Category: Economic issues of public senstivity


Pakistan is probably one of those few countries where not a single principle of good taxation system is followed. Those who make tons of money remain out of tax net whereas burden of tax is invariably on the poor segments of the society. The rich are thriving on the tax contribution of the poor. Two third of the total taxes is collected through indirect taxes. Tax on economic resources of the rich is just one-third of the total collection. Nearly a month ago, a warning was sounded that Pakistan’s unjust taxation system alone can trigger public revolt. Please read: This system alone can trigger a public revolt….

The present taxation system is also partly responsible for inflation and price hike for which the poor of the country have to bear the brunt. It is also responsible for discouraging economic activities. The rich are becoming richer and thriving on the regressive system of taxation. On the other hand, Pakistan has to beg for its relief activities of the flood victims. The amount required for this purpose can easily be generated at home. Pakistani government was conveniently indifferent to this potential but its plea for billions of dollars to recover from this summer’s floods has sparked pressure on the country to reform its dysfunctional tax system, which collects very little money, even from the rich.

The country’s biggest donor, the United States, has issued one of the strongest warnings, saying the world will only be able to fund a quarter of the tens of billions of dollars it will take to rebuild — and it will be difficult to get American taxpayers to help if Pakistanis aren’t footing their share of the bill. Businessweek has reported that this threat is not being taken seriously because the nuclear-armed country is so important in the war against al-Qaida and the Taliban. The fact of the matter is that American taxpayers could be expected to sacrifice only when Pakistani fat cats shed fraction of their (ill-gotten) wealth. And this fraction will be enough to fund the entire development program.

Despite years of international pressure, Pakistan has one of the lowest effective tax rates in the world, equal to about 9 percent of the value of the country’s economy, according to the Carnegie report. In contrast, the U.S. equivalent is more than three times as high at about 28 percent. Even India’s tax-to-GDP ratio is twice as much as that of Pakistan. One of the reasons Pakistan’s rate is so low is because many people avoid paying taxes. Fewer than 2 percent of the country’s 175 million citizens pay any income tax, according to the report. Also, some sectors of the economy like agriculture — a major money-maker for the elite — are totally exempt from tax, and the rich have pushed to keep it that way.

Ishrat Hussain, former head of the Pakistan central bank, estimated that better enforcement of current tax policies and the elimination of key exemptions should produce an effective tax rate of 15 percent — generating nearly $10 billion in additional revenue per year. That money would go a long way toward repairing devastation from the floods, which affected more than 18 million people and damaged and destroyed over 1.8 million homes. It would also provide the money necessary to begin fixing Pakistan’s crumbling school system and health infrastructure.

“This is a time we have to tell people that we have to all pitch in and mobilize our own resources,” said Hussain. “Why should the international community come to your rescue if you are not doing your part of the bargain?”

He said donors should keep up the pressure on Pakistan, but advised against directly linking reconstruction money to tax reform, predicting the move could backfire in a country where animosity toward the West, and the U.S. in particular, is extremely high. “It wouldn’t be a very smart move because people here would consider this as an intrusion on their sovereignty, and the debate would then be muddied,” said Hussain.

The U.S. and other countries have donated around $1 billion for emergency relief, and international financial institutions have provided about $2.5 billion in emergency loans. Donors are scheduled to meet in New York this weekend to discuss raising additional aid. Washington has promised more money for reconstruction, but the U.S. special envoy to Pakistan, Richard Holbrooke, warned during a visit to the country this week that the international community could only fund about 25 percent of the bill. He said the U.S. would not condition reconstruction money on tax reform, but cautioned that American generosity has its limits.

If Pakistan does not reform its tax system and the donors fail to bail the country out, it is unclear how the nation would come up with the money necessary for reconstruction. The government has proposed a one-time tax on urban property and agricultural land not affected by the floods, but it is uncertain whether it will be implemented and how much money it would produce. Hussain, the former central bank chief, said that even if the one-time tax was implemented, he was worried the elite would simply use their influence to avoid paying anything as they have done in the past. “The system has given power to the thieves to monitor themselves,” he said.

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Those who were happy that the democracy has made Pakistan an investment heaven should be ready for another rude shock. The latest blow has been dealt by no less than World Economic Forum which says that Pakistan has now reached 123rd position amongst 133 countries as compared to 101st position in the last year in the competitive index. The Global Competitiveness Report 2010-11 released by the World Economic Forum has disclosed that 15 problematic factors for doing business in Pakistan.   These factors in the order of severity are corruption, government’s instability, inflation, access to financing, tax rates, tax regulations and foreign currency regulations. The report has kept in view each and every step and Pakistan’s ranking in each area.

In the ranking of institutions the country has been ranked at 112. 2nd pillar: in the area of infrastructure Pakistan has been placed at 110. 3rd pillar: Due to the vulnerable macroeconomic environment the country has been ranked at 133, 4th pillar: health and primary education 123, Efficiency enhancers 95th, 5th pillar: higher education and training 123rd, 6th pillar: goods market efficiency 91st, 7th pillar: labor market efficiency 131, 8th pillar: financial market development 73, 9th pillar: technological readiness 109, 10th pillar: market size 31.Innovation and sophistication factors 76th, 11th pillar: business sophistication 79, 12th pillar: innovation 75. From a list of 15 factors, respondents were asked to select the five most problematic for doing business in their country.

1st pillar: in the area institutions, property rights 107, intellectual property protection 86, diversion of public funds 92, public trust of politicians 91, irregular payments and bribes117, judicial independence 74, favoritism in decisions of government officials 87, wastefulness of government spending 58, burden of government regulation 72, efficiency of legal framework in settling disputes 103, efficiency of legal framework in challenging regulations 96, transparency of government policymaking 115, business costs of terrorism 138, business costs of crime and violence126, organised crime127, reliability of police services 119, ethical behavior of firms 100, strength of auditing and reporting standards 97, efficacy of corporate boards 115, protection of minority shareholders’ interests 94, strength of investor protection 27.

