PM’s USA trip: Can Pak survive sans Aid?

The following article was published in Pakistan Today on Friday, dated 1st November 2013:

www.pakistantoday.com.pk/2013/10/31/comment/can-pakistan-survive-sans-aid/

PM’s USA trip: Can Pak survive sans Aid?

By: Omer Zaheer Meer

In the aftermath of PM Mian Muhammad Nawaz Sharif’s USA visit much is left desired. The USA has refused co-operation on three major strategic issues of vital importance to Pakistan which are Pak-Iran Gas pipeline, civil-nuclear agreement and access to American markets with tax rebates like the ones granted to Bangladesh by several western countries. Instead Pak is warned of severe consequences on going ahead with the Pak-Iran gas pipeline project without offering practically attractive alternatives. USA also advocated the Indian stance re terrorism while ignoring Pakistan’s genuine demands backed up by evidences shared through official channels, of dismantling the Indian terror infrastructure in Afghanistan wreaking havoc in Pakistan.

Despite all this humiliation and that too for a country which has sacrificed over 40,000 civilian and 7,000 plus security personnel for USA by bringing home America’s “War on Terror” from neighboring Afghanistan by allying itself with USA, there is still a powerful segment of our intelligentsia claiming that Pakistan cannot survive without the American economic and military assistance, hence we have no option or control over our relationship with USA. This is a carefully crafted stance, one that is less frequently examined with out of the box critiques.

This reminds me of my research speech  delivered at PINA (Pakistan Institute of National Affairs) hosted by Mr. Altaf Hassan Quraishi with participants of the likes of Mr. Mushahid Hussain Syed, Sartaj Aziz, Khurshid Kasuri, e.t.c. Let us examine if this myth hammered down the sub-conscience of an entire nation actually holds merit. It can then act as a starting point to work-out our options and review the strategic ploys we can employ to ensure deliverance of our strategic interests from the Pak-USA relationship.

Part 1 – USA’s Economic Assistance to Pakistan:

As I’ve previously discussed in another write-up published in Pakistan Today (http://www.pakistantoday.com.pk/2013/10/15/comment/get-pakistan-out-of-this-quagmire/), Pakistan has incurred material losses of over $ 100 Billion as a result of alliance with the USA in the war on terror. To date Pakistan has received a meager $ 15 Billion of which $ 10 Billion relates to Coalition Support Fund (CSF) reimbursements for expenses incurred by Pakistan in the USA led war. The CSF expense reimbursements are at the mercy of USA bureaucracy which routinely rejects up-to 40% of the claims already spent by Pakistan without providing any evidence or explanation for rejection, simply terming them “suspicious”.

It is worth mentioning here that USA officials often claim the total “monetary assistance” during this period to be $ 25 Billion but this seems to include humanitarian assistance for flood victims which mostly included provision of products of US corporations and was part of an international community initiative. Even more importantly it includes claimed funds spent directly by US through USAID with Pak having no knowledge of the purpose, amount and utilization. In all possibilities these funds were used to further American interests rather than assisting Pakistan’s ailing economy. Another major makeup of the figure quoted by American officials includes reimbursements of CSF expenses already incurred by Pak for USA.

In simple terms Pakistan’s state has received economic assistance from USA amounting to $ 5 Billion only against the losses of $ 100 Billion incurred as a direct result of becoming a front-line state in the USA led “War on Terror” over the last 12 years. The CSF reimbursements and humanitarian assistance for flood victims mostly in shape of US products delivered as part of global pledges does not count as economic assistance.

The largest economic assistance package announced in this duration was the Kerry-Lugar-Berman Bill (KLB) of 2009 promising $ 1.5 Billion/annum for 2010-2014 totaling $ 7.5 Billion. As per the last available figures at the time of writing, the actual payments received officially by the  Government of Pakistan to date under “KLB” amounts to just $ 485 Million which amounts to 6.47% of the total package and 8.08% of the promised disbursements till 2013. Even out of this meager cash-flow, heavy fees are paid to “experts” leaving even lesser to be actually spent. This makes the tall claims of “heavy” economic assistance seems like a petty joke with a nuclear-armed-nation of 180 million.

