Tuesday, May 13, 2014

Declining Investment Hurting Pakistan Economic Growth

Pakistan needs investment of 20% of GDP to achieve 5% economic growth, a capital-to-output ratio (COR) of four, according to Mohsin Mushtaq Chandna, economic minister at the Pakistan Embassy in Washington, DC.

Major Issues:

In a wide-ranging presentation to the Pakistan Club at the University of Chicago Booth School of Business, Mr. Chandna, an alumnus of the university, listed the following major issues facing Pakistani economy:

1. Pressure on capital account

2. Declining FDI

3. Declining tax to GDP ratio

4. Over reliance on monetary policy

5. Excessive domestic borrowing

6. Extremely volatile internal and external geo-political environment

7. Energy shortages

8. Increase in poverty and unemployment rates

Heavy Borrowing: 

To make up for the shortfall in investments and tax revenues, the Pakistani government is forced to borrow heavily from commercial banks and international financial institutions such as the World Bank, the Asian Development Bank and the IMF, in addition to recent floating of $2 billion worth of bonds on international debt market. These debts add to the debt-to-GDP ratio and put further pressure on the cost of debt service.

Many of the problems highlighted by Mr. Chandna did not exist during President Musharraf's rule when foreign and domestic investments climbed to new highs and debt-to-gdp rartio declined.

Pakistan Domestic Savings Rate Source: World Bank


Domestic savings rate was about 18% and foreign direct investment reached $5.2 billion, or 3.5% of Pakistan's GDP. These investments fueled economic growth from 2000-2008.  In my view, the activist judges led by former chief justice Iftikhar Mohammad Chaudhry have contributed significantly to the sharp decline in FDI and domestic investments in the country.

Gross Fixed Capital Formation in Pakistan. Source: ADB


Foreign Direct Investment (FDI):

World Bank's data shows that foreign direct investment (FDI) in Pakistan reached a peak of over $5 billion (3.6% of GDP) in 2007 and then fell sharply in the wake of Justice Chaudhry's reversal of the privatization of Pakistan Steel Mills. FDI has essentially dried up and the Pakistan Steel Mills Corporation has accumulated losses over Rs. 100 billion in spite of multiple bailouts at taxpayers expense. It is currently operating at just 3% of capacity and its monthly payroll adds up to Rs. 500 million, according to Dawn.

FDI as % of GDP in Pakistan Source: World Bank

Canceled Privatization Deals:

Huge subsidies are being given at taxpayers' expense to Pakistan Steel Mills and several other state-owned enterprises which take resources away from more pressing needs for spending on education, health care and infrastructure. In fact, Pakistan Education Task Force Report 2011 reported that "under 1.5% of GDP [is] going to public schools that are on the front line of Pakistan's education emergency, or less than the subsidy for PIA, Pakistan Steel, and Pepco."

Speaking at a recent international judicial conference in Islamabad, Dr. Ishrat Hussain, current dean of the Institute of Business Administration and former governor of The State Bank of Pakistan, said there has not been a single privatization deal in Pakistan since the Supreme Court's 2006 decision voiding the steel mill transaction.

Dr Hussain said that despite fulfilling the legal requirements, the fear that the country’s courts may take suo motu notice of the transaction, and subsequently issue a stay order, deters businesses from investing in Pakistan, according to a report in The Express Tribune. “A large number of frivolous petitions are filed every year that have dire economic consequences. While the cost of such filings is insignificant the economy suffers enormously,” he added.

Crucial Projects Delayed:

Among other projects, Dr. Hussain particularly cited Reko Diq and LNG projects which could not proceed because of judicial activism of Pakistan Supreme Court judges.

The lack of progress on liquefied natural gas (LNG) deal has exacerbated Pakistan's energy crisis. It would have brought in 400 million cubic feet of gas per day to bridge the growing supply-demand gap now crippling Pakistan's economy.

The invalidation of Reko Diq license to  Tethyan, joint venture of Canada's Barrick and Chile's Antofagasta, has turned away Pakistan's single largest foreign investment deal to date. The deposit in Balochistan was expected to produce about 200,000 tons of copper and 250,000 ounces of gold annually. Under the deal Baluchistan province would hold a 25 percent stake in the project, with Tethyan holding the remaining 75 percent.

Militants Released:

In addition to activist judges intervention in economic matters, there have also been many instance in which hundreds of known militants have been released by Pakistani courts. Those released have then committed acts of terror which have also scared away investors, both foreign and local.

Summary:

Mohsin Mushtaq Chandna's presentation of the data and facts is quite comprehensive. A combination of poor governance and activist judges have significantly contributed to the major issues highlighted in the presentation. I hope Prime Minister Nawaz Sharif's government is up to the tough challenges faced by Pakistan.  Failure to confront these challenges would produced yet another lost decade like the decade of 1990s when Pakistan's economic growth was just 3-4%.

You can find a pdf version of Mr. Chandna's presentation on PakAlumni.com website:

http://www.pakalumni.com/forum/topics/assessment-of-the-state-of-pakistan-economy-in-may-2014

Related Links:




26 comments:

M said...

Data till 2012??

Riaz Haq said...

M: "Data till 2012??"

Investments are still extremely low as presented by Mohsin Chandna at U Chicago

http://www.pakalumni.com/forum/topics/assessment-of-the-state-of-pakistan-economy-in-may-2014

Mayraj said...

I was told by an Indian friend that Reqo Diq deal was cheating Pakistan.
I will share with you what my friend told me:
"You might find this brief discussion that I found online interesting: http://baask.com/ diwwan/index.php?topic=3103.0

It is not as if Copper and Gold are the only minerals available there - the list of associated minerals many of which have advanced uses is long."

"The Pegmatite rock that covers much of Balochistan (and other parts of Pakistan as well) has several different gems, in it which have been mined for a long time. These are easy to visualize as they differ in color from the rest of the rock, and can be removed with a small geologist's hammer. Pegmatite, though, also contains uranium which can be separated using a Geiger Counter, and rare metals and rare earths. Some of these like Lithium can be separated relatively easily. Others like Samarium and Dysprosium are vastly more difficult to separate because you need X-Ray equipment to help identify them. Also, their presence is very small - that is why they are classed as "rare." The presence of many of these metals was not known to science until recently and until the Japanese began to use them in electronics, hardly any effort was made to mine them. Now, of course, they are all the rage because they have been found especially useful in the latest "green" generation equipment as well as in defense and other applications. Indeed, until China banned their sale to Japan, no one really even bothered about them - it suited the Japanese to remain quiet as they were getting very good prices for these resources from an unaware Chinese, and the same thing is now happening in other parts of the world, in Pakistan in this case.

