PERILS AND PROMISE By: Afshan Subohi The economy did not fare well in 2018. Acceleration halted and the economic challenges were aggravated in the second half. The PTI government’s negotiated bilateral inflows averted a sovereign default and offered space for manoeuvrability to fix disruptive factors. People hope that the new leadership will be able to revive waning business confidence and minimise the pain of stabilisation for the working masses. The PTI vision will come into full play in the year ahead. It is high time to identify the perils and promises. The Pakistani economy is on course for a drastic slowdown unless the behaviour of the business community changes and the PTI economic dream team grasps the value of prioritising and sequencing reforms instead of trying to fix everything at the same time. It is apt to identify the missteps that changed the future perception from highly optimistic at the start of 2018 to moderately doubtful by its close. It will, however, be more relevant at this juncture to pinpoint factors that can influence the economic course going forward. The blind trust in democracy to make necessary corrections in the economic framework is perhaps an oversimplification bordering absurdity. The third consecutive peaceful transfer of power did stabilise the democratic order. The disruption of democratic transition, however, entailed a high economic cost. The reality is perhaps a lot more complex and needs to be assessed objectively without ideological blinkers to make adjustments for the system to better deliver for the majority. As 2018 comes to a close, all global economic forecasters have revised down the expected economic performance of the country citing shrinking foreign exchange reserves and a high debt burden among other factors. The World Bank, International Monetary Fund (IMF) and the Asian Development Bank have brought down the GDP growth forecast by two to three per cent. Reputable credit rating agencies Moody’s and Fitch Ratings have downgraded Pakistan to the lower end of the highly speculative grade. In its current review the IMF stated: “Macroeconomic stability gains have been eroding, putting the outlook at risk. Growth is expected to moderate to 4pc in 2019, and slow to about 3pc in the medium-term”. It projected a slight rise in the unemployment ratio. The current account balance is forecast at negative 5.3pc for 2019 compared to negative 4.1pc for 2017 and negative 5.9pc in 2018. With panic gripping Pakistan’s markets, the situation has digressed to a point where no government, even with the best of intentions, can shield households perfectly on its own from the fallout of the stabilisation policies. It might be wishful thinking, but the challenges the country is facing in the current political environment demand political and economic players absorb the gravity of the situation and evolve a short-term consensus regarding a minimum economic agenda to ensure political stability in the tough phase ahead. The bottom line, however, is that only significant fresh doses of investment can ease the economic pain going forward. The challenges the country is facing demand key political and economic players absorb the gravity of the situation and evolve a short-term consensus regarding a minimum economic agenda to ensure political stability in the tough phase ahead The issues relating to transparency and terms of multiple deals under the CPEC are important. But the benefits of massive investment in costly infrastructure projects under this umbrella must be understood and appreciated by all stakeholders. Taking Chinese economic support for granted would be an unforgiveable mistake in both economic and political terms and can upset the apple cart. There is a dire need to revive and revitalise lagging projects under the CPEC immediately. It will also be important for stability to understand how the PTI hierarchy views the 18th Amendment to the constitution and the landmark seventh National Finance Commission Award. Any attempt on the part of the government to tinker with the agreed financial devolution formula is expected to face stiff resistance by all provincial governments. Again there is a need to understand and appreciate the role of the informal economy and the resilience it lends when the going gets tough for the formal sectors. Yes, there is a need for deeper insight, but unplanned disruptions can acerbate the downward spiral and add to the misery of millions who make their livelihood under the radar. The deficit-riddled government will not be in a position to close the investment gap. The responsibility, therefore, rests squarely with the private sector to rise up to the occasion. Without local investor mobilisation expecting foreign direct investment is unrealistic. Fast tracking the CPEC industrial economic zones can get the ball rolling. Will the current crop of economic ministers be able to allay the investors’ fears and offer a friendly business environment without giving-in to their tantrums is yet to be seen? Some issues being raised by the corporate sector regarding unjust taxation burden and lack of continuity in policies make perfect sense and deserve urgent attention. An adjustment in a policy framework that discriminates against industry in favour of trade is also long overdue. The demand for promotion of regional trade is intertwined with the country’s diplomatic and security policies, particularly normalisation of ties with India, and may take longer than stakeholders expect. The PTI government, in the end, did succeed in managing to get critical dollar inflows from friendly nations. The secured breathing space better positioned the country’s economic managers to bargain with the IMF regarding conditions that are perceived to be unduly harsh and politically costly. Besides mitigating risks to the external sector the dollar injection from China and Saudi Arabia, and promised budgetary support from the UAE, did earn the PTI government some trust in the country. Yet, the markets are still not comfortable. They want the IMF deal because the programme improves the credibility of the policy evolved to fix the economy and minimise risks in a highly volatile world. To manage the high public expectation in a challenging economic environment, much will depend on how quickly the PTI can earn the confidence of the private sector to nudge it towards committing capital intelligently while taking a long-term perspective. The asset owning class, with its very narrow focus, has clearly been inclined towards short-term investment avenues to roll its monies. If the elite of the country, urban businessmen and rural aristocracy that commands a sizeable, capital shows foresight, develops an appetite for risk, shrugs off lethargy and assumes charge for industrialisation, the current economic stress can actually serve to reorient the direction of the economy towards a more stable base. “Now is the time for the private sector of Pakistan to prove its credentials as an ‘engine of growth’ by committing capital in growth sectors to generate wealth, create jobs and sustain the economy,” commented a market watcher. “The PTI leadership must also have gotten some sense of the economic currents and counter currents. It enjoys more support amongst the overseas Pakistani community than any other political party in the country. It must now understand that a following on social media does not necessarily translate into material support of the scale expected, so it should start focusing on local economic drivers,” he warned. “The emphasis on exports is good but the government needs to understand that in the highly competitive word Pakistan has little scope as long exportable surpluses are produced locally,” he added drawing attention to trade. Unfortunately, household incomes may come under pressure with a slowdown in growth and inflationary squeeze in 2019. It might demand readjustment in household budgets and curtailment of entertainment spending in the middle classes. For poor the effect of the policy choices of the government will be more substantial as any hike in the prices of essentials will impact family food intake and whatever little they spend on health and education. Click on the tabs below to find out what to expect from the economy in the coming year. Published in Dawn, The Business and Finance Weekly, December 31st, 2018