An additional $ 1.6 to 2 Billion approximately is claimed to have been spent through USAID and NGO’s, over which Pakistan’s Government has no control and knows nothing about as to the purpose, deliverance or usage.  Rather than actually assisting its’ non-NATO ally substantially, the US focus seems to be on data-crunching and generating media frenzy using distorted facts to psychologically subjugate Pakistan’s decision-making brains.

For the sake of argument let us assume that the whole 100% was actually paid and that too formally to the Government of Pakistan and not through the USAID. An assumed full payment to Government of Pakistan of the entire Kerry-Lugar assistance would still amount to 0.64% of the total GDP of Pakistan.

Now let us take a minute and ask ourselves which country in the world would fail with having to let go of about half a percent of its’ total GDP? And let us not forget the possible strategic and economic benefits of an independent foreign and economic policy.

This therefore dispels the myth that Pakistan cannot survive without USA’s economic assistance. I’ve discussed before the necessary steps required for an economic revival using an economic stimulus and efficient management policy eradicating the rampant corruption instead of pursuing the IMF dictated “austerity” and privatization policy currently been pursued by the incumbent Government.

In the second and last part of this write-up, I’ll examine the myth surrounding Pakistan’s “absolute” reliance on USA’s military aid and technology and whether Pakistan can defend threats to its existence without this military assistance.

(continued)

The writer is a leading Economist who is also a qualified Chartered Accountant, Financial Analyst and Anti-Money Laundering Expert. He can be reached on Twitter and http://www.myMFB.com IDs of Omer Zaheer Meer or omerzaheermeer@hotmail.co.uk

Get Pak out of this Quagmire – Impact of WOT on Pak’s Economy

The following article was published in Pakistan Today on Eid Day, Wednesday, dated 16th Oct 2013:

http://www.pakistantoday.com.pk/2013/10/15/comment/get-pakistan-out-of-this-quagmire/

Get Pak out of this Quagmire

 By: Omer Zaheer Meer

                                                      

Impact of WOT on Pak’s Economy

History is evident that wars had been and will always be costly both economically and in terms of the loss of human lives. The western world and its allies are facing a unique war with no defined goals, targets, definite end-period and a faceless enemy making it much more costly and destructive.

The USA led War On Terror (WOT) and potential solutions as to its “end” are the talk of the town these days, with different perspectives put forth by differing sections of our society, however the economic impact and cost of this war for Pakistan’s economy is an area less frequented.

Pakistan has been paying a very heavy economic price for the ongoing WOT. The economic costs have been high including the direct costs due to heavier spending on defense, compensation for the affected, damage to the infrastructure, severely deteriorating law and order situation, extensive capital flight, lack of foreign investment, industry closures and resultant poor revenue generation for Government. Indirect costs includes loss of economic activity from increased uncertainty, lower investment due to increase in perceived risk, opportunity costs, social disorder, lack of exports due to uncertain conditions and travel restrictions on Pakistani businessmen and the economic impact of the loss of men and women earning bread and butter for their families.

Studies had been undertaken by government as well as non-governmental institutions to determine the cost of war on terror for Pakistan. While their estimates vary, they have all accepted that beside the irreparable loss of lives, a severe economic slowdown has engulfed Pakistan’s Economy as a direct consequence of this war.

What’s significant for the economists is the recent initial estimate by the Government of Pakistan of the up-to-date losses suffered by Pakistan’s economy in the last 12 years to be $100 billion approximately. On the other hand, just $ 15 billion had been paid to Pakistan through official channels (recovery rate of a mere 15%).  It is worth mentioning here that the Pak-American business council and some other private institutions’ loss estimates are much lower, though still material at 40-60% of the official figure.

Pakistan received $10 billion from Coalition Support Fund (CSF) against explicit expenses incurred, $2.1 billion assistance from FMF (Foreign Military Fund) to strengthen the Military capacity against “terrorists”, economic assistance grants had been $1.5 billion while budgetary support of $1.2 billion had been received.

The amounts and purposes of the funds spent and distributed by USA directly through local and international non-governmental organizations (NGOs) are unknown while debt worth $1.65 billion had also been written-off.

The yearly official estimated losses to Pakistan’s economy as a direct consequence of participating in the USA led WOT are as below:

• $2.669 billion in 2001-02
• $2.749 billion in 2002-03
• $2.932 billion in 2003-04
• $3.410 billion in 2004-05
• $4.670 billion in 2005-06
• $4.670 billion in 2006-07
• $6.940 billion in 2007-08
• $9.180 billion in 2008-09
• $13.560 billion in 2009-10 and
• $17.830 billion in 2010-11, totaling to $67.926 billion till 2010-11.