Much of the testing that is involved here is difficult and requires very advanced technical equipment, and even methods like gas spectrometry etc may not help identify materials that exist in extremely small percentages in soil or rock. In India for example, some of these metal reserves were not known until the USGS first and then the Russians helped analyze soil and rocks across the country. If nothing else, the Indians formed a government owned company called Indian Rare earths Limited which comes under the Atomic Energy Commission and is directly under the Prime Minister of India. They do seem to have handled the conservation and exploitation of these reserves far better than is being done in Pakistan.

In any case, my intention is not to point a finger at anyone, but to point out the fact that due to either gross negligence or perhaps to corruption, a massive national resource is about to be lost. I have dealt with some Canadian mining companies in the past and am aware of the very highly sophisticated survey and processing equipment that they possess. They surely did not invest $ 400 million in surveying the region just for copper and some associated gold, I can assure you. Beyond that, of course, what happens is going to be very lucrative for some people, while, you can take it from me, the Pakistani people will end up shortcharged."

" I have no idea whether bribes were paid or whether it was utter incompetence that governed the whole mess, but, if this is not carefully handled, someone in Santiago and in Toronto is going to laugh all the way to the bank. The people of Pakistan would have been swindled far worse than might have happened even during the colonial era.

I cannot believe that this kind of daylight robbery is taking place and that everyone responsible seems to be getting away with it, but then, the rare earths and rare metals business is not something that a vast majority of people are familiar with. "


"I would not talk about this on an open forum - even with the best of intentions, an Indian's views on a controversy within Pakistan would be construed by some as having some kind of ulterior motive.

Adeel said...

According to WB in the same period Pakistan GDP grew from 170B $ to 232B $ during last 6 years. I don't know how.

Riaz Haq said...

Adeel: "According to WB in the same period Pakistan GDP grew from 170B $ to 232B $ during last 6 years. I don't know how."

$232 billion is nominal GDP which includes growth due to double digit inflation over the period

Riaz Haq said...

Mayraj: "I was told by an Indian friend that Reqo Diq deal was cheating Pakistan."

If Reko Diq so valuable then how come no one offered to pay more than Tethyan?

And I have the same question re a non-performing asset like Pakistan Steel Mills which is heavily bleeding red ink while operating an obsolete Soviet-era plant at 3% capacity. If its privatization had gone through, it would have saved taxpayers over Rs. 100 billion which could have been better spent on education.

The fact is that every time there's a deal some people, mostly opponents of the government, come up with highly exaggerated claims of valuations and cry "corruption" in Pakistan.

The result: No deals get done. No investment comes in. And the paralysis continues.

Bottom line: It hurts average Pakistanis more than anyone else.

It denies jobs to the unemployed who could have put food on the table for their families and provided better opportunities for health care and education for their children.

EconPak said...

Thanks, so ideal COR for us is 4. Did Chandna mention how much it is today? His lecture

http://www.pakalumni.com/forum/topics/assessment-of-the-state-of-pakistan-economy-in-may-2014?xg_source=activity …

Riaz Haq said...

EconPak: "Thanks, so ideal COR for us is 4."

WE know Pakistan's current investment rate (savings+FDI) is about 12% of GDP which is producing about 3% GDP growth.

Riaz Haq said...

Express Tribune: Pak per capita GDP projected at Rs. 160,443 for 2014-15:

The Annual Plan Coordination Committee has recommended setting next year’s economic growth target at 5.1% and of inflation at 8% but cautioned that energy shortages, security situation and additional taxes may pose downside risks to the growth target.
The APCC also recommended setting the investment target at 15.7% of Gross Domestic Product (GDP) against this year’s 14%. The per capita Gross National Product (GNP) is projected at Rs160,443 for the fiscal year 2014-15, commencing from July.
Headed by Minister for Planning, Development and Reforms Ahsan Iqbal, the APCC on Monday cleared the economic framework for the approval of the National Economic Council (NEC). Prime Minister Nawaz Sharif will chair the NEC on May 29 to approve the framework.

“The growth targets are subject to risks like deterioration in energy availability, extreme weather fluctuations, non-implementation of envisaged reforms and fiscal profligacy,” noted the APCC. The APCC working paper, prepared by the Planning Commission, carries some quality advice for the Ministry of Finance to bring real improvement in the economic conditions.
It notes that the outlook for 2014-15 portends a significant recovery in growth momentum and trajectory amid wide ranging challenges including persistent energy shortages, supply-side constraints, inefficiencies of production, further reduction in fiscal deficit by mobilizing additional revenues and demand for structural reforms besides security challenges.
“Without bringing improvement in tax collection, investment and increasing exports, the country’s national development agenda remains incomplete,” said Iqbal after the APCC meeting.
The 5.1% growth rate is projected to be achieved with the aid of healthy growth in industry and services sector but a risk remains that growth in the agriculture sector will remain weak in the next fiscal year as well.
The agriculture sector is projected to grow by 3.3%, industry 6.8% and services 5.2%. The large scale manufacturing is projected to grow to 7% next year.
Regaining macroeconomic stability and adequate investment are critical for improved growth prospects, the APCC working paper observed.
The constraining factors such as lack of structural reforms, high fiscal deficit and accommodative monetary policies are no more desirable as they have serious consequences for inflation, balance of payments and foreign exchange reserves, the paper noted.
The government has also pinned down the reasons for below the expectations growth in the outgoing fiscal year.
The growth rate of 4.4% for the outgoing fiscal year was consistent with assumption of slight improvements in energy supplies, normal weather conditions, fiscal adjustments and better investment prospects. Some of these targets could not be achieved, resulting in the subsequent missing of the annual growth target.
“Fiscal situation for 2013-14 faced certain downside risks like shortfall in FBR tax collection and a sharp rise in federal current expenditures on account of more than budgeted expenditures on power subsidies and persistent increase in interest payments”.
It noted that in the outgoing fiscal year, the financing of the modest current account deficit remained challenging and the trade imbalance remained a cause of concern for a sustainable balance of payments.
For the upcoming fiscal, exports are projected to grow by 5.8% to $27 billion from $25.5 billion of this year. Imports during the next year are projected to grow by 6.2% to $44.2 billion, up from $41.6 billion of this year. The trade deficit is projected at $17.2 billion.
The current account deficit is projected at $2.8 billion or 1.1% of the GDP as against deficit of $2.6 billion or 1% of the GDP of this fiscal. The net capital inflows for the next fiscal year are estimated at $5.6 billion as against $4.9 billion of this year.

http://tribune.com.pk/story/713508/apcc-recommends-5-1-growth-target/

Riaz Haq said...

