Pakistan to Beg and Borrow Billions to Finance 2013-14 Budget

[Riaz Haq]

Pakistan's proposed federal budget 2013-14 includes $36 billion in spending with deficit financing of $16 billion. Of this $16 billion, over $5 billion will be borrowed by the federal government to pay the power sector to settle the so-called circular debt.

Heavy Tax Burden on the Poor:

Direct taxes make up only about 3.5% of Pakistan's federal revenue. The rest comes from indirect taxation, mainly consumption tax, making Pakistan's tax policy among the most regressive in the world. The low-income people who have to spend almost all of their incomes will be paying tax on their entire incomes while the high-income groups who spend a small percentage of their income will pay little in taxes.

While the general sales tax (GST), a consumption tax, has been raised from 16% to 17%, vast swaths of the economy have been left out of the tax net. A major weakness in public finances is the lack of fiscal effort by the provinces. With some of the largest segments of economic activity such as agriculture, real estate, and services in the provincial domain, the provincial tax receipts total an abysmal 0.7 percent of GDP.

To make up the difference between revenue and spending, the government is forced to beg or borrow. It fosters foreign aid dependence, limits national sovereignty and burdens Pakistan's future generations with debt that they will have to repay.

Pakistan needs to revamp its entire taxation system to make it more equitable and progressive with the rich paying a larger share of the taxes and to raise the tax-gdp ratio from the current 9% to at least 15%.

Resolving Energy Crisis:

Paying off $5 billion to the power sector will do little to resolve load-shedding. The previous government paid $14.8 billion to the power sector and the problem of load-shedding only got worse.

What is needed is to clearly identify and fix the root cause which is the flawed finances of the sector. The cost of electricity production needs to come down substantially and the revenue from bill collection needs to increase significantly to bring finances into balance. The fuel mix needs to change to lower the costs. And there needs to be serious law enforcement done to reduce power theft and collect payments  for the use of electricity. In addition, the IPP contracts need to be renegotiated to link payments to fuel efficiency and power generation capacity utilization.

Pakistan needs a long-term and comprehensive energy policy to assure availability of cheap and abundant energy to fuel economic growth and prosperity in the country.

Since the middle of the 18th century, the Industrial Revolution has transformed the world. Energy has become the life-blood of modern economies. Energy-hungry machines are now doing more and more of the work at much higher levels of productivity than humans and animals who did it in pre-industrial era. Every modern, industrial society in history has gone through a 20-year period where there was extremely large investment in the power sector, and availability of ample electricity made the transition from a privilege of an urban elite to something every family would have. If Pakistan wishes to join the industrialized world, it will have to do the same by having a comprehensive energy policy and large investments in the power sector. Failure to do so would condemn Pakistanis to a life of poverty and backwardness.

 Please watch the following video discussion on the subject of Pakistan's budget 2013-14 and resolution of power crisis:



First budget of new Nawaz Sharif government, no relief for poor; En... from WBT TV on Vimeo.

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Pak IPPs Make Record Profits Amid Worst Ever Load Shedding 

Global Power Shift Since Industrial Revolution

Massive Growth in Electrical Connections in Pakistan

Finance Minister Ishaq Dar's Budget 2013-14 Speech

[Riaz Haq]

Here's a Nation report on Neelum-Jhelum hydro project:

Prime Minister Muhammad Nawaz Sharif has directed the concerned authorities to speed up the pace of work on Neelum-Jhelum Hydro Power Project to save the people from load shedding.

