Pages: 7

Stimulating the cement sector Page 2Mutual Fund Rating – Performance evaluation orstatistical optimism?Page 8

Monday, 12 December, 2011profit.com.pk

KARACHIGHULaM aBBaS

PakISTan eyes over $1 billionworth of marble export in nextfew years as government vies toinaugurate the much awaited

‘Marble City’ by January 2012. SindhGovernment has finally provided 300acre land for the project which is aimedto have almost 200 value added indus-tries of marble. To run the importantproject under public and private ven-tures the provincial government has alsoformed a new company ‘Sindh Stone De-velopment Company (SSDC)’ which hasthe responsibility to develop the muchneglected marble sector of province, saidMohammad Younus Dagha, SecretarySindh Coal and energy department.

Referring to the first meeting of thenew company which was held on Satur-day, he said work on the delayed projectwas started soon after forming the com-

pany which includes members from bothpublic and private sectors. The alreadyapproved project was facing delays since2006. The master plan of the project, hesaid, would be completed within nextone month while the whole projectwould be completed within two years.

Zubair Motiwala, Chairman SindhBoard of Investment, was elected aschairman of SSDC, he informed.Younus Dhaga, Zameer ahmed Secre-tary Commerce Sindh, Shahid GulzarSheikh Secretary Mines and MineralsSindh were elected directors on part ofthe provincial government whileSanaullah khan former chairman allPakistan Marble Mining Processing In-dustry and exporters association,amin haswani and haroon Rashidwere representing private sectors. Sec-retary Investment, MohammadYounus Dagha said Government ofSindh has allocated 300 acres on thenorthern by-pass with availability of

fresh canal water from hub Dam.Dagha said that our prime objective isto facilitate the existing middle classentrepreneurs by providing them withtechnical assistance and one stop facil-itation to enhance export oriented pro-ductivity of this sector and to avoidwastage of raw material. he furthersaid the project shall have tremendousinvestment and growth potential forentrepreneurs being based on high endtechnology, innovation and services.The concept is based on cutting edgetechnology, common facility, traininginstitute and most technologically ad-vanced industrial park for Marble andGranite sector in karachi.

SSDC intends to engage consultantfirm for master planning and infrastruc-ture development. Sindh Land Manage-ment Development Company hasoffered to share their expertise in topo-graphical survey and master planning ofthe zone. They have been requested to

submit a proposal for fast track imple-mentation of the project.

Talking to Profit, Sanaullah khansaid the project is very important for en-hancing production and supply of mar-ble and granite made ups. Theassociation, he said was demandingearly completion of the project since itwas proposed in 2004.

Welcoming the fresh move on thepart of provincial government, he saidthat the location soon after completinginfrastructural development should behanded over to marble companies asthey need early shifting of their unitswhich are mostly located in the city. It isworth mentioning here that there aresmall and medium-scale units of marbleprocessing scattered along ManghopirRoad (Qasba Colony), Pak Colony, SITearea and environs. These units thatlargely cater to local construction indus-try complain about the poor law andorder situation and power outages.

KARACHIStaff RepoRt

PakISTanI rupee has come under consider-able pressure against US dollar on accountof more than expected weakness in the cur-rent account while, financial account has

also failed to provide any support. Resultantly, thecountry’s foreign exchange reserves have declined to$16.7 billion for the week ending on December 02,from the high of $18.3 billion touch in mid-July.

In addition, IMF’s loan repayment of $1.2b due in2hFY12, with government showing intentions of notseeking new loan, is also weighing its weight on rupee-USD parity. “Resultantly, rupee has depreciated by 4.0per cent against the green back in FY12YTD,” observedthe analysts at Topline Research. In this scenario, theanalysts said their initial assessment of rupee depre-ciating by 4-5 per cent against the US dollar in FY12,had turned out to be on the lower side. “We are revis-

iting our rupee-USD parity assessment,” they said.Incorporating the recent developments that is more

than expected, weakness in the current account (due toadverse commodity price shock), strained finance account(reduce FDI, outflow in portfolio investment and debt re-payments particularly, towards 2hFY12). “We believe,rupee would depreciate by 7 per cent in FY12 to closethe year around the levels of rupee 92 per USD inJune, 2012. This is inline with last 20-yrs (FY91-11) av-erage depreciation of 7.1 per cent, while it is above thelast 10-years average of 4.1 per cent,” the analysts said.POSITIVE IMPACT ON E&PS, IPPS, TEXTILEAND CHEMICALS SECTORS: With the dollardominated revenue stream, we expect Oil and Gase&P sector to benefit from the prevailing phenome-non. Within the sector, Pakistan Oilfields Limited(POL), stands out to be the chief beneficiary on ac-count of higher portion of oil in its revenue mix,while positive impact on PPL remains on the lowerside. Similarly, IPPs’ ROe component is indexed to

rupee-US$ parity and thus, rupee depreciationwould yield positively for listed IPP sector.

Furthermore, rupee-US$ parity, Pakistan’s tex-tile exports would yield better returns in absoluteterms benefiting export oriented companies.

With product prices and margins based on USD(PTa), LOTPTa would benefit from decline in rupee.however, this impact would be limited as PX, the pri-mary raw material for PTa, would also be importedand exchange losses on $30 million foreign loan.NEUTRAL TO NEGATIVE ON OMCs, AUTOSAND CEMENT SECTORS: For OMCs, sector wouldenjoy higher absolute margins on deregulated prod-ucts like, furnace oil rendering into improved grossmargins. For refinery sector, rupee depreciation wouldrender into higher deemed duty in absolute terms.however, for both the sector exchange losses on ac-count of higher reliance on imports will offset the in-cremental benefit. after continuous rise in JapaneseYen, rupee deprecation would further increase the im-

port bill for auto assemblers, thus, adversely impactingthe sector gross margins. Moreover, sector’s ability topass on the cost pressures to final consumer would re-main under question in heightened regulatory risk en-vironment. Thus, we expect the phenomena to have anegative bearing on the sector. The recent depreciationof Pak rupee against USD would have a negative im-pact on cement sector as coal, major component, is animported commodity. however, this impact wouldnullified for companies like Lucky, having higher ex-port share in the revenue mix.NEUTRAL IMPACT ON FERTILISER SECTOR:For fertiliser sector, rupee devaluation will have nomajor impact on urea manufacturers since, local ureaprices are at approx 35 per cent discount and are prima-rily a function of local gas prices and curtailment. Forproducers, having DaP in their product mix (FFBL), thedevaluation would slightly augment its profitability,given higher cost on imported phosacid will be morethan compensated, by the gain on DaP prices.

