Sunday, November 18, 2012

Pakistan's GDP Grossly Underestimated, Stocks Highly Undervalued

Even with the run-up (in KSE-100), Andrew Brudenell, manager of the HSBC Frontier Markets fund (HSFAX) in London, says Pakistan is one of the cheapest markets he follows, at about seven times earnings. He notes that earnings growth has kept pace with the market. The firms, he adds, are typically cash-rich, boast strong return on equity levels in the 20% range, and pay good dividends. In Pakistan, the informal, cash-based economy for goods and services is larger than the formal economy.  Barron's, November 17, 2012

Growing gap between dismal official economic statistics and consumption boom coupled with strong corporate profits in Pakistan is a challenge for many analysts around the world. Most believe that Pakistan's GDP is, in fact, much larger and growing faster than the government data indicates.

Informal Economy Estimates:

 M. Ali Kemal and Ahmed Waqar Qasim, economists at Pakistan Institute of Development Economics (PIDE), have published their research on estimates of the size of Pakistan's informal or underground economy.

Kemal and Qasim explore several published different approaches for sizing Pakistan's underground economy and settle on a combination of  PSLM (Pakistan Social and Living Standards Measurement) consumption data  and mis-invoicing of exports and imports to conclude that the country's "informal economy was 91% of the formal economy in 2007-08". Here are the figures offered by the authors for 2007-8:

1) Formal Economy: Rs. 10,242 billion= $170 billion (using Rs.60 to a US dollar)
2) Informal Economy: Rs. 9,365 billion = $156 billion
3) Total Economy (Sum of 1 & 2): Rs. 19,608 billion = $326 billion

Assuming that the ratio of formal and informal economy remained the same in 2011-12, here are the figures for Pakistan's total economy as of the end of last fiscal year which ended in June, 2012 :

1) Formal Economy: $210 billion
2) Informal Economy: $191 billion
3) Total Economy: $401 billion
Hypermart Lahore

Naween Mangi of Businessweek in her piece titled "The Secret Strength of Pakistan's Economy" described how Pakistan's informal cash-based economy evades government's radar, illustrating it with the story of a tire repair shop owner Muhammad Nasir. Nasir steals water and electricity from utility companies, receives cash from his customers in return for his services and issues no receipts, pays cash for his cable TV connection, and pays off corrupt police and utility officials and local politicians instead of paying utility bills and taxes.

Karachi Stock Market:
Comparing Karachi and Mumbai Share Indexes

A string of strong earnings announcements by Karachi Stock Exchange listed companies and the Central Bank's 1.5% rate cut have helped the KSE-100 index exceed 16,000 level, a gain of 42.1% (33.2% in US dollar terms) year to date. In spite of this run-up in KSE-100, Andrew Brudenell, manager of the HSBC Frontier Markets fund (HSFAX) in London, remains bullish on Pakistani equities, according to Barron's. Pakistan is one of the cheapest markets he follows, at about seven times earnings. He notes that earnings growth has kept pace with the market. The firms, he adds, are typically cash-rich, boast strong return on equity levels in the 20% range, and pay good dividends.


While Pakistan's public finances remain shaky, it appears that the country's economy is in fact healthier than what the official figures show. It also seems that the national debt is much less of a problem given the debt-to-GDP ratio of just 30% when informal economy is fully comprehended. Even a small but serious effort to collect more taxes can make a big dent in budget deficits. My hope is that increasing share of the informal economy will become documented with the rising use of technology. Bringing a small slice of it in the tax net will make a significant positive difference for public finances in the coming years.

Related Links:

Haq's Musings

Investment Analysts Bullish on Pakistan

Precise Estimates of Pakistan's Informal Economy

Pak Consumer Boom  Fuels Underground Economy

Rural Consumption Boom in Pakistan

Pakistan's Tax Evasion Fosters Aid Dependence

Poll Finds Pakistanis Happier Than Neighbors

Pakistan's Rural Economy Booming

Pakistan Car Sales Up 61%

Resilient Pakistan Defies Doomsayers

Land For Landless Women in Pakistan

Pakistan's Circular Debt and Load-shedding

Hypermart Pakistan


Hopewins said...

Dr. Haq,

Good Article. I am not going to play devil's advocate on this one. I will just leave you in peace.

But I would just like to point out that if our nominal GDP is as follows:
1) Formal Economy: $210 billion
2) Informal Economy: $191 billion
3) TOTAL Economy: $401 billion

Then our PPP GDP would be as follows:
1) Formal Economy: $485 billion
2) Informal Economy: $443 billion
3) TOTAL Economy: $928 billion

This means that we need just 1-2 more years to become a(PPP)TRILLION$ economy! Wow!

I just thought these PPP data should be mentioned so that your other readers don't get confuse your nominal numbers with the PPP ones.

Thank you.

Riaz Haq said...

HWJ: "This means that we need just 1-2 more years to become a(PPP)TRILLION$ economy! Wow!"

It depends on what PPP factor is used.

At 2.33, Pakistan's PPP GDP is $934 billion.

But at 2.9 PPP factor as used by the Indian govt, it's already $1.163 trillion.

Hopewins said...

^^^Riaq Haq Spake Thus: "But at 2.9 PPP factor as used by the Indian govt.."


Dr. Haq,

I recall you mentioning this once before in one of your other articles.

Are you sure of this claim? Perhaps it was just an typo-error or misprint or temporary miscalculation by some government official in some report?

The only reason I ask is that the World Bank data does not show any such discrepancy.

A) Pakistan WB Data

2011 Nominal GDP: 211 Billion$
2011 PPP GDP: 488 Billion$
Implied Factor: 2.32

B) Bangladesh WB Data

2011 Nominal GDP: 111 Billion$
2011 PPP GDP: 269 Billion$
Implied Factor: 2.42

B) India WB Data

2011 Nominal GDP: 1.85 Trillion$
2011 PPP GDP: 4.53 Trillion$
Implied Factor: 2.45

So the "conversion factors" are all about the same at 2.3-2.4, as they should be for roughly equivalent economies.

So I am not sure what that sky-high "2.9" number you mention really means.

Please explain.

Thank you.

Riaz Haq said...

HWJ: "So I am not sure what that sky-high "2.9" number you mention really means. Please explain."

Read The Hindu story. Here's an excerpt:

"The Survey estimates India's PPP correction factor at 2.9, meaning the stuff available here for $100 will cost $290 in the US. That corresponds to an exchange rate of roughly Rs 15.5 to the dollar. But the interesting bit is about the linkage with GDP. Countries with per capita GDP of $1,000-1,400 in 2009 – which include India, Pakistan and Vietnam — have an average PPP adjustment factor of 2.3.

In comparison, those with per capita GDP (unadjusted for PPP) between $8,000-12,000 — the likes of Brazil, Mexico, Russia and Turkey – require a correction of only 1.6 or thereabouts."

Hopewins said...

^^^Read The Hindu story. Here's an excerpt:


Here is the original government report that the newspaper is quoting:

You can find that "2.9" figure on Page 25 & Page 27.

It is obviously a mistake made by some bureaucrat in this particular report and is being used purely in a descriptive sense to explain ideas.

The World Bank, however, has not made this mistake. The WB data correctly show the conversion factors for Pakistan, Bangladesh & India at 2.33, 2.42 & 2.44 respectively in 2011. These numbers seem to be all within the same range, especially given that these numbers will fluctuate with the dollar-trade in these countries.

I mean if we were to really use 2.9 for India, their GDP PPP would be 5.35 Trillion$ instead of 4.53 trillion$ as the world bank is reporting it.

I think we should stick with consistent WB data whenever it is available.

VC said...

Worth reading Dr. Ashfaque Khan...

What is there in store for the economy in 2012-13? Before we answer this, it is essential that we summarise the state of the economy as it stands at the beginning of 2012-13. Lack of vision, direction, commitment, knowledge and understanding of Pakistan’s economy has destroyed the economy during the last four and a half years. By the end of the last fiscal year (2011-12), Pakistan’s economic growth slowed to an average of 3 percent per annum, equalling less than one-half of the average of 2002-07. Domestic investment hit a 60 years low and domestic saving experienced an unprecedented fall. Side by side, foreign private investment collapsed and inflation hovered in high double-digits with a corresponding deterioration in the business environment, unemployment and poverty figures and relations with the IFIs.

The root cause of our economic destruction has been the policy of ‘reckless borrowing and ruthless spending’ pursued by the government. The country has never witnessed such a level of fiscal profligacy with budget deficit touching 8.5 percent of the GDP in 2011-12. Resultantly, public debt has more than doubled in the last five years and consumed a bulk of tax revenue as interest payments. Non-availability of sufficient resources for social sector and infrastructure has resulted in the deterioration of education and health systems, crumbling of the infrastructure and worsening of the power crisis.

In short, by the end of 2011-12, Pakistan’s economy resembled a patient in intensive care unit fighting desperately for survival. To extend the analogy, the economic ‘doctors’ are least bothered about their ‘patient’. Should we expect any change in their attitude towards their patient (economy) at the tail end of their shift? Through the ‘ballot’ budget and ‘ballot’ monetary policy, the government has already revealed its preferences. Fiscal indiscipline is likely to attain new heights in 2012-13. Resources will be doled out to ‘win’ election in the name of ‘taraqiati programme’ (development budget).

No efforts will be made to mobilise additional resources by broadening the tax base and rationalising expenditure. No attempts will be made to address the issues of the NFC Award which has rendered the fiscal policy ineffective as a tool of the stabilisation policy. The ‘ballot’ budget 2012-13 failed to touch upon several key issues including agricultural income being drawn under the direct tax net, implementation of RGST, reforming of the petroleum sector taxation, bleeding PSEs, circular debt and strengthening of tax administration.

Riaz Haq said...

VC: "Worth reading Dr. Ashfaque Khan..."

I share Dr. Ashfaque Khan's basic concerns about the government's handling of the economy. But it doesn't change the facts about the underlying strength of the economy as obvious from healthy private consumption and strong corporate profits.

Let me repeat what I said in the concluding paragraph of my post:

"While Pakistan's public finances remain shaky, it appears that the country's economy is in fact healthier than what the official figures show. It also seems that the national debt is much less of a problem given the debt-to-GDP ratio of just 30% when informal economy is fully comprehended. Even a small but serious effort to collect more taxes can make a big dent in budget deficits. My hope is that increasing share of the informal economy will become documented with the rising use of technology. Bringing a small slice of it in the tax net will make a significant positive difference for public finances in the coming years. "

Anonymous said...

You cannot run your Country on shall-will do this and that, no predictions and forecast can save any country unless they really take steps to curb corruption-over spending-bad governance and best economic plans implementable. To the Author it appear but to most Pakistanis in Pakistan and outside Pakistan it appears to be in deplorable state. Author says "it appears" and next he says "economy is in fact healthier" if you ask me author is confused and had penned it down poorly.

Riaz Haq said...

Anon: "Author says "it appears" and next he says "economy is in fact healthier" if you ask me author is confused and had penned it down poorly."

I think it's you who's confusing public fiances with the overall national economy. The two are very distinct.

While Pakistan's government is incurring debts and running deficits, the nation's private sector is quite healthy.

As Barron's reported, "the (Pakistani) firms are typically cash-rich, boast strong return on equity levels in the 20% range, and pay good dividends. In Pakistan, the informal, cash-based economy for goods and services is larger than the formal economy."

Riaz Haq said...

There is one reader of my blog who continues to insist on an explanation that the consumption is coming entirely at the expense of investment. I think this is totally false.

The gap between the officially reported consumption GDP and actual consumption GDP is just too large to be explained by it.

To understand the reason for the gap between official GDP which is under-reported and the actual GDP which is much larger, please read a recent paper by Kemal and Qasim presented at PSDE (Pak Society of Dev Economists) conference in Islamabad.

The paper goes into the details of the discrepancies between the Economic Survey GDP data and the Social and Living Standards (PSLM) consumption survey which is carried out and reported separately several months after the end of each fiscal year.

The PSLM data shows there's a huge gap between reported incomes and actual consumption in a largely cash-based economy.

Another issue the paper discusses is the rampant mis-invoicing of imports and exports that contributes to understating the official GDP.

For example, 2011-12 PSLM has not yet been completed.

Hopewins said...

Dr. Haq,

Since you are now repeatedly quoting that paper by kemal & Qasim (K-Q), I gave it a glance myself.

According to Table I (they don't seem to have page numbers!), it is largely private consumption that they claim is MASSIVELY under-reported in the formal statistics.

According to them, as seen in that table, there is no problem with the INVESTMENT data as Total Investment = Formal Investment.

Let us now look at the situation you claimed for 2011-12:
1) Formal Economy: $210 billion
2) Informal Economy: $191 billion
3) Total GDP: $401 billion

According to the authors, Formal Investment = Total Investment

Formal Investment as seen in WB Data is $25 Billion for 2011-12:

Therefore, we can calculate our current Investment Rate =
Investment/Total GDP = 25/401 = 6.3%

Assuming a low ICOR of 3 for now (it will have to go up as the economy develops), this means that our future GDP growthrate average can be, at best, around 2.1%.

When we account for our 2% population growthrate, we can see that we are clearly heading for a DISASTROUS situation low per capita growth.

And all of this is because of our SUPER LOW INVESTMENT RATE of 6.3% of our total GDP (informal & formal).

What do you think? Have I made an error in my reasoning? Is there some fact that I have overlooked?

Please comment.

Thank you.

Riaz Haq said...

HWJ: "According to the authors, Formal Investment = Total Investment"

Not true. Here's the relevant excerpt from the paper:

Although data on investment is also seems to be under reported since it is calculated based on the old survey methodologies for certain sectors and predicted according to commodity flow mechanism for rest of the sectors and commodity flow could be under reported as well. Thus there are ample chances that investment data is also under estimated and increase the formal GDP if it is calculated correctly. However, in this paper we are taking investment and government expenditures same as in the formal economy.

Anyone interested in exploring officially unreported investments can easily find undocumented housing, commercial real estate and factories and other SME businesses in all parts of the country...particularly in places like Orangi in Karachi.

So your entire premise of "our SUPER LOW INVESTMENT RATE of 6.3% of our total GDP" is completely flawed.

Riaz Haq said...

Here's an excerpt of a Dawn story on informal business sector in Karachi:

Unlike the Sind Industrial Trading Estate and other big industrial and commercial zones in Karachi, Orangi, Shershah and other katchi abadis on the outskirts of the city can be taken as self-created special economic zones for the poor. Unfortunately the government has failed to provide necessary infrastructure for development of formal sector and as such a major chunk of economic activity is the preserve of informal sector.

The OPP’s micro credit programme has given fillip to micro businesses not only in Karachi, but also has expanded in other cities of Sindh. The youth initiated Technical Training Research Centre (TTRC) provides housing support service to the community and trains youth to become architects specialising in low cost housing. In a way the OPP promotes Katchi Abadis as franchise all over the country as youth of Karachi from low and middle income class learn construction and other trades skills from TTRC and then move to other settlement to set up their businesses. These katchi abadis and slums are not only working class settlements, but also have growing population of doctors, engineers, architects and business administration graduates who, in large numbers, are mainstreamed in economic process every year.

Although the government is responsible for providing main sewerage lines and treatment plants yet the Orangi Pilot Project works as a link for developing partnership between poor residents of the area and the government for accomplishing the task.

This, apart from facilitating the work of government for developing and regulating these settlements, has given impetus to construction and also construction material supply business in these areas, providing employment and self-employment to thousands of people.

Almost all katchi abadis in Karachi have business clusters in their folds, particularly of garments and leather goods manufacturing establishments. Garment factories have proliferated throughout katchi abadis which make women and children outfits including exportable fashion and designer dresses. A lot of embroidery works and small printing factories are coming up in these areas which handle the work of large scale textile industries producing fashion fabrics on sub- contracting basis.

Another important economic feature of these settlements is that all recycling operations of discarded plastic and news prints is done here. Thousands of people are employed in this business. In a way these squatter ‘bastis’ are helping clear the waste and improve the environment.

Along with the OPP quite a number of NGOs and CBOs operating in katchi abadis have initiated micro enterprise credit programmes to enable the poor to set up home- based family businesses. The OPP alone has so far expanded its micro credit programme to more than 12 cities and 50 villages of Sindh.

The Sindh government’s recent initiative to regularise katchi abadis will promote a sense of security among its dwellers.

Riaz Haq said...

Here's an Express Tribune story on Pakistan's informal sector:


The informal sector in Pakistan has grown more rapidly than the formal economy over the last three decades and while estimates vary a great deal, the size of the informal sector is not less than one-third of the country’s gross domestic product (GDP).