NEW YEAR IN NAYA PAKISTAN By: Khaleeq Kiani Prime Minister Imran Khan’s government plans to begin the New Year with the launch of a ‘diaspora bond’, followed by an investment plan. It aims to facilitate the flow of remittances through official channels but will not sign an agreement with the International Monetary Fund (IMF) until its conditions allow a soft landing for the country and the people. In a detailed interview with Dawn Business and Finance, the prime minister promised a series of initiatives during 2019 to trigger economic activity in housing, Small and Medium Enterprises (SMEs), entrepreneurship, ease of doing business and overall improvement in investor confidence. Q. Calendar year 2018 was tough for the economy. The growth rate moderated, twin deficits rose, reserves depleted, the rupee lost value by around 25 per cent, inflation hiked and the capital market stayed in negative territory for the better part of the year. Democracy stabilised with the third consecutive transfer or power but the cost of the political transition proved to be high. How can the problem be addressed? A. The previous government acted with extreme recklessness in managing the economy during its last year in government. It tried to create an artificial bubble in the economy in order to give a false impression of growth and prosperity during the election year. Rs1.2 trillion of public debt was monetised, there was a build-up of Rs400 billion of circular debt in the power sector within one year alone, government spending was doled out on infrastructure projects without any consideration for the revenue available to finance them. This led to a huge fiscal and current account deficit, depletion of our foreign exchange reserves and brought the economy to a near collapse. In order to rectify the situation, we firstly need to control our current account deficits by prioritising those sectors in the economy that build our foreign reserves, like exports and remittances, through the formal channel. Imports of non-essential goods need to be cut. We are already seeing a narrowing of the current account deficit and a rise in exports. On the fiscal side, we need to urgently cutback on unnecessary expenditures to contain the fiscal deficit and fix our tax collecting system. Q. Despite perceived tough conditions the market is waiting for the IMF deal. When do see it taking effect? A. We have been in touch with the IMF since our government took over. But the IMF’s conditionalities are a serious concern for us. Therefore, we explored alternative financing options and have been quite successful in that regard. $2bn has been received from the Kingdom of Saudi Arabia. Their $3bn oil facility will also be starting from the start of next year. Another $3bn will be provided by the UAE. Therefore, our external financing requirements for the remaining part of the financial year have been addressed. We will stay engaged with the IMF but will only sign the programme if and when we feel that its conditionalities do not harm our economy and put an undue burden on the people of Pakistan. Q. The market dreads blacklisting. How confident are you that issues raised by the Financial Action Task Force (FATF) have been managed to the satisfaction of the financial monitoring agency to avoid penalisation? A. We are treating the issue as a top priority and all the concerned ministries and divisions are moving swiftly to address all aspects that were flagged by the FATF in its last review. Provinces have been taken on-board as well to address the areas that fall under their domain. We are closely reviewing progress and have made significant headway; not just in words but in policy actions as well since we feel it is first and foremost in Pakistan’s own interests to curb terrorism financing and its avenues. Q. How do you intend to improve revenue collection, boost exports and create jobs in the phase of economic stabilisation? A. Pakistan’s revenue potential is much greater than the current levels. The Federal Board of Revenue (FBR) is being reformed and we are deploying ‘out of the box’ ideas to net the informal economy. We have already seen a rise of 30pc in annual income tax returns. However, our priority is to devise tax policies that are progressive and also do not add to the cost and ease of doing business. So we will focus on broadening and shifting the burden of taxation on the items that are consumed by the upper-income groups rather than squeezing the middle-class or the poor. Exports are a priority for us. We have already reduced their energy costs and are addressing their long stuck refunds with the FBR. Reducing taxes on their inputs is also on the agenda and we believe that if we provide our exporters with a level playing field with regard to their regional competitors, then our export sector will start showing strong growth. We need dynamism and expansion in the private sector to absorb and create jobs. We are working on removing the obstacles that have always stifled entrepreneurship in the country and creating a favourable investment climate. We are already seeing foreign investors showing a tremendous interest in our market. Our local businesses are also eager to invest and expand and we are actively communicating with them to put in place the right incentives for them. SMEs should have been a vital part of our economy but have long been ignored, so we are framing policies to promote and finance SMEs. All of this would lead to wealth and job creation. Our flagship housing project will also be a huge engine of job creation and economic growth given its direct and indirect linkages with more than 100 industries. Q. How much are you ready to bend to accommodate the business community that control resources the country needs to perk investment? A. The business community is not demanding anything that can be considered unreasonable. They want an atmosphere where they are not harassed by government agencies and wish to see the right tax policies in place. The job of the government is to create an enabling environment. Unfortunately the opposite has been taking place in the past where government policies and departments have made life difficult for investors. Subsidies were incorrectly directed towards certain business groups that thrived at the expense of genuine entrepreneurship. We are ending this culture of crony capitalism and reforming our financial institutions. Q. CPEC lost steam in 2018. Are you hopeful that the implementation will pick-up pace in the year ahead? A. No budgetary allocation for any CPEC project has been altered. We are more engaged with China today than we ever were in the past. We will build on