He stated this while inspecting various parts of the Neelum-Jhelum Hydel Power Project on Wednesday.
He was apprised that the Rs274.882 billion Neelum-Jehlum power project would have the capacity of generating 969 MW power.
The Power House of the project is located in the Chattar Kalass which is 22 kms south of Muzaffarabad. Installed capacity of the project is 969 MW comprising four units of 240 MW each.
The Prime Minister was given a briefing on the project during his visit to the site of Neelum-Jehlum hydro Power Project. The original cost of the project was Rs130 billion but the revised PC-1 cost of the project was put at Rs274.882 billion as it has escalated due to change in design and machinery requirement owing to the earthquake of 2005.
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Neelum Jehlum Hydro electric Project is a mega project of immense national importance. It is in the vicinity of Muzaffarabad (AJ&K) and envisages the diversion of Neelum river water through a tunnel and after producing power‚ out-falling into Jehlum river.
It will also help reduce the gap between demand and supply of power in the country.
The newly-elected government of Pakistan Muslim League-N is paying special attention to development of infrastructure projects in the country and the allocation of Rs. 1.1 trillion in Public Sector Project Programme (PSDP) in the FY 2013-14 is a clear manifestation of government's commitment on this count.

http://www.nation.com.pk/pakistan-news-newspaper-daily-english-onli...

[Riaz Haq]

Here's a Fiber2fashion report on Pak's rising exports in May, 2013:

Riding on the back of marginal rise in demand from the US and European markets, textile and clothing exports from Pakistan grew by 5.3 percent to US$ 1.187 million in May this year, as compared to US$ 1.128 million in May 2012, statistics released by the Pakistan Bureau of Statistics (PBS) show.

The items that positively contributed to the export growth during the period include, cotton yarn whose exports grew by 11.89 percent year-on-year, cotton cloth by 5.8 percent, cotton carded or combed by 177.27 percent, yarn other than cotton yarn by 46.44 percent, knitwear by 2.07 percent, bedwear by 14.04 percent, towels by 7.95 percent, readymade garments by 22.67 percent and other textile material by 6.48 percent.

On the negative side, raw cotton exports plummeted by 66.35 percent year-on-year, art, silk and synthetic textile by 30.29 percent and made-up articles excluding towels and bedwear by 0.43 percent.

During the first 11 months of the ongoing fiscal year that began on July 1, 2012, Pakistan exported US$ 11.93 billion worth of clothing and textile items, which is 6 percent higher than exports worth US$ 11.26 billion achieved during corresponding period of previous fiscal, the data shows.

According to the data, cotton yarn exports surged by 24.86 percent year-on-year during the 11-month period, cotton cloth by 10.72 percent, readymade garments by 12.58 percent, yarn other than cotton yarn by 14.87 percent, knitwear by 2.41 percent, bedwear by 2.14 percent, towels by 15.52 percent and other textile materials by 27.50 percent.

However, exports of raw cotton plummeted by 68.05 percent year-on-year during July-May 2012-13, cotton carded or combed by 48.31 percent and art, silk and synthetic textiles by 27.10 percent.

According to experts, the improved power supply allowed yarn and fabric producers to fully utilize their production capacities, resulting in enhanced export of several items, including towels and bedwear.

http://www.fibre2fashion.com/news/textile-news/newsdetails.aspx?new...

[Riaz Haq]

Here's a Bloomberg report on Nawaz Sharif govt Pakistan seeking IMF bailout:

Pakistan said it will discuss a loan program of as much as $7 billion with the International Monetary Fund, as the nation tries to rebuild currency reserves.
“Certainly, we will talk and negotiate for a program,” Finance Minister Ishaq Dar said in an interview late yesterday in Dubai. “We would be looking for anything pragmatic. It would be anything between $5 billion to $7 billion.”
Pakistan’s foreign-exchange reserves slid over 40 percent to $6.24 billion in June from a year earlier, enough to cover about two months of imports, central bank data show. The plunge has weighed on the rupee and adds to other challenges facing the recently elected government of Prime Minister Nawaz Sharif, such as energy shortages and a Taliban insurgency in the northwest.
“An arrangement with the IMF will give the market some confidence,” said Sayem Ali, an economist at Standard Chartered Plc in Karachi. It would calm fears among foreign investors that the rupee is headed for a “drastic” plunge, he said.
The rupee strengthened 0.1 percent to 98.87 per dollar as of 3:01 p.m. local time, climbing for the first time in five days, while the Karachi Stock Exchange 100 index was little changed.
Dar also said the government will clear about $5 billion of so-called circular debt that has choked power generation in the energy industry. Circular debt refers to money owed to power companies from unpaid bills.
The step will boost electricity output by 1,700 megawatts, helping to curb outages that have hurt economic growth, he said.
Policy Changes
Dar said an IMF team is already in Islamabad.
Jeffrey Franks, the head of the IMF’s Pakistan mission, said in January that the lender won’t sign a new loan program without a “deep and clear” commitment on a set of policy reforms to curb the budget deficit.
Dar in his June 12 budget speech pledged to narrow the widest fiscal deficit in over two decades and to spur expansion in an economy he said was “shattered.”
He imposed additional levies, such as a sales-tax increase to 17 percent from 16 percent, to help achieve a deficit of 6.3 percent of gross domestic product in the year starting July 1, compared with 8.8 percent in 2012-2013.
“We have already taken steps for reforms,” he said in the interview yesterday after attending an investment conference.
The State Bank of Pakistan on June 21 unexpectedly cut interest rates for the first time this year to boost economic growth, even as higher taxes and the drop in the currency threaten to revive inflation.
The rupee has depreciated about 4.5 percent versus the dollar in the past year, risking costlier imports. Consumer prices advanced 5.13 percent in May, the slowest pace since at least 2009, according to data compiled by Bloomberg.
Sharif is aiming for 4.4 percent economic growth next fiscal year, up from an estimated 3.6 percent in 2012-2013, and to keep inflation in single digits.
He returned to power in a May 11 general election, more than 13 years after his second period as premier was cut short by a 1999 army coup.

http://mobile.bloomberg.com/news/2013-06-26/pakistan-plans-talks-wi...

[Riaz Haq]

Here's a Daily Times report on Pakistan settling "circular debt" owed to IPPs:

In order to eliminate circular debt, the government has released Rs 362 billion to the Independent Power Producers (IPPs), out of which four IPPs announced that they have received a total sum of Rs 116.826 billion as a part of their overdue receivables, according to the Karachi Stock Exchange (KSE) notice released on Tuesday.
Five IPPs out of 19 others, in Memorandums of Understanding (MoUs) signed between government and IPPs, including Hub Power Company Limited (Hubco), Nishat Chunian Power Limited (NCPL), PakGen Power Limited (PKGP), Kohinoor Energy Limited (KEL) and Nishat Power Limited (NPL) have announced officially in notices to all bourses of the country that they have received around Rs 116.826 billion from Central Power Purchasing Agency (CPPA), Water and Power Development Authority (WAPDA) and National Transmission and Despatch Company (NTDC).
Hubco remained prime beneficiary as the company stated in a letter to the KSE that the company has received overdue amounting to Rs 75 billion out of Rs 83.2 billion (overdue as of May 31, 2013) for Hubco and Rs 17.4 billion for Narowal Plant from WAPDA and NTDC, bringing the total to Rs 92.4 billion.
Hubco announced that the company has paid Rs 55.8 billion to Pakistan State Oil (PSO) as agreed under the settlement arrangement.
Hubco has entered into three MoUs with the government as required by them for the settlement of agreeing to convert Hub plant from oil to coal, extend the credit period for its Narowal Plant from 30 days to 60 days and to endeavour to operate the plants at full capacity.
Under the MoUs, IPPs also agreed to achieve their maximum generation capacity and provide 1,500 megawatts (MW) to 1,700 MW to the national grid before Ramazan, four IPPs including Hubco, Lalpir, Pakgen and Saba Plant, have agreed on conversion to coal-based power generation within 18 months, extend credit period from 45 days to 60 days and reduce interest rate on late payments by public sector power companies.
Similarly, NCPL announced that the company has received overdue receivables amounting to Rs 6.86 billion from CPPA without any reduction in existing delay mark-up rate of existing 4.5 percent to 2.5 percent as against expected cut of 2.0 percent from 4.0 percent to 4.5 percent.
Likewise, PKGP also informed the KSE that the company has received overdue receivables amounting to Rs 6.982 billion from CPPA at existing delay mark-up rate.
Also, KEL announced in a letter to KSE that the company has received overdue receivables amounting to Rs 3.504 billion from WAPDA.
Muhammad Affan Ismail of BMA Research told this scribe that the fund injections (cash or otherwise) are a short-term solution and have no long-term implications on operational factors or returns to investors. Best would be to recall the Rs 82 billion Tem Finance Certificates (TFCs) issued last year by the government in order to help solve the power crisis, he added.
NPL has announced that it has received overdue amounting to Rs 7.080 billion.
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Naveed Tehsin of JS Research believes that PSO stands out as a key beneficiary from the retirement of the circular debt as its receivables and payables to local refineries have sharply declined to Rs 79 billion (down 54 percent) and Rs 9 billion (down 66 percent), respectively.
Tehsin expected that receivables would further decline by Rs 48 billion after the issuance of Pakistan Investment Bonds to PSO.