These views were expressed on Monday at a discussion on “The informal enterprise in Pakistan: challenges for growth”, organised by the Centre for International Private Enterprise (CIPE) and the Karachi Chamber of Commerce and Industry.

Experts said the policy environment surrounding the informal sector is characterised essentially by three parameters – taxation, regulation and private property rights. Property rights and tax reforms are needed at the policy level to encourage informal businesses to enter into the formal sector, which is considered the most important challenge faced by the business community, they said.

“Research has consistently shown that entry barriers such as lengthy registration requirements, licensing and inspection requirement and complicated taxation policy are the key reasons for people remaining in the informal sector,” CIPE Washington Regional Director Andrew Wilson said.

BusinessMen Group Chairman Siraj Kassim Teli suggested that collective action is required and the private sector should unite at one platform and encourage the informal sector to follow standards which will help them gradually convert into formal businesses.

Riaz Haq said...

Here's an ET report on the start of index futures trading in Karachi:

KARACHI: AKD Securities CEO Farid Alam struck the gong on Friday at the Karachi Stock Exchange (KSE) to mark the commencement of market making in Stock Index Futures Contract (SIFC).

As an index-based contract with its price resting on a pre-determined contract multiplier, the SIFC aims to provide investors with an opportunity to “mimic returns on the KSE-30 Index,” according to Alam, whose company will act as the market maker for the SIFC.

Therefore, the SIFC is designed to provide a hedge for individual investors and institutions to take counter-balancing positions while offering basket exposure to index stocks.

“Global fund managers are becoming increasingly aware of the potential that Pakistan’s capital markets offer, which makes the SIFC more valuable,” Alam said.

Stock index futures – designed to link the stock market with the futures market – were first introduced in 1980 on the New York Stock Exchange (NYSE).

They are a typical example of a derivative – a financial instrument widely blamed for causing the 2008 global financial crisis, which can be defined as a security whose price depends on, or derived from, one or more underlying assets.

The Securities and Exchange Commission of Pakistan (SECP) allows mutual funds to use derivatives for hedging against their risks. Therefore, an index-based mutual fund duplicates the holdings of the underlying index. This means that if the underlying index increases by 5%, for example, the SIFC on that index will also rise by 5% for that mutual fund.

Speaking on the occasion, KSE Managing Director Nadeem Naqvi said stock index futures were introduced on the Bombay Stock Exchange in June 2000.

He added that their activity remained weak until 21 market makers started working in May 2002, as daily trading volumes increased seven times in one year.

Market crash?

Naqvi said many people feared a stock market crash – like the one experienced in 2008 – in view of the KSE’s over-the-top performance in the recent past. Saying that such a crash was highly unlikely, Naqvi noted that market capitalisation was roughly 45% of the country’s gross domestic product (GDP) when the stock market crashed in 2008.

“It’s true that the KSE-100 Index is at a historic high these days, but if you see market capitalisation as a percentage of the GDP, it’s nowhere near the level of 2008,” he said.

Pakistan’s GDP in 2011 was $211 billion. According to the KSE, market capitalisation as of November 13, 2012, was $42.3 billion, which makes it roughly 20% of the 2011 GDP. “I believe the market has a lot of potential to expand and the SIFC is going to help it grow,” Naqvi said.

Riaz Haq said...

Here's a PakistanToday story on $258 million current account surplus for July-Oct 2012 period:

KARACHI - Pakistan’s dollar-hungry current account balance continued to remain in the green zone during July-October FY13 by registering a surplus of $ 258 million.
This surplus amounted to $ 432 million during first quarter of FY13, July-Sep, owing to what the official and unofficial quarters agree, receipts of war reimbursements from the United States in early August this year.
On August 1, 2012, the Islamabad’s non-Nato allies in Washington had released to the cash-strapped Pakistan some $1.118 billion under the long-denied Coalition Support Fund (CSF) after a months-long strain in bilateral ties relaxed through an on-and-off process of negotiations between the two countries on civilian, military and intelligence level.
The inflows, the SBP chief spokesman Syed Wasimuddin had confirmed, had put the country’s current account balance into a surplus since July. The central bank Monday reported that during the corresponding period of last year, July-Oct FY12, the country’s current account balance had marked a deficit of $ 1.655 billion.
In percentage terms, the surplus constitutes 0.3 percent of the country’s gross domestic product (GDP) accounting for $ 82.232 billion. This is against a deficit of 2.1 percent last year.
Senior analysts like Khurram Schehzad had also seconded the central bank’s view saying the positive was attributable mainly to the dollar inflows on account of CSF and Kerry Lugar from the US. The receipts under KLA have been meager with Washington reported to have transferred only Rs 20.356 billion during FY12 against a projected receipt of Rs 34.164 billion. Under the KLA, Pakistan has the US’s word for receiving a civilian aid of $ 7.5 billion till 2014, $ 1.5 billion per annum.
However, the funds transfer under CSF augured well for the funds-starved Pakistan which, in FY12, had braved a current account deficit of over $ 4 billion, pushing the economic managers closer once again to a fresh IMF bailout package. During the period under review, the country’s trade balance remained subdued and registered a deficit of $ 5 billion against last year’s $ 5.398 billion. A break up of trade deficit shows that during the review months the country exported goods worth $ 8.210 billion compared to $ 8.105 billion in July-Oct of FY12. Compared with last year’s $13.503 billion, the imports totaled at $ 13.210 billion.
Overseas Pakistanis also performed well by remitting $ 4.964 billion during the review period as against $ 4.315 billion last year. The State Bank says that the country on average receives over a billion dollars every month from Pakistanis working abroad. The disbursements from the foreign financers, another noteworthy indicator on the current account balance list, stayed however in the red zone by remaining confined to long-term project loans standing at $ 382 million. Last year, disbursements under the same head were recorded at $ 519 million.
However, despite these positives the analysts believe that the economic managers have still a lot to worry about owing to the current poor dollar inflows into the country specially the foreign investment.

Riaz Haq said...

Here's Bloomberg on outsize returns of KSE-100:

The KSE 100 Index, the benchmark for Pakistan’s $43 billion equity market, rose 7.3 percent in the past three years when adjusted for price swings, the top gain among 72 markets worldwide, according to the BLOOMBERG RISKLESS RETURN RANKING. Pakistan had lower stock volatility than 82 percent of the nations including the U.S. (SPX) Over five years, Pakistan’s risk- adjusted returns ranked eighth.

The country’s 190 million people are boosting purchases three times faster than Asian peers as higher rural incomes and record remittances outweigh fighting on the Afghan border, violence in Karachi that led to at least 2,100 deaths this year and power outages that sparked rioting. The region’s fastest earnings growth may increase economic stability, according to Karachi-based Atlas Asset Management Ltd. Foreign investors added to holdings for five straight months, lured by Asia’s lowest valuations and biggest dividend yields.

“Stocks are very cheap and there are some very good businesses in Pakistan,” said Andrew Brudenell, whose HSBC Frontier Markets Fund has returned 18 percent this year, beating 92 percent of peers tracked by Bloomberg, and holds more shares in the country than are represented in benchmark indexes. “We still think there’s some positive growth to come from the markets.”

Earnings in the KSE 100 index advanced 45 percent during the past year, the largest gain among 17 Asian equity indexes, and this month hit the highest level since Bloomberg began tracking the data in 2005.

Consumer spending in Pakistan has increased at a 26 percent average pace the past three years, compared with 7.7 percent for Asia, according to data compiled by Euromonitor International, a consumer research firm. While the growth in Pakistan may slow to 6.6 percent in 2012, it will still exceed the 5.3 percent pace in Asia, according to Euromonitor estimates.

Engro Foods Ltd. (EFOODS), a Karachi-based seller of dairy products, reported a 214 percent jump in net income for the third quarter, while Unilever Pakistan Ltd. (ULEVER), a unit of the world’s second- biggest consumer-goods company, had a 36 percent gain, according to data compiled by Bloomberg.

Dividends in Pakistan have also climbed at the fastest pace in the region. Payouts increased 49 percent in the past 12 months, giving the KSE 100 index a dividend yield of 6.6 percent, double the 3.3 percent average in Asia, Bloomberg data show.
Foreign investors have purchased a net $153 million of Pakistan shares since the beginning of July, according to data from the Karachi Stock Exchange. Overseas holdings amount to about 20 percent of the bourse’s free float, or shares available for trading, according to Adnan Katchi, the head of international equity sales at Arif Habib Ltd.

Bond investors are also growing more confident. Pakistan’s international debt, rated Caa1 at Moody’s Investors Service, or seven levels below investment grade, has returned 32 percent this year, according to JPMorgan Chase & Co.’s Next Generation Markets Index. Yields hit a two-year low of 8.5 percent on Oct. 26.


The country is luring more of the world’s biggest consumer brands as spending increases. Debenhams Plc (DEB), the U.K.’s second- largest department-store chain, and Nine West Group Inc., a seller of women’s shoes and handbags owned by New York-based Jones Group Inc. (JNY), opened their first Pakistan outlets this year.....

Hopewins said...

Dr. Haq,

FRESH UPDATE: SBP has just published the Exports Data for 2011-2012:

It looks like a mixed bag of results. Overall, Exports seem to have fallen by 2.3%, but that is not a huge drop. Here are the results sorted by Group:

GROUP NAME......2010-11..2011-12

GROUP NAME......$Change..%Change

It looks like Petro-products and Food-Products lost the most this year and general non-textile manufacturing (leather, rugs etc) gained the most, with textile remaining steady.

Item-wise Summary:

Winners: As you predicted, Guar exports are up by 232%, probably because of that Fracking thing. Raw cotton is up 50%, Ready-mades are up 30%, Chemicals up 15%, Leather & Sports goods are up 10%, and Cotton-Cloth grew by 5%.

Losers: Wheat exports collapsed by 90%, Refined petro-products down by 65%, Knitwear down 15% and Bed-wear & Cotton-Yarn are down 5%.

What is your analysis of these latest export trends?

Thank you.

Riaz Haq said...

Here's an ET story on Unilever targeting Pakistan market as a priority:

It is a global food and consumer goods giant that serves over 2 billion consumers every day in more than 180 countries around the world, but Unilever’s global management team is convinced that the key to their future success lies in 16 emerging markets, of which Pakistan is one.

Paul Polman, the CEO of Unilever, and Harish Manwani, the chief operating officer, visited Pakistan on Tuesday in what appears to be part of their global push to gear the company’s growth strategy towards emerging markets. “We want to be in every market with more than 100 million consumers,” said Manwani. “And we want to be in every market where the purchasing power of the consumer is growing. Pakistan meets both of those criteria, the first one by quite a lot.”

About 56% of Unilever’s revenues come from emerging markets, a number that Manwani says could rise to as high as 75% over the next few years. In Pakistan, the company operates two subsidiaries, Unilever Pakistan and Unilever Pakistan Foods, both of which are publicly listed on the Karachi Stock Exchange. For the year 2011, the company’s Pakistani subsidiaries earned combined gross revenue of over Rs73 billion, or about 1.3% of the global total for Unilever.

Growth in Pakistan is significantly higher. While Unilever’s global revenues grew by around 5%, revenues in Pakistan grew by a much stronger 9.9%, even when taking into account the rupee’s depreciation against the euro, the company’s global reporting currency. In Pakistani rupees, gross revenues of both companies grew by nearly 17%.

But it is not just the current growth figures that appear to be attracting Unilever’s attention to Pakistan, but rather what is clearly a rapid expansion of the Pakistani middle class, which is causing purchasing power – and thus the propensity to buy branded products – to rise among a wide and diverse array of Pakistani consumers. Unilever is increasingly finding that it is selling its products to everyone from the bank CEO who works on Karachi’s II Chundrigar Road to the small shop owner in rural Sanghar to the grain merchant in a small town outside Sialkot.
Malik said that the company is actively trying to reach consumers in small towns and rural areas, well beyond the larger cities in the country. The company reaches 50,000 retailers in rural areas, said Malik, a number that keeps on expanding rapidly.

That focus on rural consumers appears to be part of the global strategy: Paul Polman said that Unilever’s connection to farmers and rural communities is part of its efforts to integrate its business strategy with social responsibility. “Over 40% of the world’s population is in agriculture. We want to integrate over 500,000 of them into our global supply chain. They tend to be more reliable suppliers and help us reduce our volatility. In turn, we provide them with a better livelihood,” said Polman.

Unilever’s global CEO was effusive in his praise of the team in Pakistan. “The water conservation techniques pioneered in Pakistan will now be replicated in Unilever factories around the world,” he said. “Pakistan has always provided us with talent, and is in fact exporting talent. Over 55 Pakistanis are now working in senior positions in Unilever all over the world.”...

Riaz Haq said...

Here's a Nation story on Japanese investments in Pakistan:

LAHORE - Japanese Ambassador to Pakistan Hiroshi on Thursday said that many big Japanese investors are seriously planning to shift their units to Pakistan from India due to strong workers unions culture in India.

The Ambassador was speaking at the Lahore Chamber of Commerce and Industry. LCCI President Farooq Iftikhar highlighted the issues being faced by the businessmen while Senior Vice President Irfan Iqbal Sheikh, Vice President Mian Abuzar Shad, former presidents Tariq Hameed, Iftikhar Ali Malik, Mian Misbahur Rehman, former senior vice president Abdul Basit, former vice presidents Aftab Ahmad Vohra and Shafqat Saeed Piracha also spoke on the occasion. Hiroshi Oe said that the business environment in Pakistan is far better and it is a safer place as far as working conditions are concerned. The economy and infrastructure development are the priority areas and Japan government is focusing on them.

The Ambassador also stated that Japanese government has hosted investment seminars for Pakistan to further strengthen bilateral relations. “Japanese businessmen are being motivated for establishing business with their counterparts in Pakistan. He said Japan will continue to provide financial and technical assistance to Pakistan as we believe that this country has a great potential for the future.

There are spectacular development and investment opportunities in various fields as few countries are gifted with natural resources, the Ambassador said.

“Pakistan is facing difficult challenges which will be over soon,” adding that he will continue to strive to deepen mutual understanding through economic, educational, cultural and political exchanges....

Riaz Haq said...

Here's a Reuters' story on benefits of Pak biometric ID cards:

Elderly men wait patiently, carefully combing their hennaed beards, while a guitar-playing student entertains the long queue of Pakistanis lined-up to be photographed, fingerprinted and questioned inside a crowded office in the capital Islamabad.
...bureaucrats say the successful ID registration has dramatically cut the number of ghost voters and is assisting in the distribution of cash payments for the poor and displaced.

"The database has brought a lot of transparency. We signed up so many people," said Tariq Malik, the 44-year-old chairman of the National Database and Registration Authority (NADRA).

During elections five years ago, less than half of Pakistani adults had a government-issued ID. Now 91 percent have the plastic green cards, said Malik, who previously worked as a county technology officer in Michigan in the United States.

It is hard to verify such a high rate of registration as Pakistan's census data is many years out of date.

Malik said registration spiked after the cards were required for poor Pakistanis to qualify for cash payments from the government.

However, some families, while grateful for the cash, say the flow of aid is sporadic.

"One year ago when I received a card, I got 2,000 rupees. They come after every two to three months and give a little bit of money. Now they come only after six to seven months and only give 3,000 rupees," said Hanifa Meer Beher, 6o, who lives in Karachi's coastal belt Kaka-pir village.

"This money is not enough and it has not made my life any better. I am a poor woman. Whenever I receive this money, I buy a little bit of flour, rice...I am grateful that I am getting something."

International donors like the World Bank, who are using the ID database for cash distributions, say they are happy with the system.

The bank helps fund a program where around 5.5 million poor families who have registered with NADRA get $10 a month.

"More countries are using cash transfers because poor families can choose what to buy and are more likely to get the money on time than aid given in other ways," said a World Bank spokesman.

Neighbouring India helps its poor via subsidized food or fuel, but much of its aid is stolen and ends up on the black market. Recent efforts to link benefits to identity cards there have been chaotic.


Pakistan's new ID registrations helped eliminate 37 million ghost voters and add around 44 million real people to electoral roles, said Malik, adding voters can now use their ID number to check their registration by text message. A date has not yet been set for the next election, due in the first half 2013.

In future, the ID database may also help in the fight against tax evasion, fraud and crime, but only if the government uses the information, say sceptics like tax expert Ikramul Haq.

In a country where less than one percent of citizens pay income tax, NADRA has identified more than 2 million rich tax cheats, Malik said.

The federal board of revenue estimates tax evasion means as much as US$50 billion is missing from the treasury, money that could be used to upgrade crumbling schools and hospitals.

But so far, Pakistan's wealthy tax cheats remain untouched, yet authorities, mindful of pressure from the International Monetary Fund, are making noises about cracking down.