2nd pillar infrastructure: Quality of overall infrastructure 100, quality of roads 72, quality of railroad infrastructure 55, quality of port infrastructure 73, quality of air transport infrastructure 81, available airline seat kilometers 48, quality of electricity supply 128, fixed telephone lines115, mobile telephone subscriptions107. 3rd pillar macroeconomic environment: Government budget balance 90, national savings rate 89, inflation 137, interest rate spread 94, government debt 82, country credit rating 125.

4th pillar health and primary education: Business impact of malaria 111, malaria incidence 109, business impact of tuberculosis 114, tuberculosis incidence 113, business impact of HIV/AIDS 102, HIV prevalence 22, infant mortality 123, life expectancy 105, quality of primary education 103, primary education enrollment rate132.

5th pillar higher education and training: secondary education enrollment rate 125, tertiary education enrollment rate 121, quality of the educational system 87, quality of math and science education 90, quality of management schools 80, internet access in schools 84, local availability of research and training services 97, extent of staff training115,

6th pillar goods market efficiency: Intensity of local competition 87, extent of market dominance 65, effectiveness of anti-monopoly policy 73, extent and effect of taxation 46, total tax rate 37, number of procedures required to start a business 99, time required to start a business 71, agricultural policy costs 106, prevalence of trade barriers 106, trade tariffs 133, prevalence of foreign ownership 109, business impact of rules on FDI 73, burden of customs procedures 98, degree of customer orientation 97, buyer sophistication 62.

7th pillar Labor market efficiency: Cooperation in labor-employer relations104, flexibility of wage determination 104, rigidity of employment 110, hiring and firing practices 51, redundancy costs 111, pay and productivity 93, reliance on professional management 87, brain drain 68, female participation in labor  force 137.

8th pillar financial market development: Availability of financial services 101, affordability of financial services 85, financing through local equity market 43, ease of access to loans 40, venture capital availability 51, restriction on capital flows 83, soundness of banks 88, regulation of securities exchanges 76, legal rights index 60. 9th pillar technological readiness: Availability of latest technologies 88, firm-level technology absorption 88, FDI and technology transfer 100, internet users 100, broadband Internet subscriptions 103, internet bandwidth 111. 10th pillar market size: Domestic market size index 26, foreign market size index 61.

11th pillar business sophistication: Local supplier quantity 87, local supplier quality 95, state of cluster development 46, nature of competitive advantage 84, value chain breadth 69, control of international distribution 89, production process sophistication 76, extent of marketing 90, willingness to delegate authority 85. 12th pillar innovation: Capacity for innovation 58, quality of scientific research institutions 79, company spending on R&D 67, university-industry collaboration in R&D 81, Gov’t procurement of advanced tech products 84, availability of scientists and engineers 80, utility patents per million population 88.

There are certain fundamental dos and don’ts of governance one of which is about the conflict of interest. Those in the position of taking or influencing a decision should in no way be direct of indirect beneficiary of such a decision. Any violation of this principle hurts people at large. In Pakistan, majority of sugar barons sit in the National Assembly and they do not let any legislation through which directly or indirectly affects their interests. They would not even allow any legislation against cartelization of sugar industry because they themselves form cartels to fleece the public. The Competition Commission of Pakistan has been made toothless through feet-dragging on passage of its governing statute. The sugar barons are operating like underworld mafia and fleecing the public in a professional manner.

It has been widely reported that taking advantage of rising prices of sugar in international market, sugar barons are flouting a government ban on the export of sugar. The sugar has not been exported; it has been smuggled out of Pakistan to Afghanistan where prices are comparatively higher. On one hand, the sugar is being smuggled and on the other its import by TCP being delayed to create windfall for sugar daddies.

The implications are now hitting everyone as the sugar crisis in the country has taken a turn for the worst. The sugar mills have sold 95 per cent of their stocks but prices of the commodity continue to spiral every day. Sugar prices in the last month increased by around Rs10-14. The product was available for Rs69-72 per kg on August 1, but is currently being sold for Rs80-86 per kg. Express Tribune has reported that the industry stakeholders believe the rates would further rise in coming weeks, as sugar stocks are very low while imported sugar has not reached on time. The delay in the arrival of sugar would cause a gap between demand and supply, they said, adding that other reasons had also contributed to the sugar crisis and the sharp price increase.

Pakistan Sugar Mills Association (PSMA) chairman Iskander M Khan, said that the cabinet had decided to ban the export of raw sugar and stop smuggling of gur to Afghanistan, but the decision was not taken seriously. He said that raw sugar was smuggled to Afghanistan, where prices are very high. “The country lost at least 100,000 tons of sugar due to smuggling,” he explained.

“We have even consumed re-melting stock and now only 300,000 tons of sugar is left,” he said, adding it is the lowest-ever level of sugar stock at mills. Khan said re-melting stocks are used to recycle and make new sugar and normally 40,000-50,000 tons of sugar remain in mills. “This year, we have neither re-melting nor any carryover stocks,” he lamented. He said the millers should not be blamed for the sugar shortage, as stocks are already close to depletion.

“The lethargic attitude of the Trading Corporation of Pakistan (TCP) concerning the shortage of sugar resulted in a delayed decision to import sugar. It caused a shortage in local market and prices started increasing,” he added. On July 29, the Economic Coordination Committee (ECC) had directed the TCP to finish the ongoing sugar import of 575,000 tons by making all possible efforts to open tenders for the remaining 375,000 tons, but the TCP could not import sugar on time. Consequently, the price of sugar increased in the local market.