this relationship and enhance cooperation so there is no chance of delay in any implementation. Moving on from infrastructure, the next phase of CPEC is trade and industry. This will help create jobs and aid in technology and skills transfer for our businesses and people. Q. PTI supporters expect drastic changes in the economic policy framework. Can you please list some steps the ruling party is contemplating? A. The Pakistani people are acutely aware of the dire crises in which the previous government left the economy. So the first step was to rescue the economy, reduce the current account deficit that had soared to $19bn and fill the financing gap. We have made good progress on all these counts. Our economic policy will be driven by domestic resource generation and export, an investment and productivity growth model and not on imported debt capital and consumption fuelled growth. We will restore the focus on agriculture and SMEs as they are the most relevant yet most ignored sectors of our economy. We will not shy away from taking bold steps to enhance ease of doing business in the country and in promoting wealth creation. For example, we have already separated the policy wing from the FBR so that tax policies are not used purely for revenue generation. The people will also notice that government policy will no longer be used for personal gains or crony capitalism. Q. Do you intend to reverse the trend of financial devolution that has increased the share of provinces at the cost of the federal government? A. Devolution is actually a great concept provided it is accompanied with great responsibility. We will work with the provinces to harmonise policies, build capacity and encourage and incentivise them to take fiscal responsibility for balancing their budgets. Q. The goodwill for the ruling party amongst overseas Pakistanis could not be capitalised in the initial phase. Is there a plan to facilitate their greater engagement in building ‘Naya Pakistan’? A. Overseas Pakistanis have always been supportive of change in Pakistan. We will use their ideas and expertise and invite them to invest and create enterprises in Pakistan. Already we have seen a huge rise in remittances since our government took over. We will also be launching a ‘diaspora bond’ for the overseas people this month and are creating an attractive investment package for them. Q. Should people expect better social service delivery and equal economic opportunities under your rule? A. The Riasat of Madina was a welfare state. That is the ideal we strive for. Everything we do, all our struggles, have always been and will always be for this purpose. We have already launched the Rs18bn Poverty Graduation Programme that seeks to transfer assets other than cash to the poor. Similarly, an extension in the ‘Sehat Ka Insaaf’ card into other provinces has been initiated. Shelter homes have been set-up across the country and many other programmes that aim to directly address social service and empowerment of the poor have already been launched. Q. Reportedly renewal of work visas is becoming difficult in Saudi Arabia and most GCC countries. What strategies have been developed to accommodate them with respect to jobs? A. Our foreign office is in touch with all countries where Pakistanis are employed. Each country has its own economic and political conditions and priorities that we cannot dictate but our embassies have been directed to extend all support to our citizens and their visa issues. Q. In terms of dollars (sent illegally abroad), how much has your government brought back from abroad so far? What amount do you expect to bring back by the end of this fiscal year? A. We have collected a huge amount of data within the first 100 days of this government in terms of bank account details and information on properties held by Pakistanis in dozens of countries worldwide. We will shortly initiate investigations and prosecutions based on this data as per law. An Assets Recovery Unit has been created and is directly reporting to the prime minister and a special cell in the FBR has been created. Click on the tabs below to find out what to expect from the economy in the coming year. Published in Dawn, The Business and Finance Weekly, December 31st, 2018

BURGEONING INFLATION TO EXPOSE DARK REALITIES By: Mohiuddin Aazim The transmission of monetary tightening takes longer to tame inflation while erosion in purchasing power along with lower incomes means a double whammy for households. Inflation has varying effects on different categories of households. Rising inflation amidst lower-than-before economic growth means a fall in income for most categories of households. In 2018-19, the economy is growing slower than it was a year ago. One can safely assume a decline in income for most household categories. Erosion in purchasing power along with lower incomes means a double whammy for households. Remember, purchasing power is eroding not only because of inflation but also depreciation. In spite of the ongoing interest rate hikes, it is difficult to predict how soon inflation will recede. It is also difficult to project how enormously the fight against inflation will take its toll on the economy at a time when keeping the rupee stable remains an even bigger challenge. In the last fiscal year, inflation measured by the Consumer Price Index (CPI) stood at 3.9 per cent, with food inflation at 1.8pc and non-food inflation at 5.4pc. But the rupee was deliberately kept overvalued during that year. It shed 15.9pc value against the dollar in the interbank market, but this quantum of depreciation was far smaller than required given that the current account deficit had shot up to $19 billion from $12.6bn a year earlier. Higher industrial growth coupled with continued subsidies to both industrial and agriculture sectors — at the cost of expansion in the fiscal deficit — and the consequent better showing of the services sector took GDP growth to a 13-year high of 5.8pc. All this worked quite in favour of the PML-N government in the final year of its five-year tenure. But when this fiscal year began under a caretaker government, the nation learned to its horror that the fiscal deficit had swelled to Rs2.26 trillion, or 6.6pc of GDP, from Rs1.48tr, or 4.3pc, a year earlier. Now the challenge for the PTI government is to manage a high fiscal deficit and fix a huge current account deficit of about $19bn. What we have seen so far — a rapid depreciation, removal of subsidies, cuts in development expenses and desperate securing of financial help from friendly countries — are responses to the above-mentioned challenge. This is what the government says and obviously it holds some truth. However, critics insist knee-jerk responses, like an overemphasis on filling the state coffers via retrieval of plundered wealth, using the slogan of accountability to silence political opposition, giving in to the pressure of powerful lobbies in its drive for expanding the tax net, experiments in the taxation regime, making banking transactions painful for even legitimate foreign currency holders and initial dilly-delaying in consulting the IMF for a bailout, confused the private sector. Such confusion coinciding with the rupee’s fall jolted the markets and led to stronger-than-usual inflationary expectations. This, combined with the expansion in currency outside the banking system, which remains high despite documentation drives, is also responsible for fuelling inflation and discouraging private-sector investment. Inflation