http://www.dailytimes.com.pk/default.asp?page=2013%5C07%5C03%5Cstor...

[Riaz Haq]

Here's a Nation story on IFI loans for Pakistan:

Pakistan would receive 250 million Euros from Islamic Development Bank (IDB) and also a trade facility of $150 million for import of fertilizer and petroleum products in August as committed by bank last week. Sources in finance ministry informed The Nation that Pakistan would receive 250 million Euros from IDB in the ongoing month of August, which is part of 750 million Euros loan. Similarly, he further said that Pakistan would also avail the trade facility of $150 million for import of fertilizer and Petroleum products in the current month of August. The Islamic Development Bank had agreed to extend loan of 750 million Euros to Pakistan and trade facility of $150 million for import of fertilizer and petroleum products in a meeting between President Islamic Development Bank Dr. Ahmed Muhammad Ali and Pakistan’s Finance Minister Senator Ishaq Dar in Jeddah last week.
“The international financial insinuations like Islamic Development Bank, World Bank and Asian Development Bank will provide loans after Pakistan had reached an agreement with International Monetary Fund in early July”, said a finance ministry official while talking to The Nation on Thursday. He said that agreement between Pakistan and IMF is paving way for other financial institutions like IDB, ADB and WB to give loans to Pakistan, which is desperately needed to build the depleting foreign exchange reserves of the country.
“Pakistan will also receive $500 million from Asian Development Bank and $500 million from World Bank during the current fiscal year after the agreement sign with IMF”, he maintained. Pakistan would receive these $1 billion from WB and ADB in the second half (January-June) of the ongoing financial year 2013-14.
Sources in finance ministry said this loan would help in building the foreign exchange reserves, which is currently around $10.25 billion. Pakistan is also expecting to receive $3.4 billion from IMF during the current financial year. Pakistan and IMF reached on consensus for $5.3 billion bailout package in first week of July 2013, which would need approval from IMF’s executive board on September 4 2013.

http://www.nation.com.pk/pakistan-news-newspaper-daily-english-onli...

[Riaz Haq]

Here's a news report on upsizing of IMF bailout for Pakistan to $6.6 billion:

The International Monetary Fund has agreed that Pakistan can seek a loan package worth $6.6 billion, two top finance ministry officials said, a boost for Prime Minister Nawaz Sharif as he seeks to fix the moribund economy.
The Fund had settled on an initial package of $5.3 billion after an IMF delegation held weeks of talks in Pakistan in July. Pakistan had requested $7.2 billion.
“The IMF has raised its offer following further consultations in the US and now agreed to $6.6 billion. The official announcement will come very soon,” said a top finance ministry official.
The IMF’s executive board will formally approve the package for Pakistan sometime in early September, as long as Pakistan has made some fiscal reforms, the IMF said on its website.
The government has already slashed costly subsidies on electricity and sent out notices to 10,000 delinquent taxpayers last month as part of the conditions set by the IMF.
Pakistan has one of the lowest tax-to-GDP ratios in the world and the IMF wants it to do more to tackle rampant tax evasion by the wealthy elite.
The Saudi Islamic Development Bank Group Ltd. has also pledged a $997 million credit line and a $200 million trade facility for Pakistan to buy petroleum products, said Shafqat Jalil, the Finance Ministry’s spokesperson.
“We will end up with a shortfall of $600-700 million, which we will bridge through other donors like the ADB (Asian Development Bank),” Jalil said.
The ADB, one of Pakistan’s major lenders, estimates that Pakistan needs $6 billion to $9 billion to meet its obligations, including about $5 billion in outstanding debt on an earlier $11 billion IMF loan package that was suspended in 2011.
The new loan will come just in time.
The central bank has only about $5 billion left in foreign currency reserves, enough to cover less than five weeks of imports.
Pakistan averted a balance of payments crisis in 2008 by securing the $11 billion loan, but this was suspended two years ago after economic and reform targets were missed.
Chronic gas and electricity shortages, violent crime and a Taleban insurgency have all hampered growth and contributed to a dramatic drop in foreign investment.
The $230 billion economy grew 3.6 percent in the last fiscal year, below a target of 4.3 percent.
The new government has already made some steps toward reforms and has set an ambitious deficit target of 6.3 percent growth for 2013/14 — although some analysts say that might be hard to meet.
It also plans a new energy policy to tackle power cuts, which frequently last 12 hours a day and have devastated the economy and fueled unrest.

http://www.arabnews.com/news/461030

[Riaz Haq]

Supreme court should stay out economic decisions like fixing prices for electricity. Targeted subsidies should be given to low income households to help with energy costs. General subsidies for electricity and petrol take 34% of government's revenue ,bust budget and raise deficits and drive inflation (by printing more money to pay) hurting the low-income people the most. Energy subsidies in #Pakistan take up astounding 34% of gov revenue.Table A.3 of impressive IMF book: http://www.cgdev.org/event/book-launch-and-discussion-energy-subsid...

[Riaz Haq]

Pakistan borrows $2 billion through bond offering, reports Wall Street Journal:

Pakistan returned to the international bond markets Wednesday after a seven-year hiatus, joining a number of other countries around the world raising cash as yield-hungry investors look to put money to work.

Pakistan sold $2 billion of debt, with almost two-thirds going to U.S.-based money managers, two days after Sri Lanka sold a bond for a second time this year. Bankers say Papua New Guinea, Bangladesh and Bhutan are also expected to come to the market this year, hoping to lock in low yields.

The demand reflects both improving economies in these countries and investors' appetite to venture further afield for high returns. The appeal of emerging-market debt has risen as central banks in U.S., Europe and Japan pledge to maintain stimulus measures to keep growth humming, a move that pushes up asset prices across the globe.

"There's been a reversal in the sentiment towards emerging markets over the last two weeks. Everyone loved to hate them, and now, all of sudden everyone is increasing their positions," said Rajeev DeMello, head of Asia fixed income at Schroders SDR.LN +0.38% Investment Management in Singapore, which has $435.4 billion of assets under management.

Mr. DeMello's fund holds Pakistani bonds and said his funds are interested in buying more, and Sri Lankan bonds.

In March emerging markets saw $39 billion in portfolio inflows from global investors—$24 billion of which was into bond markets—up from $25 billion in February and $5 billion in January, the Institute of International Finance estimated.

Pakistan racked up orders worth $7 billion while Sri Lanka drew over eight times the $500 million on offer with orders of $4.3 billion, with a significant uptick of Asian investors' participation compared with its $1 billion January issuance. The finance ministries of Papua New Guinea, Bangladesh and Bhutan weren't immediately available for comment.