The price of sugar in the international market is currently hovering at $750 per ton and its landed cost at Karachi airport is around Rs70-72 per kg. If transportation charges to other cities are included, then the price increases to Rs75-77 per kg. The price excludes sales tax and any other federal duties. According to the Federal Board of Revenue, the government has lost around Rs2.5 billion to date due to reduced sales tax on sugar. Sugar Dealers Association Punjab President Rana Muhammad Ayub said imported sugar would arrive by the end of September and would cost around Rs75 per kg. He said after arrival of sugar, prices would stabilize around Rs82-85 per kg.

Sugar production in fiscal year 2009-10 amounted to 3.1 million tons and carryover stocks from 2009 were 500,000 tons. However, this year Pakistan does not have any carryover stocks. Average sugar production in one year has been around 3.7 million tons.

There was news that Pakistan’s expensively-dressed Prime Minister will donate his wardrobe for the flood-hit people. A very noble gesture indeed; but nobler still will be for the Prime Minister to donate at least half of his Cabinet which will save enormous amounts of money. And this is serious talk as Pakistan is in the eye of a storm which has the potential to destabilize the entire system that we have so far been able to save. It has been estimated that the flooding in Pakistan will inflict serious damage on its economy, posing another challenge for a cash-strapped government struggling to keep a recovery on track amid high inflation and a relentless Islamist insurgency.

Wall Street Journal has reported that Assistance from the International Monetary Fund and Western countries will likely help Pakistan avoid another brush with bankruptcy as it tries to cope with the damage, which by some estimates may reach $43 billion. But the floods will weigh heavily on economic growth this year and leave a long-term mark on the economy.

“The hit on the growth rate is going to be very severe,” said Philip Wyatt, a senior economist at UBS. “We can see a loss of one or two points of economic growth, depending on the damage.” In the fiscal year ended June 30, Pakistan’s economy grew 4.1%. Moody’s Investors Service, which had expected Pakistan’s economic growth to expand to 4.5% this fiscal year, may lower its estimate to 3% to 3.5%, analyst Aninda Mitra said.

The flood began in July and at one point covered one-fifth of the South Asian nation, or land roughly equivalent to the size of Uruguay. It has damaged crops sown over 1.93 million acres, or 776,996 hectares. Cotton output will shrink to 11.76 million bales from the 14 million bales estimated at the start of the season by Pakistan’s food and agriculture ministry. Cotton is an important raw material for the key textile export sector, one of Pakistan’s few sources of export income.

According to the United Nations, the disaster has affected close to 20 million people, killing 1,500 and leaving 1.2 million homes damaged or destroyed. Coping with the social and economic costs of the catastrophe will strain the government’s finances. The budget deficit was already on track to reach 4.5% of gross domestic product before the crisis but now could widen to as much as 6% to 7% of GDP, said Mr. Mitra of Moody’s. That is a grim prospect for a country that had external debt totaling $55.63 billion as of June 30. President Asif Ali Zardari‘s government has been reaching out to other countries for help. A delegation met with IMF officials Monday in Washington. Donors including the U.K. and the European Union have so far pledged almost $500 million in additional help.

Moody’s is unlikely to upgrade Pakistan’s credit rating in coming months due to the devastation from the floods and other challenges, but the country’s current B3 rating “adequately captures the risk” of the likely economic slowdown and is unlikely to be downgraded further, said Mr. Mitra. A B3 rating is just one notch above the C level, which applies to countries in effective sovereign default, and makes it hard for a country to issue bonds in the international market.

The natural disaster is the latest setback for the Pakistan economy, which after several years of strong growth almost ground to a halt in 2008, hurt by budget overruns, a loss in export competitiveness due to high inflation, and an insurgency that continues unabated. On Monday, while emergency workers worked to shore up levees in two southern cities, at least 36 people were killed in three separate bomb attacks across the country, and 12 suspected militants were killed in U.S. drone attacks near the Afghan border.

Concerns about the economic fallout have kept pressure on Pakistan’s financial markets, though the impact has been moderate. The cost of insuring against a default or restructuring of Pakistan’s bonds remains at very elevated levels, but has been relatively steady in recent weeks, a sign that investors anticipate IMF and U.S. support to prevent any fiscal crisis. The spread on Pakistan five-year credit default swaps was quoted at 1,099 basis points Tuesday, roughly on par with those of other high-risk sovereign bond issuers like Venezuela, but well below early-2009 highs of over 2,100 basis points during the global financial crisis.

Pakistan’s benchmark stock index, KSE-100, has fallen 7% so far in August, but is up 4% so far this year, roughly in line with other emerging market indexes. The Pakistan rupee, one of Asia’s weakest currencies in recent years, has fallen in recent days, but has found support above its record low against the dollar of 85.84 rupees hit on Aug. 2, helped by expectations that remittances from overseas Pakistanis, which have averaged around 10% of GDP in recent years, may rise to help families at home cope with the floods.

But analysts expect the rupee to remain under pressure in coming months due to Pakistan’s current account deficit and high inflation rate, which ran at 12.3% in July. The floods are likely to push up food prices and transportation costs for other goods, likely eliminating any chance that inflation might fall below 10% this year, said Mr. Wyatt at UBS.

The catastrophe of the floods had many Ds, Death, Destruction, Diseases leading the nation to Debt trap. The story of this multi-dimensional onslaught of Nature and the ramifications thereof has already been published on this blog.  There are some brave people who, in spite of their modest means, are fighting the resultant human miseries. One of these is Sehberg Trust. This week the Trust worked together with some other organizations namely Humanity First, Islamabad Jeep Club and Pakistan Fellows in various areas such as Dildar Gari, Pushtoon Garhi, Pir Sabak, Chowky Drab, Kaptan Kalay in Nowshera and Charsadda Districts and also one village in Sargodha.

A very short account of relief activities carried out in Dildar Garhi in Charsadda District are being shared for any one who might be planning relief activities.