g Sindh Govt forms SSTDC to develop marble sector g Much awaited Marble City to be inaugurated in January 2012

g Rupee to depreciate by 7 per cent against dollar till June 2012 g Foreign exchange reserves to decline to $16.7 billion

Govt needs to takemeasures to reformeconomy: ICCI

ISLAMABADStaff RepoRt

The worsening situation ofgovernance, power,infrastructure, political turmoil,

meager planning and deteriorating lawand order situation, are contributing tothe decline in economic activity andinvestment in the country.Government needs to take aggressivemeasures on priority basis to improvethe fragile foreign investmentcondition and to put the country ontrack of economic growth anddevelopment.Islamabad Chamber of Commerce andIndustry (ICCI), President YassarSakhi Butt, in a statement said imageof Pakistan needs to be improved toencourage foreign investors. “Mediacan play a proactive role in positiveimage building, as our country ishighly ranked among the mostlucrative destinations for profitableinvestments,” he added.President said negative growth inforeign investment would adverselyaffect the country’s economic growth.he said that while reacting to WorldBank’s report on foreign investmentwhich stated that foreign investment inPakistan has declined by 60 per centagainst just 2 per cent decline in Indiaand 20 per cent in Sri-Lanka; while,China, Indonesia and Bangladesh, haveachieved phenomenal economic growthby attracting foreign investment. healso added that economic managersshould also device and implementgrowth oriented strategies to attractforeign investors for bringing thecountry out of the current seriouseconomic turmoil. he said governmentcould better cope up with the problemsof poverty, unemployment, fiscaldeficits and slow pace of development,by attracting investment. More FDIwould create jobs, improveproductivity, promote businesses, pushup forex reserves and ultimatelystrengthen economy. Governmentshould maintain continuity of policieslike, other countries in the region, andalso develop a close liaison withbusinesses, industries and chamberswithin the country to increaseinvestment opportunities.

Impact of depreciating rupee on industry

eyes $1 billion marble export

China export and import growthslows, surplus narrows Page 5

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Monday, 12 December, 2011

ISMAt SABIR

On one hand, many industrialistsare worried that giving MFnstatus to India will ruin theirbusiness, as local markets willbe flooded by cheap Indian

products while, on the other hand, cementmanufacturers are optimistic that it wouldboost cement export to India. Perhaps, this isthe only industry that is happy with grantingMFn status to India. They said, Pakistan has enough surpluscapacity to meet Indian cement demand ofconstruction sector. Therefore, it is likely toenhance its exports manifold to theneighbouring country.CapaCity of Cement industry:

Cement and concrete are supposed to besynonymous regarding the union ofmaterials, but they are different in nature.The cement is a powder ultra fine ties rockand sand inside a concrete mass and is themain ingredient of concrete. The averageannual global production of concrete is about5 trillion yards or 1.25 trillion tonnes perannum. The local cement industry has acapacity of about 44.217 million tonnes asagainst demand of about 31 million tonnesconsists of 30 per cent exports and 70 percent domestic consumption, leaving around10 to 13 million tonnes of surplus capacitythat can be utilised for export.HistoriCal baCkground: 3000 BC,Egyptians used mud mixed with straw to binddried bricks. They also used gypsum mortarsand mortars of lime in the pyramids. Chineseused cementitious materials to hold bambootogether in their boats and in the Great Wall.In 1900, Basic cement tests werestandardized; 1903, the first concrete highrise was built in Cincinnati, OH and in 1936,the first major concrete dams, Hoover damand Grand Coulee dam, were built. In 1947,Pakistan inherited four cement plants with atotal capacity of 0.5 million tonnes. Someexpansion took place during 1956-66, butcould not keep pace with the fast economicdevelopment and the country had to importcement in 1976-77 and continued to do so till1994-95. During 1948-58, two more cementunits were set up and the capacity reached1,036k tonnes. The number of unit furtherrose to 9 during 1964-69 and the capacityalso rose to 2,162k tonnes. Up to 1986-87,about 20 cement units were producing7,072k tonnes cement. In 1997-98, 24cement units were manufacturing 9,364ktonnes cement. Later on by expansion incapacity the production rose to 44,070ktones, with 25 units, and estimated to reach50,000k tonnes in 2011.The industry was nationalised by Mr Z ABhutto in 1972 and privatised in 1990 byGeneral Zia-ul-Haq, which encouraged settingup new plants. The increased capacityresulted in severe competition betweencement manufacturing companies led to pricewar, particularly among the units situated inthe same region.top Cement produCing Countries:

In 2006, world total production was2,540million tonnes and top 6 cement producing

countries were Italy, South Korea, Japan,USA, India and China. per Capita Consumption: The averageper capita cement consumption in differentcountries in 2008 was as follows: Bahrain300, Kuwait 659, Oman 1,678, Qatar 4,710,Saudi Arabia 1,625, UAE 5,098 and GCCaverage 2,345 kg.export: Low cost Chinese cement hascaptured a large portion of Asian markets.The world’s leading cement exportingcountries, such as China, Thailand, Japan,Taiwan and Pakistan are located in the sameregion. Therefore, in future, only thosemanufacturers could survive, in the longrun, who are benefiting from low costenergy resources selling high quality cementat low prices. According to economic survey,presently, Pakistani cement is beingexported to Afghanistan, India, Africa,Middle East and Central Asian countries. Thecountry has already exported bulk ofcement to Afghanistan, but export to Indiawas only a fraction of it. taxes and duties: Export of cement isexempted from the sales tax and FederalExcise Duty (FED). However, the domestic salehas to pay the sales tax at the rate of 17 percent and Federal Duty (FED) Rs700 per tonne.The import of cement and coal used as fuelfor the cement plants is allowed at zero percent customs duty and 17pc sales tax. As perinvestment policy of the government, theimport of plant machinery and equipment formanufacturing sector is allowed at 5 per centcustoms duty. However, in spite of all theseconcessions, average retail price of cement inthe domestic market is gradually increasingsince June 2010. Average prices in Pakistanare around Rs417 per 50 kg bag in thenorthern areas and Rs401 per bag in thesouthern region. Cement prices in Indian market rangedIRs270 to IRs280 per bag; however, if cementis imported from Pakistan, the landed cost ofimport is lowered to Rs235 per bag i.e. 16 percent less than local price. As opposed toPakistan, India has a differing supply anddemand situation. The cement industry inIndia is facing challenge of bridging demandand supply gap. India has 300 small and 130large units with a capacity of 234 milliontones, but produced 167 million tonnes. Therehas been an acute shortage of cement in theIndian market, but importing cement fromPakistan takes at least 15 days for delivery,which is sold on cash basis.Local cement manufacturers are exportingcement to India through trains only.Therefore, only a limited quantity of cementcould be exported to India. If India allowscement imports from Wagah border, it wouldbe more beneficial for the units of northernarea, like DG Khan, Lucky, Maple Leaf,Gharibwal, Bestway and Pioneer Cement.These units would bear less transportationcost, which would result in improving exportmargins. The cement exports to Indiathrough Gujarat port would benefit southerncement units Pakistan as they are locatednear to the sea port. Out of the total, 44.217 million tonnescapacity, 80 per cent is situated in the northand 20 per cent in the South of the country.