"We have so many enemies. The rich, who are not accustomed to pay taxes, pension cartels, politicians who want their voters to get benefits they are not entitled to," said Malik.

Registering Pakistan's 180 million population, spread from the Indian Ocean to the Himalayas, meant sending mobile registration vans and skiers laden with bulky equipment to far-flung villages and setting up booths at fairs....

Anonymous said...

ohh cm'n if it is so then why pakistan is considered as a failed economy . Rising middle class in pakistan is a sheer joke. pakistan is a worse performing economy even worse than Bangladesh.

Riaz Haq said...

Anon: "ohh cm'n if it is so then why pakistan is considered as a failed economy . Rising middle class in pakistan is a sheer joke. pakistan is a worse performing economy even worse than Bangladesh."

What you heard and read in Indian media is WRONG!

Failed economies do not produce rising disposable incomes!

Talking about household disposable incomes in South Asia, there were 1.8 million Pakistani households (7.55% of all households) and 7.9 million Indian households (3.61% of all households) in 2009 with disposable incomes of $10,001 or more, according to Euromonitor.

This translates into 282% increase (vs 232% in India) from 1995-2009 in households with disposable incomes of $10,001 or more.

Riaz Haq said...

Here are some excerpts of an interesting Op Ed in The Nation newspaper by former finance minister Shaukat Tarin:

Despite all the gloomy news and events that has started to define Pakistan, our national resilience remains intact. However, the question that is one every one’s mind is for how long?

Let’s start with the positives (yes there are always some!) of Present Day Pakistan;

• CP Inflation while high is showing signs of becoming range bound;

• Foreign Remittances continue to rise (the PRI scheme launched under my stewardship has borne fruit with remittances expected to cross the $l2b annual mark this year);

• We have finally started to debate/define our role in the devastating ‘War on Terror” and the end game of Afghan conflict has started to be played out.

• Pakistan’s banking system remains insulated from the Western banking meltdown.

• Booming Agrarian economy, despite devastating floods; with corporate sector moving into dairy, live-stock and value added processing.

• While most of the rest of the world is ageing our population is getting younger

• Democracy is still holding on!

However, we are far from the country we all aspire. The negative list (so to speak) is long, makes a somber reading, but largely includes:

• Lack of governance and transparency (lack of meritocracy).

• Unrelenting and crippling energy shortages.

• Lack of Scale/infrastructure to support GDP growth.

• Security and Law and order situation (Perception twice as worse as reality with the reality bad enough especially in Karachi and Quetta)

• Weak Social Sector reforms/indicators.

• Increasing friction amongst state institutions.

... the economic and social sector performance of Pakistan has also been severely impacted by the following:

1) Inability of the successive governments to balance their budgets by increasing tax to GDP ratio, reducing non-development expenses and losses of the Public sector enterprises.

2) Negligible expenditures on education and health sectors to develop our most important asset i.e. human resource.

3) Creating a competitive environment of high economic growth by focusing on the productive sectors of our economy such as agriculture and manufacturing, and

4) Focusing on infrastructure and energy sectors to facilitate the economic growth.

Whereas, we have seen efforts in the past to address these weaknesses they have been at best weak and far between.

The present economic scenario is again infected by the same weaknesses i.e. large fiscal deficits, low expenditure on education and health, chronic electricity and energy shortages, lack of focus on the productive sectors resulting in high inflation, high unemployment and low economic growth. We all want a Pakistan which is economically prosperous, institutionally resilient and strategically oriented. In essence, we want to make Pakistan an economic welfare state. In my view, a key pre-requisite for an Economic Welfare State is to ensure that a country experiences equitable and sustainable growth for a prolonged period of time. Look at the examples of India and China where uninterrupted economic growth has changes the whole value proposition of these countries.
To reduce our fiscal deficit we will have to increase our taxes. As I have said it many a times, all incomes will have to pay taxes and there cannot be any sacred cows. Agriculturists will have to pay their taxes and so should the retailers, real-estate developers stock-market and all professionals. Our tax to GDP is woefully inadequate at 9pc, where Sri Lanka is 17pc, India 19pc, China 21pc and Turkey 33pc. Before I left the government, there was a tax plan in place, which needs to be implemented. It will require a strong political will.....

Riaz Haq said...

Here's an excerpt from a piece in The Atlantic Cities on economic mobility in US and comparing it with Pakistan:

A 2007 study by the organisation for Economic Cooperation and Development combined a number of previous estimates and found income heritability to be greater in the United States than in Denmark, Australia, Norway, Finland, Canada, Sweden, Germany, Spain, and France. The United Kingdom, which had been far less mobile than the United States during the late nineteenth century, brought up the rear, but this time it was just a bit less mobile than the United States. Thanks to a 2012 recalculation by Miles Corak, an economist at the University of Ottawa, we can now add Switzerland, Japan, New Zealand, Singapore, and Pakistan to the list of societies that are more mobile than the United States.

Riaz Haq said...

Here's a News report on sizing Pakistan's informal economy:

Tax authorities have estimated that the size of informal economy stood in the range of 31.4 to 44 percent of gross domestic product (GDP), according to official documents of the Federal Board of Revenue (FBR).

The proposed amnesty scheme will give last opportunity to avail after approval of the parliament to those who are major beneficiaries of huge volume of black economy, it said.

“Unfortunately, Pakistan has a large percentage of underground economy. It is difficult to estimate the exact volume but different studies have estimated the size of underground / informal economy in the range of 31.4 percent to 44 percent of the GDP,” according to the documents.

The FBR’s working also referred other studies done in the past in order to give policymakers a candid comparison to reach the rationale decision.

Referring to the World Bank’s research done in July 2010, it said that the size of informal economy stood at 36.7 percent of GDP. The State Bank of Pakistan had estimated the size of informal economy at 27.3 percent in 2000s and 28.6 percent in 1990s.

According to the Global Financial Integrity Organization paper on Illicit financial flows from developing countries 2000-09 (December 2011), the illicit financial flows was estimated at $1,449 million.

According to the research conducted by Ali Kemal of Pakistan Institute of Development Economics (PIDE) for 2007-08, Pakistan’s formal GDP was half the GDP. However, it is still an underestimated figure since investment data is not adjusted. The informal economy is 91.4 percent of the formal economy, he revealed during the last PIDE conference held in Islamabad in November.

However, the FBR has informed the prime minister, the finance minister and other cabinet ministers that several countries in recent past have provided opportunity to whiten income in their respective countries.

Riaz Haq said...

Here's an ET report on rise in worker remittances to developing world:

Developing countries are expected to receive $406 billion in remittances in 2012, which is 6.5% higher than the remittances they received in 2011, according to a recent World Bank report.

The World Bank projects that remittances to developing countries will grow by 7.9%, 10.1% and 10.7% in 2013, 2014 and 2015 respectively, to reach $534 billion in 2015.

While the international economic downturn has adversely affected remittance flows to Europe and some other regions, South Asia is expected to fare much better than previously estimated, the report says. Remittance flows to South Asia are expected to clock in at around $109 billion in 2012, up by 12.5% over 2011, it said.

According to the State Bank of Pakistan (SBP), the country received remittances of $13.2 billion in fiscal 2012, which were 17.7% higher than the preceding fiscal year.

Similarly, in the first four months of the current fiscal year, remittances to Pakistan stood at $4.9 billion, higher by 15% compared to remittances received in the corresponding four-month period last fiscal year.

“Regions and countries with large numbers of migrants in oil-exporting countries continue to see robust growth in inward remittance flows, compared with those whose migrant workers are largely concentrated in the advanced economies, especially Western Europe,” the World Bank report says.

According to the Bureau of Emigration’s Assistant Director Farrukh Jamal, more than 80% of the manpower that Pakistan has exported resides in Saudi Arabia. “Almost 90% of recent emigrants from Pakistan currently work in the Middle East,” he told The Express Tribune in an interview two weeks ago.

The largest single-country chunk of remittances that Pakistan received in fiscal 2012 – amounting to $1.1 billion – was from Saudi Arabia. It was followed closely by the United Arab Emirates (UAE), with $963.1 million remitted from the country in the same period. The United States ($795.3 million) was the third biggest source of remittances during fiscal 2012...

Riaz Haq said...

Here's Daily Times on Mobilink's planned $1 Billion expansion:

A delegation of VimpelCom informed Prime Minister Raja Pervez Ashraf of plans for further investment of $1 billion in Pakistan for the enhancement of Mobilink’s nationwide mobile network. A delegation comprising senior management from VimpelCom, the parent company of Mobilink, called on the prime minister at the Prime Minister House, on Thursday. The delegation was headed by VimpelCom Group CEO Jo Lunder who apprised the prime minister on VimpelCom’s global operations and the significance of the Pakistani market for VimpelCom’s growth strategy. The prime minister also discussed VimpelCom’s outlook on current operating conditions within Pakistan, and was apprised of Mobilink’s existing investment of over $3.9 billion towards consolidating its position in Pakistan’s telecom sector.\11\30\story_30-11-2012_pg5_2

Riaz Haq said...

Here's Dawn on KSE continuing rally to set ew records:

Pakistani stocks hit a record high for the fourth day in a row on Friday, closing the week up nearly 3 per cent, driven by a rally in cement shares and expectations that the central bank will ease rates next week.

The Karachi Stock Exchange’s (KSE) benchmark 100-share index surged as high as 16,651.10 in intraday trading.

It closed at 16,573.86, up 0.28 per cent or 46.78 points from the previous session.

“Investors remained bullish in cement stocks, while the textile sector also joined the bandwagon,” said Samar Iqbal, an equity dealer with Topline Securities.

“With the end of the year approaching, there was also renewed interest in the banking sector.” Fauji Cement rose 2.05 per cent, or 0.14 rupees, to 6.98 per share, while National Bank was up 4.99 per cent, or 2.37 rupees, to 49.87 per share.

Karachi Electric fell 0.72 per cent, or 0.05 rupees, to 6.88 per share.

The market also found support from expectations that the State Bank of Pakistan will cut its discount rate with inflation under control.

The government will publish November inflation figures on Monday, while the central bank meets later in the week to decide on monetary policy.

In the currency market, the Pakistani rupee strengthened to 96.49/96.54 to the dollar, compared to Thursday’s close of 96.54/96.59.

Overnight rates in the money market remained flat at 9.50 per cent.

Riaz Haq said...

Here's a Dawn story on growing retail sector in Pakistan:

Karachi’s Dolmen City Mall is a large, plush building that would not be out of place in Dubai. Heavily fortified with security guards, the interior is impressive, with its cavernous corridors and gleaming marble floor – a far cry from the hustle and bustle of the city’s other shopping areas.

Newly arrived from London earlier this year, Karachi residents were insistent that I must see this wonderful new addition to the city. When I did, it was something of a home from home. In addition to high end local clothing brands were a whole plethora of foreign stores, from Mango, to Next, to the Body Shop. Many (though not all) of these are British imports.

The latest to open its doors was Debenhams, stalwart of the British high street, which this year became the first international department store in Pakistan with its branch in Dolmen. It joins other UK brands such as Next, Early Learning Centre, Accessorize and Monsoon.

So what is behind the influx of foreign stores to Karachi’s high streets? Internationally, Pakistan is not viewed as an obvious market for retail brands due to security concerns – both real and perceived – and the attendant difficulties of doing business.

However, the numbers tell a different story. The retail sector is one of the fastest-growing in Pakistan, and is expected to grow at a rate of 7 per cent per year until 2015. To give some indication of the growth it has already seen in recent years, compare the market value in 2006 – £19124.1 million – with 2010, when it had increased to £26541.2 million.

Yasin Paracha runs Team A Ventures, the company which holds the franchises for UK brands Debenhams, Next, Early Learning Centre, Accessorize, and Mothercare. He explains that the historic ties between the two countries means that British brands have instant recognition in Pakistan.

“People in our target market are used to travelling to London frequently,” he says – many people will have visited the UK as tourists, students, or on family or business visits.

Indeed, the growth of this target market – young, urban, and with significant disposable income – is crucial to increased retail operations in Pakistan. The urbanized middle classes are a steadily growing group.

Of Pakistan’s 180-million strong population, around 55 million live in cities such as Karachi, Lahore, and Faisalabad. Consumerism is on the up, fuelled by a recent boom in consumer banking and the media industry, and encouraged by ever-increasing investment from both local and foreign chains. Traditionally, many people in this target market have preferred to do much of their shopping abroad, meaning that they are already predisposed to foreign brands.

But what about the security risks for new businesses? Karachi, in particular, is home to outbreaks of sectarian and ethnic violence, terrorist attacks, and a high instance of crime including extortion rackets.

“Of course it’s a concern for new investors,” says Paracha. “On the surface of it, a lot of brands are hesitant, but when they first make the trip to Pakistan, they are reassured because they realise that the things on the ground are very different from what they see in the media.”

However, the situation cannot be ignored. “One has to be cautious,” Paracha continues. “You can’t go into a very aggressive expansion because you can’t deny the security issue, especially in some cities. But so far we have not had a major negative impact on our operations.”

The visible success of household names like Debenhams and Next in Pakistan is likely t encourage other British brands to see the country as a potentially viable market. In addition to this, there is a concerted drive from the UK government to encourage British investment in Pakistan, due to a bilateral trade agreement between the two countries....

Riaz Haq said...

Here's an interesting Huffington Post piece by investment adviser Dan Solin:

Pakistan is often in the news and usually in unflattering terms. The relationship between the U.S. and Pakistan is troubled, characterized by deep mutual distrust and conflicting goals.

The economy of Pakistan is equally troubled. According to the Heritage Foundation, its economy has been plagued by "political instability and violence." Much needed economic reform has been stalled by bureaucratic delays and lack of political will. Property rights in Pakistan are "compromised." The rule of law is "fragile." Taxation is "poorly administered." Its public debt is over 50 percent of total domestic output. Foreign investment is declining. Its overall ranking on economic freedom is below the world and even regional averages, placing it in the category of "mostly unfree" economies. To put this in perspective, there is more economic freedom in Yemen, Senegal and Nigeria than in Pakistan. Its unemployment rate is a staggering 15 percent. Its inflation rate is 11.7 percent.

Does this country seem like a good place to invest to you?

Now for the shocker: Year-to-date returns for the stock market of Pakistan were 46.73 percent. That's not a typo. Year-to-date returns for the U.S. during the same period were 11.90 percent.

Here are some other interesting facts. The stock markets in Nigeria and Kenya
were 27.26 percent and 26.56 percent, respectively. What about the returns in fast-growing economies like Brazil and China? Brazil was an anemic 1.43 percent. China was a loss of 10.20 percent.

If you are a typical investor, you believe paying attention to the financial news is important to your investing success. You read the financial media. You watch CNBC and pay special attention to the fund managers who "explain" the stock markets to you and encourage you to follow their advice (often by investing with their firms). Maybe you follow the stock picks served up by Jim Cramer, who appears to have an encyclopedic knowledge of all things financial.

Let me ask you this question. Did any source of financial news advise you to invest in the stock markets of Pakistan, Nigeria or Kenya? Or Turkey, which topped the list with returns of 47.31 percent? How about your broker or financial adviser? They make it appear they have special insight into the financial markets. Did they advise you to invest in any of the countries reporting returns higher than the U.S.?

The average returns of the 77 countries is a positive return of 8.47 percent. In 2011, the average was a negative 14.15 percent and the list of top performers was markedly different, with Venezuela, Jamaica and Botswana turning in stellar results, along with Pakistan which came in second.

Trying to predict which country will perform best in 2013 is a crapshoot. So is trying to pick stocks that are mispriced, or betting on which asset class will outperform. Yet the securities industry continues to thrive by persuading you to pay its members fat fees for dispensing precisely this kind of "advice."

The next time your broker peers into his crystal ball and makes a recommendation, ask this question: Did you predict stellar returns in Pakistan, Nigeria or Kenya for 2012?

Riaz Haq said...

Here's Reuters on 70% of Pak lawmakers not filing tax returns:

Almost 70 percent of Pakistani lawmakers did not file income taxes last year, an investigative journalism group said on Wednesday, highlighting deep flaws in a taxation system that has drawn repeated criticism from Western aid donors.

The Center for Investigative Reporting in Pakistan released a report based on leaked tax returns, marking the first time that the records of 446 lawmakers and ministers have been published and focusing scrutiny on individuals ahead of polls next year.

Pakistan's inability to raise revenue has constrained government spending, depriving schools and hospitals of funds and exacerbating a power crisis, causing widespread hardship in the nuclear-armed country of 180 million people.
"This is what the people of Pakistan are upset about," said Jehangir Tareen, a trim, silver-haired businessman who paid the most tax in the National Assembly last year. He tried to set a precedent by making his returns public but no one followed suit.