The Economic Survey of 2010-11 disclosed that the loss to Pakistan’s economy due to participating in WOT was app $68 billion till then. The government didn’t disclose the updated economic losses in the Economic Survey of 2011-12. The latest official estimate as mentioned above is app $100 billion which is over 43% of Pakistan’s GDP ($231.2 Billion per World Bank) and 164% of the total foreign debt ($60.9 billion as of March 2013)

An interesting observation to note is the rising rate of the losses in the financial year 2010-11. This shows the rising intensity of the war and the upward trending economic costs. Moving forward this loss may rise at an even higher rate.

Not only did the growth in Pakistan’s economy nosedived but the overall economy was also hit hard. To understand the severity of the economic losses let us examine the fiscal year 2010-11. The exports dwindled to the tune of $2.90 billion, terrorism compensation amounted to $0.80 billion, infrastructure damage amounted to $1.72 billion, foreign investment declined by $2.10 billion, privatization projects worth $1.10 billion could not materialize, industrial output was negatively affected to the tune of $1.70 billion, tax collection declined by $2.10 billion, cost of uncertainty amounted to $2.90 billion, expenditures overrun by $1.60 billion and others expenses incurred were $0.90 billion, totaling $17.82 billion in just one year.

Since accounts have been rebased to 2005-06, we’ll use comparative figures from 2006-07 to meaningfully appreciate the extent of the economic impact. Tourism industry has been destroyed. Industrial sector is adversely affected as working hours were lost with increased uncertainty, terrorism and resulting migration. Its growth rate of 7.7% from 2006-07 fell to a mere 3.5% in 2012-13 with the manufacturing sector amongst the hardest hit sub sectors. The services sector also slumped to a growth rate of just 3.7% in 2012-13 compared to 5.6% in 2006-07. Agriculture growth rate at 3.3% in 2012-13 almost regained the level of growth of 3.4% from 2006-07. The massive potential of increasing this could not be realized though. Total investment has declined from 18.79% of GDP in 2006-07 to 14.22% of GDP in 2012-13.

Post 9/11 Karachi, the economic lifeline of the country, faced a series of terrorist attacks which were repeated in Punjab and Baluchistan. KPK without doubt has been the worst affected. This further increased the risk perception of the country. Economic growth slowed down to the point of stagnation growing at an average of 2.94% since 2008-09. With all these staggering losses there is still no end in sight to the war on terror ravaging the economic, social and political landscape of Pakistan? The quicker we get out of this quagmire the better it will be for Pakistan.

The writer is a leading economist who is also a qualified chartered accountant, financial analyst and anti-money laundering expert. He can be reached on Twitter @OmerZaheerMeer

The untold story of another ‘Malala’

The following article is published in today’s Daily Times dated 15th Oct 2013:

http://dailytimes.com.pk/default.asp?page=2013\10\15\story_15-10-2013_pg3_3#

By: Omer Zaheer Meer

It is high time that we rise to defend the rights of helpless females across the globe without consideration of underlying geo-political interests, race, caste, colour or creed

She did not know that such a beautiful morning could be the beginning of something so ugly and horrendous. She went to her school as usual but was stopped by a group of armed men at a check post, belonging to the force that now ruled her town. While teasing and harassment on the way to and back from school was a routine, this time around she was frisked by men, something alien to her culture. The comments and way of frisking to the terrified young girl were anything but professional. Scared, she rushed towards her home hearing the lewd comments directed at her. She asked her younger siblings to not tell their parents, as she did not want her education to end.

Slowly, but surely the transgressions by the armed extremists started increasing. She felt helpless as she did not want to leave her studies and they would not let her continue in peace without harassment. The matter eventually came to the notice of her parents. Being the strong and determined teenager that she was, she assured them that she could handle the situation, but her parents were scared. They knew those psychopaths could do anything. Their State and governments were helpless and would not be able to protect them. They used to hear many disturbing stories of abductions and violations of young girls in their area by these people ‘governing’ them now. Seeing the love of their daughter for her education they let her continue though with strict instructions of extreme caution and avoidance.