Here's an excerpt of Bloomberg story about Pakistani Taliban warning foreign investors and MNCs to leave Pakistan:

Pakistan’s military began a full-scale operation in the Taliban stronghold of North Waziristan, prompting insurgents to warn foreign investors, airlines and multinational companies to leave the country.
“We’re in a state of war,” Shahidullah Shahid, a spokesman for the Tehrik-e-Taliban Pakistan, or TTP, said in a statement today. “Foreign investors, airlines, and multinational companies should cut off business with Pakistan immediately and leave the country or else they will be responsible for their damage themselves.”
Related:
Pakistan Army Starts Offensive Against Taliban in Tribal Area
Pakistan Military Says 80 Terrorists Killed in N. Waziristan
The army said yesterday it would target local and foreign terrorists in North Waziristan, a tribal region near the Afghan border the U.S. has called the “epicenter” of terrorism. The operation, long sought by the U.S., comes a week after militants attacked the country’s biggest international airport.
As Islamic militants capture cities in Iraq and the U.S. draws up plans to withdraw from Afghanistan, public opinion in Pakistan is shifting in favor of stronger action against fighters who were previously seen locally as more of a threat to America’s interests. The Taliban wants to impose its version of Islamic Shariah law in Pakistan, which includes a ban on music and stricter rules for women.
Pakistan’s Future
“At stake is the future of Pakistan,” Mahmud Ali Durrani, a former national security chief and ex-ambassador to the U.S., said by phone. “Do we want a Talibanized Pakistan or do we want to live according to the constitution, democracy? If we want to live according to our constitution and democracy then we have to fight for it, because they are the kind of people who don’t believe in these things.”
Prime Minister Nawaz Sharif’s party won an election last year after pledging peace talks with the TTP, the group at the forefront of an insurgency that has killed 50,000 people since 2001. Negotiations that began in March collapsed over the TTP’s demands for prisoner releases even before progressing on issues such as Shariah law.


http://mobile.bloomberg.com/news/2014-06-15/pakistan-army-strikes-at-terror-epicenter-after-airport-attack.html

Riaz Haq said...

Coke to invest in new plants in Karachi, Multan and Islamabad.
Sees 20% per year sales growth in Pakistan.

Coca-Cola Co (KO.N) expects to start production in five new factories in Egypt and Pakistan over the next 18 months, seeing double-digit percentage growth in sales for both markets this year, its Middle East and North Africa president told Reuters.
---------
Surpassing Egypt for its sales growth, Pakistan will see three new plants open in the next 18 months in Karachi, Multan and Islamabad to serve the domestic market with sparkling drinks such as Coke, Fanta and Sprite.

"We watch the needle in Pakistan and almost every month we red-line on what our capacity is," Ferguson said, adding he expected sales growth of around 20 percent in Pakistan this year. "We're just scratching the surface there."
-----------
"Egypt is going to be one of our key anchor countries," Curt Ferguson said on Wednesday, citing the country's large and growing population as a big positive. "For sure the other key anchor will be Pakistan."

As part of a $500 million investment plan announced for Egypt in March, Coca-Cola will start constructing a new juice plant in 6th of October city near Cairo next year in a joint $100 million dollar project with Saudi Arabia's Aujan Coca-Cola Beverages Company.

The $500 million will be spent over the next three years, Ferguson said.

http://www.reuters.com/article/2014/06/18/us-coca-cola-egypt-pakistan-idUSKBN0ET1NE20140618

Riaz Haq said...

Here's a Dawn Op Ed by Dr. Ishrat Husain on Pakistan's isolation from global economy:

It is becoming increasingly difficult for Pakistanis to obtain visas to visit other countries of the world. Security clearances have made it difficult for businessmen to travel and explore opportunities. The resurgence of polio has further added to the existing problems. Even Sri Lanka has removed Pakistan from the list of ‘on arrival visa’ countries.

It is pertinent to probe the reasons that have led to our isolation.
The international Financial Action Task Force has placed Pakistan among a handful of countries in the high-risk category for its lack of action against money laundering and terrorism financing. Capital inflows and outflows from Pakistan are now subjected to more serious scrutiny. Even legitimate philanthropic donations for noble causes have to bear the brunt.

International retail banks are either completely withdrawing or substantially curtailing their operations particularly at the retail level. Pakistani banks are facing difficulties in maintaining international correspondent banking ties. Pakistan is being edged out of international financial integration.

The country’s market share in world exports has declined significantly. The recent energy crisis can be blamed for short-term production difficulties but the withdrawal of the buying houses’ physical presence from the country has contributed significantly to this decline. New and emerging companies avoid Pakistan as they can source their supplies at competitive prices and quality from Bangladesh, Cambodia, Vietnam etc. where they can easily undertake reconnaissance and exploratory trips.

Karachi used to be once an international hub for air travel. Almost all reputed airlines used to route their operations through Karachi. Western airlines suspended their services in the 2000s and after the recent attack on the Karachi and Peshawar airports some airlines have cancelled flights or discontinued their services altogether. Pakistanis are now left with fewer choices for travelling abroad.

Insurance premia on shipping cargo and passengers escalated soon after September 2001 but slowly came down. In recent years, premia are becoming heftier, reinsurance getting difficult to obtain and several Western companies are unwilling to issue insurance policies to foreigners intending to visit Pakistan. The landed cost of goods at Pakistani ports is likely to rise due to this escalation in insurance premia. Alternatively, big shipping companies will simply skip our ports.

The northern areas of Pakistan that can be compared to the mountainous regions of Switzerland used to attract thousands of tourists from abroad every year for hiking, trekking, mountain climbing, skiing and other sports. The local economy of this area depends on the tourist trade. Since the murderous attacks on the tourists at the Nanga Parbat base camp tourist traffic has almost disappeared.

In the knowledge-based economy that is going to characterise the 21st century, Pakistani students, researchers and faculty suffer from a serious handicap as they do not get to meet any of their international counterparts at home and have great difficulty in getting opportunities to visit abroad. Collaborative research and exchange in natural and social sciences in which Pakistan used to feature prominently is waning rapidly.

Pakistani professionals used to dominate international organisations in both the public and private sectors. They had disproportionately high representation in senior decision-making positions. It is now difficult to find Pakistanis in top positions in any noteworthy public international organisation, or private multinational company. Pakistanis in higher positions were conduits for promoting business with the country of their origin as they understood the situation much better.


http://www.dawn.com/news/1117090/delinking-from-global-economy

Riaz Haq said...

Here's a Dawn Op Ed by Dr. Ishrat Husain on Pakistan's isolation from global economy:

It is becoming increasingly difficult for Pakistanis to obtain visas to visit other countries of the world. Security clearances have made it difficult for businessmen to travel and explore opportunities. The resurgence of polio has further added to the existing problems. Even Sri Lanka has removed Pakistan from the list of ‘on arrival visa’ countries.

It is pertinent to probe the reasons that have led to our isolation.
The international Financial Action Task Force has placed Pakistan among a handful of countries in the high-risk category for its lack of action against money laundering and terrorism financing. Capital inflows and outflows from Pakistan are now subjected to more serious scrutiny. Even legitimate philanthropic donations for noble causes have to bear the brunt.