During 2010-11, domestic demand was only22.002 million tonnes and exports were 9.419million tonnes, thus leaving substantialcapacity to be utilised. The production ofcement during Jul-Mar 2009- 10 was 23.1ktonnes and in 2010-11 was 20.8k tonnes,showing a change of -9.7pc.apCma demands payment of inland

freigHt subsidy: All Pakistan CementManufacturers Association (APCMA) hasdemanded that the government should clearpayments of inland freight subsidy claimsand facilitate the industry in exportingcement. They said local demand is stagnantfor the last many months and units areworking below capacity showing 12.796million tonnes idle capacity. Chairman APCMA, Aizaz Mansoor Sheikh,said that the manufacturers had contactedthe government in 2009 to give 50 per centinland freight subsidy to boost cementexports by sea. The inland freight cost isquite high made impossible for the units toexport, especially located in the northernregion are unable to compete in theinternational market, if cement is exportedby sea. After wasting six months, EconomicCoordination Committee (ECC) and TradeDevelopment Authority of Pakistan (TDAP)allowed inland freight subsidy at the rate of35 per cent for cement exports by sea butonly for the period of March 26, 2010 toJune 30, 2011. Chairman pointed out that after fulfilling allconditions, claims were filed for subsidy toTDAP, but till now claims of Rs269.293 millionhave not been cleared. It was learnt that theMinistry of Finance has not released any fundsfor paying the claims. APCMA said they weredemanding subsidy to maximize exports viasea and especially to help the cement unitslocated in the north zone.Presently, Pakistan is exporting cement toAfghanistan and Central Asian States at verycompetitive prices. However, there are vastopportunities exist to increase exportsthrough sea they could get more exportorders, provided the issue of high inlandfreight cost from upcountry is resolved. It isvery crucial that export by sea route shouldbe encouraged, and inland freight subsidymay be extended to the current financial year.This would help not only to earn foreignexchange but would also assist the cementunits to solve their financial crisis. APCMAindicated that the loss making mills in thenorthern zone of the country may not be ableto survive for long if they are not facilitated inincreasing their exports. HigH profitability: However, ananalyst indicated in his report that the risingprices have helped cement industry to earnhuge profits, besides covering losses. Theindustry posted Rs1.619 billion profit aftertax in the first quarter of FY12 as comparedto the after tax loss of Rs1.056 billion in thesame quarter in FY11.During the first quarter of Y12, cement unitsimproved their financial health significantly,both prices and dispatches were in favour ofthe manufacturers as they rose 25 per centand 8 per cent, respectively the analysts said.Companies like Flying Cement, Gharibwal,Kohat, Cherat and Fauji Cement remained on

the top five positions in the sector. They grew383 per cent, 164 per cent, 82 per cent, 66per cent and 61 per cent, respectively. On theother hand, Lucky Cement contributed 94 percent to the sector. Lafarge Cement and MapleLeaf shared cumulative loss of Rs536 million.Due to high prices in the domestic market,manufacturers were interested to sell morein the local market, showing a growth rateof 12 per cent in local dispatches. Theexports increased only by 0.21 per cent,said Invest Cap. The report shows that out of 18 companies,10 were in profit, seven posted losses while,one was non-operational. These companieshave a share of 98 per cent of the marketcapitalisation. The overall growth of thecement sector was 38 per cent to Rs35billion as compared to Rs25 billion in thesame period last year. The total grossmargins improved by 674bps to 23.5 percent mainly due to the higher retentionprices during this period. However, risingcost restricted sector to expand. The cost ofcement went up by 27 per cent per tonnebecause of higher coal prices in internationalmarket, up 28 per cent as against to lastyear, besides energy prices in the country.Operating cost was also rose 49 per centwhile financial cost rose by 2 per cent. The details further revealed that thegovernment aims to increase bilateral tradebetween Pakistan and India from $2.6 billionto $6 billion that would surely increasecement export. However, construction activities in winter,nov-Jan 2011 would be slowed down reducingless quantity of cement import by India. Butreduction in export would be compensated bythe local demand of Pakistan. FY11 was a difficult year for cementindustry, especially the former half of it, dueto the floods of 2010. However, the currentfiscal year depicted some improvement inlocal cement demand because ofreconstruction activities while the exportside remained weak. The total cement dispatches for four monthsof 2011-12 recorded a six per cent increaseover the same period last year. A decline inexport in this period is being attributed tohigher local supply, particularly in thesouthern region. The government is alsofocusing on development work as electionsare fast approaching that has increaseddemand of cement.Export dispatches from the south fell by 23per cent evaporated the effects of theimprovement in the north, and dipping thetotal exports for the period of Jul-Oct 2012over 2011.Manufacturers said that exports have beendeclining due to low export prices, meetingonly variable costs. Consequently,manufacturers have diverted theirattention towards selling cement in localmarkets than exports.The performance of cement industry inOctober has been the best in FY12 in terms ofboth export and domestic demand higherthan the previous three months. In spite of a13 per cent slump in exports via sea to India,the over all exports increased as compared toSeptember 2011.

debate02

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TO meet the challenge of maintaining abuoyant economy and well being ofconsumers, promotion of the conceptof free economy is a must. Domesticmarkets which form the basis of the

economy must be ready to compete at home for in-tegrating effectively in global markets. Ironically,factors limiting competition in domestic markets aregrowing in size thus the case of effective enforce-ment of competition laws in this setting becomesmore important in Pakistan.