"Taxes are the beginning and end of reform in Pakistan," said Tareen, who gave up his seat in parliament in frustration over his inability to push changes. "Right now the rich are colluding to live off the poor."

Umar Cheema, an award-winning journalist heading the Center for Investigative Reporting, said he hoped the report would make members of parliament more accountable to voters.

Cheema took legislators' identity card numbers from their public election nomination papers, then convinced employees at the Federal Board of Revenue to leak the tax returns related to the identity numbers. It took him a year to collect the data.


The report highlights why Pakistan has failed to improve its tax collection rates: politicians benefit from a lax regime. No one has been convicted of income tax evasion in 25 years and few Pakistanis see a failure to pay tax as shameful.

Although lawmakers have about $25 a month deducted from their basic pay in tax, almost all have second incomes.

They built this system for their own benefit," said tax expert Ikramul Haq. Poor laws and loopholes meant lawmakers often have their income exempt from tax, he said.

Huge swathes of the economy, like agriculture, are virtually exempt. Specially designated products also benefit from "zero-ratings" and are not subject to any tax.

"We want to cut down on zero ratings and loopholes," said Ali Arshad Hakeem, the head of the Federal Board of Revenue. He has vowed to crack down on tax cheats.
Most countries collect between 20 to 40 percent of their economic output in tax. In Pakistan, less than 10 percent is collected, Franks said.

Pakistan revenue authorities say 0.57 percent of adults pay income tax and the number is steadily declining.

"People know that the elites, the government, are corrupt but they don't understand how the corruption works," said report author Cheema.

"If our rulers are not paying for themselves, why should taxpayers in other countries pay for them?"

Part of the problem with going after tax evaders is the poor state of records at the Federal Board of Revenue. It's hard to distinguish ineptitude from corruption, officials said.

About three quarters of the time, people's declarations of what they paid did not match the actual payments, the officials said. An official said authorities never really tried to match up the records: "Oh dear God, no!" he laughed.

Riaz Haq said...

Here's LA Times on Pakistan's tax collection effort:

The man hired to go after a nation of tax evaders jabs his finger at his laptop screen as he scrolls through a database of wealthy Pakistanis and dissects their spending habits.

He stops at the name of a rich man from Peshawar.

Everything's there, Ali Arshad Hakeem says: the man's photo, his home in a posh Peshawar neighborhood, his frequent trips to Abu Dhabi, his BMW and a bevy of bank accounts.

"We have the universe; now how do we use that universe?" asks Hakeem, Pakistan's new Federal Board of Revenue chairman. Hakeem answers his own question. "My approach is to give them an offer."

Hakeem has the Sisyphean task of overhauling Pakistan's broken income tax system, and he claims to have the remedy. He is asking parliament members — a majority of whom are believed to evade taxes themselves — to approve a national amnesty wiping the slate clean for millions of Pakistanis who have never paid a rupee in taxes, if they agree to a one-time payment of 40,000 rupees, about $420. Then, in 2013, they would have to file a return and pay whatever income tax they owe: for example, about$11,100 on a taxable income of $56,000

Hakeem, 49, was appointed in July, after a four-year stint as head of the National Database and Registration Authority, the agency that issues the national identity cards. He says his prime target is Pakistan's moneyed upper crust: owners of sprawling two- and three-story marble-floored homes kept white-glove clean by teams of servants.

Among them are ministers and politicians, the very people responsible for enacting and executing laws aimed at fixing the system. A 2010 study by the Pakistan Institute of Legislative Development and Transparency, an independent think tank, reported the average worth of a Pakistani lawmaker to be about $850,000, while the richest lawmaker's assets topped $34 million.

According to a study released Wednesday by Pakistani investigative journalist Umar Cheema, two-thirds of Pakistan's federal lawmakers and more than 60% of the Cabinet did not file income tax returns in 2011. One senator, Mushahid Hussain Sayed, paid less than $1 in income taxes in 2011, Cheema says. The report also says President Asif Ali Zardari did not file an income tax return last year, though it adds that an aide said the president did file a return.

"The problem starts at the top," the report states. "Those who make revenue policies, run the government and collect taxes have not been able to set good examples for others."

To track down cheats, Hakeem and his team of young computer experts have combed a variety of national databases to form individual spending and income profiles. One of those experts and a top aide to Hakeem, Samad Khurram, says previous tax amnesties in Pakistan failed because the government had no idea who the tax evaders were.

"Now we know them, their children, their wives, where they travel, what cars they use," Khurram says. "We're saying, 'We know you, we're coming after you, and if you don't pay, we do this….' That's not an amnesty — that's a threat."....

Riaz Haq said...

Here's a Daily Times story on a report about Pak stocks and bonds historic performance:

Magnus publishes first comprehensive study on Pakistani stocks and bonds

KARACHI: The first comprehensive study about returns of stocks and bonds in Pakistan has been recently published by Magnus Investment Advisors Limited. The research provides data for equities starting July 1965 and for bonds starting January 2001. The study shows that long term real Pakistani rupees return (after inflation adjustment) on local equities ranges between 4.82 percent to 5.69 percent. The treasury bills have provided negative returns. The real return on 5 year and 10 year PIBs is 2.19 percent and 3.43 percent respectively. The study also provides nominal and US dollar returns. Issues such as 'Equity Risk Premium' and relevance of 'Purchasing Power Parity' in the context of local securities market are also dealt with. The study also provides an asset allocation frame-work for local trustees. The most interesting part is the analysis of equity returns in Pakistan with other emerging markets and investment in Pakistani equities from the perspective of foreign investors. The study conclusively demonstrates that Pakistan stocks do not represent any unusual risk in the universe of emerging markets. Pakistani stocks should get one of the highest allocations among emerging markets from the perspective of US investors. The study is not only useful for local trustees of retirement funds and charitable institutions but it also fills a major gap for local business schools where so far graduates had little knowledge and understanding about risks and returns of local capital markets. The study is also a useful read for the Ministry of Finance, SECP and BoI officials who are called upon to promote investment in Pakistan from time to time. Magnus is a boutique investment advisory firm based in Karachi. It acts as an investment advisor to retirement funds sponsored by large companies (mostly MNCs) in Pakistan.\12\14\story_14-12-2012_pg5_6

Riaz Haq said...

Here's a Bloomberg report on central bank rate cut in Pakistan:

Pakistan cut its benchmark interest rate to the lowest level in five years as policy makers seek to stimulate an economy battered by an energy crisis and insurgency that is likely to need more International Monetary Fund aid.

The State Bank of Pakistan reduced the discount rate by 50 basis points to 9.5 percent, Syed Wasimuddin, spokesman, told reporters in Karachi yesterday. The decision was predicted by 14 of 15 economists surveyed by Bloomberg News. One saw no change.

Pakistan’s economy will probably expand 3.5 percent in the 12 months through June, the IMF forecast Nov. 29, less than the 4.3 percent predicted by the government. Fighting with militants along the nation’s northwest border is sapping the budget and undermining confidence among businesses that are already struggling with record power outages that have shut factories and left thousands of people jobless.

“Pakistan is likely to go back to the IMF for another loan next year,” Hamad Aslam, head of research at Lakson Investments Ltd in Karachi who predicted yesterday’s decision, said before the announcement.

Pakistan is scheduled to repay about $7.5 billion to the Washington-based IMF between 2012 and 2015, with $1.2 billion due in June. A partially disbursed $11.3 billion loan program expired in September 2011.

The central bank’s reduction reflects inflation slowing to a 41-month low of 6.93 percent in November. Today’s cuts add to 2 percentage points of easing since August. The new rate will be effective from Dec. 17.

“Deceleration in inflation is faster than the projected path and credit extended to private businesses remains muted,” the State Bank said in its monetary policy statement yesterday. Average inflation for the year ending June will be below the 9.5 percent target, it said.

While the central bank has scope for a larger cut, it may opt for a conservative approach amid IMF repayments, Uzma Taslim, an analyst at Alfalah Securities Pvt. Ltd. in Karachi, said before the announcement.

The rupee traded at a record high against the dollar this week, after falling 9 percent earlier this year.

“Government finances are also under pressure,” Moody’s Investors Service said in November. “The budgeted deficit of 4.7 percent for the year ending June is likely to see slippage due to optimistic revenue and expenditure assumptions.”

Pakistan recorded the highest budget deficit in two decades in the fiscal year ended June.

Hopewins said...

Here is an Dec 13,2012 article by Dr. Hilaly which agrees with your basic premise...

Quote: "But, it’s hardly a secret that what really cushions the economy is the black economy, which is almost as large as the documented one and remains beyond the purview of the government."

Riaz Haq said...

Here are a couple of reports on Pak economy:

1. Dr. Ishrat Husain in The News:

“The economy is facing lot of difficulties due to bad governance,” he said at a seminar on ‘Pakistan’s Economic Outlook – 2013 & Beyond’ organised by the Institute of Chartered Accountants of Pakistan (ICAP) on Tuesday evening.

Dr Ishrat, who is also Dean and Director of Institute of Business Administration, disagreed with the doom and gloom painted about the economy by other speakers, saying the situation is not as worst as being projected. “There is plenty of room to improve the system by improving good governance in law and order, education and energy,” he added.

He said that it was an issue of governance that authorities were not taking action against tax evaders and criminals. “Due to lack of enforcement the criminals feel comfortable,” he said.

The economic situation is much better right now, he said and added that the country had witnessed a crisis like situation when oil ships were anchored on the ports and government had no money to pay them in the past.

He neither criticised the present government setup nor supported it, but said that the democratic system should be given opportunity for sustainable economic growth. “We did not allow democratic system to flourish,” he added.

Further, Dr Ishrat said that 50 percent population of Pakistan is living in an urbanised society, and most of them belong to middle class. Besides, a big strength of youth would set direction for better.

To a question about rupee depreciation against dollar that is creating difficulties in capital investment for manufacturing sector, which would result in decline in exports, he said rupee depreciation will help in increasing exports. He said that the nation was blinded by short-term measures and frequent changes of heads at SBP and finance ministry also resulted in economic instability.

2. Reuters on Pak current account deficit:

Pakistan’s current account deficit for the July-November period of the 2012/13 fiscal year was $365 million, compared with a deficit of $2.341 billion in the same period last year, the central bank said on Thursday.

In November, the current account deficit was $638 million.

The current account deficit for the 2011/12 fiscal year was $4.634 billion compared with $214 million in the 2010/11 fiscal year.

“This was positive mainly because of lower commodity prices and the gap between imports and exports was lower,” said Ahsan Mehanti, an analyst at Arif Habib Corp.

“At the same time, there was higher foreign investment in the country and higher remittances. There was a higher rupee to dollar value.”

Riaz Haq said...

Here's Fiber2fashion on Pakistan's rising textile exports:

Pakistan’s textile exports grew to US$ 5.4 billion during first five months of the current Pakistani fiscal year that began on July 1, 2012, showing a year-on-year rise of 7.81 percent, Pakistan Bureau of Statistics (PBS) data showed.

Pakistan exported textiles worth US$ 5.009 billion during same period of last fiscal.

Product-wise, the items that depicted positive year-on-year export growth during July- November this year, include cotton yarn which grew by 38 percent year-on-year, yarn increased by 62.73 percent, cotton cloth by 12.31 percent, towels by 10.98 percent, readymade garments by 14.26 percent, tents by 25.49 percent and other textile materials by 70 percent.

On the negative side were raw cotton, exports of which declined by 44.35 percent year-on-year, cotton carded by 86 percent, knitwear by 2.02 percent, bed wear by 9.61 percent, art silk and synthetic textiles by 18.1 percent and made-up articles by 2.14 percent.

Riaz Haq said...

Here's an Express Tribune list of Pakistani companies with over a billion in revenue:

The Billion Dollar Club

1. Pakistan State Oil Company

Revenues: $11.57 billion

Joined club: Before 1986

2. Pak-Arab Refinery

Revenues: $3.00 billion

Joined club: 2000

3. Sui Northern Gas Pipelines

Revenues: $2.52 billion

Joined club: 2004

4. Shell Pakistan

Revenues: $2.38 billion

Joined club: 2000

5. Oil & Gas Development Company

Revenues: $2.23 billion

Joined club: 2005

6. National Refinery

Revenues: $1.97 billion

Joined club: 2005

7. Hub Power Company

Revenues: $1.97 billion

Joined club: 2009

8. Karachi Electric Supply Company

Revenues: $1.84 billion

Joined club: 2008

9. Attock Refinery

Revenues: $1.74 billion

Joined club: 2008

10. Attock Petroleum

Revenues: $1.72 billion

Joined club: 2010

11. Lahore Electric Supply Company

Revenues: $1.49 billion

Joined club: 2006

12. Pakistan Refinery

Revenues: $1.44 billion

Joined club: 2011

13. Sui Southern Gas Company

Revenues: $1.38 billion

Joined club: 2005

14. Pakistan International Airlines

Revenues: $1.36 billion

Joined club: 2005

15. Engro Corporation

Revenues: $1.29 billion

Joined club: 2011

16. Pakistan Telecommunications Company

Revenues: $1.25 billion

Joined club: 2000

17. Kot Addu Power Company

Revenues: $1.14 billion

Joined club: 2012

18. Mobilink

Revenues: $1.11 billion

Joined club: 2006

19. Pakistan Petroleum

Revenues: $1.09 billion

Joined club: 2012


Riaz Haq said...

Here's Daily Times on the impact of nearly $700 million CSF funds from US to Pakistan:

Pakistan received the second tranche of $688 million Coalition Support Fund (CSF) from the US on Friday. This second CSF tranche is expected to provide relief to the ailing economy, supporting the country’s macroeconomic indicators positively in short-term.
Analysts said that Pakistan’ depleting foreign exchange reserves have been enhanced with inflows of much-awaited funds dedicated mainly for the expense of military operations in the war against terrorism. This was the second instalment received by the country after it got $1.12 billion in July.
The foreign reserves will be improved along with balance of payment and rupee position against dollar on temporary basis.
The current account balance failed to sustain its surplus position as it turned into a deficit of $365 million in November due to trade imbalance of trade and services that stood at $6.3 billion and $8.2 billion, respectively in the first five months of the current financial year. The rupee, which neared the Rs 100 mark against the dollar, will likely get some respite. The macroeconomic situation will be improved for a quarter with inflows of millions of dollars into the country’s reserves, analysts said.
In the short-term, the country will benefit from the millions of dollars inflows but its impact will not be sustainable for the long-term, they added.
The overall CSF pledged by US government is $2.5 billion in which remaining amount will be expected in future to be received by the country depending on diplomatic relationship with the US government. The persistent inflows are important for the country mainly for the payment of $7.9 billion it borrowed from the International Monetary Fund (IMF), otherwise, the economic situation will get severe and the country will again go to the IMF.\12\29\story_29-12-2012_pg5_13

Riaz Haq said...

An Express Tribune article cites a World Bank report to conclude Pakistan has low rates of people who keep their money in a bank.

I believe the lower rates of banking in Pakistan is the key reason for the nation's huge undocumented economy and massive tax evasion.

Growing gap between dismal official economic statistics and consumption boom coupled with strong corporate profits in Pakistan is a challenge for many analysts around the world. Most believe that Pakistan's GDP is, in fact, much larger and growing faster than the government data indicates.

Riaz Haq said...

Here's Dawn on KSE-100 among best performers in the world:

KARACHI: Pakistani stocks closed lower on Monday, although the market gained 49 per cent during 2012 and crossed 17,000 points for the first time.

The Karachi Stock Exchange’s (KSE) benchmark 100-share index ended 0.22 per cent, or 37.86 points, lower at 16,905.33.

The market’s rise was partly down to a substantial decrease in the interest rate, said dealer Samar Iqbal at Topline Securities.

Stocks that ended positively included Byco Petroleum, which rose 4.81 per cent, or 0.67 rupee, to 14.59 per share and Bank of Punjab, which was up 10.31 per cent, or one rupee, to 10.70 per share.

Stocks that fell included TRG Pakistan, down 0.7 per cent to 5.65 per share, and Fauji Cement, which fell 0.91 per cent to 6.53 per share.

In the currency market, the Pakistani rupee ended steady at 97.18/97.23 against the dollar, compared to Friday’s close of 97.17/97.23.

Overnight rates in the money market ended at 8 per cent compared to Friday’s close of 7 per cent.

Here's Bloomberg on Asian markets:

Dec. 28 was the final trading day of the year in South Korea, Taiwan, Indonesia, Thailand, Vietnam and the Philippines. Thailand’s SET Index surged 36 percent this year, the biggest advance by any Asian benchmark gauge after Pakistan’s Karachi 100 Index.

Riaz Haq said...