International retail banks are either completely withdrawing or substantially curtailing their operations particularly at the retail level. Pakistani banks are facing difficulties in maintaining international correspondent banking ties. Pakistan is being edged out of international financial integration.

The country’s market share in world exports has declined significantly. The recent energy crisis can be blamed for short-term production difficulties but the withdrawal of the buying houses’ physical presence from the country has contributed significantly to this decline. New and emerging companies avoid Pakistan as they can source their supplies at competitive prices and quality from Bangladesh, Cambodia, Vietnam etc. where they can easily undertake reconnaissance and exploratory trips.

Karachi used to be once an international hub for air travel. Almost all reputed airlines used to route their operations through Karachi. Western airlines suspended their services in the 2000s and after the recent attack on the Karachi and Peshawar airports some airlines have cancelled flights or discontinued their services altogether. Pakistanis are now left with fewer choices for travelling abroad.

Insurance premia on shipping cargo and passengers escalated soon after September 2001 but slowly came down. In recent years, premia are becoming heftier, reinsurance getting difficult to obtain and several Western companies are unwilling to issue insurance policies to foreigners intending to visit Pakistan. The landed cost of goods at Pakistani ports is likely to rise due to this escalation in insurance premia. Alternatively, big shipping companies will simply skip our ports.

The northern areas of Pakistan that can be compared to the mountainous regions of Switzerland used to attract thousands of tourists from abroad every year for hiking, trekking, mountain climbing, skiing and other sports. The local economy of this area depends on the tourist trade. Since the murderous attacks on the tourists at the Nanga Parbat base camp tourist traffic has almost disappeared.

In the knowledge-based economy that is going to characterise the 21st century, Pakistani students, researchers and faculty suffer from a serious handicap as they do not get to meet any of their international counterparts at home and have great difficulty in getting opportunities to visit abroad. Collaborative research and exchange in natural and social sciences in which Pakistan used to feature prominently is waning rapidly.

Pakistani professionals used to dominate international organisations in both the public and private sectors. They had disproportionately high representation in senior decision-making positions. It is now difficult to find Pakistanis in top positions in any noteworthy public international organisation, or private multinational company. Pakistanis in higher positions were conduits for promoting business with the country of their origin as they understood the situation much better.
---------


http://www.dawn.com/news/1117090/delinking-from-global-economy

Riaz Haq said...

Here's an FT story on Pakistan plans to raise $2 billion through privatization:


Pakistan expects to raise at least $2bn by March next year through the international sale of shares in Pakistani energy and banking companies, according to the man spearheading the privatisation drive.
Muhammad Zubair, chairman of the privatisation commission, signalled the country’s return to global equity markets following what the government says is the end of a political crisis marked by weeks of demonstrations in the capital, Islamabad.


“There was uncertainty that the prime minister will be forced to resign, the parliament will be packed up,” he said, referring to the protests led by Imran Khan, the cricketer-turned-politician, and Tahirul Qadri, a moderate Islamic leader. “By mid-September, it was clear that the prime minister was staying and the parliament will remain intact.”
Demonstrators remain camped outside the parliament, but other political parties, including some opponents of Prime Minister Nawaz Sharif, have backed the government’s right to run the country until its five-year mandate expires in 2018.
Mr Zubair will share his message of returning political stability on Thursday when he meets potential investors at the start of a roadshow beginning in London to sell a 7.5 per cent stake in Oil and Gas Development Co. Analysts say the offer through global depositary receipts should raise more than $800m.
This will be followed by the offer of government shares in the privately run Habib Bank, which analysts said could fetch up to $1.2bn in the first quarter of next year. HBL was privatised in 2003 when 51 per cent was sold to the Aga Khan Fund for Economic Development.
Mr Zubair said a successful outcome of the two deals would build investor confidence and help pave the way for privatising other public sector companies. He said at least nine electricity distribution companies and six generating companies would be privatised.
Pakistan International Airlines, the lossmaking state-owned carrier would also be offered for sale. In the past week, Pakistani officials have said the government was planning to split PIA into two, offering its international operations to a Middle Eastern airline while selling ageing aircraft and domestic routes to a local investor.
beyondbrics

Beyond brics
Emerging markets: News and comment from more than 40 emerging economies
Mr Zubair said the privatisation programme had the support of every mainstream political party. “We have met with 60 international equity funds. At least 90 per cent are convinced that political stability will remain in Pakistan . . . We now have to demonstrate we are back at work.”
Mr Sharif was elected prime minister for the third time in May 2013 and is seeking to revive confidence in an economy ravaged by corruption, poor management and attacks on official and civilian targets by Taliban Islamist extremists.
As the scion of a prominent business family in the populous Punjab province, Mr Sharif has advertised himself as a business-friendly leader eager to privatise lossmaking state groups.
But some analysts are sceptical about the likely extent of privatisation, warning that even a successful sale of OGDCL and HBL shares will not necessarily lead to the sale of struggling electricity groups.
“Getting credible foreign investors has historically proven difficult, especially when it comes to taking charge of public sector companies,” said Sakib Sherani, a former adviser to the finance ministry.
“These assets include those that are heavily overstaffed and have run in loss for a long time. The real test will come when these assets are put up for strategic sales along with transfer of management.”
Nor is political stability guaranteed, with Mr Khan and Mr Qadri repeating their demands for Mr Sharif to resign and trade unions likely to flex their muscles.

http://www.ft.com/intl/cms/s/0/029b3250-487a-11e4-ad19-00144feab7de.html

Riaz Haq said...

ISLAMABAD, Pakistan - Pakistan plans to split ailing national flag carrier Pakistan International Airlines (PIA) into two companies and sell control of the core business to a global airline over the next 18 months, but political opposition to the sell-off will be intense, the country’s privatization czar said.

Financial advisers are now in talks with several airlines about taking over cash-strapped PIA, which has some 17,000 employees but just 36 aircraft — and 10 of them are grounded due to a lack of spare parts.

Mohammad Zubair told Reuters in an interview during a visit to New Delhi that no decision had been taken on the buyer, but he mentioned Emirates airline, Etihad and Qatar Airways — the Gulf giants that dominate the regional sector — as possibilities.

“It’s going to be the most difficult sale,” said Zubair, who is aiming to raise around $4bn this fiscal year from the sale of stakes in several companies, anticipating demands that the government hold onto PIA and nurse it back to health itself. “If we are saying that for 25 years PIA has been going from bad to worse, we can’t claim that we are business-savvy and we can turn it around. Anyone who thinks that the government can fund it is living in a fool’s paradise.”

Zubair, a former IBM chief financial officer for the Middle East and Africa, was tapped by Prime Minister Nawaz Sharif to take charge of a central plank of economic reforms promised by Islamabad in return for an International Monetary Fund bailout. Pakistan announced this week that it will seek to raise about $815mn through a sale of shares in Oil and Gas Development Co (OGDC), its largest offering in eight years.