Broadly speaking, inthe absence of effectivecompetitive environ-ment, Pakistani firms areapparently slow to ad-just, yield low levels ofproductivity, lack energyto innovate and arepainfully highly concen-trated ones which haveled to anti-competitive

behaviours on the part of firms. In the recent past, the Competition Commis-

sion of Pakistan (CCP) has conducted a number ofinvestigations into alleged cases of anti-competitivebehaviour on the part of firms. These cases mostlybelonged to firms operating in sugar, cement, veg-etables ghee, poultry, aviation, banking, automo-biles and telecom sectors.

If Pakistani firms want to be sturdier, theymust demonstrate a high level of efficiency, inno-vate aggressively and improve firm-level produc-tivity. These are all prerequisites to prepare forglobal competition. Large sized private firms andSMes represent the seeds for growth for the Pak-istan economy and hence should be the center-piece of every policy framework.

That being said, government’s role becomeseven more important if Pakistan wants to competeglobally. Policymakers’ primary focus should be on

increasing efficiency of factor markets, market gov-ernance and infrastructure services. as a conse-quence, we expect thriving markets which rewardinnovation and punish inefficient firms engaged inanti-competitive behaviour.

To deepen the competition level in Pakistan, ac-tive policy formulation and its implementation alongwith institutional reform is the need of the hour.Government’s role should become limited to facili-tating rather than regulating the markets.

The robust and modern structure of the CCP inpartnership with active and independent judiciarycan help ensure protection of competition. The flawsin judicial system should be improved which is amajor barrier in punishing the culprits and creasingout market irregularities. The CCP claims to haveimposed fines of up to Rs7.3b on various firms forviolating anti-competitive laws but they are yet to re-ceive single penny due to flaws in our judicial sys-tem. The alleged firms are given stay-orders bycourts when they are fined by the CCP; hence around140 cases are pending in the courts.

The era of heavy protection regime (for exam-ple automobile, aviation and textiles sectors), sub-sidies and tariff concessions has to go if Pakistanibusinesses want to compete both nationally andinternationally. Indeed much has been said andwritten about giving MFn status to India but Ithink if Pakistani businesses were efficient, inno-vative and able to produce at lower costs, then thehuge market of 1.2 billion Indian consumersawaits us. To be able to compete in the Indianmarket, cost of doing business at home has to belowered in the first instance.

a World Bank survey of ‘ease of Doing Business’placed Pakistan at the 96th position (out of 183economies) in 2011 which has now slipped to the105th rank in 2012. higher barriers such as dealingwith construction permits (104), getting electricity(166), paying taxes (158) and registering property(125) are some kick-starters which need to be im-proved to enable the entry of new firms easier andmarkets competitive.

Pakistani businesses can only compete globallyif domestic markets encourage competition and in-novation; businesses demonstrate high level effi-ciency and equal opportunities are provided to allthe players.

The author is an Islamabad based freelancecontributor, researcher and a trainer. He can be

reached at syed311@hotmail.com

IF november’s 10 per cent year-on-year decline in exports and 19 percent surge in imports fail to soundalarm bells in the finance ministry,the middle and lower income groups

should brace for a particularly hazardous run-up to the elections. That the trade gap widenedby 55.5 per cent in the previous month despitea healthy rise in remittances underscores theperilous fiscal state the government is aboutto send itself head first into.

normally, we’d take the usual argument atface value, that unusually amplified imports oweto increased raw material demand formanufacturing sector expansion in the wake ofmonetary expansion by the central bank. But aswe have often questioned in this space, as hasour panel of experts, it is difficult to expectcurrent monetary easing to stimulate expansionwhen industry is operating well below capacity.Unless existing capacity is amicably utilised,there can be no question of expansion. Plus, theinterest rate regime has turned into a double-edged sword. What advantages a decliningborrowing rate can deliver the private sector

with the government so heavily present in theborrowing market is questionable.

Furthermore, it turns out that our fearsregarding international commodity pricesfalling, thus removing the exogenous supportour exports got last fiscal, were all too real.Unfortunately, for some reason such concernswere not appreciated within the financeministry, hence the deficit quagmire Islamabadhas sleepwalked into.

It is not just exports, the government’sposition is compromised on most issuesconcerning its fiscal breathing space. Promisedtax reforms are nowhere to be seen andprovincial powers granted by the 18thamendment have so far been wasted. PSescontinue to unnecessarily bleed the governmentof billions every year, with few chances ofaddressing the problem. and the export base isstill unimpressive, far from adequately tappingour comparative advantages. Judging by thetrend, it seems the finance ministry shouldprepare for another round of embarrassmentcome budget time, when actual achievement iscompared to projected targets.

Back to the deficits

Ironically, factorslimiting competition indomestic markets aregrowing in size

State of competition inPakistan

Syed Asad Hussain

E D I T O R I A L

Of plight and provincial disparity

IT seems that the terrorism smoghas successfully subdued sepa-ratist sentiments. Or maybe theterrorist coterie has provided anumbrella to all those with griev-

ances, with a promise to satiate once thebigger ‘war’ is won. In any case, no onecomplains about Punjab hegemonythese days; like all energies eventuallyconverge into one energy, the enemynow is also a consolidated mass. Theironic bit is that the hate althoughstrongly targeted is towards an intangi-

ble, unnamed unknown demigod.In an effort to deconstruct, re-exam-

ine and open all the knots like manymartyrs before, the first and the mostimportant woe is the inequity in every-one’s take-home, disposable return. allunderstand that the provincial brawl ishistorically centered on the distresspivot of “why am I poor when you arenot”? If unofficial numbers are consid-ered good approximations, then Pun-jab’s share in the country’s GDP standsat about 56-59 per cent, Sindh’s at a lit-tle more then 30 per cent, kP generates10 per cent and Balochistan about 4 percent for about the last two decades.

If money is the centre of everyone’sproblems, then it must be understoodthat the solution only lies in increasingthe supply of money! If the governmentis to be brought under scrutiny first,then with a tax to GDP ratio of aboutnine per cent, about six per cent of theGDP, or two-thirds of the government’s

revenue amounting to Rs1.2 trillion wasbudgeted to be shared with theprovinces. Of this amount, 48 per centwas deemed to be transferred to Punjab,27 per cent to Sindh, 16 per cent to kPand 9 per cent to Baluchistan.