She ignored the harassment and eve-teasing, determined to continue her studies, which she rightly believed was the most important right of every girl.

A few days later, one day after coming home from school she was looking after her beloved plants in the little garden in their house. There were strong bangs on the door. Her father answered the door. She looked up and saw those same men who used to man the check-post on her way to school. Scared, she ran inside her home to her mother. One of them saw her and ran after her while others started beating her father. They took him inside too. The armed men now ordered the entire family to line up for a ‘detailed’ body search.

It became a routine occurrence. The men would often break into the house demanding a detailed body search of the family. During one such instance one of them ran his index finger down her cheek. It terrified her and her family.

Her father immediately stopped her from going to school. She cried and pleaded to be allowed to continue her education. But her family was terrified. More so, because they had been warned by their neighbours about the armed men on the check post (just 200 metres from their home), watching the teen girl gardening and other chores. Her father had told them that it was no big deal as she was just a kid. He did not know how wrong he was.

Her mother went to young girl’s uncle to tell their relatives the worrying situation. She shared that several times she had caught the occupying men staring at her daughter, who would raise their thumbs up to her, pointing towards her teen daughter saying, “Very good, very good.” Disgusted and concerned they decided the teenager needed protection and planned for her to spend nights with her uncle’s family.

On that fateful day, the teenaged girl, sad for not been able to continue her studies like many of her friends due to the armed men now ruling her town, was asking her parents to let her go to school. Just then five armed men barged in their home. They were pointing their guns and screaming. One of them took her mother, six-year-old sister and father to one room while others took her to another. They started taking turns raping the 14-year-old girl who was crying for help and screaming, asking what her crime was. What did she do wrong? She only wanted to study. But the brutal, shameful laughter conveyed to her that she was not amongst humanity anymore.

As if the humiliation and brutality were not enough the armed man from the other room came out, proudly announcing killing her father, mother and young sister. Her world came down trembling. The barbaric animal disguised in human skin then proceeded to rape her while she continued her pleading. When done with the heinous crime he started beating the little girl as if she was a punching bag. Still, unsatisfied, he proceeded to shoot her in the head. To satisfy some evil urge he then set alight her body and went back to fry some wings to eat. After they left the fire started spreading. Seeing the smoke, the neighbours rushed and saw the carnage.

This young ‘Malala’ brutalised was Abeer Qassim Hamza al-Janabi. Her town is Al-Mahmudiyah, Iraq and the brutal animals forcing her and several other girls off education and then committing the monstrous acts were five of the six soldiers from a check-post near her home belonging to the 502nd infantry regiment of the US Army.

Following a successful initial cover-up, one of the men broke down during a psychological counseling session, which he claimed to have asked for to “bypass a command structure prone to cover-ups and get an audience with Army investigators.”

It is high time that we rise to defend the rights of helpless females across the globe without consideration of underlying geo-political interests, race, caste, colour or creed. The message would not go through until Malalas attacked by Taliban are given protection and even honoured but Malalas brutalised by the American soldiers are buried in the wilderness. We must remember that hypocrisy breeds contempt even for the noblest of causes.

The writer is an economist, a chartered accountant, financial analyst and anti-money laundering expert. He can be reached on twitter and www.myMFB.com IDs of Omer Zaheer Meer

 

 

 

IMF-Driven Policies : Will the Government Review or Run Risk of a Revolt?

(The following article/column is published in today’s Daily Times dated: Saturday, October 12, 2013

Titled: IMF-driven policies : Will govt review or run risk of a revolt?

http://dailytimes.com.pk/default.asp?page=2013\10\12\story_12-10-2013_pg5_15)

IMF-driven Policies:

Will the Government Review or Run Risk of a Revolt?

 

By: Omer Zaheer Meer

Pakistan is going through an economic slump, some would argue a meltdown. With rampant lawlessness, terrorism, rising inflation and severe electricity and gas load management especially for industry, the economy needs a revival. It was against this backdrop that the PMLN government decided to go to the International Monetary Fund for a $ 6.7 billion loan package.

Interestingly IMF’s package is austerity based seeking to cut subsidies in a very short duration, demanding reduced public spending leading to the decision to privatize national institutions like PIA and requiring atleast 5% devaluation in the value of Pak Rupee (already initiated) besides others.