Here's Daily Times on decline in Pak defense budget and debt service since 1990s:

* Defence expenditures fall from 5.6% of GDP in 1994-95 to 2.5% in 2011-12, while debt servicing expenditures slump from 7.6% of GDP in 1997-98 to 4.3% in 2011-12

Staff Report

ISLAMABAD: Defence and debt servicing expenditures have been on the decline over the last nearly two decades in relation to gross domestic product (GDP), as spending on defence decreased from 5.6 percent in 1994-95 to 2.5 percent in 2011-12 while debt servicing which was 7.6 percent in 1997-98, is at a moderate level of 4.3 percent in 2011-12.

According to a report of Ministry of Finance’s Debt Coordination Office director general, the falling tax-to-GDP ratio has been a consistent problem over the decades. Even in the years of fiscal deficit contraction, the tax-to-GDP continued to fall. The decline is attributed to rising GDP in recent years but tax revenue failed to keep pace with the GDP growth. Hence, the improved fiscal discipline period has also been resultant of a controlled expenditure rather than expansion of revenues.

The policy decision to allocate 3.0 percent of the GDP to defence expenditures has not been done for the last couple of years due to financial constraints.

Fiscal balance has been under pressure for the last few years on back of structural deficiencies in tax system coupled with increasing expenditure on the back of high cost of subsidies. Broadening the tax net, enhancing the tax compliance, improving the service delivery, minimising the untargeted subsidies and result-based management of development expenditure are essential to attain fiscal discipline.

In May 1998, Pakistan went public with its nuclear capabilities, it is estimated that around Rs 100 billion were invested in Defence Saving Certificates (DSCs) by the public during 1997-98 and 1998-99. DCSs are 10 years instrument and both profit and principal are paid at the time of maturity. As the government follows cash accounting and no accrual is passed during the period, it results in understatement of fiscal deficits in initial years and overstatement of fiscal deficit in which the maturity of these certificates falls. The government paid around Rs 425 billion as interest on these DCSs during 2008-09 and 2009-10.

The total amount of food and energy subsidies paid between 2001-02 to 2007-08 stood at Rs 742 billion, whereas, Rs 1,407 billion was paid during last four years, which includes Rs 511 billion related to past year’s unpaid subsidies against power sector and commodity operations. The government didn’t increase the electricity tariff substantively during 2003 to 2008 that created circular debt in power sector companies. In 2010-11 and 2011-12, the government cleared the unpaid subsidy claims of Pakistan Electric Power Company related to past years amounting to Rs 433 billion (Rs 120 billion in 2010-11 and Rs 313 billion in 2011-12). Furthermore, past years’ subsidy claims of Rs 78 billion related to commodity operations were also paid during 2011-12. Higher international oil and commodity prices forced the government to intervene by providing higher energy and food subsidies to protect the vulnerable segments of the society and contain inflation.

Domestic loans: Pakistan’s domestic debt comprises permanent debt (medium and long-term), floating debt (short-term) and unfunded debt [made up of the various instruments available under the National Savings Scheme (NSS)] having shares of 22 percent, 54 percent and 24 percent, respectively in total domestic debt as on June 30, 2012.

Permanent debt mainly consists of medium to long-term instruments including Pakistan Investment Bonds (PIBs), government Ijara Sukuk bond, prize bond etc.

Riaz Haq said...

Here's bloomberg on fast food craze in Pakistan:

...Local and overseas business groups are queuing up to buy franchise rights in Pakistan for an array of popular food sold from Los Angeles to Kuala Lumpur, driven by rising demand from a booming middle class in South Asia’s second-biggest economy after India. Pakistanis increasingly flock to American food outlets even as ties between the two nations are strained by U.S. drone missile strikes in the northwest of the country.

Johnny Rockets Group Inc., another American fast-food group based in Aliso Viejo, California, that operates or franchises 68 hamburger restaurants in 16 countries, Second Cup Ltd., a coffee shop chain based in Missisauga, Canada, with over 360 cafes and Malaysia’s MammaRoti and PappaRoti are set to open their first stores in Pakistan this year.


Fatburger joins Hardee’s Food Systems Inc., headquartered in St. Louis, Atlanta-based cinnamon roll maker Cinnabon International Inc., The Noodle House of the United Arab Emirates, and five foreign frozen yoghurt chains that opened their first outlets in the world’s sixth-most populous nation since 2011. Consumer spending in Pakistan has increased at a 26 percent average pace the past three years, compared with 7.7 percent for Asia, according to data compiled by Euromonitor International, a consumer research firm.

...Pakistan’s middle class has doubled to 70 million people in the past decade as booms in agriculture and residential property, as well as jobs in telecom and media have helped people prosper, according to Sakib Sherani, chief executive officer at Macroeconomic Insights in Islamabad.

Franchising is also booming as businesses battling Pakistan’s record energy outages seek alternatives to factories that can’t run without adequate power, said Samiullah Mohabbat, chief executive officer of Fatburger Pakistan and the country representative for the World Franchise Association. Mohabbat received over 100 queries this year from entrepreneurs wanting to buy franchise rights for international food chains.

The number of foreign food franchises in Pakistan will “easily double” in the next two years as more coffee houses and casual dining outlets enter the country, Mohabbat said. About two dozen foreign food franchises operate in Pakistan since Louisville, Kentucky-based Yum! Brands Inc.’s Pizza Hut opened two decades ago, followed by the same company’s KFC in 1997 and Oak Brook, Illinois-based McDonald’s Corp., the world’s largest restaurant chain, the following year.

KFC plans to open 40 more stores in Pakistan over the next five years to expand its network of 64 outlets in 18 cities, said Rafiq Rangoonwala, chief executive officer of Cupola, the company with the franchise rights for KFC, the biggest fast-food chain by outlets in Pakistan.
Salt Lake City-based Mrs Field’s Original Cookies Inc., that opened an outlet in Lahore in 2011, plans to start 15 more this year, said Rashed Siddiqui, franchise owner.

Second Cup will open its first outlet in Islamabad within the next six months and Red Mango Inc., a Dallas-based frozen yoghurt retailer, will enter Pakistan this year, Mohabbat said.

Fullerton, California-based Tutti Frutti Frozen Yoghurt, that has 20 outlets in Pakistan since opening in late 2011, plans to start 100 more this year, said Naeem Niazi, director for international business development at Wellspring Industry Inc., owner of Tutti Frutti.

Pakistanis spend 90 billion rupees ($924 million) a year on eating out at the 20,000 restaurants nationwide because of a paucity of other entertainment facilities, said Nauman Mirza, founder and chief executive officer of Food Connection Pakistan, an online restaurant guide.

Riaz Haq said...

Here's Bloomberg on informal savings and investment in Pakistan:

Ali has been selling wall clocks and wristwatches in a crowded Karachi market for 15 years. He’s been participating in savings circles with fellow shopkeepers for just as long, and has used the proceeds to buy a car and acquire a new store.

Now he’s a few months away from getting 400,000 rupees ($4,100) from a savings group of 16 shopkeepers into which he’s been paying 1,000 rupees a day for almost a year. He plans to put a down payment on an apartment. “This system is flawless,” says Ali, 35, who goes by one name. “You can never save this way without this binding commitment of making payments every day or every month. At banks there are hassles and procedures that waste time. This is simple. The organizer comes to collect the money himself, and because of the trust element, it’s a given that we’ll get the money.”

Millions of Pakistanis save billions of rupees in informal, interest-free savings circles called ballot committees—popularly known as BCs—run by housewives, students, office workers, shopkeepers, even high-society ladies. Each member of a group of trusted friends or relatives contributes the same sum daily or monthly to a pool for a predetermined length of time, usually one year. Through a ballot, each participant is allotted a number indicating his or her turn. Every month, one participant gets the pool total. Everyone on the committee keeps contributing until each member gets a pot of cash.


No one knows the origins of savings circles, but they’re found in Africa and Latin America as well as Asia. “This system has existed in South Asia as long as I’ve known, and it was started by low-income women who were financially insecure,” says Ashfaque Hasan Khan, dean at the business school of the National University of Sciences & Technology in Islamabad. “The purpose was to hedge against a problem or to pay for a son or daughter’s wedding.” In India a similar savings plan, called a chit fund, flourishes. The big difference is that India’s savings circles, after years of operating on their own, are now regulated by the government.

No estimates exist of the total amount of the funds collected by the committees. In Karachi alone, the All Karachi Traders Alliance Association estimates 10 million rupees pour into ballot committees on a daily basis. “The size and volume of the circles is on the rise because inflationary pressures mean people need more cash now to do the same things,” says Dean Khan of National University. Inflation in Pakistan is close to 8 percent. While the official savings rate is 10.7 percent of gross domestic product, it is probably higher thanks to the committees.

Another reason the ballot committees are flourishing is the low level of financial literacy in Pakistan and the reluctance of ordinary Pakistanis to take part in cumbersome banking procedures. “Coverage by bank branches is fairly limited, especially in rural areas,” says Sakib Sherani, chief executive officer at Macro Economic Insights, a research firm in Islamabad. “The ballot committees offer greater flexibility and avoid the hassle of traveling to a bank, keeping documentation, and paying service charges.”

Only 14 percent of Pakistanis use a financial product from a formal financial institution, according to a 2009 World Bank report. That compares with 48 percent for India. But when informal financial networks such as the BCs are taken into account, 50.5 percent of Pakistanis have access to finance, according to the report. ....

Riaz Haq said...

Here's an excerpt of an Op Ed in The News on issues with informal economy:

Concerns regarding informal economy generally arise on the following grounds: First, informal economy creates biases and economic distortions. Second, it does not contribute to the state kitty as the firms and businesses operating in the informal sector are not registered with the tax authorities. Third, a huge informal economy is indicative of low trust between the government and business agents, and lack of confidence in economic and business regulations, procedures and policies.

Fourth, informality retards a country’s subsequent economic development, because informal entrepreneurs cannot use their wealth as collateral for loans to finance investments. Fifth, informality has social costs as well. Almost all countries have social security plans, labour welfare laws and safety regulations for the welfare, security and protection of labourers working in factories and other workplaces. But such laws will be applicable to formal businesses as informal businesses hide their business activity from regulators.

But the key question is: what causes the ballooning of the informal economy? Various elements are responsible for a large informal economy. High formalisation costs, high taxation, huge regulatory burden and corruption, and poor enforcement are considered prime reasons of Pakistan’s informal economy. The costs of formalisation are both monetary and non-monetary. These costs may be prohibitively high.

According to the World Bank’s Doing Business Report 2013, a Pakistani entrepreneur must complete 10 procedures to start a business. These take at least 21 days. The cost involved in meeting the procedural requirements is 9.9 percent of per-capita income.

Simple back-of-the-envelope calculations show fulfilment of these requirements consumes your income of 36 days. Is the cost very high? To arrive at a conclusion let us analyse this in the light of some regional and developed countries. In the case of India, the total number of procedures involved is 12, the time involved is 27 days and the income earned by an average Indian in 182 days is spent in the fulfilment of procedural requirements.

For Sri Lanka, the total procedures are five and seven days are required, on average, while a Sri Lankan will earn the income required as start-up costs in 70 days. In the case of Bangladesh, seven procedures are involved and the time taken is 19 days, and an average citizen of Bangladesh would earn the money required to formalise the business in 92 days.

In the US the procedures involved are six and it takes six days to register your business. A US citizen can earn in five days the money required in the registration of his business. In the UK the number of procedures involved are 19, the days required to start a business are 13, and it takes the earnings of two-and-a-half days to cover procedural costs and formalities. For countries like Sweden, Finland and Switzerland, the start-up costs are much lower in terms of per-capita income.

Where do we stand in terms of start-up costs? Compared with the regional countries we do not lag behind as far as ease of starting business is concerned. Rather, Pakistan fares better. We lag behind the developed countries not in terms of number of procedures but in the time and costs involved in meeting the procedural requirements. Certainly, we need do to further improve our processes and reduce start-up costs, but the present start-up costs are not a big constraint for formalisation of a business. So formalisation costs we can be ruled out as a key reason for informality in Pakistan.....

Riaz Haq said...

Here's an ET piece by economist Shahid Javed Burki:

On my way from Pakistan to Washington, I had a chance meeting with a Pakistani economist of considerable repute. We met at Karachi airport’s departure lounge. I have known him for years and have highly valued his work on the Pakistani economy. He surprised me by suggesting that the country was in a much better shape than suggested by some of my writings and those of several others who thought like me. He was of the view that the situation did not warrant the kind of pessimism reflected in our assessments. “Macro numbers may look bad but the real economy is doing reasonably well — in fact very well”, he said. ...
He told me of a recent visit he and some other economists had taken to Faisalabad — arguably the hub of Punjab’s industrial economy — and came across extraordinary enthusiasm about the future of the country and its economy. “The industrialists and traders we met at the city’s Chamber of Commerce were looking forward to the opening of the economy with India. There was nothing but good in that for them and the country”. But it was not only the entrepreneurs operating in large urban centres of the country that look upon Pakistan’s economic future with hope. “The countryside was booming with consumer durables being sold at rates never seen before”, said my economist friend. “I have traveled up and down the country in recent months and seen with my own eyes what numbers don’t tell. The recent commodity boom in the international market place has done wonders for the Pakistani producers in the countryside and also for rural consumers. There is palpable prosperity in the country’s towns and villages”.
For the last five years, Pakistan has had a representative form of government but the representatives people have sent to the various legislative assembles have served mostly vested interests. Would that change? The tens of thousands of people who followed the preacher-politician Tahirul Qadri to Islamabad did so in the hope of widening the system by including those who are prepared to work for others.

Riaz Haq said...

Here's a Dawn Op Ed by Economist Sakib Sherani on Pak informal economy:

NEW estimates indicate that Pakistan’s informal economy is larger than previously approximated, and is expanding at a rapid pace. On the other hand, the formal sector appears to be on the retreat.

Indications to this effect have been around for several years. These indicators have included, among others, a rising share of informal jobs in total employment, a static share of output and employment of the formal manufacturing sector, a growing level of cash transactions in the economy, and an increase in estimates of the “tax gap”.

In addition, firm-level behaviour has also provided clues to the underlying trend in the economy. There are fewer listings on the stock exchanges, and some prominent de-listings, while a fairly significant number of previously formal small and medium enterprises have chosen to become Association of Persons over the past few years, according to some tax experts. Finally, according to some reports, the number of firms on the tax register (for income as well as sales tax) has declined in the past five years.

In fact, anecdotal evidence suggests that in the past few years, there have been instances of even large manufacturing units that have either completely or partially “shifted” production to the underground economy. Evidence to this effect has come from the Federal Board of Revenue (FBR) in the case of at least one significant sector of the economy — cigarettes — where a sharp dip in federal excise duty collection in 2009-10 was attributed to this phenomenon.

Having set up and run my own small business in the formal sector for the past two years has given me some unparalleled insights. While Jamil Nasir in his article in January (in another newspaper) believes the tax structure is not a big contributor, and the regulatory burden is a bigger factor, my own experience suggests that it is both, the tax and regulatory burden, that are either preventing informal businesses from formalising, or are driving already documented firms into the informal economy.

Here’s how. For starters, a formally registered firm filing an income tax return has a 20 per cent disadvantage compared to an enterprise that is operating in the undocumented sector (the tax arbitrage for informal firms). But this is not the end of it. The direct costs of maintaining books, having the firm’s accounts externally audited by a professional auditor, hiring tax consultants and an accountant etc. are not insignificant.

More annoying from my perspective is the opportunity cost of devoting roughly 10-15 per cent of my management time to tax and SECP-related issues, not least of which are chasing up on tax deduction certificates and acting as a withholding tax agent for the government.

In addition, the number of corporate and tax-related filings that the company has to make each month, every quarter, and then on an annual basis is absurd. To incentivise informal sector players to formalise, both the Federal Board of Revenue (FBR) and the Securities and Exchange Commission of Pakistan (SECP) will have to reduce the number of filings, while the transactional relationship with FBR will need to be converted to “arm’s length” via the use of automation.

Finally, the government should consider a system of tax credits and rebates on investment and hiring by small registered businesses, and an initial lower income tax rate for newly corporatised firms as a powerful incentive.
At the other end of the spectrum, the tax and regulatory burden on large, formal firms also needs to be reduced by a comprehensive broad-basing of the tax regime.

Riaz Haq said...

Here's a Dawn Op Ed on hidden economy west of Indus:

GOING by the numbers alone, it would appear that no significant economic activity takes place west of the Indus. Look at the provincial GDP numbers, the revenue figures and you see no movement, no activity on any significant scale.