during this fiscal year has spiked for a variety of reasons including, but not limited to, a lagged effect of the last fiscal year’s depreciation, ongoing decline in the rupee’s value, higher inflationary expectations, expansion in money outside the banking system and massive note printing during the last fiscal year as well as the first five months of 2018-19. Higher inflation remains a concern and the central bank is fighting inflationary pressures with higher interest rates. It should not be difficult to assume how this will impact an already low level of private-sector investment in 2018-19. In 2017-18 when inflation was below 4pc, private-sector investment stood at 9.8pc of GDP while the savings of non-government sector, including the private sector and public-sector enterprises, was equal to just 7.5pc of GDP. The interest rate tightening, which is likely to continue to keep inflation in check and meet one of the pre-conditions of a new IMF loan package, means higher financial cost for businesses and lower margins. In contrast, the contraction in demand as a result of higher interest rates will mean further erosion in businesses’ profits. One can imagine how our private sector’s savings and investment will grow in such a stifling environment. As for the government spending, it is but obvious that in its drive to keep fiscal deficit in check, Islamabad will have to reduce both development and non-development expenses. The extent to which these expenses will be limited can be smaller if the government succeeds in boosting tax revenue, the signs for which so far are not very encouraging. In an economy where markets are imperfect, transmission of monetary tightening takes longer to tame inflation. Keeping these facts in mind, we cannot hope much for an immediate relief in inflation. And given the fact that the agriculture sector’s performance is projected to deteriorate during this fiscal year and energy subsidies are being withdrawn rapidly, inflation for the poor, gauged with the sensitive price index (SPI), is expected to remain a bigger worry. Inflation measured by the wholesale price index (WPI) that takes into account ex-factory or ex-farm prices of food and non-food commodities is also rising too fast: year-on-year increase in WPI that stood at just 2.9pc in November 2017 shot up to 13.5pc in November this year. Our key gauge of inflation — CPI — has not gone berserk. But even the CPI-based annualised inflation that stood at 4pc in November last year rose to 6.5pc in November this year. When and how a very high increase in WPI will start impacting CPI and SPI and how this will have an overall impact on the economy are issues that analysts will watch with interest in 2019. Click on the tabs below to find out what to expect from the economy in the coming year. Published in Dawn, The Business and Finance Weekly, December 31st, 2018

DESPITE TALL CLAIMS, FDI WILL NOT BE A CURE-ALL By: Kazim Alam A one-time inflow of dollars creates local jobs, but continuous repatriation afterwards leads to a drawdown on the country’s foreign exchange reserves. THE PTI government is betting heavily on industrial cooperation with China for attracting foreign direct investment (FDI) in 2019. The country has received overall investment ‘commitments’ worth $40 billion for the next three to five years, according to Board of Investment (BOI) Chairman Haroon Sharif. “More than selling Pakistan to (new) investors, my challenge is to materialise these commitments,” Mr Sharif told Dawn. Considered to be the best source of foreign exchange after exports and remittances, FDI creates jobs without increasing the debt repayment burden. But attracting $40bn in five years seems ambitious. Total FDI in the last five years amounted to only $10.8bn. It dropped 35 per cent in the first five months of 2018-19 largely because Chinese investment in early-harvest power projects slowed down. What’s different this time, the BOI chairman says, is the planned establishment of nine industrial estates across the country, known as Special Economic Zones (SEZs), under the China-Pakistan Economic Corridor (CPEC). A working paper recently published by the Centre of Excellence for CPEC shows that the SEZs are expected to create their first 30,000 jobs in 2018-19. The expected number of SEZ-based new jobs for the next five years is almost 400,000. Mr Sharif says BOI has ‘prioritised’ four SEZs — Nowshera, Dhabeji, Faisalabad and Islamabad — for earlier completion. While government officials hope that rising FDI will spur GDP growth and help the country crawl out of a recurring balance-of-payments crisis in the long run, some economists believe otherwise. “FDI has become a drain on the economy,” says Dr Kaiser Bengali, an economist who served as adviser to Sindh and Balochistan governments. FDI flows are not debt-creating, but foreign investors repatriate profits and dividends every year. Theoretically, it should not be a problem for a nation’s external account if foreign investment is export-oriented. For example, China attracted massive foreign investments to produce exportable goods. Even if an American investor repatriated 90 cents out of every dollar earned by exporting made-in-China goods, Beijing still had a notional net gain of 10 cents. However, the pattern of FDI in Pakistan shows it has mostly been in services or consumption-based sectors: banks, telecoms, packaged food, beverages, drugs, toiletries, clothing etc. In other words, these companies earn in rupees but repatriate their profits in dollars. A one-time inflow of dollars creates local jobs, but continuous repatriation afterwards leads to a drawdown on the country’s foreign exchange reserves. “Over the years, FDI has resulted in a net foreign exchange loss for the country,” says Dr Bengali. Profit repatriation for the first five months of this fiscal year was $822 million as opposed to FDI of $881m. After gathering pace in Musharraf years, FDI flows peaked in 2007-08 with $5.4bn. Yet Pakistan had to seek a bailout from the International Monetary Fund twice in the following 10 years for balance-of-payments support. The country is once again on the doorsteps of the IMF because it lacks foreign exchange reserves to meet its dollar-denominated liabilities. Mr Sharif of BOI agrees that FDI hasn’t been export-oriented so far. “About 90pc of the economy is based on consumption. A recurring balance-of-payments crisis clearly means exports are not taking place,” he says. China and Pakistan have agreed on five priority sectors for industrial cooperation: value-added textiles, petro-chemicals, agro-based food, light engineering and mining. The BOI is now asking foreign investors to aim for exporting at least 20pc of their output, says Mr Sharif. “We’ll give them more incentives. Consumption-led FDI is not a good thing. Results will start appearing after June 2019,” he adds. But announcing incentives for SEZ-based factories without fixing the underlying problems can only have a limited effect on the overall economy. After all, most of the 500-plus industrial estates set up by past governments lie in ruins today. A recent paper published by the Sustainable Development Research Centre at SZABIST estimates the tax-to-GDP ratio for the manufacturing sector at 29pc as opposed to just 0.5pc and 6pc for agriculture and services sectors, respectively. This shows the burden of taxes is overwhelmingly on the industry. The study found the manufacturing sector depends heavily on imports instead of domestic raw materials: as much as 48pc of these imported raw materials are used to produce consumer goods that are sold mostly in the local market. In short, Pakistan has become a “high import-content, consumption economy”. Therefore, the multiplier effect — i.e. the increase in final income because of new spending — of domestic manufacturing activity is weak in Pakistan. In fact, the multiplier effect is generated in the countries from where Pakistan imports raw materials, the study says. Dr Bengali doesn’t believe the latest push for FDI will result in any significant jump in exports. “If there was any export potential under the existing macroeconomic framework, exporters would have already tapped it. Whatever we export, we do it on account of subsidies. The cost of every subsidy is eventually borne by the taxpayer,” he says. Click on the tabs below to find out what to expect from the economy in the coming year. Published in Dawn, The Business and Finance Weekly, December 31st, 2018