The devaluation has already resulted in unbearable levels of inflation, making an already tough situation even tougher. Even the prime constituency of the incumbent Government, the business community is protesting but at the end of the day they will still be able to simply pass on the effects to the consumer. The masses would thus be hit the hardest. With the industry already in tatters due to the energy crisis, law and order situation and ever-increasing input costs, they are shifting base overseas resulting in a flight of local capital. The gigantic increases in the power tariffs will further worsen an already dire situation for the local industry. On the other hand national institutions, instead of being revamped and properly managed are being planned to be sold off in conditions when they could be going for peanuts.

POL products are treated as a cash-cow for revenue generation, ignoring the super-inflationary effects of increases in their prices. It is indeed iconic that while the prices in international market and neighboring India fell, there was a material increase in Pakistan. The Rupee devaluation policy also contributed to this.

While the IMF program may stabilize the national exchequer in the long-term the economic opportunity costs, resulting unemployment (expected to be an additional one million) and the high risk of an economic meltdown makes it less than a prudent choice. Something which is pretty obvious is that Pakistan’s economy requires an impetus, a stimulus to revive the economic activity and not the program agreed with the IMF.

While we can give some space to the Economic Team citing the tough challenges they are facing, what is unfortunate is that even the possible steps within the ambit of Finance Ministry are not taken. There seems to be a lack of understanding and political will to actually carry out the reforms necessary to resuscitate the failing economy.

Financial Management is one such area. I’ve written before that the way the circular debt of app 500 bn was paid to power generation companies was astounding to say the least. There were no audits, no checks and no proper incentives implemented (even if secretly negotiated) for the masses.

Despite claims of up to 40 % unused capacity by power companies, the promised increase in the electricity generation has not been delivered either. Pakistan went to IMF for a $ 6.7 billion loan while 75% of that was distributed as if it was a free lunch. We must ask the finance ministry why no proper audits were performed? Why could we not negotiate with the power companies the terms for say payments in four or six installments with the next installment payable only on achieving an additional power generation as agreed? Furthermore, there has been no effective national energy conservation drive or campaign to cut the line losses to the minimal possible.

It is now obvious that the necessary reforms required to revamp the tax system and structure are not been followed. Instead of extending the tax base by bringing in Agriculture and other exempt areas in the tax net the existing base is being taxed more and higher indirect taxes are being imposed, both disastrous in the long run. Had we actually taken the tough but necessary decision of broadening our tax base and executed proper financial management especially in the power circular debt payment we would not need to go the IMF. The PKR 850 billion printed by the Government could actually have been used more wisely to pay the foreign debt installments and make segmented payments to clear the circular debt owed to the power companies as suggested above.

There are already noises about a very powerful industrialist from Punjab dictating the economic policies of the current government. On the backdrop of this, a list of public sector power companies up for privatization was announced with all based, guess where? Yes, all based in Punjab. This further ring alarm bells. The Prime Minister needs to direct the finance ministry for an independent forensic audit into the payments of circular debt to the power companies and implementation of measures to ensure transparency. Corruption scandals of the likes of the last PPP Government would not be tolerable anymore. This, along with tough decisions to carry out reforms to extend tax base with a focus on direct instead of indirect taxation and proper financial and institutional management can still lead a turn-around.

The biggest question is will the present Government review its IMF driven economic policies and carry out the necessary reforms while providing relief to the ordinary citizen or will it continue to focus exclusively on temporarily filling up the coffers of the national exchequer without any bearing to the economic condition of a common man and risk a revolt? It should remember empty stomachs breed anarchy.

The writer is a leading Economist who is also a qualified Chartered Accountant, Financial Analyst and Anti-Money Laundering Expert. He can be reached on twitter and www.myMFB.com ID’s of Omer Zaheer Meer

Remember the lessons of the East India Company. They aren’t so ancient.

(This article was published in Pakistan Today on 03rd October 2013 titled: Remember the East India Company?

http://www.pakistantoday.com.pk/2013/10/02/comment/remember-the-east-india-company/ )

By: Omer Zaheer Meer

When Friedman and Savage (1948) put forth their behavioral theories, they discussed behaviors that contradict traditional finance assumptions of rational individuals always seeking to maximize the utility of their money and being risk-averse, they used examples of buying lottery tickets and insurance, in which expected utility is low but people participate in their purchases. One wonders of their joy only if they knew about the IMF sponsored economic plan of the current Pakistani Government.