Zubair said investors are returning to Pakistan after weeks of anti-government protests in Islamabad that have now fizzled out, and the OGDC deal representing 7.5% of the company’s share capital would be a test of their confidence. The OGDC sale is part of a sell-off drive to raise capital for an economy that has been crippled for years by power shortages, corruption and militant violence, and to staunch huge losses from dysfunctional companies. Zubair said the losses of power distribution companies alone are equivalent to one-sixth of the government’s fiscal revenues.

Next on the block will be the government’s 40% stake in Habib Bank Ltd, which will be sold in two stages between November and next March, for around $1.2bn. Also ahead is the sale, targeted at domestic investors, of the state’s 7.5% stake in Allied Bank Ltd, for around $150mn, Zubair said.

Over the years, critics say, governments have manipulated state Corps like PIA for political and financial gain, giving jobs to so many supporters that the size of the workforce has become unsustainable in the face of mounting losses.

Zubair said that PIA’s employee-to-aircraft ratio, at around 600, is one of the worst in the world and keeps going up as more planes are grounded. Under his plan, the airline will be spun off as a separate entity and PIA’s other interests — such as ground-handling, catering, hotels and even a poultry business — would go into a holding company that would be retained by the state.

To avoid mass layoffs that would run into political opposition the holding company would absorb all the employees, keep a share in the airline to earn dividend income and then sell off each of its interests individually over time.

Zubair said he could not proceed with the sale of PIA as quickly as other companies, partly because parliament may have to approve legislation allowing it to pass into private hands. “It’s more politically sensitive,” he said. “PIA is not going to be sold just like that.”

http://www.eturbonews.com/51147/pakistan-talks-several-airlines-about-taking-over-ailing-pia

Riaz Haq said...

Why does capital flow from poor to rich countries?
Almost a quarter of a century ago, Robert Lucas posed the simple question: “Why does capital flow from poor to rich countries?” (Lucas 1990). It remains as relevant today given that the poorer countries of the world tend to run current-account surpluses (thus exporting capital) and the richer ones (most notably the US) tend to run current-account deficits (thus importing capital).1 Table 1 below shows that the global financial crisis has not really changed this pattern.


Here I argue that the direction of capital flows makes economic sense given savings behaviour. But the real puzzle is why savings rates are high in poor countries and low in rich ones.

-------
While the differences between the two large groups are small, there are important differences in terms of the capital-to-output ratios within the two groups. These correspond to the large capital flows one observes.

The most important ‘outlier’ among the emerging markets is China.
China has a high capital-to-output ratio (close to 3) despite being poor. It is thus not surprising that China has become a capital exporter.

Other poor countries, for example India, have much lower capital-to-output ratios than China and even most developed countries.
It thus makes sense that India tends to import capital (it is running current-account deficits most of the time).

Similar, but smaller differences exist among the group of developed economies:

Japan and Germany have an above average capital-to-output ratio and the one for the US is below average.
This fits well with the continuing current-account deficits of the US and the continuing surpluses of the other two. All in all it seems that global capital markets seem to be ‘efficient’ in the sense that capital goes where the return is highest.

The real puzzle is thus not where the investment goes, but the savings rates which are much higher in emerging economies, allowing them to finance their own development out of their own resources.

When Lucas wrote his seminal paper in 1990 the investment rate in emerging economies was much lower than today and they were running consistent current-account deficits – i.e. their investment rates exceeded their savings rates.

At the time puzzle was why there was not more investment in the capital-poor countries. Today the investment rate is more than 10 percentage points of GDP higher in emerging economies than in advanced economies. If their savings rate had remained unchanged emerging countries would be running very large current-account deficits and would thus be importing a lot of capital. However, their savings rates have increased even more than their investment rates and the real puzzle has become: “Why do poor countries save so much?”

http://www.voxeu.org/article/why-does-capital-flow-poor-rich-countries

Riaz Haq said...

Times of India Op Ed by Morgan Stanley's Head of Emerging Markets Ruchir Sharma on "The Quiet Rise of South Asia":

Together, India, Bangladesh, Sri Lanka and Pakistan are now growing at an average annual pace of close to 6%, compared to 2% for the emerging world outside China.
Due to their lower per capita income, it should hardly be surprising that South Asian economies are growing faster than other emerging markets. But that spread of nearly four percentage points is the largest in the region’s post-independence history. While hopes for a revival in India exploded when Prime Minister Narendra Modi took power in 2014, promising major economic reform, its smaller neighbours remained under the radar. Now, however, Bangladesh, Sri Lanka and Pakistan are leading the quiet rise of South Asia.
Since the global financial crisis, a number of emerging markets have been ramping up debt and government spending. But the smaller South Asian economies have largely avoided these excesses, so they still have room to boost growth. While falling prices for oil and other raw materials are hurting most emerging regions, they are a boon to the nations of South Asia, all of which are commodity importers.
The impact of low commodity prices is helping to keep inflation low even as growth accelerates, while countries like Brazil, Russia and South Africa face stagflation. Many emerging economies have been hurt by rising wages and have seen their share of global exports decline, but not Pakistan and Bangladesh. Their wages are still competitive, and they are increasing their share of global exports, even as growth in global trade is stagnating for the first time since the 1980s.
They are benefitting along with Sri Lanka as manufacturers look for cheaper wages outside of China, with wages in the manufacturing sector having increased by 370% in the world’s second largest economy over the past decade. Bangladesh is now the second leading exporter, after China, of ready-made clothes to the US and Germany.
And as China and Japan compete with India for influence in the Indian Ocean, they are pouring billions into new ports in Bangladesh, Pakistan and Sri Lanka. The upshot of these positive trends is that South Asia could sustain a growth rate of over 5% for the next few years, which would make it one of the fastest-growing regions in the emerging world.
The competition between Japan and China is a huge boost: after Beijing recently announced plans to build a $46 billion “economic corridor” connecting Pakistan to China, Japan beat out China for rights to build Bangladesh’s first deep-water port, at Matarbari. The inflow of foreign direct investment is helping to keep South Asia in what can be identified as the investment sweet spot: strong economies tend to invest between 25 and 35% of GDP. Sri Lanka and Bangladesh are now right in the sweet spot, at or near 30% of GDP.
Investment also tends to have the greatest impact on jobs and growth when it is going into manufacturing. Both Sri Lanka and Bangladesh have strong manufacturing sectors, representing 18% of GDP. Pakistan is much weaker, with investment at 14% and manufacturing at 12% of GDP. But Pakistan’s manufacturing sector is now growing, due to both increasing electric output and the fact that – like Bangladesh – its young population and labour force is expected to continue expanding for at least the next five years.
At a time when much of the workforce is entering retirement age in larger emerging nations including China, Korea, Taiwan and Russia, the positive demographic trends in South Asia are potentially a big competitive advantage. With exports and investment strong, Bangladesh is running a current account surplus, Sri Lanka is reducing a deficit now equal to 3% of GDP, and Pakistan has cut its current account deficit from 8% of GDP in 2008 to just 1%.

http://blogs.timesofindia.indiatimes.com/toi-edit-page/bucking-stagnation-elsewhere-the-quiet-rise-of-south-asia/

Riaz Haq said...