Devesh Ashra, head of Asia debt syndicate at Bank of America Merrill Lynch, said the most important reason these countries are issuing bonds is the expectation that global interest rates are going to rise. The Federal Reserve has started slowing the pace of economic stimulus, meaning it is likely that yields are set to rise as the U.S. economy improves.

"U.S. investors are looking for incremental yield and issuers are ready to lock in rates knowing that we are going to be in a higher-rate environment in one year's time," he said.

The debt is sold in dollars, another lure for investors given strong prospects for the greenback in the long run on signs of a slow but renewed recovery.

But even outside the U.S. dollar, there is demand for emerging markets that had been shunned last year. Turkey said Tuesday it would issue a euro-denominated bond and Greece says it will return to the market with an approximately €2 billion ($2.75 billion) debt sale, for the first time after being bailed out.
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While many other long-term investors remain convinced there is high-growth potential of these emerging markets, several are treading carefully and in some places demanding extra compensation for holding risky assets.

While investors welcomed junk-rated Pakistan's 10-year bonds, the country had to pay investors a hefty premium for the deal. The yield was at 8.250%, compared with 6.875% it paid to issue a similar-duration bond in 2007 and that is currently trading at 6.338%...

http://online.wsj.com/news/articles/SB10001424052702303873604579491...

[Riaz Haq]

Here's a News Op Ed on devolution of fiscal power in Pakistan's constitution:

Fiscal devolution involving the transfer of taxing and spending powers to sub-national levels of government is totally non-existent in Pakistan despite clear command contained in Article 140A of the Constitution of Islamic Republic of Pakistan. Pakistan is in dire need of fiscal devolution — presently major fiscal powers are concentrated in the hands of federal government. Even the Constitution denies the provinces right to levy sales tax on goods within their respective territories.
The provinces have also shown apathy to devolve administrative and fiscal powers to local governments. Since all broad-based and buoyant sources of revenue are with the federal government, contribution of provinces in total tax revenues is only six per cent and in overall national revenue base (tax and non-tax revenue) just around eight per cent. This has made them totally dependent on the Centre for transfers from divisible pool.
What makes the situation more disturbing is the fact that right of provinces to levy sales tax on services is encroached by the federal government through levy of presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services and excise duty on a number of other services.
Like other federations — notably India, USA, Canada — in Pakistan the provinces should have the exclusive right to levy indirect taxes on goods and services within their respective physical boundaries. Right to levy any tax on goods should be restored to the provinces as was the case at the time of independence. Despite levying of taxes by the federal government that should have been the provinces’ right, Centre has miserably failed to reduce the burgeoning fiscal deficit that is reaching a horrifying mark of Rs1.8 trillion this year. Had provinces been allowed to generate their own resources, the present chaotic situation could have been averted.
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The provincial parliaments in Pakistan should be pressurised by civil society to enact laws for establishment of local governments as ordained under Article 140A of the Constitution on the basis of social policy — they have so far just copied the previous outdated ones with patchwork here and there. The ruling classes do not want to empower people through self-governance. They want to enjoy total control over resources. The local governments will not be meaningful unless entitled, within national economic policy, to have adequate financial resources of their own, of which they may dispose freely within the framework of their powers and for public welfare.
In a nutshell, for achieving the goal of fiscal devolution, local governments’ financial resources must be commensurate with the responsibilities provided for by the constitution and the law to ensure welfare of the people and ensure sustainable growth at grassroots level. Part of the financial resources of local authorities shall derive from local taxes and spent for providing universal entitlements and development. Pakistan must follow the model of welfare states where resources available to local governments are based on a sufficiently diversified and buoyant nature to enable them to keep pace with the real evolution of the cost of carrying out their tasks.

http://tns.thenews.com.pk/fiscal-devolution/