. For instance, fodder supply projects arelikely to make the most of the situation. Likewise, in low-cost dairying countries, majoritems of farm equipment tend to be owned and operated by a rural contractor rather thaneach farmer owning expensive equipment which may be used only seasonally. DairyPakistans plan to introduce low-cost practices into the dairy sector is likely to supportthe introduction of rural contractors.

Informal economy and its impact

By Rauf NizamaniMonday, 07 Sep, 2009 | 01:26 AM PST |

THE size of the informal economy is believed to have grown to more than half of the$163 billion formal economy. Official estimates are quite conservative as a formerchairman of the Federal Bureau of Revenue (FBR) recently said: I believe the informaleconomy is 30-40 per cent of the total economy and this is quite disturbing. A substantialpart of the informal sector needs to be documented so that resources can be mobilised for

welfare purposes.

One report says that the informal economy has reached such proportions that it wasupsetting public welfare plans. It puts its size at $83 billion which is more than half of thetotal GDP. According to an assessment, informal economy has expanded at the rate ofnine per cent a year from 1977 to 2000.

An independent study in 2005 estimated the underground economy in the range of 54.6 to


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62.8 per cent of GDP. The economy is largely undocumented providing space to informalsector to grow and thrive. Similarly, the under-invoicing has gone on for years on a hugescale.

Various governments have tried time and again to document the economy but did not

succeed due to the strong resistance to it. Only recently, hoarders and speculators ofstaple food commodities like rice, wheat and sugar were able to make a killing by theircovert activities with the active connivance of government officials. According to anewspaper report, mill owners and traders made a profit of about Rs86 billion from therecent sugar crisis, probably outside the company balance sheets.

A study conducted by the Lahore University of Management Sciences (LUMS) in 2003showed that out of estimated Rs100 taxes due, the government receives only Rs38 whileRs62 were pocketed by taxpayer, tax collector and tax practitioner. It was also estimatedthat tax evasion in 2005 was from 5.7 to 6.5 per cent .of GDP.

The informal economy is not just the unregistered street vendors and tiny businesses thatform the backbone of market places. It includes many established companies operating indiverse fields such as retail, construction, consumer electronics, software,pharmaceuticals and even steel production. As much as 70 per cent of the non-agricultural workforce is employed in informal businesses.

The black economy, of course, is a global phenomenon. The weekly Economist estimatedthat in 1998 the worlds black economy accounted for a missing $9 trillion worth ofoutput, almost equivalent to that of the US. Later, a study by Friedrich Schneider, anAustrian economist, attempted to measure the size of black economy in 76 developed andemerging economies which revealed that underground activity is equivalent to 15 percent of the officially reported GDP, on average, in rich economies and about one third ofGDP in emerging economies.

While most of the underground economy elsewhere in the world revolves around thecriminal or illegal activities, the major contributors to the black economy in India arelegal businesses and government. According to the Indian Council for Research onInternational Economic Relations legal businesses controlled by the government,government expenditure and taxes have always been a major source of black moneycreation.

Similarly, Americas fast growing black economy is believed to worth $970 billion ornearly nine per cent of the real economy. It could soon pass $1 trillion.

The cost imposed by the informal economy is not limited to loss of tax revenue. Moredamaging is its pernicious effect on economic growth and productivity. The unearnedcost advantage the informal businesses enjoy by ignoring taxes and regulatory obligationswhich allow them to undercut prices of more productive competitors and stay in business,despite very low productivity. Informal software companies in India appropriateinnovations and copyrights without paying for them, reducing the industrys productivity


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and profitability up to 90 per cent. Informal apparel makers in India gain a 25 per centcost advantage over their law-abiding competitors by not paying taxes.

Most policy makers implicitly assume that informal economy does no harm. But researchby Mckinsey Global Institute found that informal economies are not only growing larger

but are also undermining enterprise level productivity and hindering formal economicdevelopment. Thus the rise in the underground economy creates problems for policymakers to formulate economic policies, especially in the monetary and fiscal sphere.