Economic experts have been lambasting the outgoing PPP government’s economic policies as amongst the worst in the country. That was before the current Government unfolded its own, dictated by the IMF’s terms for a $ 6.7 billion loan package. The government pleaded its case for the borrowing citing it as absolutely “necessary” to pay back a previous IMF loan.

It also rightly stressed the importance to clear the circular debt of the energy companies to ensure “maximum” supply of electricity.  However, this was largely achieved by borrowing from the local market which to a large extent crowded out private sector businesses.  Finding it insufficient, the Government also printed currency worth PKR 804 billion in just 2.5 months (about the same amount for which the IMF program was accepted). This along with the SBP purchasing over $125 million in open market to “build” dollar reserves during the two months (July and August 2013) created immense pressure on PKR which for the first time in history has hit over PKR 108.7/$. As a result over PKR 330 billion has been added to the national debt just due to currency devaluation. This of course has increased the future debt servicing costs too.

While anti-public actions of the IMF program like increasing the power tariffs by gradually removing subsidies and devaluation of currency, causing high inflationary pressures, are being implemented in the name of economic reforms despite the dire situation of the industry, the much-needed structural reforms in the taxation system are being ignored. The rich and the powerful practically still enjoy a tax-free income stream while the poor and middle-class is being milked unjustly through indirect taxation.

Throughout the world the focus is on maximizing the direct taxation as indirect taxation always results in inflation and unjust taxation. To elaborate the point, rich person would be paying the same amount of indirect tax on fuel or groceries as a poor or a middle-class person resulting in high tax to income % for the less affluent.

With increased terrorism already paralyzing Pakistan’s economy, these are certainly not the best reforms one would expect from a properly prepared and prudent economic team. Consider the current economic situation of Pakistan:

The rupee is in a constant fall, already declining by 2.5% per month, inflation is rising at an increasing rate, power cuts have yet to be reduced significantly for industry (power supply for home consumers have improved at the cost of industry), industry is struggling against power crisis and increasing production costs, GDP growth is forecasted at about two and a half percent while fiscal deficit is expected to cross 9%.

Now examine the major effects of the “reforms” panned out by the government so far:

Constant devaluation of currency and increased interest rates resulting in even higher inflation, resulting reduced purchasing power leading to stagnant or reduced revenues for business and public exchequer, rounds of layoffs fuelling already serious crime rate and militancy, power crisis (not just electricity but also the gas load “management”) and inflation forcing more industries to shift abroad while further increasing unemployment and an even greater piece of national budget going to debt servicing.

What is actually needed is to extend the tax base by not only widening the numbers in existing tax classes but also bringing in the “forbidden” areas of agriculture especially big landlords in the tax net. It’s a pity that over two third of Pakistan’s population is associated with agriculture, yet there is no tax on it. Even where tax net exists, there are many famous cases where people were never taxed. There is a famous case of a “biryani wala” bought into tax net only after he bought property worth millions. An extensive focus in this direction with proper incentives, powers and training for implementation officers can actually yield much more effective results at much less economic costs and hardships than the current IMF program.

Another area to improve upon is inducing proper checks and balances and ensuring the system is followed in all financial dealings. The power companies’ circular debt payment is already viewed with suspicion due to the lack of the above.  A sum of over PKR 500 billion was paid to several power companies in haste without any audit and checks as to the accuracy of the bills. Furthermore, no material concession was successfully implemented even if negotiated at all. To give an idea of how material this was, it is about 75% of the total amount the IMF will be lending to Pakistan over the entire duration of its program.

Saving and restarting investment and economic activity requires political will to take tough decisions and introduce reforms that may not necessarily be anti-public. Unfortunately, Prime Minister Mian Muhammad Nawaz Sharif’s government has so far showed no signs of doing so. They better start doing so now as I still remember what an influential friend in London once told me, conquering the countries by wars is just too expensive but making them slaves economically is very effective and a proven way. Remember the lessons of the East India Company. They aren’t so ancient.

The writer is a leading Economist who is also a qualified Chartered Accountant, Financial Analyst and Anti-Money Laundering Expert. He can be reached on twitter @OmerZaheerMeer and www.myMFB.com ID: Omer Zaheer Meer