The essential problem lies with thefact that public spending in sectors, lo-calities, etc, acts as a catalyst for confi-dence creation, reduction in uncertaintyand hence risk. Low levels of formal fi-nancial sector’s penetration in Baluchis-tan and kP, where infrastructure deficitquite eminently prevails, prove this. ac-cording to data by the SBP, out of Rs3trillion disbursed under credit to theprivate sector, Rs1.6 trillion and Rs1.4trillion were bagged by Punjab andSindh respectively. With the majorchunk gone, the non-existent and un-heard of private sector in Balochistanand kP were advanced Rs14 billion andRs49 billion respectively. This is lowerthan advances to the questionable pri-

vate sector in Islam-abad only which wasable to borrow more than Rs240 billionas of Dec-10. The numbers have notchanged much since.

Moreover, in terms of publicspending, Balochistan is the worsthit, as in real terms, the governmenthas in fact been divesting from theprovince; the budgeted transfer forFY12 was 11 per cent higher on YoYbasis whereas inflation is expectedto go up by 12 per cent during theyear. and so to say, this is perhapsthe most resource rich centre of thecountry, the epicenter of the nextphase of growth in the economy, ifthere is going to be any. numbers forfederal spending on the remainingprovinces show a real increase of 12per cent for Punjab, nine per cent forkP and only four per cent for Sindh.So one can predict where the nextwave of dissent is likely to emerge

from given that thistrend continues.

Miners and others with some com-mon sense of would prudently under-stand that to use coal or any othernatural resource, one has to extractthem first. The common lament of pol-icy makers is that the economy lacksfunds to invest in the extraction process.In disbelief, one may exclaim, “Real-lly?”, because the last time anybodychecked the government has been bor-rowing more than hundreds of billionsrupees every quarter,which is only a‘portion’ of what the financial systemhas to offer.

If the most corrupt are the richest inthis country, then let’s concede to givingthem a large cut. But let’s progress…it’sabout surviving this time!

The writer is an economic researcherand freelance financial journalist. She canbe reached at sakina.husain@gmail.com

Sakina Husain

For comments, queries and contributions, write to:

email: profit@pakistantoday.com.pk Ph: 042-36298305-10 Fax: 042-36298302 website: www.pakistantoday.com.pk

BaBuR SaGhIRCreative Head

haMMaD RaZaLayout Designer

ShahaB JaFRyBusiness Editor

alI RIZvINews Editor

MuneeB eJaZLayout Designer

M o n d a y, 1 2 D e c e m b e r, 2 0 1 1

It’s aboutsurviving this time!

KunwaR KhulDune ShahIDSub-Editor

Maheen SyeDSub-Editor

Ufone, ‘Teri mehrbani’!

The writer has made a very comprehensiveanalysis; I totally agree that consumers can-not be persuaded through just humorousadvertisements. This phenomenon alwaysseemed to surprise me and I am glad, some-one wrote about it and actually did a greatjob. Ironically, I am a Ufone subscriber too,but the advertisements never drove me tochoose Ufone as a network. I also know thatUfone adverts are mostly for VaS, but thenagain, there is a reason why Ufone alsocomes up with new adverts every now andthen. Obviously, it is looking forward to en-hance its sales in wake of extreme competi-tion, which is why it comes up with suchbrilliant campaigns every time.

HARRIS ALIGUjRat

Three new airlines

The three new airlines Indus air,Bhoja air and Pearl air that are onthe horizon bode well for the fu-ture. There is a precipitous ascentin the numbers of people travelingby air, and as things stand the serv-ice provided has not been sufficientto cater all possibilities and coverall the bases. The three airlinestaking off next year would not onlyenhance competition – in turn en-suring a rise in the quality- itwould also enhance options for thepassengers. all eyes would un-doubtedly be on Bhoja, who wouldwant to come back strongly aftertheir demise in 2000.

SAnIyA WASIMLaHoRe

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Monday,12 December,2011

04news

CeO unilever Pakistan, ehsan a Malik

We have increased our retailfootprint in the rural areassignificantly and that hasfuelled our growth

KARACHIWaQaR HaMZa

The case of revival of karachiCircular Railway Project will bereferred back to executive com-mittee of the national economicCouncil (eCneC) as keeping it

outside Public Sector Development Pro-gram (PSDP) is not feasible. This was dis-closed in a briefing given to the PrimeMinister last month that after a series ofmeetings at various forums Secretary Fi-nance Chaired a meeting on 4th novem-ber, 2011 and recommended that case maybe referred back to eCneC that keepingthe project outside PSDP is not feasible.

Moreover, other recommendationsmade by the secretary include that loan tobe on-lent with minimal economic burdenon kCR Project; loan from Japan Interna-tional Cooperation agency (JICa) to eco-nomic affairs Division (eaD) may beon-lent to Ministry of Railways for kCR asdevelopment project of Ministry of Rail-ways to avoid re-lending charges; in caseof any recurring operational losses, thesame should be borne by share holders ofkarachi Urban Transport Corporation(kUTC) proportionate to their shares inkUTC; and inclusion of kCR in PSDP ofMOR without disturbing its portfolio.

While present status of the project is

that a team of JICa experts from Tokyo,Japan are working in kUTC Office sinceSeptember 2011 for Study of SaPROF-IIon kCR Project, while feasibility study ofresettlement site is in process and wouldbe completed by 30th December, 2011.however, one of the pending issues of theproject is the issuance of notification forlegal coverage, as at present compensa-tion to PaPs (Project affected Persons)and non title holders PaPs are not cov-ered by law because national Resettle-ment Policy Ordinance March-2002 haslapsed. It is to be noted that in the sixthmeeting of Board of Directors of kUTCheld on 29th november, 2010 chaired byChief Secretary Sindh/Chairman kUTCBoard. It was decided that a notificationis to be issued by government of Sindhwith consultation of provincial SecretaryLaw, and Secretary Imp. (SGa&CD) willbe the focal person for the same.

and Secretary Law, Sindh, after vettingthe notification (June 14, 2011) returned itto Secretary Imp. (SGa&CD), so the matterof issuance of notification is under processwith government of Sindh. another pend-ing issue is the confirmation of transfer ofPakistan Railway land to kUTC required forkCR from PR to kUTC. executive Commit-tee of Railway Board decided (March 22,2010) for transfer of 100 acres land alongUP Mainline from karachi City to Drigh

Road Station; along kCR Loop entire PRland (225 acres); Suit land at Jumma Gothwill be utilised by kUTC for Resettlementof PaPs and balance suit land will beutilised by PR for operational purposes.Ministry of Railway in a meeting with JICaon 16th June, 2011 agreed to transfer the re-quired land to kUTC on lease basis aftersigning of loan agreement. On JICa re-quest, MoR issued “Letter of Comfort” totransfer the required Pakistan Railwaysland to kUTC on 60 years lease on conces-sion rates. JICa agrees on 60 years lease forRoW land but desires 99 years lease periodfor Resettlement Site and Real estate De-velopment, the briefing stated.