ORBIT OF EXTERNAL INFLUENCE: IMF OR NO IMF? By: Jawaid Bokhari THE PTI-led government has bought more time in which to conduct the difficult negotiations with the International Monetary Fund (IMF) by securing cumulative $6 billion deposits which will help shore up foreign reserves in the shot-term. According to a media report, which has not been officially denied, Saudi Arabia’s one-year $3bn deposit is ‘not to be used for debt servicing or any other foreign exchange obligations’. The terms and conditions of UAE’s $3bn have not been announced but earlier reports said that the Emirate’s assistance will not be an alternative to an IMF loan. It is unlikely that UAE and Saudi Arabia, close allies, will be pursuing different forex deposit policies. Incidentally, the United States does not want the IMF credit facility to enable Pakistan to repay Chinese loans. Another $3bn Saudi deferred payment facility for oil purchases is extendable annually, for three years. As Pakistan’s imports are well over 50 per cent of its oil needs from UAE, —the rest comes from Saudi Arabia— it is looking forward to a similar support from the Emirate. However, a stubborn external sector ‘crisis’ has left no option for the PTI government — both on account of domestic and external reasons — but to access multilateral assistance. Addressing the G20 Summit in Argentina, IMF Managing Director Christine Lagarde expressed deep concern over the total value of global debt that has rocketed by 60pc since the international financial crisis of 2007-08. Pakistan’s debt profile is no different from the global debt trend. In a joint press conference in Islamabad on Dec 19, the Country Director Asian Development Bank (ADB) Xiaohong Yang and the ADB’s visiting Strategy, Policy and Review Department’s Director General Tomoyuki Kimura announced that the bank will give policy loans after getting a letter of comfort from the IMF on the economy’s assessment. Pakistan’s debt profile is fast deteriorating, though an official in Islamabad says they may be able to muddle through this year without an IMF bailout with Chinese commercial loans and flotation of bonds and by boosting home remittances. Fitch Ratings has forecast that the debt-to-GDP ratio at 72.5pc recorded last fiscal year will rise further to 75.6pc of GDP this fiscal year ‘as a result of additional rupee depreciation.’ The current sovereign debt servicing over the next three years will amount to $7.9bn per annum. Fitch has downgraded Pakistan’s long-term credit rating from B to B negative. Assessing debt sustainability is ‘one of the priority issues’ on the agenda in the ongoing talks between Islamabad and IMF staff, the Fund’s Communications Department’s Garry Rice revealed at a press conference in Islamabad on Dec 15. Unlike in the past, the Fund is stated to have shifted its focus to ‘primary balance’ instead of the overall budget deficit. Debt sustainability means much more than just balancing the books through patchwork. Raising the price of gas and electricity to reduce losses is not the same as making bleeding utility companies financially viable by increasing efficiency and productivity. Even the World Bank does not agree with such a policy for utility pricing as the underlying problems remain unresolved. On the opportunity it opens, Pakistan’s entry into the IMF programme ‘would build confidence of all stakeholders’. Pakistan’s ‘Memorandum of Economic and Financial Policies’ envisaging ‘macroeconomic stabilisation graduating into growth strategy over the next three years’ is under discussion. The IMF is demanding that most of the policy actions, both fiscal and structural, must be front loaded in the first year while Pakistan wants them to be spread over three years of the programme, and in some cases to run into the fourth year. Finance Minister Asad Umar told a parliamentary panel on Dec 19 that owing to the delay in finalisation of the agreement with the IMF, a mini-budget will be announced in January. A number of measures (or preconditions) have already been taken by the government and the State Bank to qualify for the IMF credit facility. An official source is quoted by Dawn’s correspondent in Islamabad as saying that the IMF wants ‘the adjustment to come before the funds are disbursed.’ The Fund is seeking a cut in current account expenditure including debt servicing, defence and subsidies, says the official who has been part of the negotiation process. While both sides denied that the exchange rate is being targeted, as speculated to a level of Rs145 or Rs150 to a dollar, they confirmed that under discussion is the IMF proposal on how the exchange rate may be determined to transit towards a market-based exchange rate regime. By giving a different interpretation, the Arif Habib report sees challenges ahead such as the ‘IMF’s proposal for a free float ‘implying’ additional devaluation of 5-7pc and 100-150 basis points increase in policy interest rates. Authorities rule out a free float. To reduce the huge trade imbalance and foreign debts, the government is banking on import substitution and export-oriented investment from China. It wants to ‘leverage Chinese experience, latest technology and efficient methods to supplement domestic manufacturing capabilities.’ As this point of time the move is at the Memorandum of Understanding stage (signed in Beijing on Dec 20) and will take some time to materialise. The PTI government will be put to a critical test in 2019 in setting the policy direction while the IMF stability programme is likely to influence the course of the economy for better or for worse during PTI’s term in office. Click on the tabs below to find out what to expect from the economy in the coming year. Published in Dawn, The Business and Finance Weekly, December 31st, 2018