More detailed metrics of economic activity also show great ‘tranquillity’ in the west. Detailed figures on consumption of electricity by industrial and commercial categories of consumer, for instance, show very little change over the years.
But take a closer look and you’ll find something odd. The State Bank has a data series on its website that shows something enormous, of truly gigantic proportions, stirring beneath the tranquillity suggested by the formal macroeconomic data.

Here is what the data reveals: the amount of money passing through the clearing houses of Quetta and Peshawar is so large that it rivals the amounts in clearing houses of cities like Faisalabad, Multan and Rawalpindi.

The State Bank operates 16 clearing houses in cities all over the country. Every month it releases data on how many cheques were presented for clearing in each of these, and what the total amount cleared by cheques was.

If you take this data, which stretches back to 1999, and plot it for each city in Pakistan, you notice something very interesting. Remove the cities of Karachi and Lahore from the sample for the time being, because these are global cities in a sense with long-distance connections. Compare only the regional cities and here is what you’ll find.

Following 9/11, half the cities in the total sample will show a sharply rising trend in the amount of money going through their clearing houses. For the other half, the line is flat.

The cities that show a rising trend are led by Peshawar, with Faisalabad, Multan, Rawalpindi and Quetta in close succession. For Peshawar, the amount of money being cleared via cheque in the year 2011 crosses Rs1.3 trillion! For Quetta, in the same year, the amount is just under Rs900 billion, meaning between them these two regional cities are seeing almost Rs2tr going through their clearing houses in one year alone.

This figure compares with Faisalabad at Rs1.3tr, Rawalpindi at Rs1.4tr, and Multan at Rs826bn. Cities that show a flat trend over the entire reporting period include Sukkur, Hyderabad, Sialkot and D.I. Khan.

What the data shows is a steep intensification of transactions being cleared by cheque in some cities, and no change in others, meaning the pace of economic activity accelerated unevenly over the decade, sweeping some along its path and leaving others behind.

But what are Peshawar and Quetta doing on this list? With Faisalabad and Multan, it’s easy to understand. These are regional hubs, productive centres, large seats of agrarian operations.

In fact, after Karachi and Lahore, it is Multan, Faisalabad and Rawalpindi that account for the bulk of transactions in branchless banking, which shows the intensification of activity in the clearing houses of these cities is accompanied by an overall deepening of the financial sector.

But in Peshawar and Quetta, there is no other accompanying trend, not in branchless banking, TT transfers, bulk consumption of electricity. There is only one lone spike, showing an increase in clearing house transactions that keeps pace with the agricultural and industrial heartland of the country.

The obvious question is: what is driving this spike in Quetta and Peshawar? Where is the economic activity that is sending such spectacular sums of money through the clearing houses of these two cities? And why does this money leave no trace on any other economic indicator of the city or the province?


Here’s another explanation: these cities are engulfed by a very large hidden economy, from where a massive river of transactions briefly appears on the official record, then disappears from view again....

Riaz Haq said...

Here's a Daily Times report on State Bank Governor Yaseen Anwar's assessment of Pak economy:

KARACHI: Pakistan’s economy has the ability to navigate through choppy waters and the economic potential this country holds encourage all to become a part of the country’s future.

The Governor State Bank of Pakistan (SBP) Yaseen Anwar at Pakistan Navy War College Lahore said while our current economic situation was less than optimal and it was also very far from what might be described as an economic calamity.

Anwar said in 65 years, Pakistan has never gone through an episode of hyperinflation, Pakistan has never defaulted on its international and domestic debts, in fact our economy has grown consistently, but not spectacularly, over the past six decades.

This has been despite periods of international alienation and sanctions, three expensive wars, two hostile fronts, regular political upheaval, social unrest, sharp increases in the price of oil, and much, much more, he added.

State Bank has always ensured that the financial system of the country remains safe and stable. The robustness of our financial system is a direct consequence of the reforms process and the State Bank’s constant vigilance, he said.

There is a lot that can be improved in our financial system. He called for the development of efficient debt markets, even better regulatory and reporting practices and the broadening of the financial sector’s scope to include largely unbanked sectors of the economy, such as agriculture, small and medium enterprises and housing.

‘Despite this wish-list, the fact remains that our financial system is, by design, secure and does not pose any threat to the economy as a whole,’ he added.

The size of Pakistan’s undocumented economy is by some estimates, as large as the formal economy. The informal economy does not file taxes and while it does absorb a significant chunk of the labour force, it also evades corporate and labour laws, he said.

Although close informal relationships do make the economy more resilient, they do so at a cost to the overall economy, by eroding the ambit of the regulators.

He stressed the need for the greater integration of country’s domestic market with global markets but observed it does not mean that we should not have proper controls and mechanisms in place to safeguard our own interests. ‘Greater integration with financial markets will mean that capital will flow more quickly through our borders. It’s definitely something that will boost the national economy, but, as most East Asian countries learned in the 90s, it can be a double-edged sword.

Therefore having some capital controls in place, which reduce the volatility of capital flows, is a necessary regulation in this day and age, Anwar added.

More effective regulation is the need of the hour for our own economy, he said, adding it is an essential part of what is needed today to get the economy on a track for steady and sustainable growth.

He said the government’s footprint in some sectors of the economy was very large and quite negligible in other sectors.

Such divergence is unhealthy. Effective regulation is sorely lacking in other sectors. The tax machinery can be tightened considerably. One of the country’s most challenging problems today is the size of the fiscal deficit-and a large part of the solution lies in increasing our tax base by enacting regulation that encourages tax compliance, and punishes tax evasion, he added.

The government will need to borrow less money from the central bank. Borrowing from the central bank is popularly known as printing money, he said, adding if government borrowing from the central bank falls, inflation will follow suit.

Therefore, better tax collection is a necessary condition for faster economic growth. And for that we need to have more effective tax regulation, he added.


Riaz Haq said...

Here's PakistanToday on Non-Bank Financial services (NBFS) report:

KARACHI - The Securities and Exchange Commission of Pakistan (SECP) on Monday unveiled a document titled ‘Report of Non-Bank Financial Sector’ (NBFS) Reforms Committee’ for public feedback.
Prepared by senior SECP officials and leading market professionals, the report contains proposed reforms for the development of the non-bank financial (NBF) sector in Pakistan.
SECP Chairman Muhammad Ali, commissioners and leading professionals and businessmen from the financial sector attended the ceremony.
Addressing the ceremony, Ali said it was imperative that the SECP and the State Bank of Pakistan (SBP) work in close cooperation for effective and seamless regulation across the financial sector in a globally integrated market.
He said Pakistan’s financial sector was bank-centric with NBF sector accounting only 4.9 percent (excluding insurance sector) of the financial sector’s total assets. This dependence on the banking sector, he said, made the country’s financial system vulnerable to risks through lack of diversification and also restricted the scope of product innovation
In terms of the proposed regime, capital market activities of all entities including that of commercial banks and DFIs are to be regulated by the capital market regulator (CMR), i.e., SECP and deposit taking/financing/lending activities of all the financial sector participants would be regulated by the banking regulator (BR), i.e., SBP. This recommendation is in contrast with the prevalent concept of entity based regulatory
domain in Pakistan.
Other proposed reforms for the mutual fund industry include distribution of mutual fund units through stock exchanges, reduction in the annual regulatory fee provided more than 50 percent of a funds’ net assets are held by retail clients, introduction of concept of expense ratio, introduction of multiple classes of units based on the investment amount, improving the skill set of key personnel such as fund managers by specifying a minimum criteria among others.
Investment finance services are broken down and redefined as stock brokerage, investment advisory, corporate advisory, securities financing and securities underwriting services and each component has been further defined. Flexibility has been offered to an entity to be reclassified as non-bank finance company to obtain either a full scope or limited scope. The suggested regime for IFS outlines a mechanism to transform existing brokerage houses as NBFCs to become part of NBF sector. The inclusion of brokerage services in NBF sector is expected to open up a new era of licensed activities for brokers including advisory and other ancillary services.
To facilitate the launch of the real estate investment trusts (REITs) in Pakistan, the committee has proposed a reduction in REIT fund size to address the issue of
capital constraints and allow launching of medium-size REIT projects having better potential for growth and return.
In order to develop non-banking financial services, the committee, in line with best international practices has proposed the implementation of the concept of activity based regulatory regime in Pakistan for cluster one entities. In terms of the proposed regime, capital market activities of all entities are to be regulated by the SECP and deposit taking, financing and lending activities of all financial sector participants will be regulated by the SBP....

Riaz Haq said...

Here's an interesting Op Ed by Mazur Ejaz in Friday Times:

The condition of an economy is often confused with the financial health of its government. Pakistan's economy is perceived to be in a deep hole because of its near-bankrupt fiscal conditions. Similarly, America's inability to settle on a national budget is taken to be an indicator of the collapse of the US Empire.

In some ways, the condition of the economy and the financial health of the government are separate matters. Major stock market indexes at Karachi Stock Exchange and the Wall Street are at their highest level, but both governments are facing serious financial problems. Most of the countries around the world are facing similar dichotomous situations. So how does one solve the riddle of the corporate sector making record profits while governments around the world are in serious financial jeopardy?

The phenomenon needs to be analyzed at grass-roots level. A shopkeeper from my village comes to mind. He told me that he sells PTCL internet cards grossing about Rs 9,000 every day. There are several other such shops in the village. That means that just in one village, the total sale of PTCL internet cards is up to 50,000 rupees. This consumer item was not present five years ago, which means hundreds of computers have been bought in the village recently. Furthermore, if such luxury products are making such huge profits for village shops, traders throughout the country must be making much larger profits selling essentials every day. One of the indicators of booming business in our village is that the United Bank branch in the village is doing very well, according to its manager.

There are thousands of such villages in the country, and that gives one an idea of the mammoth growth of rural markets. Such an undocumented economy is not even factored in estimating the economic growth of the country. From these supposedly marginal markets, one can extrapolate the profits of the corporate sector in towns and cities.

It may be astounding for some that Pakistan's banking sector is considered fourth in profitability in the entire world. Producers of other major industrial and agricultural products are also making huge profits. Cement, fertilizer, automobile, construction and telecommunication industries are doing extremely well. Other than the textile industry, which has been hit by power shortages, there is hardly any manufacturer or importer/exporter of any kind of goods who is not making money. The stock markets look at the profits of these industries and price them accordingly. Therefore the claims of Pakistan's economic growth are not a fairy tale. The evidence is out there in the market.

The government is also like a large corporation whose income depends mainly on tax revenue. Most of the goods and services (such as roads, defense, education and health) provided by the government are public goods which are not priced directly. The government has to price its public goods through direct taxes on income and sales, or indirectly. Following a certain brand of capitalism, countries like Pakistan and the US are not collecting enough taxes to cover the cost of public goods. They have failed mainly in collecting direct taxes on income. While Pakistan cannot implement an appropriate tax collection mechanism because of corruption, the US has leaned towards favoring high income groups and ended up in a jam. The net result is the same: the rich are getting richer, appropriating most of the new wealth generated....

Riaz Haq said...

Here's a Bloomberg report on remittances helping the poor and keeping Pak economy afloat:

Living in poverty in a mud shack in Pakistan, Mazhar Ali dropped out of school, sold the family’s two buffalo and bought a visa to work in Dubai. The money he sends home is paying for a new house.

“We’re going to build three rooms with bricks and cement, plus a courtyard and a washroom,” said his younger brother Azhar in Larkana, home town of the ruling People’s Party about 300 kilometers north of Karachi. “We will then start marrying one by one, starting with Mazhar sometime this year.”

The family’s change in fortunes reflects a rising trend of rich nations with aging workers tapping poorer ones for labor -- total remittances to developing economies will rise 7.9 percent this year, and reach $534 billion by 2015, the World Bank says. For Pakistan, the income offers a source of stability, with the country poised for its first civilian handover of government in May even amid power shortages, bombings and a Taliban insurgency.

“This is our savior for keeping Pakistan out of the oxygen tent,” Farooq Sattar, former Minister for Overseas Pakistanis said in an interview in Karachi last month before his party quit the government alliance. “It has kept us from a complete economic collapse.”

Almost 10 million Pakistanis work overseas and the sum they’ve sent home has doubled in the four years through June, to a record $13 billion.

The rising tide of funds from overseas contrasts with a struggle by President Asif Ali Zardari’s administration to raise enough revenue to fund programs that would boost domestic growth. Pakistan owes the IMF $7.5 billion by 2015 and is evaluating a possible further loan from the fund as a buffer against shocks, Saleem H. Mandviwalla said in December as Finance Minister.
Falling Rupee

The local currency has fallen on concern loan repayments will erode foreign-exchange reserves, which fell to $7.5 billion in January from $11.8 billion a year earlier, according to the central bank. The rupee traded yesterday at 98.35 per dollar, near a record low, according to data compiled by Bloomberg.

Pakistan was among the 15 lowest revenue-gathering nations in the world as a percentage of GDP, according to the U.S. Central Intelligence Agency’s World Fact Book 2012. The South Asian nation recorded the highest budget deficit in two decades in the fiscal year through June as it missed its tax target.

The nation’s fiscal deficit may be 7.5 percent of gross domestic product this year, wider than the government’s target of 4.7 percent, the IMF said in January.

Among the biggest challenges for the government is the need to add almost 4,000 megawatts of power generation to end a shortage that’s causing blackouts for as long as 18 hours a day, idling factories and swelling unemployment. The government said energy shortages cut economic growth last year by as much as 4 percentage points.

Keeping Afloat

“Extreme poverty has not risen as much as it would have without remittances,” Rashid Amjad, a professor at the Lahore School of Economics said in an e-mail. “Most of the remittances are flowing into consumption, real estate, housing and the stock market, and have played a critical role in keeping Pakistan’s economy afloat.”

Pakistan will hold parliamentary elections on May 11, after the outgoing government, led by Zardari’s Pakistan Peoples Party, became the first democratically elected administration in 65 years of independence to complete its term.
Remittances that fuel a thriving underground economy may rise further in the next few years as more Pakistanis seek employment overseas, said G.M. Arif, an economist at the Pakistan Institute of Development Economics in Islamabad.


Some Pakistanis also use the system to avoid paying tax..

Riaz Haq said...

Here's a PakistanToday report on KSE-100 performance in Q1-2013:

KARACHI - Hopes for change in the political setup along with strong foreign inflows were the major drivers of the country’s equity market during the first quarter of calendar year 2013 (1Q2013).
The market observers believe that while the May 11 election are around the corner, the equity investors were cautiously looking at the fast-changing political developments in the country. “We anticipate market activity to hinge on political temperature of the country,” viewed Topline analyst Nauman Khan.
The heightened investors’ confidence was also attributed to significant reduction in the policy rate that had facilitated the funds flows towards equity market, said the analysts.
The benchmark KSE 100-share index posted a gain of 6 percent, 5 percent in dollar terms, during the quarter to close at 18,043 and overall market capitalization reached Rs4.4 trillion or $45.2 billion.
“Though the index made a new high of 18,185, on March 01, 2013, the market capitalization was still seven percent, 40 percent in dollar terms, down from its record high of Rs 4.8 trillion ($74.9 billion) achieved on April 18, 2008,” said Khan.
With index achieving our midyear target of 18,000, we re-iterate that index can make a new high by crossing 19,500 in calendar year 2013 as mentioned in our strategy note date December 12, 2012. Abrupt PKR deprecation due to weakness in external account remains the major risk to our assessment.
The positive momentum was accompanied by higher traded volumes. During 1Q2013, average daily traded volumes stood at Rs5.7 billion (US$58.4 million) which compares favorably with Rs4.5 billion (US$46.6 million) recorded in the previous quarter. The average traded volumes are the highest in last 12-quarters.
In terms of shares, average volume stood at 210.6 million which is up 25 percent from preceding quarter, while are highest since 1Q2008 (19-quarters high).
In addition to higher foreign buying, we believe increased participation by individual investors have also contributed to improved depth of the market. Individual participation on an average improved to 50 percent in 1Q2013 as against 48 percent in the preceding quarter.
The foreigners, that hold $3.3 billion worth of Pakistan shares that is 31 percent of free-float and 8 percent of market capital, remained net buyers in 1Q2013.
The offshore investors in the quarter bought shares worth $228 million and sold $158 million resulting in net buying of $70 million as of March 28.
The numbers compare favorably with $65 million net inflow registered in previous quarter.
Giving their future outlook, the analysts reiterated that the market participants were likely to cheer signs of change in the political setup. “Mid caps with high leverage and consumer related business can perform better than large caps in 2013,” said Khan.

Riaz Haq said...

Here's a Dawn Op Ed by Khurram Husain on Pakistan's hidden economy:

...More detailed metrics of economic activity also show great ‘tranquillity’ in the west (Balochistan & KP). Detailed figures on consumption of electricity by industrial and commercial categories of consumer, for instance, show very little change over the years.