HISTORY OF KCRkCR was constructed, opened and op-

erated for traffic by Pakistan Railways inthe year 1964 and was patronised till1984. Due to lack of investment in infra-structure, etc the operational efficiencywas marginalised resulting in reduction ofpassengers and eventually was closed inDecember 1999.

REVIVAL OF KCRIn December 2004, government of Pak-

istan decided to revive kCR as modern com-muter system for the citizens of karachi. Itwas also decided that kUTC will be formedwith Ministry of Railways, government ofSindh and City District government. karachi(CDGk) as shareholders in the ratio of theirequity sharing 60 per cent, 25 per cent, and

15 per cent respectively.kUTC has been incorporated with

SeCP on 8th May, 2008 with nine direc-tors and Chief Secretary Sindh is ex-Offi-cio Chairman of kUTC board. Presidentduring his visit to karachi on 20th april,2009 had very kindly consented to the ex-ecution of Revival of kCR Project with In-ternational help. President furtherdirected that a Resettlement action Plan(RaP) should be prepared immediatelyfor Project affected Persons (PaPs). Only20 per cent of the Right of Way of kCR hassquatters (4653 household unit)

FUNDINGJICa will arrange 93.5 per cent cost of

the project ($1457.7 million) through SoftTerm Loan at a markup of 0.2 per cent re-payable in 40 years including 10 yearsgrace period and remaining 6.5 per centcost ($101.1 million) will be borne by stake-holders of kUTC (PR, GOS and CDGk) asper their respective equity share. It is to benoted that release of funds by stakeholdersfor FY 2011-12 includes Rs1237.2m fromPakistan Railway, Rs515.5 million by gov-ernment of Sindh, and Rs309.3 million byCDGk out of total Rs2062 million.

PUBLIC PRIVATE PARTNERSHIPa consortium of international Consult-

ants will be engaged for design, drawings,preparing tender documents, appointmentof consultants and contractors, certificationof payments by JICa/experts at karachi

and release on approval by JICa, Tokyo, andproject monitoring and evaluation.

according to the time line of the proj-ect, appraisal by JICa will be received byDecember 2011/January 2012;pledge/loan agreement by april/May2012; and project commencement byJune 2012. The completion period will becomprised after 3 years after the comple-tion of Resettlement of Project affectees.

APPROVALS AND STUDIESn Donor agency JICa, sponsored a

study named SaPROF (Specialassistance for Project Formation) forProject and the final report wasreceived in May-2009 at estimatedcost $1558.8Ml.

n environmental Impact assessmentstudy approved by environmentalProtection agency (ePa), GOS onJuly 4, 2009.

n eCneC approved PC-I of the Projecton 3rd September, 2009 cost: $1.558billion. (Rs128.6 billion at1US$=Rs.82.50).

n Iee Report of Resettlement Site forPaPs of kCR Project approved byePa on 26th May, 2010.

n Satellite Imagery of kCR route hasbeen completed by SUPaRCO on26th October, 2009.

n RaP Study of PaPs (4653 nos.)prepared in conformity with WorldBank, aDB, IFC guidelines and finalisedto the satisfaction Donor agency JICa.approval received by Donor agencyJICa, Tokyo on 28th July, 2011.

KCR PROJECT REFERRED TO EXECUTIVE BODYg Team of JICa experts from Tokyo, Japan working in KuTC Officeg JICa agrees on 60 years lease for Row landg notification to be issued by Sindh govt

Textile industryrebuts baselesspropaganda

FAISALABADfaRaKH SHaHZaD

TeXTILe industry and exporters haverebutted the false and baselesspropaganda by some vested

interests in the garb of agricultural sectorthat fertiliser industry had priority overtextile industry. Textile industry, they said isbackbone of the country’s economy and isthe largest provider of employment, foreignexchange, and revenue. Textile sector wasemploying over 40 per cent of the workingpopulation, generating 65 per cent of theforeign exchange earnings, and contributing8.5 per cent to the nation’s GDP vis-a-visfertiliser which did not earn single dollarrather spent huge forex on imports. Briefingthe newsmen Rana arif Tauseef, ChairmanPakistan Textile exporters association saidto sacrifice the most important labourintensive and forex earning industry of thecountry at the altar of low employment andcost intensive industry was an unreasonableand unpatriotic demand. The advice ofdiesel for textile industry was misleadingargument as the same foreign exchangeshould be spent on fertiliser import, he said.Furthermore gas use in stentor machines oftextile processing mills was not replaceableby any other means similar to its use infertiliser manufacturing. The currenteconomic situation demands thatgovernment’s priority should be to savemillions of jobs and ensure availability ofgas to keep the wheels of industry running,he added. PTea Chairman said gas wasimperative to run the wheel of industry. Butwithout its availability, no one could eventhink to run industry. Textile industry wasworking on thin margins and cannot affordto continue production on alternate fuel.Government had cut gas supply to textileindustry from three days initially, followedby four days a week at present.

Agri forum optimisticabout MFN to India

LAHOREStaff RepoRt

TheRe is no need to worryabout awarding most favourednations (MFn) status to India

as 1,936 items are already importablefrom India. Some 800 products are onregulatory list offering protection todomestic industry for a certain periodto reinforce domestic industry. Thiswas the crux of the speeches of vari-ous speakers who addressed at a sem-inar on “Impact on Pakistaniagriculture and livestock sectors afterdeclaring MFn status to India” – or-ganised by Pakistan agriculture Sci-entists Forum (PaSF). These speakersincluded Jamshed Iqbal Cheema, Saf-dar Saleem Sial, Ibrahim Mughal,Mustafa kamal, Syed Baber ali andhafiz Wasi Muhammad khan.

They underscored that by opposingtrade with India, Pakistan had onlypromoted profiteering in the countryinstead of strengthening domestic in-dustry. They said that almost all econ-omists in the country had consensusliberal trade regime with India wouldreduce pressure on escalating inflation,where government borrowing from thebanking system had become a giganticproblem. noted entomologist Chaud-hary Mushtaq ahmed Warraich under-lined that huge borrowing from thebanking system was fuelling inflationand government was left with no optionto deal the worse situation. Disparitybetween income and expenditure had

forced the government to rely on bankborrowing. By granting MFn status toIndia Pakistan could arrest spiraling in-flation, he maintained.