Humanity First had identified a pocket in District Charsadda through Pakistan Fellows another NGO which also provided support in transportation of goods. The name of the area was Dildar Garhi and it was located at 200 km from Islamabad, 20 km from Charsadda and 48 kms from Nishata Interchange on Islamabad- Peshawar motorway. It was badly hit by flooding as it is situated at the bank of Swat River one end of Dildar Garhi Bridge which has succumbed to the flooding cutting off this area from Peshawar. On the way, the roads and small bridges were broken and the terrain was very difficult the last 3 kms was not accessible by trucks and jeeps and light vehicles had to be used.

250 families were provided with packets of food each containing 1 kg sugar, quarter kg black tea, 8 packs of 200 ml milk and ten roghani nans plus 20 liters cans filled with clean water and chlorine tablets to make the water safe for the next ten days. 5000 naans, 2000 milk packs, 50 kg tea and 200 kg of sugar was distributed. Humanity first had provided dates, biscuits etc and dry food rations like oil, flour and lentils were provided by Pakistan Fellows.

We all felt that at least as far as Khyber Pakhtunkhwa is concerned, the emergency phase seems to be over in Nowshera, Charsadda and Swat districts and has entered the transition phase. People now have temporary shelters some in the form of tents, others in relief camps and majority with their relatives. Currently, there is acute shortage of clean drinking water and raw material for cooking. Skin and other water-borne Infections were now very obvious and it seems like soaps, combs, hand fans and clothing should also be considered.

Next week we are going to provide flour, oil and daal (lentils) to the same 250 families in the area. We have also now started collecting clothes and shoes for the week before Eid to be distributed in various relief camps that have already been established. Also, in the plan is the collection of Bangles and Mehndi for little girls and toys for little boys to be distributed in the camps.

With about two thousand people dead, millions homeless and deadly diseases spreading, mighty Indus is still furious and this death and destruction is only one side of the story. And its only the beginning.  Deadlier still are events unfolding as are the stories of Government’s incompetence to deal with this situation. The floods are an excellent recipe of disaster for Pakistan as a country, if those rich elite who plundered it do not cough up whole of the looted wealth or at least a fraction of it. Pakistan’s already creaky economy has been pushed to the verge of ruin by the devastating floods of the past month. With foreign aid only now beginning to trickle in, the impoverished country has been forced to take out further loans while pleading for outstanding ones to be restructured.

Already burdened by heavy debt, the country’s economy has suffered a major setback. According to the Independent, funds will have to be poured into reconstruction efforts while many sectors of the economy, especially agriculture, will suffer losses for up to several months, if not years.

So far, the floods have covered a fifth of the country, cost at least 1,600 lives, displaced 4.6 million people, destroyed roads, bridges and schools, damaged power stations and dams, and swamped millions of acres of agricultural land. About 150,000 Pakistanis were forced to move to higher ground yesterday as water from a freshly swollen Indus River submerged dozens more towns and villages in the south. Officials expect the floods to recede across the country in the next few days as the last river torrents empty into the Arabian Sea. Survivors may find little left when they return home. Already, 600,000 people are in relief camps set up in Sindh during the past month. The floods have affected about one-fifth of Pakistan’s territory; at least six million people have been made homeless, and 20 million affected overall.

Some officials estimate that the cost of rebuilding infrastructure could be $15bn, money that Islamabad simply doesn’t have. As of July, Pakistan had a debt of $55.5bn. That figure will jump to $73bn in 2015-16, as debts that were rescheduled after 9/11, in As a result of the tragedy, the budget deficit will grow, inflation will rise, and economic growth will slow – all areas where the fund had wanted to see progress in the opposite direction.

At the same time, Islamabad has secured loans of $1bn from the World Bank and $2bn from the Asian Development Bank to help relief efforts and begin the task to rehabilitation and reconstruction. Government officials say that they were left with no option but to approach the banks as foreign aid has generated only a fraction of what’s needed. The disaster has revealed decades of infrastructural neglect that damns successive governments. However efficiently the current government may have been able to mobilize resources, the state’s capacity was woefully lacking in the first place.

Some 17 million acres of agricultural land have been submerged by the floods, which are still raging in the southern province of Sindh. Key crops including wheat, cotton and rice have been affected. Pakistan’s economy has long suffered problems because of its embarrassingly narrow tax base. Broad sections of the wealthy, including senior politicians, pay little or no tax. But Mr Sheikh said that the crisis could be an opportunity to take tough economic decisions the government has long wanted to. “We could push through a sales tax, introduce a flood surcharge on well-to-do people and get some leeway from the IMF.”

As the deadly diseases threaten survivors of Pakistan’s deadliest floods, the global aid response to the Pakistan floods has so far been much less generous than to other recent natural disasters — despite the soaring numbers of people affected and the prospect of more economic ruin in a country key to the fight against Islamist extremists. To make the matters worse, the so-called political leaders, at least a majority of them, remain unmoved by the plight of about 14 million souls they claim to represent, though on dubious credentials. The floods have affected about a quarter of the country, overwhelming an already weak government coping with crushing economic conditions and attacks by al-Qaida and Taliban militants. Around 1,500 people have been killed since the torrents began more than two weeks ago.

International community remains unmoved, so is vote-grabbers who only appear in the voting season like frogs who are irritatingly visible in the monsoon season. It is only the philanthropists and NGOs who are helping the needy. A story of an NGO has already appeared in these pages eliciting tremendous response. There was hardly any response to government’s appeal for donations, apparently for lack of trust. Reasons for international apathy include the relatively low death toll of 1,500, the slow onset of the flooding compared with more immediate and dramatic earthquakes or tsunamis, and a global “donor fatigue” — or at least a Pakistan fatigue. Businessweek has reported that triggered by monsoon rains, the floods have torn through the country from its mountainous northwest, destroying hundreds of thousands of homes and an estimated 1.7 million acres (nearly 700,000 hectares) of farmland. In southern Pakistan, the River Indus is now more than 15 miles (25 kilometers) wide at some points — 25 times wider than during normal monsoon seasons.