THIS IS WHERE YOU CAN INVEST YOUR MONEY IN 2019 By: Dilawar Hussain how the economy’s performance in the upcoming year, investors have started worrying about the best investment options available in 2019. In 2018, gold gleamed as an investment option, a safe bet in volatile times. Gold has an inverse correlation with most other asset classes — a group of securities that behave similarly in the marketplace — so that when returns on stocks were negative, and almost all else in single digit, the 21.8 per cent gain in gold eclipsed all save the dollar. Investors in the greenback sat on the highest gain of 25.8pc due to a massive depreciation in the value of the rupee. This however was a oneoff for the dollar as it produced double digit returns for first time in 10 years with the last bounty at 27.6pc during the global depression of 2008. Dr Khalid Mirza, chairman Securities and Exchange Policy Board opines that in 2019 investor in securities are likely to be winners. But, he cautions, by winners he means those who put their money using stock ‘technicals’ and not ‘fundamentals’. He believes real estate can provide good returns if investments are made in properties that are on the outskirts of major cities and not in the centre, while for fixed income securities he displays no penchant: “It is akin to fighting against inflation,” he says. Syed Hussain Haider, head of research at JS Global makes a guess on how returns on investment will play out in 2019: Stock market providing a return of around 20pc; National Saving Schemes (NSS) and government securities a return of 11.3pc. Money in the bank, which in 2018 earned just 3.2pc, is likely to provide 9pc in 2019. The dollar could generate 6pc and gold 12pc. According to the above, returns on all asset class — save for gold and dollar — will improve, but the equity market will take the cake. “The problems that the stock market has been going through are not unique. If we look back at all the times the market has faced a rough patch, one thing is immediately evident: Those investors who enter at these ‘inflection points’ of the market cycle are the ones who are a cut above the rest,” says Mr Haider. He affirms that in 2019, for investors with an appetite for risk, equity market returns are expected to be higher than those of other asset class. For risk-averse investors fixed income instruments, money market and government securities are considered to be avenues of choice. As an asset manager, Mr Haider would not talk about investment in mutual funds owing to a conflict of interest, but recommended Bonds due to high interest rates for high net-worth individuals and NSS for risk-averse, small, investors. Zulqarnain Khan, executive director, Next Capital also puts stocks as the winner of 2019, expected to generate a return of 17.6pc. He believes mutual funds may offer attractive returns: Stock Fund 27.1pc; Income Funds 10.7pc and money market funds 9.7pc. Mr Khan estimates returns on savings accounts in banks at 8.5pc; Defence Savings Certificates 12.2pc, one-year Treasury Bills to yield 10.9pc and three-year Pakistan Investment Bonds (PIBs) 11.7 pc. It is a small consolation that the Pakistani investor is not alone in their loss of wealth in 2018. The world’s richest people lost $511 billion in the year, according to Bloomberg, which ascribed the fall to global trade tensions and worries about US recession. “For 2019, equities look like a suitable investment avenue, considering that they delivered losses in the last two years (negative 20pc in 2017 and negative 24.9pc in 2018),” says the CEO of Insight Securities, Zubair Ghulam Hussain. The turmoil in the economy that reverberated in the financial markets is likely to calm down as the economic situation improves post the International Monetary Fund (IMF) aid package (if it goes through) and crude prices sinking to recent lows. This may allow equities to bounce back. Samiullah Tariq, director research and business development at Arif Habib Limited responds: “For small investors with an appetite for risk, the best place to park money is in equities and mutual funds as stocks are currently trading at a mere 7.6 times price-to-earnings (p/e), which is quite below the nine times p/e for the 14-year average.” For risk-averse investors he recommends PIB yields at 13.08pc, where returns are guaranteed. And in case interest rates decline in a year or two they can pocket capital gains and return to equities. Owing to improved reserves from aid provided by friendly countries (and perhaps an IMF package), the stumbling oil prices could trim the trade deficit because of which investment in the dollar holds scant appeal. The rupee is expected to depreciate by 4-5pc going forward. With regard to equities, many analysts have changed perception from investment in defensive plays to high growth value shares. Most investment strategists will not bet on real estate due to both regulatory and market risks, aside from the terror of the sector being a prime target of investigations into money laundering. Activity in the housing market slumped in 2018, as investors’ confidence was dented due to the ban on, and subsequent lifting of the curbs on high-rise buildings in Karachi and the Bahria Town fiasco. “An investor who puts money in real estate runs the risk of being trapped for it will be difficult for them to recover their capital if the land turns out to be an unregulated or encroached property,” says an analyst. Many knowledgeable investors consider it a blessing that the Pakistani market was not ripe for new and untested assets such as Bitcoins. The digital currency proved to be the worst performing asset class in the developed world as the bubble burst, wiping out investors’ wealth. Yet asset managers also complain that the Pakistani investor is forced to invest in the same class of assets over the last 50 years with no new investment avenues. “Is it surprising then that the money, both black and white, continues to be siphoned out to countries with better and safer investment options?,” asks a critic. Click on the tabs below to find out what to expect from the economy in the coming year. Published in Dawn, The Business and Finance Weekly, December 31st, 2018

FARMERS' WAIT FOR PTI TO DELIVER ON PROMISES CONTINUES By: Mohammad Hussain Khan With a huge growth potential for crop diversification, Pakistan’s agriculture sector is in need of modernisation. It’s not just about machinery or equipment. The sector can make great strides if the authorities adopt a scientific and modern approach under a strong regulatory framework. Structural issues, ad hoc-ism, insufficient policy thrust, weak writ of government and increasingly unreliable water flows are major challenges. At least a dozen important research bodies remain without regular heads. The sector recorded 3.81 per cent growth in 2017-18, 3.5pc in 2016-17 and minus-0.19pc in 2015-16. The government has planned an investment of Rs200 billion for the next two to three years. The Ministry of National Food Security and Research (MNFSR) has unveiled an Rs82bn package aimed at increasing yields and improving water efficiency. In major crops, Sindh was unable to meet the wheat sowing target for 2018-19. Punjab met its target, but Sindh could achieve only 73pc of it by the middle of December owing to a water shortage of 35-40pc in the Rabi season. Sindh had to face a 50-70pc water shortage in Kharif, which affected cotton and rice. Cotton acreage showed a decline in 2018-19 in Punjab and Sindh. Against the national sowing target of 2.95 million hectares, farmers could use only 2.4m ha, indicating a drop of 10.9pc from a year ago and missing the target by 18.6pc. Sindh reported a loss of 31pc in acreage over last year while the decrease was 5.2pc in Punjab as Pakistan struggles to meet the target of 14m bales. The Pakistan Cotton Ginners Association (PCGA) said the total cotton production was 9.9m bales by Dec 15. It reported this amidst a controversy about the weight of a bale that the PCGA says is 140 kilograms while the worldwide standard, including in Pakistan, is 170kg. Nationally, rice production remained 2.7pc over and above the target of 6.931m tonnes. Again, Sindh recorded a 10.8pc decline in terms of area and production while the production