#Pakistan’s debt-fueled journey from $6b to over $15b in foreign exchange reserves under #PMLN #Nawazsharif #PTI #PPP http://tribune.com.pk/story/972449/sbps-reserves-pakistans-journey-from-6b-to-over-15b/ …

In addition to total disbursements amounting to $4.5 billion from the IMF since 2013, Pakistan has also raised at least $3.5 billion from the international bond market by floating Sukuks and Eurobonds.

In its many reports on the economy, the SBP has made it abundantly clear that it is not particularly fond of the government’s approach to shore up foreign exchange reserves on borrowed funds.

It should be noted that repayments to the Paris Club — following the debt rescheduling of December 2001 – are set to begin in 2016-17 whereas IMF repayments will start from 2017-18. It is against this backdrop that the SBP believes shifting financing away to non-debt creating inflows (i.e. foreign investments) is a must to strengthen the country’s debt servicing capacity in the future.

“A sustainable solution requires narrowing the FX gap with real earnings from exports and/or remittances, rationalisation of imports, and curbing smuggling,” the central bank advised the government in one of its recent reports.


Riaz Haq said...

Sakib Sherani's Op Ed in Dawn on Pakistan's debt situation:


In overall terms, since July 2013, non-debt creating foreign exchange inflows (such as foreign direct investment, remittances and exports) have increased by $2.2bn, while debt flows have increased by $4.1bn (in net terms).

While Pakistan’s overall external debt situation is not alarming at the moment, with the bulk of the debt stock long-term and concessional in nature, and with debt repayment indicators in a relatively comfortable zone, the trend established in the past few years does give cause for concern.

The concern is accentuated by the possible confluence of a number of unfavourable factors in the medium term. Within the next three years, repayments begin on maturing sovereign dollar-denominated bonds; to the Paris Club on rescheduled debt; and to the IMF for the amounts disbursed under the current programme. In addition, imports relating to new power plants and the projects under the China-Pakistan Economic Corridor will also kick in. On top of all this, Pakistan could be incurring as yet unspecified external liabilities on CPEC projects.

With exports misfiring, the government paying inadequate attention to this cause, and remittances plateauing, the unfolding scenario could be the ‘worst case’ rather than the hopeful ‘base case’ constructed by the government and IMF.

(A crude indicator of the PML-N government’s priorities is the number of hours the finance minister has spent travelling the world meeting foreign bond investors in the past two years versus the amount of time he has given to Pakistan’s exporters in listening to, and trying to address their concerns.)

Taking external as well as domestic debt together, Pakistan’s debt dynamic in overall terms is extremely unfavourable. Public debt has increased nearly three-fold since 2008, rising to almost Rs18 trillion by end-June 2015, growing at a compounded annual rate of over 16pc. In the last two years, Rs3.2tr has been added to the public debt, increasing the stock by 22pc. Making the debt dynamic non-benign is the fact that the bulk of the increase (Rs2.7tr) has come from high-cost, shorter-maturity domestic debt.

With economic growth stagnating, inflation-adjusted increase in government revenues only nominally positive, and uncertain prospects for exports, the outlook for public debt is not benign. Already, public debt-to-GDP ratio stands at over 65pc (excluding the quasi-fiscal deficit), well above its legal threshold under the Fiscal Responsibility and Debt Limitation (FRDL) Act of 60pc. Interest payments are inching up, budgeted to consume 52pc of total net federal revenue (after provincial transfers) in the current fiscal year.

An oft-overlooked aspect of Pakistan’s debt situation is the political economy. There is an inherent asymmetry between the ‘benefits’ derived from new debt undertaken, and the burden of its repayment. There are two facets worth considering. First, those segments who tend to ‘benefit’ from the debt contracted (the elite) are usually different from those who bear the incidence of the debt burden (the less affluent).

The elite benefit from the country’s overall borrowing because it insulates them from difficult choices by easing their budget constraint. The debt expands their available resource pool, and their control and influence of expenditure allocation allows them to increase the spending on their constituencies while shifting the ‘burden’ and consequences to less influential segments. The consequences can be in the form of expenditure cutbacks, lower spending on public services, lower investment and growth in the economy and/or higher inflation.




http://www.dawn.com/news/1213356

Riaz Haq said...

Record #Pakistan Reserves Mask Risks of Needing More #IMF Aid. Loans make up much of reserves. #PMLN http://bloom.bg/1MAStCO via @business

Debt, grants account for at least 50 percent of FX holdings
Lower oil prices cushion Pakistan; medium-term risks seen

Pakistan’s record foreign-exchange reserves are masking economic weaknesses that risk pushing the nation toward more aid from the International Monetary Fund.
At least half of the country’s $20 billion stockpile comprises debt and grants, almost all of which have flowed in since Prime Minister Nawaz Sharif took office in May 2013. That money could leave quickly as Pakistan begins repaying the IMF in 2016 or if oil prices surge, leading to another balance-of-payments crisis.
"This is borrowed money and not a reflection of a stable economy," said Yawar uz Zaman, vice president for research at Karachi-based Shajar Capital Pakistan Pvt. "Finance costs will continue to grow in the years to come, which will mean we will go for another loan from an international lender."
Sharif won a $6.6 billion loan from the IMF soon after taking charge, triggering a stock market rally that has put Pakistan among the world’s best performers. Since then, however, he’s struggled to attract more stable inflows as a shaky global economic recovery damps demand and makes investors wary.


The increase in reserves can’t be attributed to a single factor, central bank spokesman Abid Qamar said in an e-mailed response on Thursday. However, the holdings’ "robustness" can be gauged from the import cover, which has risen to "well above" three months from less than two in fiscal year 2013, and the reserves to external debt-servicing ratio has risen to 3.5 from 1.7, he said.
The record reserves will boost inflows along with recent investment agreements with China and Sharif’s focus on alleviating Pakistan’s energy crisis, Qamar said. He didn’t directly address a question on the odds of another bailout.
‘Low Quality’
Looming debt repayments in 2016 prompted Pakistan to go ahead with a $500 million overseas bond sale in September amid rising borrowing costs even as Turkey, Iraq and Abu Dhabi pulled back. It needs to gradually start paying back the IMF, with repayments rising to $639 million in 2019.
Foreign direct investment in the year through June 2015 was the lowest since 2012 with no signs of a pick up this year. Exports in September fell by the most since 2009 and domestic investors have boosted bank withdrawals by 38 percent from a year earlier.
"The reserves build up in the last two years is certainly of low quality," said Shamoon Tariq, Stockholm-based fund manager at Tundra Fonder AB, which holds $155 million of Pakistani shares. Low global oil prices should see Pakistan through the short term, but balance-of-payments risks will emerge in the months ahead if Sharif is unable to substitute dollar financing with investments, he said.