The floods have disrupted the lives of 14 million people — 8 percent of the population. Many are living in muddy camps or overcrowded government buildings, while thousands more are sleeping in the open next to their cows, goats and whatever possessions they managed to drag with them. And the U.N. says more flood surges may be on the way. Late Friday, local TV reported more flooding in towns and villages along main rivers in Sindh and Punjab provinces.

Going by the numbers of people affected, the disaster is worse than the 2004 Indian Ocean tsunami, the 2005 Kashmir earthquake and the 2010 Haiti earthquake combined, the U.N. says. But international aid for those disasters came at a more rapid pace, aid experts say. Ten days after the Kashmir quake, donors gave or pledged $292 million, according to the aid group Oxfam. The Jan. 12 disaster in Haiti led to pledges nearing $1 billion within the first 10 days.

For Pakistan, the international community gave or pledged $150 million after the flooding began in earnest in late July, according to the U.N. Office for the Coordination of Humanitarian Affairs, known as OCHA. U.N. officials on Wednesday launched a formal appeal for $460 million for immediate relief and have said the country will need billions more to rebuild after the floodwaters recede.

OCHA spokesman Nicholas Reader said that of the $310 million still needed, the U.N. received $93 million with an additional $32 million pledged. Pakistan is also receiving bilateral donations, which are not part of the appeal and which the United Nations does not track. The United States has donated the most, at least $70 million, and has sent military helicopters to rescue stranded people and drop of food and water. Washington hopes the assistance will help improve its image in the country — however marginally — as it seeks its support in the battle against the Taliban in neighboring Afghanistan.

Britain, Pakistan’s former colonial ruler, was the second largest donor, pledging over $32 million. Other major donations included $13 million from Germany, $10 million from Australia, $5 million from Kuwait, $3.5 million from Japan and $3.3 million from Norway. U.N. spokesman Martin Nesirky said humanitarian organizations in Pakistan are working around the clock to deliver lifesaving assistance to at least 6 million people in need, but that far more funding is required to provide help quickly. He said U.N. Secretary-General Ban Ki-moon was planning a trip to Pakistan to inspect the damage.

Comparatively low-key coverage in the international media and a lack of celebrity involvement has also kept the flood disaster off many would-be givers’ radar, said Molly Kinder, a Pakistan aid expert with the Washington-based Center for Global Development. “I haven’t exactly seen Lady Gaga go on Oprah to pledge donations to Pakistan’s flood victims,” she said. The civilian government’s response to the flood has not inspired confidence among many donors. Pakistan’s economy is already dependent on foreign aid and has received billions of dollars since 2001 because of its role in the fight against Islamic militants.

Prices of UK property are in a very interesting shape. People have always been in love with UK property which has traditionally been a parking lot for the ill-gotten money stashed in poor countries and then transferred to Britain through property investment. Credit-crunch triggered recession witnessed marked slump in the market which has no signs of going away even when the economy is recovering. Thanks to British Government’s recent budgetary measures, property prices are expected to fall further by 5% this year and will keep falling @ 10% per annum during next two years. Those interested in buying UK property, including Rockwood Estate, should wait for another two years. This wait will be well-rewarded and buyers could get the deal of their lifetime.

According to a report appearing in the Daily Telegraph, economists predict collapse in house prices of 23% from the start of 2010 – a deeper drop than the 19.3% crash during the recession. The numbers imply a torrid second half of 2010 as house prices are currently 3% higher than the start of the year according to Nationwide Building Society.

“Higher taxes, spending cuts and rising unemployment all point to fresh house price falls this year and next,” the forecasters said in a report. “The benefits of low interest rates will be undermined by a fresh tightening in mortgage lending criteria.” It is the second report in less than a week to make grim reading for Britain’s homeowners. PwC warned “there is a 70% chance that UK house prices will still be below peak 2007 levels in 2015 in real terms … and that real house prices [after inflation] may not regain their previous peak levels until around 2020”.

Average house prices peaked at around £187,000 in October 2007 before collapsing for 16 months consecutively, according to Nationwide. The subsequent recovery has left them at £170,111 – 9% below the top of the boom. Capital Economics justified its outlook by noting that the house price-to-earnings ratio is still far above its 4% long-run average at 5.5%, and stressing that mortgage rates will only get more expensive. It expects “London to be hardest hit by the second leg of the correction”. However, it cautioned that the 2012 forecast “is highly uncertain”.

The firm’s prognosis is based on considerably worse outlook for the economy than the Treasury’s. Capital Economics expects the economy to grow just 1% this year, 1.5% next and 2% in 2012, against official forecasts of 1.2%, 2.3% and 2.8%. Unemployment, it added, will rise to 3m after 750,000 public sector job cuts against the official forecasts that unemployment has peaked despite a looming 500,000 civil service cuts.

The average price of a UK home fell 0.5% to £169,347 in July, according to the latest figures from Nationwide Building Society released on Thursday. This month’s fall comes after prices stalled in June, and leaves them just 6.6% higher than they were a year ago. A combination of record low interest rates and far less unemployment than feared has helped prices rebound after slumping for 18 months in the wake of the credit crisis. However, Nationwide today suggested that the balance between buyers and sellers, which has also helped buoy prices, may be changing as the number of potential buyers dwindle.

For most people, it is simple bricks and mortar that matter most – the value of your home. Research by Savills, the estate agents, has forecast an inflation-adjusted rise of 40% in house prices over the next decade. Sounds good, but that is well below the 67% spike between 2000-2007, the 43% rise in the 1980s and the 49% rise in the 1970s. Another worrying trend that experts warn about is the split, which could be permanent, between those who have equity in their homes, having been on the properly ladder for years, and those who do not. Over the past 10 years the size of a deposit for a first-time buyer has risen from being roughly equivalent to 20% of their average income in 2000, to almost 100% today, making buying homes increasingly difficult for young people. If they cannot generate any equity then getting started, never mind trading up, is impossible.