in Punjab was 15.7pc higher than the target, provisional figures show. Sugar cane farmers continue to face a perennial conflict with millers. Sindh and Khyber Pakhtunkhwa recorded a decline of 16.1pc and 1.4pc, respectively, in 2018. Acreage in Sindh dropped 16.1pc, but the production in Punjab was 47.1m tonnes against the target of 44m tonnes. Pakistan Agriculture Research Council (PARC) Chairman Dr Yusuf Zafar believes the government needs fiscal space to effectively manage agriculture through the Public Sector Development Programme (PSDP). It should re-appropriate funds from unproductive uses, he adds. “The government plans to promote cadge fishing in water bodies to increase fish exports to $1bn from $40m,” Mr Zafar says. There is a serious concern about Pakistan’s food import bill ($6.13bn in 2016-17). A major chunk of it is edible oil ($2bn). Cultivating oilseed crops and sesame can be helpful for import substitution. Sesames exports, as per one estimate, may fetch $45m from the Middle East. Sunflower farming is another option. But its area in Sindh has slumped to 60,000-80,000ha from 266,000ha in 2010-11. The government seems to be giving great importance to the livestock sector. A scheme to promote backyard poultry to end poverty will take place nationwide. “Meetings have been held with the heads of all provincial livestock departments,” says an office of the Punjab livestock department. Policy interventions like foot and mouth disease control through vaccination and calf fattening schemes have yielded good results in Punjab with the annual allocation of Rs6bn. “We have reduced the foot and mouth disease to 5pc from 35pc in 2013-14,” he says, adding that other provinces should follow suit. Water is arguably the most important factor for any growth in agriculture and livestock sectors. The government would initiate the second phase of the lining of watercourses at a cost of Rs68bn. Besides lining, the command area of small dams will be developed in rain-fed areas, which may save nine million acre feet (MAF). The first phase of lining under the National Programme for Improvement of Watercourses (NPIW) was executed in the Musharraf regime on a cost-sharing basis. Sindh has built recharge/storage dams in Jamshoro, Karachi, Nagarparkar and Dadu. Surface water availability is a must for food security. Researchers believe the introduction of crop zoning can help overcome water shortages. Pakistan Council of Research in Water Resources (PCWR) former chairman Dr Mohammad Ashraf says cultivation of high-delta crops — sugarcane and rice — must stop in water-deficient areas. “Aren’t foreign exchange earnings by means of rice exports useless if food imports cost billions of dollars every year?” Rice exports mean Pakistan is actually exporting water used in rice cultivation, he adds. Crop patterns must be defined and strictly adhered to in order to save surface water through crop zoning. “We grow sugar cane in South Punjab where people don’t have access to drinking water. Similarly, the cotton-growing area of Ghotki in Sindh has witnessed unprecedented growth of sugar cane,” he says. Groundwater mining continues at an alarming rate. Dr Ashraf says he is concerned about the matter: it increases the farmer’s cost of inputs and harms soil productivity as the groundwater level drops alarmingly. Water mining needs a regulatory framework without any delay. Researchers believe groundwater aquifer is developed in millions of years. It is depleting fast and, according to one estimate, around 53MAF water was being pumped every year. The aquifer level in Quetta has dropped to 1,200-1,400 feet from 100 feet, according to Dr Ashraf. Punjab government pitched in an Rs8bn subsidy in agriculture, with a Rs2.18bn allocation for 500,000 bags of DAP fertiliser, crop insurance for small farmers, Rs5,000 per acre for oilseed crop cultivation on 156,000 acres, and the provision of 100,000 bags of certified cottonseeds. Sindh offers nothing of the sort as it seems comfortable with the two ongoing World Bank–funded programmes. Views from the field Employing around half of the country’s workforce, producing food and industrial raw material as well as accounting for more than a third of the total export earnings, agriculture is vital for the national economy. But the sector has been witnessing a gradual slowdown in growth, barring a few years, for the last couple of decades and its contribution in the total value of the GDP has been diminishing. The outlook for 2019 is not bright as even the most optimistic farmers say even if the incumbent government is sincere in its intentions for the sector, it doesn’t have the funds required to give farming a boost. Amanullah Chattha President, Kisan Board Pakistan, Punjab branch In view of its over four-month performance, we’re losing all hope that this government can work wonders for farmers. For the first time, sugarcane crushing season has begun after a delay of more than a month and a half. And it’s not yet clear what rate the sugar millers will offer to the growers, who are suffering on two counts because of the delay: loss of sugar cane crop weight, and missing wheat-sowing time because the fields are occupied by sugar cane. The government’s plan to lower the wheat procurement target from four million tonnes to 3MT this season is creating fear that the open market rate of the major staple food will collapse to Rs1,000 per 40kg and even below the Rs1,100 per 40kg last year. Prices of farm inputs are increasing and set to go further up as authorities fail to check artificial shortages of fertilisers, seeds and pesticides. Diesel prices are being enhanced each month. The only relief so far announced for the farming sector is abolishing Rs22 per horse power tariff on tubewells imposed by the caretaker setup, though a formal notification of the facility is yet awaited. Whenever the government’s financial help will be sought on an issue, the ministers will put forth the excuse of empty coffers. Khan Mazullah Khan Member, Kisan Rabita Committee, KP There are two positive aspects of the incumbent rulers. One, they have raised awareness amongst the masses about corruption through their claims, public meetings and sit-ins. Two, the ministers are available soon after a request for a meeting is made. But, the positivity of their image is washed away when one sees that not a single step has so far been taken for the all-important agriculture sector as the incumbents seem visionless, lacking any solid programme to implement the claims they had been making. Prices of farm inputs are increasing. So far each one of them has registered around 50 to 55 per cent increase. The phosphate fertiliser (DAP) which was available at Rs2,500 per bag before they came to power is being sold at Rs4,500 per bag, at least in KP. Hoarders of urea fertiliser are minting money by increasing its rate from Rs1,600 per bag to Rs1,900 per bag as there seems no market control by the authorities. There are still no official plans for improving the supply of certified seed and introducing quality farm inputs. They’re rather bent upon damaging the KP farm sector by imposing the so-called ‘sin’ tax on tobacco, one of the major crops of the province. The sector is, in fact, regressing instead of moving forward. Syed Mahmood Nawaz Shah Vice President, Sindh Abadgar Board The agriculture sector in Sindh requires diligent planning. This will enhance production through improvement in yield, conservation of water and development of an export-oriented