World economies

Bangladesh

Bangladeshs economy will grow six per cent in 2009-10. Even the economy mayoutpace the target as signs of recovery of economy in the US have started to resurfaceand a number of giant financial institutions opted to pay back the money they received asbailout packages. The US. is the biggest market for Bangladeshs multi-billion dollartextile exports, a mainstay of the impoverished south Asian countrys economy.

The US buys $3 billion worth of ready-made garments and frozen fish from Bangladeshannually, and hold potentials for more exports.

Bangladeshs exports totaled more than $14 billion and remittances from expatriateworkers reached over $9.67 billion in the fiscal year to June 2009.

The economy grew 5.9 per cent in the year. But the global financial crisis slowed downexports and remittances in recent months, raising concerns Bangladesh may not achieve a5.5-6 per cent GDP it hoped for the current year. The government, however, hoped thatGDP may exceed the conservative growth projection and officials are focusing oninfrastructure development through public-private partnership.

Unlike most of other economies in the region and elsewhere, output growth inBangladesh has so far been mildly impacted by the ongoing global economic downturnwith estimated 5.9 per cent real GDP growth last fiscal year following 6.2 per centgrowth in 2007-08. Bangladeshs half yearly monetary policy, spanning from July to

December period of 2009, has been designed to accommodate six per cent real GDPgrowth in the current fiscal year ending in June 2010. To help spur investment andsustain economic growth in context global economic downturn, the Bangladesh Bank willtake tougher stance against the commercial banks to compel them ease credit conditionsat least for next six months.

The July-December monetary policy announced recently and the credit policy forfarmers, the mainstream of Bangladesh economy, were proactive and investment


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The economy could feel the impact of global financial crisis through four differentroutes- a slowing down in inflow remittances, a recessionary tourism sector, decline inaid, and a demand-deficient manufacturing sector. While a slowing of the first threecomponents will affect poverty reduction and development initiatives, the decline inglobal demand for Nepali-manufactured products will put direct downward pressure on

growth rate. The rate is expected to hover around 5% during 2009.

The financial crisis in the West is gradually engulfing the economies of both developedand developing countries, causing the global output forecast to shrink by 0.75 percentagepoints to hit 2.2 per cent in 2009. The crisis will not directly affect the Nepali financialsystem, nor put strains on monetary policy, as Nepal is largely insulated from the toxicassets of big investment like in the West. However, it will indirectly affect economicgrowth, revenue collection, and development initiatives carried out by Non-GovernmentOrganizations (NGOs). Potential monetary imbalance may arise from changes in Indianmonetary policies and the exchange rate.

The economy could feel the impact of global financial crisis through four differentroutes- a slowing down in inflow remittances, a recessionary tourism sector, decline inaid, and a demand-deficient manufacturing sector. While a slowing of the first threecomponents will affect poverty reduction and development initiatives, the decline inglobal demand for Nepali-manufactured products will put direct downward pressure ongrowth rate. The rate is expected to hover around five per cent during 2009.

A global economic meltdown will decrease demand for products made in India, where amajority of low-skilled Nepali laborers work. Meanwhile, a slowing down of theconstruction and service sectors in the Middle East, the other major source ofremittances, and in countries such as South Korea, Malaysia, and Japan, will result inlowering demand for Nepali labor abroad. Put simply, fewer workers leaving the countryin days ahead will decrease remittances inflow in a number of ways. This could affect therate of progress made in poverty alleviation and potentially lower domestic demand, ashouseholds will be more hesitant to spend money due to declining income.

Nepal exports its large number of labour mainly to Gulf countries including the UnitedArab Emirates, Qatar and Malaysia. Malaysia alone has got more than 300,000 Nepalesemigrant workers and is under risk. Malaysia had already sent back 84 Nepalese labourerssome two weeks ago. Similarly, the government of United Arab Emirates (UAE) hasdecided to cut the number of foreign workers by 45 per cent. In this instance, Nepaleseworkers were expected to be worst-hit by the decision, as hundreds of thousands of themhad been working in the major cities of UAE.