But it is not just first-time buyers who are going to face problems in future. “We have seen plenty of cycles [over the past 50 years], there’s nothing new about that,” says Martin Ellis, head of housing economics at Halifax. “But what is new is the scale of the credit crunch, its impact and the fallout.”

The biggest change has been an end to easy credit from mortgage lenders, which was a big factor behind the most recent house-price boom. Banks are cautious about lending as they look to protect capital ratios, shore up balance sheets, maintain profits and avoid bad debts.

“There are going to be two or three tiers in the market,” says Ian Marris, a partner at Knight Frank. “The northern cities, for example, have been dependent on Government money. There’s simply not going to be the wealth to support anywhere near the sort of growth we have seen.”

Another difference this time round is an increase in flats, snapped up by buy-to-let investors before the market caved in. From 2000 to 2008, the proportion of newly-built homes that were flats rose from just over 15% to almost 50%. In contrast, detached housing fell from 45% to less than 15%. This trend increased the supply of new homes and meant that over the past 10 years, old houses grew in value more than new houses. With so many new flats on the market, prices could be depressed for some time, although that could help affordability, assuming buyers can actually get a mortgage.

One of the strange trends in recent years, however, has been the lack of pain that homeowners have suffered since the housing market peaked in the spring of 2007. Where are the repossessions, so common in previous property busts which brought misery to communities across the nation? In 1991, more than 75,000 homes were repossessed, followed by 68,000 in 1992. The highest figure in this downturn has been 46,000 in 2009.

The answer lies with the near-zero cost of money being stubbornly maintained by the Bank of England’s Monetary Policy Committee. The official Bank rate is just 0.5% and has been since March 2009, keeping many people afloat artificially. Experts such as Ed Stansfield, chief property economist at Capital Economics, reckon this loose monetary policy is distorting the residential property market. “In previous recessions, people would have struggled to keep up with repayments. But here they are managing to keep up and one of the big drivers in the past in pushing house prices down has been distressed sales,” he said. The market, he believes, is “without equilibrium”, with prices out of kilter with the wider economic climate. They are too high, in other words, and a fall is a clear risk especially once interest rates start to rise again, as they inevitably must do.

While some residential homeowners are still sitting on huge profits accumulated over decades, the chances of having made a killing in the commercial property market have proved rather more elusive. According to IPD, the leading commercial property-price index, the real value of property has fallen by 55% over the past half-century. Within that, industrial and retail assets have performed the best, with office blocks falling the most, even though that sector often attracts the biggest deals.

Ian Coull, chief executive of FTSE 100 industrial property group Segro, says there is a rational explanation for the trend. “Why should it do any more? We are able to match supply with demand and if there is a shortfall all we do is build more and keep pace with inflation.”

Surprisingly, property in the City of London, which along with the West End, attracts the most investment, has also underperformed. Since 1987, prime capital values in the City have slipped from £2,500 per sq ft to around £1,000, according to CB Richard Ellis. The West End has risen from £1,000 per sq ft to £2,000 per sq ft. There is another reason why residential property has performed better than commercial. According to Francis Salway, chief executive of Land Securities, the difference is in the greater difficulty developers face in building new homes than in putting up another office block. “The UK is one of the tightest places for housing,” he says. “Also, an increasing proportion of GDP has gone into salaries and therefore poured into property.”

Of course, it’s not all doom and gloom in commercial property. If you are smart, you can get rich. “Property is not a long-term hold, it is a trading asset,” says Chris Northam, of Jones Lang LaSalle. “If you get it right, you can make a fortune.” And over the years many people have made many fortunes and, if they were smart, managed to avoid the worst falls which have happened in the 1970s, the early 1990s, and since 2007.

Patrick Vaughan and Raymond Mould, business partners who met in the 1960s, have earned a reputation as kings of calling the property cycle. With London & Stamford they are now on their third venture. They sold Arlington and retail-park developer Pillar just before previous market crashes. The pair went into the 1970s downturn with cash, a period Vaughan describes as a “very messy market”. He adds: “A lot of money [in the property market] came from fringe banks that were allowed to crash.”

In contrast, the collapse in values in the early 1990s was linked to overdevelopment, as a string of new projects reached the market, such as Broadgate in the City of London. With this influx of new space, rental values and capital values crashed as the economy slowed down.

The fall between 2007 and 2009, which saw values drop 44%, was a double-whammy caused by a lack of capital due to the banking crisis, and rental income falling as the recession damaged business demand for new space.

Lessons learned from the previous two falls suggest that values now face a period of stalling growth as banks look to reduce their exposure to the sector amid economy fragility and uncertain consumer spending. For those willing to play a waiting game, however, there could still be exciting opportunities.

Mike Slade made his first acquisition at Helical Bar in 1984. The property was bought from the National Bank of Kuwait after being held on its books for 10 years. “These assets don’t come out for three to four years,” Slade states. “I am quite confident moving forward, although the big problem in the next three to four years will be [the lack of] consumer spending.”

But the road ahead could be a slow one for those looking to invest, as banks are likely to take their time readjusting their balance sheets before being willing to back property schemes with loans. In the 1990s, according to figures from the Bank of England, it took from March 1991 to December 1997 for banks to reduce their exposure to property lending from its peak level to a low. This decade the corresponding peak was reached in July 2009. A return to boom times is obviously some way off.

There are some positives, though. The UK, and particularly London, has become increasingly popular with overseas investors and that extra demand is expected to support growth. In 2009, around three-quarters of deals in Central London were done by overseas investors, from Qatar, Germany and the US, compared to a third in 1994.

Although regulation and the rise of rival financial centres in the Far East threaten London’s status as a financial centre, the City’s long-lease lengths, relative transparency and international business community mean it should remain a safe haven for investors. London’s restrictive planning regime should further protect prices, according to Mr Salway. “Someone is always going to want to be in Mount Street or St James’s Street but you just can’t build there,” he explains.