Pakistan was importing around Rs7billion worth of merchandise fromIndia of which Rs5.5 billion worth ofproducts were being traded via Dubaiand Singapore. Malpractices in thecountry’s international trade were in-creasing the cost of doing business inthe country. he suggested that Pakistanshould go for joint ventures with Indiancompanies in IT sector. he indicatedthat India had significant demand forPakistani horticulture products, includ-ing kinnow and mango, due to theirbetter quality. In addition, local cementindustry was more competitive, whichcould attract huge foreign exchangethrough cement exports.

Prof Dr Muhammad nawaz saidwe are self-reliant in food, stressingthe need for good governance and bet-ter policies to compete not only withIndia but also with european coun-tries. he said Pakistan has the world’sbest quality buffalos and a hugeamount of foreign exchange can begenerated by exporting the cattles.

he said presently medicines arebeing manufactured in the country butraw material is imported. he saidUVaS has started several programmeson biological medicine. To bridge gapbetween industry and academia theUVaS is establishing a vaccine plantwith the finance of Rs100 million. heregretted that Pakistan imported poul-

try vaccines of over Rs6 billion, whichcan be manufactured in the countrythrough public-private partnership.

Ibrahim Mughal said if govern-ment is eager to enhance its importsfrom the rival nuclear state, first itshould import cheaper fertilisers,diesel and electricity from there, asour manufacturers are looting themasses by selling their products atmuch higher rates, experts said.

“Diesel is Rs94 per liter in Pak-istan while in India it is available forRs77 per liter. electricity is being pro-vided to Indian growers at Re1 perunit and in Pakistan it is not less thanRs8.38 per unit,” they said. Rate ofagriculture produce is much higher inIndia than Pakistan while their cost ofproduction is very low, as Pakistanifarmers spend Rs321.33 billon moreon agricultural inputs as compared toIndian growers.

Some speakers were of the viewthat Indian exports were rising with-out MFn status whereas Pakistani ex-ports have a downward trend despitehaving MFn status, as Pakistani ex-porters cannot get access to Indianmarkets because of the non-tariff bar-riers created by Indian bureaucracy.

Indo-Pak bilateral trade particu-larly through Wagha border route isonly benefiting to India, as 31,897truckloads worth Rs21 billion reachedPakistan while only 4,664 trucks, hav-ing goods of Rs1.33 billion, were sentto the nuclear rival state during fiscalyear 2010-11, they added.

g Pakistan has world renowned buffalosg Rate of agriculture produce much higher in Indiag Rs7 billion worth of merchandise imported from India

‘Biotechnology– a solution forfood security’

LAHOREStaff RepoRt

InVeSTMenT in biotechnologyresearch, strengthening of regulatoryframework and adoption of

genetically modified technologies inagriculture are inevitable for nationalfood security of Pakistan. anotheragriculture revolution is required to feedthe exploding population that wouldtouch 335 million by the year 2050.noted agriculture biotechnologists madethese observations at a seminar organisedby Pakistan Biotechnology InformationCentre (PaBIC) in collaboration withagriculture Journalists association(aJa), Lahore. The seminar was attendedby biotechnology researchers and aJamembers from print and electronicmedia. addressing the seminar, Pakistanatomic energy Commission’s DirectorGeneral (agri & Biotech) Dr Yusuf Zafarunderscored that the country was facingmultiple food security relatedchallenges, which required equalattention from both public and privatesectors. he pointed out that in percapita term; Pakistan had 7,400-cubic-meter water available in 1947, whichdropped to 1,000-cubic-meter in 2005.Similarly, land availability had shrunkfrom 0.7 hectare to 0.4 hectare duringthe same period. On the other hand,population had been busting on a rapidpace, which would touch 335 million by2050, he maintained. he pointed outthat in the wake of new WTO laws andregulations, including agreement onagriculture (aoa), Trade-Relatedaspects of Intellectual Property Rights(TRIPS) and Sanitary and Phytosanitary(SPS) measures, were hurdles intransfer of new technologies, butgovernment and public sector couldplay a vital role in these areas.

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news

CORPORATE CORNERTeradata sponsors 10th annualnational IT excellence awardsKARACHI: Teradata, the leading analytic datasolutions company, has announced nominations for the10th annual national IT excellence awards, beingaccepted until January 6th, 2012. Winners will berecognised at a gala event to be held in March 2012. Tomaintain neutrality and transparency in the nominationand evaluation process, Teradata has engaged kPMGTaseer hadi and Co, as an independent auditor toreceive and compile nominations. pReSS ReLeaSe

Bahria College holdsannual prize distribution day

ISLAMABAD: Bahria College, Islamabad held an annualprize distribution day. admiral Mohammad asif SandilahI (M) Chief of the naval Staff graced the occasion as chiefguest. The students staged a spectacular performancethrough a variety of skits, plays, songs, tableaus anddances. While giving away prizes to the students excellingin academics and co-curricular activities, the chief guest,appreciated the prize winners for their splendidperformance and emphasized that we have to evolve aneducation system that should cope up with the cyber techage and new challenges. pReSS ReLeaSe

nationwide poverty surveyof BISP wins international praiseISLAMABAD: The step of conducting the nationwide firstever poverty survey in the history of Pakistan, has woninternational praise for following best internationalpractices, maintaining transparency and conducting theentire process in highly efficient manner. It has been learntthat various international organisations contributing insocial safety programme world-over including, World Bank,has appreciated BISP for the successful process ofconducting nationwide door to door poverty survey. Thesurvey was launched in October 2010 in all districts of thecountry, including aJk and Gilgit-Baltistan to provide equalopportunity to every Pakistani who holds a Computerisednational Identify Card (CnIC) to get registered with BISPregardless of caste, creed and religion. pReSS ReLeaSe

Coca-Cola moves its secret formula to the worldKARACHI: Coca-ColaCompany has moved the125-year-old secret formula forCoca-Cola, to a new home atthe world of Coca-Cola inatlanta. as the capstone tothe 125th anniversary year of

Coca-Cola, the company is sharing the rich history andtimeless appeal of its secret formula in a brand newexhibit where visitors can experience the world’s mostrecognised brand like never before. pReSS ReLeaSe

Corporate social responsibility andsocially responsible development arenot marginal to our foreign policy, butessential to the realisation of our goals

uS Secretary of State, hilary Clinton

LaHoRe: prof Sohail afzal, executive Director, punjabGroup of Colleges and allied Schools, signed MoU withDr abdul tawwab Khan, president of Rising Suneducation and Welfare Society, on behalf of USaID, forInclusive education teachers’ training. PRESS RELEASE

KaRaCHI: Commerce Minister, Makhdoom amin fahim,snapped with Uae Consul General, Sohail Bin Matar alKetbi, Chief Minister Sindh, Syed Qaim ali Shah, SpeakerSindh assembly, Nisar ahmad Khuhro and provincialMinister Sindh, adil Siddiqui, at the 40th National DayCelebration of Uae. PRESS RELEASE

Worries grow overIMF loans to Europe

WASHInGtOnReUteRS

The prospect of euro-pean heavyweights likeItaly or Spain turning tothe IMF for rescueloans is worrying the

United States and other nations thatfear they could suffer losses on fundsthey have extended to the IMF.