Large number of unskilled manpower will tempt to commit anti-social activities insociety as they will not have any work to engage. Only 2% of Nepalese labourersworking abroad are skilled whereas 71% unskilled. Besides unemployment, foreignemployment was holding Nepals economy through foreign remittance, which is likely tofall soon by 2010. Nepals economy is highly dependent on foreign remittance. If foreignremittance falls down, the Nepals economy will be badly affected.


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Maldives

The state of the Maldivian economy has declined sharply since November 2008. TheMaldives Monetary Authority reported in May 2009 that the real economy has

decelerated in 2009. The MMAs April 2009 Quarterly Economic Review projects thatGDP growth rate will be -0.3 in 2009, as compared to 5.8 per cent in 2008. It projects thatreal output will contract by 1.3 per cent in 2009. Tourism is forecast to decline by 11 percent in 2009 while the construction sector is projected to decline by 24 per cent.

The consumer price inflation in March 2009 was 11.2, much higher than the 8.2 per centinflation in March 2008. However, the government had brought national inflation downfrom 12.06 to 10.38 per cent since last year. Inflation is mostly contributed by the priceof food, transport, health and housing.

During the first three months of 2009, fish catch increased by eight per cent. However,

fish purchasers such as the government company Maldives Industrial Fisheries Companywere ill prepared to purchase this catch. Fish purchases by commercial buyers plunged by45 per cent in Jan-March 2009. This means that, where in 2008, fishermen were able tosell 59 per cent of their catch, in 2009 only 30 per cent of their catch was bought. Thiswould thereby halve their income for the period, as compared to 2008.

The volume of fish exports also sharply declined by 54 per cent compared to thecorresponding period of last year. Similarly, earnings on fish exports also took a nosedive, falling by 54 per cent from $40.6 million in the first three months of 2008 to $18.6million in the same period of 2009. This is a $22 million reduction in export earnings tothe country in just the first three months of 2009.

The overall deficit of the 2009 government budget (minus the recent supplementarybudget) is projected to be Rf4.8 billion (28 per cent of GDP). Total revenue is projectedto decline by nine per cent, while total expenditure and net lending is projected toincrease by Rf1.9 billion (71 per cent of GDP). The decline in revenue comes mainlyfrom the decline in import duty and tourism bed tax. This is in contrast to an increase inrevenue in 2008 by five per cent, with a budget deficit of Rf2.2 billion (14 per cent ofGDP). Total expenditure and net lending in 2008 was equivalent to 63 percent of GDP.The government expects to finance the 2009 budget deficit from external (70 per cent)and domestic sources.

The government has also passed a supplementary budget of Rf.12.5 billion. Although thiswas eight per cent less than what the government initially proposed at the beginning ofthe year, the supplementary budget itself has a Rf.2.23 billion deficit. This takescumulative budget deficit for 2009 up to Rf.7.03 billion. This brings the 2009 budgetarydeficit to an alarming 41 per cent of GDP. This is a dangerously high level. It is a 34 percent jump from 2008 budget deficit of 14 per cent of GDP.

Maldives copes with severe regional disparities across its 200 inhabited islands or atolls.


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The government is actively pursuing reforms to address these imbalances by enhancingfiscal resources and evolving its role as an enabler of development. By selling asignificant stake in the Maldives Airport Company, the government is undertaking thefirst such initiative to infuse private capital to improve governance and profitability of itsstate-owned enterprises. This will help the government free up scarce resources to pursue

poverty-alleviation policies and measures.

The government is committed to strengthen the national economic fundamentals, increaseproductivity and address the bottlenecks to economic activities. The economy of theMaldives was facing a critical economic situation, the dramatic fall in fiscal revenuesince the latter part of 2008 combined with large fiscal and external imbalances had led tobudget deficits of worrying proportions. The Maldives could face a severe fiscal andbalance of payments crisis in the months to come, unless a substantial policy adjustmentis put in place. The government was therefore, committed to implementing a policyprogramme to stabilize the economy and put it back on a path of sustainable andequitable growth.