Riaz Haq said...

Pakistan needs to do the following to wean itself of IMF:

1. Increase exports to earn foreign exchange

2. Build products domestically for import substitution

3. Take steps to encourage and incentivize foreign and domestic investments (FDI) by a) solving energy crisis b) improving security and c) increasing ease of business

4. Decrease reliance on foreign and domestic loans and grants

Riaz Haq said...

Debt Markets worry over #Pakistan default on $50 billion debt coming due as Credit Default Swaps surge http://bloom.bg/1oCaZR1 via @business

Bets are rising that Pakistan will default on its debt just as it starts to revive investor interest with a reduction in terrorist attacks.
Credit default swaps protecting the nation’s debt against non-payment for five years surged 56 basis points over the past week amid the global market sell-off, the steepest jump after Greece, Venezuela and Portugal among more than 50 sovereigns tracked by Bloomberg. About 42 percent of Pakistan’s outstanding debt is due to mature in 2016 -- roughly $50 billion, equivalent to the size of Slovenia’s economy.
Prime Minister Nawaz Sharif has worked to make Pakistan more investor-friendly since winning a $6.6 billion International Monetary Fund loan in 2013 to avert an external payments crisis. The economy is forecast to grow 4.5 percent, an eight-year high, as a crackdown on militant strongholds helps reduce deaths from terrorist attacks.
"Pakistan’s high level of public debt, with a large portion financed through short-term instruments, does make the sovereign’s ability to meet their financing needs more sensitive to market conditions," Mervyn Tang, lead analyst for Pakistan at Fitch Ratings Ltd., said by e-mail.

Since Sharif took the loan, Pakistan’s debt due by end-2016 has jumped about 79 percent. He’s also facing resistance in meeting IMF demands to privatize state-owned companies, leading to a strike this month at national carrier Pakistan International Airlines Corp.
The bulk of this year’s debt, some $30 billion, is due between July and September, and repayments will get tougher if borrowing costs rise more. The spread between Pakistan’s 10-year sovereign bond and similar-maturity U.S. Treasuries touched a one-year high on Thursday.
If Pakistan’s debt servicing costs rise, Sharif doesn’t have much room to maneuver. Already about 77 percent of the country’s 13 trillion rupees ($124 billion) budget for the year through June 30 is earmarked for interest and principal repayment on loans.

------

Another worry, as ever in Pakistan, is political stability. The military has ruled the country for most of the time since independence in 1947, and General Raheel Sharif -- no relation to the prime minister -- has boosted the army’s image with a campaign to root out terrorists who massacred 134 children in 2014.
While Raheel Sharif has said he plans to retire when his term ends in November, the risk of political upheaval is ever present. Pakistan has the 10th highest political risk score among more than 120 countries in the Economist Intelligence Unit ranking, worse than Egypt and Iran.

Riaz Haq said...

#Pakistan Steel Privatization Stalled. No production. $3.5 billion debt. $5 million weekly loss http://reut.rs/1Q0axpZ via @Reuters

Once the producer of almost half the country's steel needs, state-owned Pakistan Steel Mills' (PSM) cavernous factory buildings on the outskirts of Karachi stand eerily still.

A 4.5 km-long (2.8 mile) conveyor belt that once carried coal from the nearby port is idle and blast furnaces rest silent. Birds build nests in Soviet-era equipment and stray dogs nap outside abandoned plants.

The company is for sale, but the government cannot find a buyer as it struggles to get privatizations back on track after a series of setbacks. A glance at PSM's finances may explain why.

The company has $3.5 billion in debt and accumulated losses, loses $5 million a week and has not produced steel at its 19,000-acre facility since June last year. That was when the national gas company cut power supplies, demanding payment of bills of over $340 million.

Like many Pakistani industrial firms, political meddling and competition from cheaper Chinese imports left PSM vulnerable.

They also undermine Prime Minister Nawaz Sharif's promise to the International Monetary Fund to privatize PSM by March, in return for a $6.7 billion national bailout loan agreed in 2013.

More than 14,000 jobs are at risk, while the Pakistani economy needs industrial growth to provide employment for a growing population.

"Nine billion rupees ($86 million) are immediately needed to see the company through to June," company CEO Zaheer Ahmed Khan told Reuters at its sprawling premises.

"It's really sad, it's a national asset. We are a nuclear power but what does it say that we can't operate a small steel mill?"

PRIVATIZATION PAINS

The government has injected $2 billion into PSM since a failed selloff in 2006, but cannot invest more capital, Privatization Commission Chairman Mohammad Zubair said.

"The best option is to privatize so that private sector buyers inject capital to upgrade the plant and machinery, buy raw material and so on," he said.

PSM is one of several firms Pakistan wants to sell to revive loss-making entities that cost the government $5 billion a year.

But it has struggled to restructure bleeding companies, including PSM and Pakistan International Airlines (PIA), and get them in shape for potential buyers.

This month, Pakistan shelved plans to privatize power supply companies, and officials said Islamabad told the IMF it would not meet deadlines to sell PIA or PSM.

While the loss-making firms are a drain on Pakistan's resources - around an eighth of the government's fiscal revenues last year - few fear Pakistan will slide into economic crisis.

The IMF has continued to release installments of its 2013 bailout package despite missed targets, and Pakistan is exploring other sources of support, like ally China which plans to invest $46 billion in a new economic corridor.

BACK IN THE USSR

Designed and funded by the Soviet Union in the 1970s, PSM was once the pride of the nation, showcasing a rapidly industrializing Pakistan with the means to produce a basic building block for the future.

Across the site, signs implore workers to believe steel will make Pakistan stronger. The firm's motto is "Yes, I can."

The facility has the capacity to expand to produce 3 million tonnes of cold and hot-rolled steel annually, against today's 1.1 million tonnes, CEO Khan said. At 3 million tonnes, PSM would become "very profitable".

Riaz Haq said...

#Pakistan misses GDP goal for 2015-16. Actual 4.7% vs target 5.5%. #Service sector grows 5.7%. #Agri shrinks 0.19%

http://www.dawn.com/news/1259741/pakistan-misses-economic-growth-target

The country missed the economic growth target for the current financial year by a wide margin mainly because of widespread dismal performance by the agriculture sector. The gross domestic product (GDP) grew by 4.7 per cent against the target of 5.5pc.

At a meeting on Friday of the national accounts committee comprising senior representatives from the four provinces and regions and technical experts, the performance of all economic sectors was added up that showed higher than targeted growth by the industrial sector. The services sector achieved its growth target of 5.7pc.

But the most worrying aspect of the year was a 0.19pc negative growth by agriculture as a whole against the target of 3.9pc.