But take a closer look and you’ll find something odd. The State Bank has a data series on its website that shows something enormous, of truly gigantic proportions, stirring beneath the tranquillity suggested by the formal macroeconomic data.

Here is what the data reveals: the amount of money passing through the clearing houses of Quetta and Peshawar is so large that it rivals the amounts in clearing houses of cities like Faisalabad, Multan and Rawalpindi.

First some background. Every time you write a cheque and the other party deposits that cheque in their account, it goes through a process called “clearing”. Because banks don’t hold your money themselves — much of it is held by the State Bank — the task of actually taking the money out of the books of one bank and transferring it to the books of another every time a cheque is cleared, is performed by the State Bank at its clearing house.

The State Bank operates 16 clearing houses in cities all over the country. Every month it releases data on how many cheques were presented for clearing in each of these, and what the total amount cleared by cheques was.

If you take this data, which stretches back to 1999, and plot it for each city in Pakistan, you notice something very interesting. Remove the cities of Karachi and Lahore from the sample for the time being, because these are global cities in a sense with long-distance connections. Compare only the regional cities and here is what you’ll find.

Following 9/11, half the cities in the total sample will show a sharply rising trend in the amount of money going through their clearing houses. For the other half, the line is flat.

The cities that show a rising trend are led by Peshawar, with Faisalabad, Multan, Rawalpindi and Quetta in close succession. For Peshawar, the amount of money being cleared via cheque in the year 2011 crosses Rs1.3 trillion! For Quetta, in the same year, the amount is just under Rs900 billion, meaning between them these two regional cities are seeing almost Rs2tr going through their clearing houses in one year alone.

This figure compares with Faisalabad at Rs1.3tr, Rawalpindi at Rs1.4tr, and Multan at Rs826bn. Cities that show a flat trend over the entire reporting period include Sukkur, Hyderabad, Sialkot and D.I. Khan.

What the data shows is a steep intensification of transactions being cleared by cheque in some cities, and no change in others, meaning the pace of economic activity accelerated unevenly over the decade, sweeping some along its path and leaving others behind.

But what are Peshawar and Quetta doing on this list? With Faisalabad and Multan, it’s easy to understand. These are regional hubs, productive centres, large seats of agrarian operations.

In fact, after Karachi and Lahore, it is Multan, Faisalabad and Rawalpindi that account for the bulk of transactions in branchless banking, which shows the intensification of activity in the clearing houses of these cities is accompanied by an overall deepening of the financial sector.

Riaz Haq said...

Here's an Express Tribune report on rebasing Pak GDP from fiscal 2000 to 2006 adding another Rs. 557 billion to GDP:

A new rebasing exercise has been carried out by the Pakistan Bureau of Statistics (PBS), aimed at shifting the base (reference) year for calculation of economic statistics from fiscal 2000 to fiscal 2006. The share of services and agriculture in the overall size of the economy has resultantly increased, while the industrial sector has significantly shed its value. The exercise has resulted in gross value addition of 7.8% or Rs557 billion to the total size of the economy.

Headed by Dr Shahid Amjad, adviser to the prime minister on finance, the PBS Governing Council approved the change on Monday.

“The overall size of the economy from 2006 onwards will now be calculated afresh and presented to the National Accounts Committee (NAC) for approval,” Chief Statistician of Pakistan Asif Bajwa told The Express Tribune. The NAC meeting will also give approval to this year’s official growth rate. It is scheduled to meet on May 3.

As a result of the shift, the total size of the economy in fiscal 2006 will now be considered as Rs7.72 trillion, higher by Rs557 billion than the size of the economy in fiscal 2000.

The current size of the economy, estimated as Rs23.6 trillion in 2012-13, has been calculated keeping the base year as fiscal 2000. Experts say its size will increase after new calculations, which will not only add additional value to this year’s growth rate, but also lower the budget deficit in percentage terms.

Taking the new base year as 2005-06, the size of the agricultural sector now stands at 23% of total Gross Domestic Product (GDP), as against the earlier 20.3%. Due to the rebasing, Rs318 billion has been added to the value of the agriculture sector, taking its total size to Rs1.78 trillion.

The contribution of the services sector to total GDP, meanwhile, has increased to 56% against its earlier share of 52.8%. The value of the services sector in absolute terms has been reassessed as Rs4.4 trillion – higher by Rs547 billion.

At the same time, the industrial sector has shed its value by Rs308 billion, while its share in GDP has shrunk to 20.9%, against an earlier share of 26.8%. Its total value has reduced to Rs1.62 trillion due to major contractions in the sizes of the sub-sectors of large and small scale manufacturing.

Rebasing exercises usually increase the size of the economy due to the addition of new goods and services into the calculation. The government had carried out 223 studies for the last time the economy was rebased, which had been debated extensively in technical committees overseeing the matter.

Bajwa said the technical committee constituted for the recent exercise reviewed every subsector of the economy item-by-item, and had the exercise vetted by experts. Thus, he said, there are no chances of error. The PBS Governing Council was also informed that double counting, omissions and errors have also been rectified as a result of the rebasing.

The rebasing has been done in the light of improvements in international statistical systems, say officials. The availability of new data sources through censuses, surveys and studies, updated prices and industry bases have all been utilised in the exercise.

A similar exercise aimed at rebasing the economy was conducted last year, which immediately ran afoul of analysts as it resultantly reduced the overall size of the economy by Rs2.5 trillion of its value. The exercise had sent waves in the corridors of economic power, as it necessitated a revision of all major economic indicators over the preceding five years..

Riaz Haq said...

Here's a Dawn story on rebasing Pak economy resulting in 7.8% increase in GDP for 2012-13:

ISLAMABAD, April 29: After a delay of one year, the Governing Council of Pakistan Bureau of Statistics (PBS) on Monday approved the rebasing for calculation of national accounts.

Dr Shahid Amjad, adviser to the prime minister on finance and also chairman of the council, changed the base year for calculation of national accounts from 1999-2000 to 2005-06 to depict the actual performance of the economy and variables.

As per rebasing, the size of the GDP now expands to Rs7,716bn from Rs7,159bn in the previous base year, reflecting an increase of 7.8 per cent (Rs557 billion).

The size of the GDP is the outcome of changes in procedures, methodology for calculating various indicators, expansion of coverage to more sectors and corrections in the existing sectors. Double counting, omissions and errors have also been rectified.

The re-basing is now believed to make the system more advanced and on a par with the international system. Some missing areas like stone crushing industry, stock exchanges, brokers, cable operators, internet providers etc., are now part of the economy.

A senior official of the PBS told Dawn that the budget proposals for 2013-14 would be based on the new figures, which will be finalised by end of this week. “We are now working on calculating new growth figures on the basis of new base year”, the official added.

Last year, the base year was revised ahead of the budget, but the then finance minister Dr Abdul Hafeez Shaikh had reversed the process to show good feel figures.

Since July 2012, the rebasing was on the agenda of the PBS governing council but no meeting was convened.

The growth in the size of overall economy was mainly driven by an increase of 14.47 per cent (Rs547bn) in the share of services sector to GDP.

In the services sector, the share of wholesale and retail increased by 20.68pc (Rs261bn); transport, storage and communication 5.61pc (Rs51bn); housing services (owner of dwelling) by 172.97pc (Rs320bn); general government services 5.1pc (Rs21bn).

However, the share of two services finance and insurance; other private services dipped by 22.2pc (Rs81bn) and 3.82pc (Rs25bn), respectively.

With the introduction of Financial Intermediation Services Indirectly Measured (FISIM) in the banking and insurance sector, the contribution of the sector had been measured based on the services provided.

The share of overall agriculture sector in GDP increased by 21.82pc (Rs318bn). The share of crops increased by 21.01pc (Rs133bn), livestock 21.5pc (Rs165bn), forestry 21.4pc (Rs6bn), fishing 43.4pc (Rs13bn).

In the crops, the share of major crops dropped by 3.23pc (Rs15bn). However, major increase of over 52pc (Rs89bn) was witnessed in the share of minor crops. As part of the new base year, the share of cotton ginning/others were also calculated as part of crops.Earlier, cotton measurement was part of the manufacturing sector.

Ironically, the share of industrial sector in the size of overall economy dipped by 16pc (Rs308bn), reflecting a trend of de-industrialisation.

Of these the share of manufacturing dipped by 22.31pc (Rs306bn) in the industrial sector. However, mining and quarrying witnessed an increase of 15.9pc (Rs35bn).In the manufacturing sector, the share of LSM dipped by 9.97pc (Rs100bn); small scale manufacturing 63.82pc (Rs157bn) and slaughtering 40.16pc (Rs49bn), respectively.

On the other hand, the share of electricity generation and distribution and gas distribution share in the overall economy size dropped by 39pc (Rs43bn). However, the construction share increased by 3.22 pc (Rs6bn)..

Riaz Haq said...

Sharp fall in Indian currency against the US dollar and slower economic growth have caused India's GDP for Fiscal  Year 2012-13 to shrink in US $ terms to $1.84 trillion from $1.87 trillion a year earlier. The Indian rupee has plummeted from 47.80 in 2012 to 54.30 to a US dollar in 2013, according to Business Standard. Since this report was published in Business Standard newspaper, Indian rupee has declined further against the US dollar to Rs. 59.52 today. At this exchange rate, India's GDP is down to $1.68 trillion, about $200 billion less than it was in  Fiscal 2011-12.

Meanwhile,  Pakistan's economy continues to struggle with its annual GDP rising just 3.6% to $252 billion ($242 billion at Rs. 100 to a USD exchange rate)  in fiscal 2012-13, according to Economic Survey of Pakistan 2012-13 estimates based on 9 months data. The country is facing militancy and energy shortages impacting its economy.

Riaz Haq said...

From VOA report:

The World Bank says that in Pakistan, roughly 70 percent work in the so-called informal sector, a part of the economy that is unregulated and untaxed.

On a good day, Jamil Hassan will have some 15 customers, and earn an average of $8 a day.

Hassan is one of the millions working in Pakistan's informal economy, the mainstay for the country's vast poor. He never went to school. Cutting hair is all he knows.

"I've been doing this all my life," he said. "My father and grandfather did it before me, so this is what I do."

About 40 percent of all workers in Pakistan have no education. Hassan says illiterate people like him will never make enough to be able to save money.

Economist Ali Kamal says the informal economy can be seen as helping the country's overall economy.

"It absorbs a labor who is otherwise unemployed, it provides services at a cheaper cost and cheaper price to the general public, and it complements the formal sector," he said.

Mohammad Naeem works in a modest seasonal wheat mill, when Pakistan's constant power cuts don't grind work to a halt. Naeem says he would like to have his own business. But he doesn't believe in bank loans or in savings.

"I feel that people should not take loans, not owe money," he said. "That is very important. You should only use what you earn."

Kamal says millions of workers like Naeem and Hassan don't pay taxes, meaning less money for an already cash-strapped state.

"If we collect sales tax from all those informal sectors, it may account for four to five percent of GDP, and if we collect four to five percent GDP in sales tax from those informal activities, then we don't have any budget deficit anymore," he said.

But as of now, the informal sector is providing cheaper goods, services and labor to the formal sector. Analysts say Pakistan would have to reform its entire economic structure to change the situation

Riaz Haq said...

Ratio of informal (shadow) to formal (documented) entrepreneurs:

Indonesia 131

India 127

Philippines 126

Pakistan 109

Egypt 103

In a study of 68 countries, Professor Erkko Autio and Dr Kun Fu from Imperial College Business School estimated that business activities conducted by informal entrepreneurs can make up more than 80 per cent of the total economic activity in developing countries. Types of businesses include unlicensed taxicab services, roadside food stalls and small landscaping operations.

In a study of 68 countries, Erkko Autio and Kun Fu of London's Imperial College Business School found that after Indonesia, India has the second highest rate of shadow entrepreneurs.

This is the first time that the number of entrepreneurs operating in the shadow economy has been estimated.

Shadow entrepreneurs are individuals who manage a business that sell legitimate goods and services but they do not register their businesses. They do not pay tax and operating in a shadow economy where business activities are performed outside the reach of government authorities.

Indonesia has 131 shadow businesses to every business that is legally registered compared to India's 127.

Philippines have 126, Pakistan has 109 and Egypt has 103 shadow businesses to every legally registered business.

Experts say the shadow economy results in loss of tax revenue, unfair competition to registered businesses and also poor productivity - factors which hinder economic development.

As these businesses are not registered it takes them beyond the reach of the law and makes shadow economy entrepreneurs vulnerable to corrupt government officials.

The researchers said, "If India improved the quality of its democratic institutions to match that of Malaysia for example, it could boost its rate of formal economy entrepreneurs by up to 50% while cutting the rate of entrepreneurs working in the shadow economy by up to a third. This means that the government could benefit from additional revenue such as taxes."

The UK exhibits the lowest rate of shadow entrepreneurship among the 68 countries surveyed, with a ratio of only one shadow economy entrepreneur to some 30 legally registered businesses.

Autio said, "Understanding shadow economy entrepreneurship is important for developing countries because it is a key factor affecting economic development. We found that government policies could play a big role in helping shadow economy entrepreneurs transition to the formal economy. This is important because shadow economy entrepreneurs are less likely to innovate, accumulate capital and invest in the economy, which hampers economic growth."

Riaz Haq said...

In "Capital in the Twenty-First Century", French economist Thomas Piketty argues that the GDP growth rates of India and China are exaggerated.

Picketty writes as follows:

"Note, too, that the very high official growth figures for developing countries (especially India and China) over the past few decades are based almost exclusively on production statistics. If one tries to measure income growth by using household survey data, it is often quite difficult to identify the reported rates of macroeconomic growth: Indian and Chinese incomes are certainly increasing rapidly, but not as rapidly as one would infer from official growth statistics. This paradox-sometimes referred to as the "black hole" of growth-is obviously problematic. It may be due to the overestimation of the growth of output (there are many bureaucratic incentives for doing so), or perhaps the underestimation of income growth (household have their own flaws)), or most likely both. In particular, the missing income may be explained by the possibility that a disproportionate share of the growth in output has gone to the most highly remunerated individuals, whose incomes are not always captured in the tax data."

"In the case of India, it is possible to estimate (using tax return data) that the increase in the upper centile's share of national income explains between one-quarter and one-third of the "black hole" of growth between 1990 and 2000. "

Riaz Haq said...

Pakistan’s true economic output is not reflected in the official gross domestic product (GDP) and this is the reason why.
It fails to include important industries that have sprung up since the last census of the manufacturing base was conducted nine years ago.
The State Bank of Pakistan (SBP) highlighted this anomaly in its annual report on The State of the Economy 2013-14, mentioning economic contributors not incorporated in the Large Scale Manufacturing (LSM) and agricultural data.
Manufacturing has a 11% share in economic output, but experts have been going on for years, saying that tens of thousands of establishments from Karachi to Faisalabad are the real drivers of the economy but remain unreported.

The last Census of Manufacturing Industries (CMI) was carried out by the Pakistan Bureau of Statistics (PBS) in fiscal 2005-06 on the basis of response received from 6,417 factories — a number much smaller than the actual size of the industrial base.
Some very large businesses are not covered by the PBS at all.
Engro Polymer and Chemicals, which meets over one-third of the domestic demand for caustic soda, is a glaring example.
Caustic soda holds the largest chunk in the 11 categories of chemicals reported by PBS. Excluding Engro distorts actual output of the industry, the SBP said.
While the production of caustic soda posted a 8.4% year-on-year decline in 2013, Engro Chemicals reported a 5.6% increase in production this year. “The inclusion of this company could have offset the reported decline in caustic soda,” SBP said.

When it comes to automobiles, PBS relies on data provided by the members of Pakistan Automotive Manufacturers Association (Pama). This leaves out leading bus and truck manufacturers like Afzal Motors and Al-Haj Faw Motors that entered the market later.
Textile and food
Similarly, the weightage of cotton yarn and cotton cloth is one of the highest in CMI, together holding 17%. Yet PBS leaves out 90% of the manufacturers as it covers only mill-related activity, which is based on units registered with the Ministry of Textiles.
As a matter of fact, data of wearing apparels and dressing, publishing, printing products and recorded media, fabricated metal products, computers, medical precision and optical instruments, and other industries, is not included as part of LSM, stated the SBP.

“In the food sector as well, demand and production of a number of processed food items like packaged milk, yogurt, dairy items, pastas cereals, has grown in past few years. But the production of these items is not included in LSM data,” it noted.