The key elements of the policy program include: bringing public finances on asustainable path, including through a continuous reduction in public debt from 2010;mustering adequate multilateral and bilateral assistance; and, strengthening the liquidityand capital position of the banking system. The governments aim at bringing its financesback to a sustainable medium-term trajectory. Without corrective action, the fiscal deficitwould soar to about 33 percent of GDP. The government has begun the implementationof the reform measures following the austerity measures announced by the cabinet on12th August. These reforms aim to reduce the fiscal deficit to 28 of GDP in 2009, and to15 per cent of GDP in 2010.

Monetary policy and the central banks autonomy

By Dr Hamza Ali MalikMonday, 07 Sep, 2009 | 01:20 AM PST |

Over the last few years, a lot has been said about the monetary policy, some writers havecriticised it while others recognised its prudence. Overall, the discussions have been veryhealthy and bode well for a better understanding of the role of the monetary policy in the

economy.

The discourse also reflects the efforts of the State Bank of Pakistan to be moretransparent and accountable. This article explains the monetary policy framework toremove ambiguities and misconceptions in recent comments

First and foremost it must be understand that central banks world-wide are essentiallycreatures of central governments and Pakistan is no exception. A central bank can only be


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autonomous within a government and that monetary and fiscal issues cannot be entirelydivorced from each other.

Effective coordination between the central bank (SBP) and fiscal authority (ministry offinance (MoF)) is the key in understanding a central banks performance and its role in

the economy. In this context, the SBP is an autonomous organisation and monetarypolicy is formulated independently under the umbrella of the State Bank of Pakistan Act.

The ultimate target of monetary policy is to achieve price stability without prejudice toeconomic growth. The targets of average CPI inflation and real GDP growth are set bythe government and announced prior to the beginning of a fiscal year. These targetsprovide a basis for setting an indicative target for broad money (M2) expansion, whichserves as an intermediate target.

Broad money is chosen as an intermediate target because the availability of money in thesystem helps to determine aggregate demand in the economy. Whether broad money

should be an intermediate target or not is a useful debate. However, it is beyond the scopeof this article. A practical reason for its use as an intermediate target is that thisinformation is compiled by the SBP on a weekly basis, whereas the information on othermacroeconomic variables and sectors becomes available with a considerable lag.

Available information on the components of broad money the net foreign assets (NFA)and the net domestic assets (NDA) of the banking system and their projections for thenext fiscal year are used in understanding and analysing interactions of the monetarysector with the real, fiscal and external sectors of the economy. This helps in assessingthe demand pressures in the economy relative to its productive capacity, which mainlydepends on structural factors such as availability of energy, productivity etc.

NFA is essentially determined by developments in the balance of payments and reserveaccumulation/depletion and NDA is composed of the credit extended by the bankingsystem to the government (for budgetary support as well as commodity operations) andthe non-government sector (private sector and public sector enterprises) and the (net)other items.

Looking at their trends along with their projections, updated regularly, gives SBP a fairlygood idea as to how the external, fiscal and real sector developments will influence thebroad money expansion and thus the inflation and growth targets of the government.Thus, the projections of equilibrium money growth have to be consistent with not onlythe projections of the external account and announced federal budget, but also theprojected inflation path and the likely real GDP outcome. Herein lie the importance ofcoordination between SBP and the MoF.

Some observers see government borrowing from SBP as a sign of SBPs weakness andcompromise of its autonomy. Government borrows from the SBP for cash flow purposes;the timing of government expenditure and revenues or financing from other sources isgenerally not in sync with each other. There is nothing wrong with this practice. The


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problem arises when the government continues to borrow unabatedly, as it did in fiscalyear 2008 and first quarter of fiscal year 2009.

Asserting its independence and using its legal powers, SBP has raised this issue ofexcessive borrowing in writing to the MoF, in meetings at the highest level, and in its

Monetary Policy Statements (MPS).

Excessive government borrowing creates numerous problems for the effectiveness ofmonetary policy. Apart from causing inflation, it complicates liquidity management,dilutes the monetary policy stance, puts pressure on foreign exchange reserves, and hurtsthe private sector credit growth.