agricultural industry. Growers currently suffer losses despite support prices and subsidies. If current planning is to continue, 2019 will again see a surplus wheat situation and affected yields in cotton. Unresolved production issues and inadequate supply chain infrastructure will lead to non-sustainable production. Barring two donor-funded agriculture programmes in Sindh there is no policy-related intervention that helps growers. Even foreign-funded projects aren’t being properly implemented. The Sindh government did take in hand the lining of major canals like Rohri but the fact whether major canals should be lined is still under debate. Watercourses’ lining should be a priority and a composite plan for irrigation system is critically required. The provincial government’s Sindh Enterprise Development Fund had planned to upgrade rice mills but no one knows whether the task was completed as planned. Wheat production can be rationalised and its area used for crop diversification like sunflower that has a huge potential in Sindh and can reduce the edible oil import bill by billions of dollars. We don’t see any programme like in Punjab where the government is incentivising farmers for promoting oilseed crops to lessen edible oil import.—MHK Click on the tabs below to find out what to expect from the economy in the coming year. Published in Dawn, The Business and Finance Weekly, December 31st, 2018

DIPLOMACY: TOO MUCH SECURITY, TOO LITTLE ECONOMY By: Nasir Jamal Pakistan’s current economic and financial challenges are directly or indirectly linked to its foreign policy choices. Struggling to stave off a financial crisis, the Imran Khan government brought back its top diplomats from at least 11 key capitals to Islamabad for a two-day ‘conference on economic diplomacy’ last week. Organised by the Ministry of Foreign Affairs, the conference was supposed to provide the country’s key trade and investment officials an opportunity to woo much needed foreign private investment and boost exports with the diplomats. Will this initiative help align the nation’s development and economic goals with its security-focused foreign policy during 2019 and beyond? Not really. Pakistan’s current economic and financial challenges are directly or indirectly linked to its foreign policy choices. They allow the country’s diplomats to look at bilateral and multilateral cooperation only through a ‘prism of national security’ at the expense of its economic and development priorities. Successive governments have ignored the crucial importance of economic diplomacy, and failed to prioritise development goals in international relations owing mainly to decades of generous multilateral aids and loans because of Pakistan’s privileged position in the US foreign policy agenda. However, the global economic and geopolitical conditions are changing with Pakistan losing its privileged status in Western powers’ global agenda. The deteriorating Pak-US ties have worsened in recent years and bottomed under President Donald Trump with the suspension of military aid and drastic reduction in civil assistance. The difficulties Islamabad is facing in securing a new bailout package from the International Monetary Fund is also indicative of its deteriorating relationship with Washington. Pakistan’s placement on the grey list of the Financial Action Task Force of the Asia/Pacific Group is yet another indication of its declining relationship with international institutions. Foreign policy experts underscore the need for actively pursuing economic diplomacy because they think it will continue to become difficult for Pakistan to access bilateral and multilateral assistance in the future even if tensions between Islamabad and Washington ease. Given its financial and economic difficulties and changing geopolitical dynamics, it is high time for Islamabad to make trade and investment promotion the cornerstone of its foreign policy and vigorously pursue economic diplomacy to for growth. Several countries from Barbados, South Africa, Ireland, Zimbabwe and Hungary have done the same by merging their foreign and trade ministries or by creating powerful trade and investment councils at their foreign offices to promote their development interests globally. “Look at China. It has been quietly focused on its economy since 1980, putting its political and territorial disputes aside. We also see India increasing its trade with China despite a war and outstanding border dispute with Beijing. India has also significantly increased its trade with Bangladesh and Sri Lanka disregarding political disputes with them,” Manzoor Ahmed, who was Pakistan’s World Trade Organisation (WTO) representative between 2002 and 2008, points out. “On the other hand Pakistan signed the Economic Cooperation Organisation Trade Agreement in 2003 and The South Asian Free Trade Area agreement in 2006; none have taken-off thus far because we are used to viewing everything through security prism. “Our economic agenda doesn’t figure anywhere in our foreign policy. We haven’t has a representative at the WTO for months because the previous one appointed by the PML-N government was recalled earlier and his deputy is doing a Staff College course. That gives a fair idea of our foreign policy choices,” he concludes. Simbal Khan, an Islamabad-based independent governance and security consultant, isn’t hopeful of the government resetting its foreign policy priorities any time soon. “Economic diplomacy means the economic and financial goals of a country drive its internal and external policies; it means a country shouldn’t shy from establishing and increasing it’s economic and trade relationships even with its enemies. “Pakistan weighs its international relationships on the basis of the quantum of support it gets on its stance on Kashmir and against India rather than on the basis of its economic and development interests. A real change in our foreign policy will mean a shift from security-led priorities and flexibility on the establishment of trade ties with India. Doing so does not mean giving up on our (political and territorial) stand,” she says. Syed Nabeel Hashmi, a former chairman of the Pakistan Association of Automotive Parts and Accessories Manufacturers, argues that the first step towards a shift to economic diplomacy requires placement of credible professionals. Instead of political loyalists or junior career diplomats who are difficult to communicate with and are usually unresponsive to businessmen, individuals with knowledge of international trade, business and investment should be placed in the country’s embassies and missions abroad. “The government should consider active, successful overseas Pakistanis with local knowledge and networks for the job of commercial officers abroad. They can prove to be a better choice for export and investment promotion, as well as for securing greater market access and improving the country’s perception, a major trade barrier for our exporters.” But people like Shamshad Ahmed Khan, who served as Pakistan’s foreign secretary between 1997 and 2000, don’t agree that the country’s foreign policy is totally devoid of economic content. He is of the view that a country that is not secure can’t thrive economically: “You cannot put security on the side. Still about 60-70 per cent of our foreign policy is about economic diplomacy.” Click on the tabs below to find out what to expect from the economy in the coming year. Published in Dawn, The Business and Finance Weekly, December 31st, 2018