Cotton output led the freefall in the agriculture sector, considered the backbone of the national economy, as it posted a negative growth of 27pc. The cotton output stood at 10.1 million bales against the target of 13.96m bales. Last year, its output stood at 13.9m bales with a 9.5pc growth.

As a result, cotton ginning declined by 21pc against the target of 5pc. Important crops output fell by 7.18pc against the target of 3.2pc, while other crops fell by 6.2pc against the target of 4.5pc.

Wheat production grew by a meager 0.61pc to 25.47 million tonnes.

The livestock sector grew by 3.63pc, but remained short of the 4.1pc target, while fisheries increased by 3.3pc, surpassing the 3pc target. Forestry was the only saving grace in the agriculture sector as it grew by 8.8pc against the target of 4pc.

On an overall basis, industry grew by 6.8pc against the target of 6.4pc. It was supported by the construction and electricity sectors — the linchpins of the Pakistan Muslim League-Nawaz government’s development focus.

Last year, industry had grown by 3.6pc.

The mining and quarrying sector grew by 6.8pc against the target of 6pc, but the overall manufacturing sector could not meet growth expectations. The manufacturing sector posted a growth of 5pc, but remained short of the 6.1pc target. It had grown by 3.2pc last year.

The most important sector in industrial domain — large scale manufacturing (LSM) — also could not meet its growth target of 6pc. It grew by 4.6pc. LSM had improved by only 2.4pc last year. Small and household manufacturing grew by 8.2pc against the target of 8.3pc.

The construction sector grew by 13.1pc as it went beyond the 8.5pc target, while electricity generation and gas distribution improved by 12.2pc against the target of 6pc.

The services sector could meet the target of 5.7pc, but this was mainly supported by an increase in the salary of government employees. This was evident from an 11.13pc growth in general government services against the target of 6pc.

Transport, storage and communication services grew by 4.1pc against the target of 6.1pc, while wholesale and retail trade improved by 4.57pc against the target of 5.5pc.

The finance and insurance sector exceeded the target of 6.5pc with a 7.1pc growth. Housing services stood at 3.99pc against the target of 4pc.

Likewise, other private services improved by 6.64pc against the target of 6.4pc.

Riaz Haq said...

'ICBC is positive on #Pakistan's future,' CEO, Industrial & Commercial Bank of #China #CPEC | Business Recorder
http://www.brecorder.com/br-research/brief-recordings/0:/47533:icbc-is-positive-on-pakistans-economic-future-ceo-icbc-pakistan-operations/?date=2016-05-20



BRR: How important will CPEC be for ICBC?

HS: CPEC is the landmark of trade and economic cooperation between China and Pakistan. We cannot praise more of its significance to the governments and commercial sectors of both countries. As the only Chinese commercial bank that has set up branches in Pakistan, ICBC of course plays an indispensable role in the development of CPEC. Firstly, CPEC brings mega infrastructure and energy projects to Pakistan and ICBC, with its global financial capacity, is undoubtedly the natural partner for the finance of these big projects.

Secondly, along with CPEC, more and more Chinese enterprises are coming to Pakistan and seeking for business opportunities. ICBC, as the local Chinese commercial bank, will serve as an important channel for such clients to understand better the environment of investment in Pakistan. In addition, CPEC also sets a sound foundation for the usage of cross-border RMB settlement and ICBC is an incomparable expert in providing quality services to our customers in this area.

As a matter of fact, ICBC is already playing an indispensable role in CPEC, being one of the major finance providers to the major projects. During Chinese President Xi's visit to Pakistan last year, ICBC signed four contracts worth $4.5 billion. So far, the international syndications led by ICBC for projects such as Thar Coal mine and Power station, Dawood Wind Power and Sachal Wind Power have reached financial closure and started drawing down. Other projects such as SK Hydropower Station and Sahiwal Coal Power Station are also soon to reach financial closure. In the mean time, ICBC are also acting as agent bank and custodian bank for many projects of CPEC, ensuring the safety and convenience of the fund management.

BRR: What is your view on Pakistan's economy?

HS: Pakistan is one of the major developing economies with great geographical advantages and her importance as an economy in South Asia cannot be exaggerated. It is of great significance to maintain fast and sustainable economic development of Pakistan for the overall regional economy. ICBC holds a firm and positive view on the future development of Pakistan economy.

A country with the sixth largest population in the world, Pakistan shows huge potential for economic development and is drawing greater attention from international investors. As we shall see, with CPEC going further, Pakistan will benefit a great deal from future investment and infrastructure construction. It is based on such a positive view that ICBC has adopted a long term strategy for the business in Pakistan. ICBC Lahore Branch, the third ICBC branch in Pakistan, was formally inaugurated with the witness of Chinese President Xi Jinping and Pakistani prime minister Mr Muhammad Nawaz Sharif in April 2015, as a high praise of ICBC's presence in Pakistan as well as an indicator of the level of friendly commitment between the two nations. The set-up of Lahore Branch also proves ICBC's long term view and commitment to the local market.

BRR: Will your bank have a role to play with the CPEC investment coming in?

HS: As I have mentioned above, as the largest commercial bank in China, ICBC will primarily focus on facilitating and boosting the trade and economic cooperation between China and Pakistan. It is not just our commitment but also our business foundation to give support to the smooth development of CPEC related projects. With the fast development of local economy, ICBC will be more confident in business operation in Pakistan. For the mutual benefits of China and Pakistan, ICBC will continue to bring her global advantages to Pakistan, give funding and advisory support to local and Chinese enterprises, and make memorable contributions to CPEC.

Riaz Haq said...

#ADB to loan #Pakistan $600m for structural reforms to boost performance and financial stability of PSUs http://www.publicfinanceinternational.org/news/2016/06/adb-agrees-600m-fiscal-breathing-space-loan-pakistan … via @pfintl

“This assistance will give the government the ‘fiscal breathing space’ it needs to proceed with measures to create more sustainable business, delivering more efficient and cost-effective services to the Pakistani public, and will eventually free up public funds for vital social sector spending.”

At present, the Pakistan government owns 191 public sector enterprises employing around 420,000 workers. But according to the ADB, a fiscal consolidation drive to improve federal finances has prevented the government from making important reforms in this area, such as reducing pension liabilities.

ADB financing will be used to create a cost fund to “manage huge unfunded pensions and other retirement liabilities of workers”, which present a “serious threat” to Pakistan’s public sector, the bank said.

Power distribution companies and Pakistani Railways are also among the organisations that need “immediate financial support” to initiate reforms.

Pakistani Railways will receive support to strengthen auditing and accounting, and funding will also be used to improve the transparency of the public sector and strengthen corporate governance.

This funding is part of a coordinated donor packaged arranged by the Asian Development Bank, the International Monetary Fund and the World Bank. The programme consists of two batches of $300m and will run until 2018.