It also creates a sense of complacency on the part of the fiscal authority that rather thanadopting prudent fiscal measures, it tends to rely on the easily available funds.

The natural question that arises here is why then SBP does not enforce its

recommendations by bouncing governments cheques. The reason is that it is not apractical solution and would only result in creating systemic risk for the financial sectorand loss of public confidence over its institutions. Thus the conclusion that government isallowed to borrow at will and that the SBP is not independent is misleading.

The solution lies in reforming the fiscal policy and its debt operations and enhancingcooperation and interaction with the SBP to ensure consistency between monetary andfiscal policies. Failure to do so will only result in less than optimal policy outcomes. Onits part, SBP will continue to do its assessment of developments in the economy, inrelation to its targets, communicate the necessary actions required from other policyinstitutions, and take its monetary policy decisions independently.

Nonetheless, the SBP and MoF officials do interact with each other to resolve issues ofmutual interest. The result of these efforts is that a comprehensive macroeconomicstabilisation programme was formulated last year, which is being implemented with theIMF support.

Almost all the targets of the programme have been successfully met so far, despite fastchanging domestic and global conditions. The government borrowing from the SBP iswithin the quarterly limits, foreign exchange reserve position has improved, and inflationhas fallen considerably. Moreover, numerous structural measures have either alreadybeen taken or are in the pipeline. All of this would not have been possible without thecoordinated efforts of MoF and SBP.

Coming back to the description of the monetary policy framework, change in themonetary policy stance is signaled through adjustments in the policy discount rate afterassessing the actual trends of NFA and NDA, their underlying interactions with the restof the economy, and their projections and likely impact on ultimate targets. Not only thecurrent behaviour of economic variables is affected by monetary policy actions (currentas well as expected) but also the expected path is influenced via many channels;


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monetary policy formulation is essentially a forward looking phenomenon. Thus,forecasting the behaviour of key macroeconomic variables, in particular inflation, is anintegral part of SBPs monetary policy framework.

The change in the policy discount rate is complemented by appropriate liquidity

management mainly through Open Market Operations (OMOs) and if required changes inthe Cash Reserve Requirement (CRR) and Statutory Liquid Reserve requirement (SLR)are also made. The effects of these measures are transmitted to the economy mainlythrough changes in the numerous market interest rates, starting with the overnight moneymarket repo rate, which serves as the operational target of monetary policy.

Effective control of this rate through calibrated liquidity management ensures smoothfunctioning of the money market, helps in influencing other market interest rates in adesired manner, and thus increases the effectiveness of monetary policy in fostering pricestability. The policy discount rate (SBPs overnight reverse repo rate) serves as theeffective ceiling, while the repo rate on the new overnight facility (SBPs repo rate)

provides a binding floor to its downward movement.

Prior to the adoption of this new explicit operational target, SBP had already transferredthe decision of setting the T-bill cut-off rate to the MoF to separate liquidity managementfrom debt management. The former is the responsibility of the SBP while the latterpertains to fiscal operations and is the responsibility of the MoF. Despite SBPs clearcommunication of the rationale of this decision, some commentators have asserted thatSBP compromised its authority over monetary policy by handing over this power.

In fact, SBP deliberately transferred this responsibility to clearly communicate to themarket that cut-off decisions in T-bill auctions should and are taken purely on debtmanagement considerations and do not reflect monetary policy stance. This differencecan only be made clear by separating debt and monetary management and was notpossible with SBP deciding both the policy discount rate and auction cutoff rates.

The writer is director, monetary policy department, State Bank of Pakistan

Piracy and open source software

By Munawar IqbalMonday, 07 Sep, 2009 | 01:20 AM PST |

PAKISTAN stands at the crossroads with regards to advancement (or backwardness) inthe field of information technology (IT). Recently, one observed raids on computerindustry vendors by the FIA and arrests on charges of violation of copy rights. The actiontaken at the behest of international software companies was a blow for the struggling ITindustry.