This basically leaves out manufacturers like Unilever, Kolson, Nestle, Engro Foods and National Foods, it noted.
The story is the same with cosmetics and personal care goods produced by FMCGs like Unilever and P&G that are also not part of the LSM.
Plastic sector
Another sector, which has emerged as an important contributor to the economy, and ignored in CMI, is plastics. The Pakistan Plastic Manufacturing Association (PPMA) has around 6,000 upstream and downstream units, employing 0.6 million people.
Plastic sector has a weight of 0.75% in CMI while data is collected from only 142 units. As per PBS’ own numbers, in 2013-14, Pakistan exported 253, 896 tons of plastics products valued at $350.7 million, which was a 7% decrease compared with plastics exports in the previous year.
SBP also pointed out that while exports are down, imports of raw materials witnessed 26.4% growth in this year, which indicates robust growth in manufacturing in this segment.
The last CMI recorded 3,590 factories in Punjab, 1,825 in Sindh, 673 in Khyber-Pakhtunkhwa (K-P) and 212 in Balochistan.
At basic prices, textile sector had the highest contribution to GDP of 27.41%, food products and beverages 15.82%, chemicals and chemical products 14.83%, and non-metallic mineral products 7.52%.

Riaz Haq said...

Another important issue pertains to the coverage of sectors and manufacturing units, which are
included in LSM by the Pakistan Bureau of Statistics (PBS). The existing LSM index is based on the
Census of Manufacturing Industries (CMI) that was conducted in FY06. 32
While constructing LSM
index, only those sectors were included which had significant value addition to GDP at the time of
census. Our assessment is that not only has manufacturing activity in a number of sectors been
enhanced, many new manufacturing units have started operating in the country in the recent past.
Hence, an expanded data coverage exercise of manufacturing units and new categories is required, to
present a more realistic picture of large scale manufacturing in the country. We believe the actual
growth in LSM is better than what is reported by PBS (Box 2.2).
Box 2.2: Coverage Issues Undermining LSM Growth
Large scale manufacturing data is compiled across countries, according to the International Standard Industrial Classification
( ) of the United Nations Statistics Division, which has defined 22 broad categories of manufacturing.33
In the case of
Pakistan, however, the coverage of LSM pertains to only 15 sectors identified by the ISIC. Data pertaining to manufactures
of wearing apparels & dressing; publishing, printing products & recorded media; fabricated metal products (except
machinery & equipment); office & accounting machinery and computers; medical precision & optical instruments; and
recycling of metal and non-metal waste scrap, is not included as part of Pakistan’s LSM.34
The current LSM index is based
on the Census of Manufacturing Industries (CMI) conducted in FY06.

32 PBS conducted the CMI in 2006 to collect information about industrial activity in the country. Providing this information
by production units, is obligatory under Section 9 & 10 of General Statistics Act 1975, and Section 5 & 6 of Industrial
Statistics Act,1942. PBS is currently engaged in conducting a fresh CMI.
34 The manufacturing data as reported by India contains all categories identified in the ISIC. Source:
35 Similarly in the case of glass, production of one of the leading manufacturers is not captured by LSM index.

Riaz Haq said...

LSM posted 3.9 percent growth in fiscal year 2014 (FY14) compared to 4 percent in FY13; however the SBP while disagreeing with figures believed actual growth in LSM was better than what was reported by Pakistan Bureau of Statistics (PBS). Reasoning for its contradiction of PBS’s figures, the SBP said the existing LSM index was based on Census of Manufacturing Industries (CMI) that was conducted in FY06 while constructing LSM index, only those sectors were included which had significant value addition to Gross Domestic Product (GDP) at the time of census.

Meanwhile, manufacturing activity in a number of sectors has been enhanced and many new manufacturing units have started operating in country in recent past. Hence, an expanded data coverage exercise of manufacturing units and new categories is required, to present a more realistic picture of LSM in the country, it added.

In annual report for FY14, the SBP said LSM data was not being compiled in Pakistan according to International Standard Industrial Classification (ISIC) of United Nations Statistics Division’s defined 22 broad categories of manufacturing.

As in Pakistan, the coverage of LSM pertains to only 15 sectors identified by the ISIC while data pertaining to manufactures of wearing apparels and dressing, publishing, printing products and recorded media, fabricated metal products (except machinery and equipment), office and accounting machinery and computers, medical precision and optical instruments and recycling of metal and non-metal waste scrap, is not included as part of Pakistan’s LSM.

Pointing out main concerns, the SBP said LSM data for cotton cloth and cotton yarn was collected by Ministry of Textile, which only covered mill sector activity. The non-mill sector, which entails over 90 percent of overall production of cotton cloth in country, is not included in the data set. While the growth in manufacturing textiles posted a slowdown in FY14, the export quantum of almost all textile categories (with the exception of cotton yarn) posted an increase in the year. In fact, the provision of generalised system of preferences plus status from the European Union (EU) suggests strong growth prospects of this sector.

Similarly in automobiles, the PBS reported production of units registered with Pakistan Auto Manufacturers Association only while some leading bus and truck manufacturers namely Afzal Motors and Al-Haj FAW Motors were not included by the PBS. The PBS reports data for 11 categories of chemicals, with caustic soda claiming the largest share. For caustic soda, production of Engro Chemicals, which caters to one-third of the entire domestic demand of caustic soda, is not included in LSM data. The demand and production of a number of processed food items has grown in the past few years (eg packaged milk and products, dairy items, yogurt, pastas, cereals, frozen and ready to cook items etc). The production of these items, however, is not included in LSM data which leaves out large and vibrant manufacturers like Unilever, Kolson, Nestle, Efoods and National Foods.

Similarly, non-food Fast Moving Consumers Goods (FMCGs) products like cosmetics, personal care products and toiletries, which are produced by prominent brands like Unilever, Medicam and Procter and Gamble are also not captured by LSM. The production of plastics is completely absent from LSM data set.

According to Pakistan Plastic Manufacturing Association there are around 6,000 upstream and downstream units operating in the country, employing 0.6 million people. This sector is producing a broad range of products ranging from household items, industrial containers, medical and surgical items, auto parts, stationery items, PVC pipes etc. Yet they are not covered in LSM.

Riaz Haq said...

Jaitley Hails #India's Tax-Free, Job-Rich Informal Economy Estimated At 40% of Official GDP #Modi #BJP via @business

India’s underground economy is booming, and Finance Minister Arun Jaitley wants to keep it that way.
The informal sector is estimated at $780 billion, or about 40 percent of India’s official gross domestic product. It employs more than 90 percent of India’s workforce, according to the government.
“I’m a great supporter of this informal sector," Jaitley said in an interview on Monday. “The informal sector generates more jobs than the organized industry."
The approach goes against the advice of many economists, including those at the International Monetary Fund, which recommends widening the tax net to alleviate India’s chronic shortfalls in fiscal revenue. Indian governments often need to slash infrastructure spending to meet deficit targets that are still among Asia’s highest.
India ranks among the world’s top employers in the informal sector, according to the International Labour Organisation. It puts to work about 400 million people -- more than the entire U.S. population.
In India, it’s nearly impossible to avoid. Retail stores offer discounts for customers if they pay cash, and landlords often take a portion of the monthly rent in stacks of 1,000-rupee notes. Back-alley hawalas transfer billions of dollars around the globe with no questions asked, and thousands of unregistered and underpaid chauffeurs and housemaids don’t file annual income declarations.
“The black economy is growing faster than the white economy and everybody is involved -- the entire country," said Arun Kumar, author of “The Black Economy in India," who came up with the $780 billion estimate by looking at wages, under-the-table transactions and cash-based real estate sales. “This isn’t just a problem among the wealthy -- almost everyone with disposable income participates in the black economy and it’s accepted."

Total corporate and personal income tax payers in India amount to about 40 million -- roughly 3 percent of the country’s 1.2 billion people. To expand that, a Finance Ministry-created panel suggested putting levies on farmers in the untaxed rural sector who make more than 5 million rupees ($76,000) per year -- an approach backed by the IMF.
“We think there’s scope to bring the fiscal deficit down in particular with the revenue side," said Thomas Richardson, the resident representative of the IMF in India. “It’s really a task of widening the tax net -- not raising rates, but bringing more people into the tax net."
“Neo-Middle Class"
Jaitley, for one, rejects that idea. Most farmers don’t make much money anyway, he said, and the rest could use the extra cash.
“We need to strengthen the neo-middle class and put more money in their pockets," Jaitley said. “So bringing tax violators into the tax net, yes, but bringing people with marginal incomes into the tax net -- I’m not so excited about it at all."
Instead, Jaitley wants to finance them. This year the government started a program to boost lending to small entrepreneurs like shopkeepers, fruits and vegetable vendors and artisans. Government-run banks have so far disbursed nearly $6 billion in increments of as much as about $15,000.
Part of the problem is India’s strict labor laws for companies with more than 100 employees. They incentivize businesses to stay small, leaving workers with few rights. The government so far has tweaked only a few minor labor laws, and it’s unclear when they will push for more changes.
While Jaitley this year is again struggling to raise revenue, he’s confident he’ll hit his deficit target of 3.9 percent of GDP without slashing funds for roads, bridges and ports. Shortfalls in direct taxes and state assets sales will be compensated by higher-than-expected indirect taxes -- including payments on services and exports.

Riaz Haq said...

Shadow Economies All over the World
New Estimates for 162 Countries from 1999 to 2007
Friedrich Schneider
Andreas Buehn
Claudio E. Montenegro

Pakistan's shadow economy estimated at 36%

Activities associated with shadow economies are facts of life around the world. Most societies
attempt to control these activities through various measures such as punishment, prosecution,
economic growth or education. To more effectively and efficiently allocate resources, it is
crucial for a country to gather information about the extent of the shadow economy, its
magnitude, who is engaged in underground activities, and the frequency of these activities.
Unfortunately, it is very difficult to get accurate information about shadow economy
activities, including the goods and labor involved, because individuals engaged in these
activities do not wish to be identified. Hence, doing research in this area can be considered a
scientific passion for “knowing the unknown.”
Although substantial literature5
exists on single aspects of the hidden or shadow economy and
comprehensive surveys have been written by Schneider and Enste (2000), and Feld and
Schneider (2009), the subject is still quite controversial as there are disagreements about the
definition of shadow economy activities, estimation procedures utilized, and the use of their
estimates in economic and policy analysis.6
Nevertheless, there are some indications that the
shadow economy has grown around the world, but little is known about the development and
the size of the shadow economies in developing Eastern European and Central Asian (mostly
former transition) countries, and high income OECD countries over the period 1999 to
2006/2007. The period was chosen as it has the most comprehensive data availability. This
study is an attempt to fill this gap by using the same estimation technique and almost the same
data sample used in Schneider and Buehn (2009) and Schneider and Enste (2000).
Therefore, the goal of this paper is twofold: (i) to undertake the challenging task of estimating
the shadow economy for 162 countries in various stages of development and located in
several regions throughout the world7
and (ii) to provide some insights about the main causes
of the shadow economy. To our knowledge, such an attempt has not been undertaken so far;
hence, we provide a unique database of the size and trends of the shadow economy in 162
countries over the period 1999 to 2006/2007. This is an improvement compared to previous
work – we used the MIMIC (Multiple Indicators Multiple Causes) estimation method for all
countries, thus creating a unique data set that allows us to compare shadow economy data.

Riaz Haq said...

Dissatisfied with size of Pakistan’s economy, Dar authorises World Bank study

Pakistan has authorised the World Bank to undertake a study to come out of what an economist called the age of ‘statistical darkness’, after the country’s finance minister also started believing that the nation’s gross income is understated by as much as 25%.

“I have asked the World Bank to trigger a study and come out with the actual size of Pakistan’s Gross Domestic Product (GDP), which I believe is currently understated by 20% to 25%”, said Finance Minister Ishaq Dar on Saturday while addressing a gathering of chartered accountants from South Asian nations.

His statements came in the backdrop of a widely used figure for the size of the Pakistani economy, currently stated to be hovering around the $280-billion mark.
Dar said after noticing this undercounting of economic output, he decided to stick to 7% GDP growth rate target for 2019.

What is wrong with Pakistan’s economy?

He said that the input output coefficient of various industries has not been worked out for the last two decades. Dar said that the World Bank would require at least one year to complete the study.

He assigned the task to the World Bank last week during his visit to Washington. He is the second person and the first in the government who has now started believing that the country’s national output could be far more than what it is at the moment.

The idea was first floated by Shahid Javed Burki, former vice-president of the World Bank, during a meeting with Dar that took place two months ago.

Pakistani policymakers are taking decisions in statistical darkness and the World Bank can help to end this, wrote Shahid Javed Burki in an article published in The Express Tribune after his meeting with Dar.

He had written that China was also making a similar mistake and was underestimating its gross income by as much as 25%. He believed that Pakistan was under-counting its GDP by the same order of magnitude.

A 25% upward adjustment in the estimate of GDP will bring 2017 Pakistani income from $280 billion to $350 billion, improving its world ranking from 43rd to 31st. It is then likely to cross South Africa, Singapore, Malaysia and Egypt, according to Burki.

According to Burki, some of the methods that Pakistan was using and the surveys that collected required data were seriously outdated. Pakistan was also not correctly estimating the size of its modern services – in particular information, communications, entertainment, travel and advanced commerce. All these sectors contribute much more to the economy than suggested by official numbers, he wrote.

Tax target

Meanwhile, Dar on Saturday finally announced that this fiscal year’s tax target of Rs3.621 trillion has been revised downwards. “We are aiming for over Rs3.5 trillion tax collections for fiscal year 2016-17,” said Dar.

The Federal Board of Revenue (FBR) is now aiming to collect Rs3.521 trillion – a cut of Rs100 billion.

Pakistan’s economy quietly rises even as terror makes headlines

The government had to lower the target after it faced a shortfall of Rs168 billion during the first nine months (July-March) of the current year. The shortfall has further widened in April to Rs198 billion after the FBR also missed its April target by a margin of Rs30 billion. Against the monthly target of Rs290 billion, the FBR could pool Rs260 billion, according to provisional results. The monthly collection is expected to slightly go up to Rs263 billion.

The cumulative tax collection during the first ten months (July-April) increased to Rs2.55 trillion. The FBR needs to generate Rs996 billion in the remaining two months of the fiscal year, which seems like an uphill task.

Special Assistant to Prime Minister on Revenue Haroon Akhtar said that the FBR sustained Rs121 billion shortfall due to change in polices by the government after the announcement of the last budget.

Riaz Haq said...

5 Most Profitable Business Sectors in Pakistan:

Pakistan business sector is growing fast, a country with 193.2 million estimated population in 2016 has shown strong growth in the past five years which is expected to grow further. A study published by Harvard indicates that Pakistan’s economic growth will surpass China’s in the next 20 years, growth statistics and current development in the country including China Pakistan Economic Corridor CPEC attracts more businesses to invest in Pakistan from across the globe. Recently, France, United Kingdom, Turkey and China has shown special interest to start bilateral trade with Pakistan and private sector companies from these countries are also leapfrogging to make considerable investments in Pakistan.

Despite, these are many sectors in Pakistan that are underdeveloped but these five sectors including; FMCG, Chemicals and Fertilizers, Automotive, Textile and Energy/Petroleum are the most growing and profitable in Pakistan.

The data acquired from Karachi Stock Exchange KSE from 2013 to 2017 indicates that top companies who performed well are from the above five sectors. The companies witnessed strong growth and profitability over the four years.


FMCG is the most lucrative and huge business sector in Pakistan, companies that are consistently growing and becoming more profitable includes; Colgate Palmolive, Unilever, Nestle and Engro Foods. The market is huge and still in growing stage whereas industry has few multinational players covering the whole market.

2 Chemicals and Fertilizers

“Chemicals and fertilizers” is another big sector which caters even bigger market, companies like ICI Pakistan, Fauji Fertilizer, Engro Fertilizers and Chemicals, Abbot, Lucky Cement and some other are dominating the market with strong growth over time and profitability.

3 Automotive

The automotive industry in Pakistan forms oligopoly, global players like Toyota, Honda and Suzuki dominates the market. However, Pakistan has allowed other automakers to setup car assembly plants in Pakistan, increasing disposable income and the transport needs in the country make the market more attractive, potential and profitable.

4 Textile

Pakistan’s textile industry is popular in all over the world; however, due to lesser facilities and government support Pakistan is not able to streamline its textile growth but the textile industry accounts for 57% of the country overall exports. There are several companies in this sector including Premium Textile and Din Textile that are quite lucrative.

5 Energy/Petroleum

Where there are people there is a need for energy in all segments of life whether you are at home, traveling, working, playing and having leisure energy and petroleum products are inevitable, Pakistan’s energy and petroleum needs are growing rapidly, it is estimated that Pakistan’s energy needs will surpass 50,000 MW by 2025. Petroleum and energy sector in Pakistan is expected to grow further and become more profitable in the future.