Although we are in for a bumpy and unpredictable few years, positive long-term fundamentals in both residential and commercial property remain. The UK’s high population density and planning restrictions mean meeting demand with supply will always be difficult. Although economic growth is fragile at present, its return should keep demand bubbling away so that every Englishman, not to mention Scotsman, Welshman and Irishman, can still count his home as his castle.

When Titanic sank in 1912, the shipbuilding pride of Harland & Wolff Shipyard sank along with it. Its sinking was triggered by many things but the most noteworthy was the arrogance of White Star Line literally insulting the basic principles and measures of passengers’  safety which were ignored by over-confident ship operators. The ship not only sank in record time, it did not have the comfort of communication of its distress with other ships. Same is the case of some of the Titanics of our economy. Their sinking is imminent because basic principles of their governance are flouted and insulted, and everybody including the lamp-post and Charlie’s aunt can see that but no effort is being made to take steps to minimize the effects of sinking. These ships will not only sink themselves, they will sink the entire economy along with them.

Public sector corporations, which are yet to be privatized, are bleeding the economy and making us poorer by the day. The Government has to keep their lifeline by injecting billions of tax-payers hard-earned money so that these white elephants keep doling out luxuries to those who are mis-managing them.  It is feared that by the time government puts them on sale, their value would have been reduced to zero and taxpayers would have to subsidize their sale. Of these entities, PIA and Pakistan Railways enjoy tremendous patronage and protection of the Government.

The passengers have to wait for weeks to be able to book a seat in PIA, yet the airline is making huge losses. It is a fact that it is not operating in monopoly and has to compete with other national and international airlines but it has a position of advantage; (a) it does not have to spend as much in variable costs as other airlines as its food is cheap and substandard and it does not have to offer expensive alcoholic drinks to its passengers, (b) passengers of Pakistani origin, mostly semi-literate expatriate workers traveling to and from Middle East, always prefer to travel PIA due to dietary and linguistics limitations and PIA’s generosity in carrying excess baggage and (c) all travels to be financed by the Government must be undertaken through PIA if not by PIA.

With comparatively higher fares and lower variable costs, PIA enjoys virtual competitive advantage but this advantage is offset by very exorbitant fixed costs. PIA is probably the only airline which has the maximum number of employees per aircraft. At one time, it was the best airline but it suffered at the hands of those who tried to stuff it with incompetent political workers in order to get political benefits at the cost of this vibrant organization. Its story was published in detail in this or a sister blog. It has no hopes of any recovery unless some remedial measures are taken on war footings otherwise, it will not sink alone, it will sink the entire economy and the national integrity along with it.

The other white elephant is Pakistan Railways which suffered similar blows at the hands of politicians and is now being closed down, bit by bit. The blame of its demise is being conveniently laid at the doors of bureaucrats but by training and experience, bureaucrats are incapable of destroying national assets. This job has always been successfully undertaken by other players. The story of Pakistan Steal is no different and its death is taking place right in full sight of everyone.

What is it that the Government can do to save these entities, and consequently the country, in the present circumstances? There was a paper which appeared in April 2004 edition of Asian Journal of Government Auditing on survival strategy of public sector entities. Although the paper discusses post-regulation scenario of telecom sector, yet some of the solutions can be adopted for survival of these white elephants. The paper stresses increased focus on the principles of corporate governance for survival of public sector corporations which are as under:

Effectiveness of the governing bodies

For proper corporate governance, the Boards of Directors and Management of these entities are required to be independent and competent in order to become effective. While nominating members on these boards, the Government should exercise special care to ensure that the interests of the entities do not get compromised due to conflicting personal or business interests of the members. These members should be selected on merit keeping in view their experience in, and exposure to, the dynamics of telecom market. Selection criteria other than this merit will spell disaster and will hurt the commercial interests of these two entities much ahead of the commencement of actual competition.

Roles and responsibilities within the organization and accountability

Corporate governance principles require that these entities should have clearly documented objectives and should establish clear roles and responsibilities within the organization. The entities should also ensure that these roles and responsibilities are clearly understood by everyone in the organization from the Board to the lowest level of the management. In the history of Pakistan’s corporate sector, there have been unfortunate instances of undue interference by the Ministries’ bureaucracy, which had no clue to the business, in the day-to-day affairs of these corporations with the result that no clear responsibilities could be fixed for the collapse of public sector. The Government should ensure that its role confines to policy directives only and it does not get down to transacting the business of these entities which is the responsibility of experienced professionals. For appropriate corporate governance, the respective Boards and managers should be made fully responsible for performance of these entities. Failing in this area will hamper the building of constructive relationships within the entity. In addition to this, the corporate accountability for poor performance and for failure to meet the expectations of taxpayers and stakeholders will be impossible to enforce in the absence of clear roles and responsibilities.

Effective monitoring

The public sector entities should make effective monitoring arrangements within the organization. This monitoring system includes the establishment of internal control mechanisms, a clear policy on internal audits and appointment of independent audit committees reporting to no one except the Board. While there is some arrangement for internal audit, this audit has to report to the management and not to the audit committees of the Board, which compromises independence of audit. The quality of internal audit within these entities, therefore, becomes questionable. The internal auditors should be adequately equipped with appropriate professional skills, should be truly independent of the management and should have a comprehensive view of the best international business practices, and should also have an understanding of all the spheres of the business of the entity. This internal accountability will keep the managers on their toes and they will be under pressure to perform in a transparent manner.