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Of course, nobody favours violation of copy rights. But what is the viable alternative forthe IT industry as well as end users, especially, third world countries, where industriesare unable to absorb expensive software?

Today when multinational companies dominate computing as well as the internet,seemingly a motley collection of free software tools and operating systems - collectivelydubbed, open source software offers an alternative solution. Open sourcetechnologies are now playing an important role in many developing countries, wheregovernments and corporate entities are moving increasingly towards open standards in aneffort to reduce costs or to increase revenues.

A majority of the end users--students or low income groups--find it too difficult to buyexpensive software after managing a cheaper hardware. Open source technologies are notjust another option for reducing costs, but they also represent the only way to eliminateillegal copying of copyrighted software.

Piracy has been a huge obstacle in the way of foreign investment in IT sector. Thegovernment has taken some initiatives to raise awareness for elimination of piracy andprotection of intellectual property. However, conducting raids at various locations hasproved counter-productive. The government and private sector need to enhance level ofcooperation on this front so that a shared vision may be achieved for educating peopleabout the benefits of using open source software.

Industry experts believe that Pakistan can attract a lot of foreign investment, if piracy isproperly tackled. Open source has a great potential in terms of reducing costs for ourprivate sector and to eliminate piracy. The stakeholders need to realise the importance ofopen source and should adopt free alternatives of copyrighted software in the form ofOpen Source System (OSS) to counter piracy.

Many initiatives were launched to build an operating system that could be deployed onmultiple hardware platforms.

The most prominent example is Unix, which was a product of AT&T Laboratories andpublished back in 1969. Sharing the source code among developers and researchers was acommon phenomenon, which brought about major developments in the field of internetand related technologies.

Since then, many open source projects have emerged. However, Linux is gainingpopularity because it is completely free of charge. No user or server licenses are required.Another advantage of using Open Source System is that it is developed by hundreds andthousands of people worldwide. Because of this, the system has evolved into a stableentity.

Open source came as a fresh breeze for all system administrators as it is much moresecure and consumes less system resources to run the services on a highly complex


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network. However, the question still arises that with all the benefits of the system, is itsuccessful in attracting wider audiences towards the adoption of free software, especiallyin Pakistan? Except large corporations and multinational firms, every single computerruns pirated software. Hence, piracy is recognised as one of the biggest problemsconfronting the IT sector in the country.

It is time that the IT professionals realise that we have the option of using softwarelegally in the form of Free and Open Source Software (FOSS).

The FOSS is liberally licenced to grant the rights to redistribute and study, change andimprove its design through the availability of its source code, something that proprietysoftware developers have dreamed about.

It is encouraging that the private sector spearheaded by Pakistan Computer Association(PCA) and Pakistan Software Exports Board (PSEB) have taken some valuable initiativesfor free training of vendors and other stakeholders. These trainings are aimed at raising

the capacities of individuals, groups, institutions, organisations, societies, and thegovernment by using Open Source for their sustained economic and social development.

The number of OSS users still remains under 1000.It is time to realise that the countryhas long suffered due to software piracy. Analysts and experts of the industry are busypromoting OSS as there is much scope for a rapid development in the IT sector. The freesoftware technology would ease the pressure on the end users, especially those who findexpensive software beyond their purchasing power.

The writer is central president of the Pakistan Computer Association (PCA).

[email protected]

Exports crippled by recession

By Anand KumarMonday, 07 Sep, 2009 | 01:20 AM PST |

EXPORTS account for less than a fifth of Indias gross domestic product (GDP), yet a

slowdown in international trade has hurt several key sectors of the economy. The globalrecession has had a major impact on Indias foreign trade, both in terms of a sharp fall involumes and in terms of job losses.

Nearly half a million people working in nearly a dozen export-oriented sectors (fromgems and jewellery, leather and BPOs to textiles and apparels) lost their jobs betweenOctober and December last year because of the slowdown, according to the government.


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Employment data in India is usually sketchy and unreliable and the country does not havecredible data relating to jobs; unemployment rates are not monitored, unlike inflation,GDP, or foreign trade. Yet, the labour ministry does come out with some employment-related data.

According to the ministrys figures for April-June, 154,000 workers lost their jobs in thetextile sector and 34,000 in the information technology and BPO industries, both overlydependant on exports.

Job losses because of a slowdown in foreign trade are evident across the country,especially in export-driven cities such as Tirupur and Coimbatore in the southern state ofTamilnadu, Surat and Rajkot in Gujarat and Ludhiana in Punjab.

Tirupur accounts for 80 per cent of Indias cotton knitwear exports. A majority of the6,000-odd export units in the city are small and medium-sized ones. Exports fromTirupur shot up from less than Rs100 million about 25 years ago to Rs10 billion last year.

But the global economic crisis has hit Tirupur badly.

According to sources in the export trade, nearly 50,000 workers have been sacked inrecent months, as orders for knitwear have dried up. Thousands of other workers havehad to take up to 50 per cent cut in wages.

In Surat, the countrys diamond capital, thousands of migrant workers from states such asBihar and Uttar Pradesh have been forced to return home because of a sharp fall in gemsand jewellery export.

Similarly, about a fifth of workers at the Surat Apparel Park special economic zone havelost their jobs as garment units are facing massive losses because of a fall in export ordersfrom the US, Europe and Japan.

According to Nilesh Mehra, secretary, Surat Apparel Park Association, most of the unitsin the SEZ are planning to shut down their facilities because of lack of export orders. Theexporters are demanding denotification of the SEZ and its conversion into a regular park,so that they can then sell their products in the domestic market.

* * * * *

INDIAS ambitious drive to boost exports in recent years has come a cropper. Accordingto government figures released last week, exports in July fell sharply by 28.4 per cent to$13.62 billion, as compared to the corresponding month in 2008. Imports fell by 37.1 percent to $19.62 billion.

In June, exports had fallen by 27.7 per cent and imports by 29.3 per cent. Exports duringthe first four months of the current fiscal (April-July) dropped by 34.1 per cent to $49.65billion. India had recorded a surge in exports in recent years; during the first half of 2008-09, exports had shot up by 30 per cent.


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But the global crisis, triggered off by the collapse of Lehman Bros in September last year,had a devastating impact on exports from India. Exports have shrunk every month sinceOctober 2008. During April-July 2008, Indias exports added up to $75.28 billion, butthis year they have fallen to $49.65 billion.

During financial year 2008-09, Indias exports touched a record $168.7 billion. But this isunlikely to be attained in the current fiscal. The governments target of $200 billion inexports has had to be shelved by a few years. It has not disclosed its projections for thecurrent fiscal.

Commerce and Industry Minister Anand Sharma says India hopes to achieve the $200billion export target by March 2011.

Fortunately for the government, declining imports have resulted in a dramatic contractionof the trade deficit. For April-July 2009, the deficit fell to $28.91 billion, from $41.09

billion a year earlier.

Imports have fallen thanks to the sharp drop in global oil prices. Oil imports in the April-July four-month period fell by almost 50 per cent as compared to the correspondingperiod in the previous year from $42.21 billion to $21.96 billion. In July, the oil importbill was down to $5.63 billion, from $12.67 billion a year earlier.

Non-oil imports also declined by nearly 25 per cent in July to $13.98 billion, reflectingthe slowdown in the Indian economy.

International rating agency Moodys expects a further fall in exports from India thanks tothe deficit in rains. The south-west monsoon has been erratic this year, resulting in anearly 25 per cent shortfall across the country. The government has already declared 278of the 625 districts as drought-hit.

Indias foreign trade is yet to bottom as the decline in exports and imports deepenedagain in July, warned a research report from Moodys. The biggest current threat toIndias trade outlook is the drought.

* * * * *

CONCERNED about the abrupt U-turn in Indias foreign trade prospects, the governmentrecently came out with a set of incentives to exporters. Unveiling the countrys foreigntrade policy (FTP) for 2009-14, minister Sharma said the immediate aim was to arrestand reverse the declining trend of exports and to provide additional support to sectorsbadly hit by the global crisis.