Systematic and integrated risk management system

Risk management is a critical element of corporate governance and in the liberalized markets, when businesses are exposed to a variety of risks, conventional reactive approach is neither sufficient nor relevant anymore. These risks include financial risks, risk of losing subscribers’ confidence, risk of losing credibility with private sector partners, risk of unwarranted and illegal external interference and above all, risk of failure in view of all these risks. It is to be seen whether our public sector telecom entities incorporate risk management explicitly in their governance processes, or do these entities include risk management into strategic and business planning processes. Governance-specific information on these entities is rarely available through their Annual Reports, and little information that is readily available suggests that these organizations do not explicitly identify and asses their key risks or they do not have any risk management strategy or policy in place. The absence of a risk management system leads to inefficiencies in prioritizing and allocating resources to manage risk.

Transparency through good external reporting

Transparency through good external reporting is an essential element of corporate governance in case of public sector telecom entities in Pakistan. For the time being, this element is totally non-existent in view of the absence of external public accountability through the SAI and Public Accounts Committees. Till such time that appropriate transparency arrangements are put in place, the absence of this critical element can be compensated through appropriate accountability by the regulator, provided the regulator is truly independent of the influence of vested interests of any of these entities.

Pakistan was at the verge of insolvency in the 90s when it had to contract fresh debts, at exorbitant costs, to service existing debts. Then happened 9/11 leading USA to seek Pakistan’s cooperation. The financial institutions had to queue up to offer financial assistance to Pakistan. IMF was booted out and the lenders, most notably the Paris Club offered moratorium and other concessions on Pakistan’s foreign debts. Pakistan, however, could not assess its position and utility in this war and dictate its terms. It was probably happy for coming out of isolation and being recognized as a state despite being chained in sanctions.

If it had negotiated its price for being a frontline state in advance, it would have been in a much better position today when it has a number of economic issues including war on terror which alone is costing it very dearly. Pakistan has paid an immense price for being a front-line state in this war. The direct and indirect costs of our involvement over the last five years have been more than Rs2 trillion ($30 billion). This was the underlying message of Poverty Reduction Strategy Paper released by the IMF and reported in the Express Tribune. The paper noted that Pakistanis have largely lived in a state of denial for years with notions that “this is not our war” and we are “fighting the war for the US”. The economic cost aside, the cost to our image in the world, confidence in our nation’s capabilities and psychological impact on our people is unquantifiable. Taking cue from the acknowledgment of the IMF, the paper suggests that Pakistan should use this as an opportunity to plead for debt relief.

The paper makes a strange assertion that Pakistan’s foreign debt situation is not as bad as it is made to be believed in certain segments of the media. As of March 2010, total foreign debt stood at $54.5 billion. Out of that, Pakistan owes a group of 18 nations called the Paris Club $14 billion, other bilateral lenders $1.8 billion, multilateral agencies like the IMF, World Bank, Asian Development Bank, Islamic Development Bank, etc, around $32 billion. By demanding a relief initially from bilateral loans that are payable to the nations in the Paris Club, and other countries like China, Saudi Arabia, Kuwait and loans from Germany and Japan taken during the last two and a half years, Pakistan can easily get relief to the tune of $15.8 billion.

With success in due course which will depend on our diplomatic and political canvassing, we can make the same demand to the multilateral lenders as well to seek the debt relief. Pakistan’s demand for debt relief is not unjust. It is our role in standing up to terrorists that gives us the opportunity to seek such relief. First and foremost, despite a difficult macro-economic environment, Pakistan has never defaulted on its obligations. Earlier in January 2010, Pakistan successfully repaid its $500 million Euro-Sukuk. All other obligations to the global debt markets are being met as per schedule.

It is worth noting that Pakistan’s Credit Default Swap (CDS) had widened both after the assassination of former Prime Minister Benazir Bhutto and then in the summer of 2008 when a near run on banks was witnessed after rumors emerged that Pakistan was freezing foreign currency accounts. The result of these two events was a flight of capital from the country, causing a liquidity crunch, increase in interest rates and then the economic crash that began in the West from August to September 2008 made the return of the capital back to Pakistan difficult. To put it into context, Pakistan fulfilled its obligations aptly despite taking expending huge sums of money on the war against terror, despite defaults being the order of the day the world over at the time.

At the time of rumors of a run on banks in June-August 2008 and when the fight against militants was taking place in Swat, Pakistan’s CDS touched as high as 30 per cent. It is only in due course of time and showing the world that Pakistan is capable of handling the terrorism problem, we find that our CDS is back to the point when troubles started. In a nutshell, today we are a less risky place for an investor than we were 24 months earlier.

In October 2009 when Hillary Clinton was in Pakistan, in a meeting with legislators the matter of writing off the debt, standing approximately at $2 billion, Pakistan owed to the US was raised. Clinton had assured that she would raise the matter with the US Treasury as it was a fresh issue. However, nothing much has happened as the media tirade that followed the Kerry-Lugar Bill and echoing support by the opposition and military made the matter of writing off the debt inconsequential. It is high time that we raise the issue again with the US, which leads the world, and if it is willing to write off our debt, we can move from one country to another to seek the same relief.

This initiative has to begin from parliament and the ministry of finance. A suitable course of action in this regard could begin with devising a strategy involving the ministry of finance, ministry of foreign affairs and State Bank of Pakistan to envisage the scenarios and conditions that can be put on the negotiating table. After a thorough homework, all political parties’ heads can be involved to bring them on board on this matter.

At the same time while presenting the benefits of debt relief, the political stakeholders can be presented a plan of action as to what the state will do with the savings made due to the debt relief. After necessary approvals and agreement within the country is achieved, an effectively planned and executed lobbying with concerned quarters in Washington, DC, has to begin. In Washington, Pakistan has to tap necessary support of the US State and Treasury Department, World Bank and the IMF.

Critics of the proposal will talk about the impact on Pakistan’s image and standing in global capital markets. It is important to note that lenders always have scenarios to envisage a write-off which can be coupled with conditions that need to be met in order to seek an advantage. The IMF and World Bank already have a Heavily Indebted Poor Countries (HIPC) Debt Initiative and Multilateral Debt Relief Initiative (MDRI) whereby debts of indebted countries can be written off to provide due relief.