We have taken a conscious view to expand and diversify our export markets, especiallyin the emerging markets of Africa, Latin America, Oceania and the CIS countries, pointsout Sharma.


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Indian exports are overly dependant on the US and Europe, which together account forover a third of total exports. The US is the biggest export destination for India, with anearly 13 per cent share.

According to a recent study by the Reserve Bank of India, the countrys central bank,Africa accounts for just seven per cent of Indias exports and Latin America a mere 3.5per cent. With the US and Europe crippled by the recession, it was inevitable that Indianexports would also be hurt.

The new FTP envisages incentives to exporters targeting countries in Latin America,Africa and Asia-Oceania. The incentives now add up to three per cent of the total valueof exports.

The new policy has also hiked market development assistance and market accessinitiative incentives to exporters looking at new geographies. These new measures

would allow exporters to provide exposure to Indian goods in new markets, explainsAjay Sahai, director-general, Federation of Indian Export Organisations. Our exportshave been impacted due to demand contraction in the US and Europe.

The long-term policy objective of the FTP is to double Indias share in global trade by2020, from 1.64 per cent at present. Sharma points out that the global slowdown hasresulted in some countries raising protectionist barriers, hurting Indias exports. He isalso reluctant to discuss export targets for the short term.

Even though economists are talking of emergence of green shoots, I remain hesitant tohazard a guess on the nature and extent of this recovery, he says. We would like toachieve an annual export growth of 15 per cent over 2010-11 with an annual export targetof $200 billion by March 2011.

He is, however, hopeful that exports could expand by 25 per cent annually, especiallyafter 2011. The Planning Commission is also confident of a revival in exports after 2010-11, when the industrialised countries are expected to see significant growth.

Expanding government

By Shahid Javed BurkiMonday, 07 Sep, 2009 | 01:19 AM PST |

IN many ways, some of them much too subtle to be grasped easily, the role of thegovernment is likely to change quite significantly in the years perhaps even decades to come.


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It is known from experience that ideas about economic governance readily flow acrossnational borders. This happened in the 1980s when what came to be called Reaganism orThatcherism, depending on which side of the Atlantic you happened to be, relegated thestate to the sidelines.

This economic philosophy had tremendous consequences for policymaking in countriessuch as Pakistan that had to take advice from Washington and London in order to accessthe foreign capital that was desperately needed. Under this approach, Pakistan during theperiod of President Pervez Musharraf, adopted an approach that gave a great deal ofspace to the private sector and pushed the state to the background. But foreign influencewas not the only reason why that happened. Economic policymaking at that time was ledby an individual whose own background was in commercial banking with very littleknowledge of economics and even less interest in strategic thinking.

Under his stewardship, the private sector ascended the commanding heights of theeconomy while the institutions of the state were allowed to weaken. Two sets of

institutions were affected adversely in particular. The Planning Commission was virtuallytaken out of the business of strategic work and regulatory institutions that could overseethe working of the private sector were not given the autonomy they needed to workeffectively.

The thinking on the economic role of the state has changed quite dramatically over thelast several months. This creates an opportunity for Pakistan to redefine the states rolesince it will not be forced to go in a different direction by institutions such as the IMF onwhich the country is once again dependent for access to external capital.

There are at least four reasons why the thinking has changed. The first, of course, is thedeep economic recession across the globe. This started in the United States where theprivate sector, left more or less to its own devices, showed that the assumption that itcould self-regulate was totally misplaced.

Alan Greenspans belief that the state should keep itself at a long distance turned out tobe totally misplaced. With the private financial sector having gotten itself into a series oftight situations, it had to rely on the state to get it out and to have it functioning again.This was done with a great deal of public money doled out to the banks and to theautomobile sector. Without formally nationalising parts of the private sector, the USgovernment now owns large chunks of the assets in a number of vital sectors.The secondreason for the disillusionment with this philosophy was the growth in income disparitiesin a number of countries that had followed it aggressively. In the United States the gapbetween the incomes of the well placed executives and owners of assets and their workersincreased to the point that it became a political issue. Pres

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