The International MonetaryFund cannot be expected to step inas a substitute for a stronger com-mitment by europe which needs toassume the brunt of any losses onemergency loans, a senior US offi-cial said on Friday.

Despite the International Mon-etary Fund's stable record - no bor-rower has ever defaulted on an IMFloan and no country has ever lostmoney lending to the IMF - thereare concerns about the IMF's grow-ing exposure to the euro zone.

That exposure could take aquantum leap if Italy and Spain needbailouts, a level of assistance thatwould almost certainly dwarf theloans already approved for Greece,Ireland and Portugal in deals engi-neered with the european Union.

emerging markets, which arecontemplating lending more moneyto the IMF -- which couples mone-tary assistance with tough condi-tions that seek to ensure a countrydoes not default -- have also raisedconcerns in the IMF about the risksto the fund's capital, officials fromemerging nations told Reuters.

a crucial european Union sum-mit ended on Friday with a historicagreement to draft a new treaty fordeeper integration in the euro zonein an effort to rein in a debt crisisthat started in Greece two years agoand has continued to spread.

Worries about the IMF's risk arealso brewing among congressionallawmakers. Four U.S. lawmakerswho met with IMF chief ChristineLagarde this week expressed uneaseover the risk the fund would take on

with a bigger role in europe.a request for a big IMF loan for

Italy or Spain would put the UnitedStates, which holds veto power overmost IMF lending decisions, in anuncomfortable spot.

The american public is stillstung by the U.S. government's bigbailouts for banks during the 2007-09 financial crisis and fears thatmounting U.S. debts imperil the na-tion's future.

With President Barack Obamafacing a tough battle for re-electionin november, the White house isnot keen to appear as europe's sav-ior, and the administration's mes-sage to europe has consistentlybeen: Put more of your own moneyon the line. Indeed, Republican law-makers are seeking to yank a $108billion loan the United States ap-proved for the IMF in 2009, a movethat would undercut Washington'sability to influence the conditionsattached to IMF loans.

"If the United States wants tohelp europe find a way out of itscurrent debt crisis, we must be astrong, world economic leader, notmerely the lender of last resort," Re-publican Senator Jim DeMint wrotein The Wall Street Journal on Fri-day. "Members of the Obama ad-ministration must focus all of theirefforts on strengthening the U.S.economy and balancing our budget,rather than on continuing to borrowfrom China to pay for europe's out-of-control debts," he added.

DeMint said he would seek toforce another vote to stop U.S.Treasury Secretary Timothy Geith-ner from supporting more europeanbailouts. The Senate voted 55-44 inJune against a proposal by DeMintto repeal IMF loan authority.

Domenico Lombardi, a formerIMF board official now at the Brook-ings Institution in Washington, saideven if the U.S. Congress rescindedthe loan, it would not prevent theIMF from lending to europe. he saidthe international community has a

stake in ensuring the euro zone crisisdoes not spread further.

PREFERRED CREDITOR

The IMF enjoys an understand-ing among its members that bor-rowing nations will always pay theIMF back ahead of private creditors.

however, the scale of borrowingtroubled euro zone countries mightneed raises the specter that one ofthe nations could default on an IMFloan. The IMF has about $380 bil-lion available for lending, a figureoutstripped by Italy and Spain'sdebt refinancing needs. Italy needsto roll over 340 billion euros (290.5billion pounds) in debt next year,while Spain needs to refinance 120billion euros.

"The problem with some ofthese countries now is you're get-ting to a point where (debt) is largeenough that defaulting on the IMFis attractive enough if you want toreduce your debt," said RaghuramRajan, a former IMF chief econo-mist now at the University ofChicago's Booth School. "I'm notsaying the euro area will act at crosspurposes with the fund. But when itcomes to writing down the debt, willthe euro area respect the (preferred)status of the IMF?" european lead-ers agreed at a summit on Friday toprovide 150 billion euros in bilateralloans to the IMF to tackle the crisis,with another 50 billion euros com-ing from non-european countries.

national central banks in theeuro zone would pump the capitalinto the IMF. The funds would notcount as a contribution toward eu-rope's IMF quotas, which determineits voting power in the fund.

WHOSE MONEY IS THIS ANYWAY?

There are two ways of channel-ing the money to the IMF, eitherthrough the fund's general re-

sources or a so-called IMF-adminis-tered account.

any lending from the IMF'sgeneral resources would spread therisk across the entire IMF member-ship. In an administered account,the countries contributing wouldtake the losses in the case of default.

Thus far, europe has indicatedit is legally easier for its funds to bepart of general resources.

When it comes to additional re-sources to battle the euro zone debtcrisis, the United States prefers thesecond option, which would putmost of the risk on europe and noneon the United States. The Obamaadministration has argued formonths that europe needs to putmore capital on the line.

"The key point is that officialfunding must also bear losses if nec-essary," Rajan wrote in a recent col-umn. "Consequently, if support ischanneled through the IMF, thefund will need a guarantee from theeuro zone that it will be indemnifiedin case of a (debt) restructuring."

Mario Blejer, a former argen-tine central bank governor, arguesthat europe should take care of itsown and bear the full risk of any de-fault. "The IMF's seniority is an un-written principle, sustained in adelicate equilibrium, and high-vol-ume lending is testing the limit,"Blejer and eduardo Levy Yeyati, asenior fellow at the Brookings Insti-tution, wrote recently.

"From this perspective, the pro-posal to use the IMF as a conduit foreCB resources -- thereby circum-venting restrictions imposed by eu-ropean Union's treaties -- whileproviding the eCB with preferred-creditor status, would exacerbatethe Fund's exposure to risky bor-rowers," Blejer and Yeyati said.

"This arrangement could beseen as an unwarranted abuse ofFund seniority that, in addition, un-fairly frees the eCB from the need toimpose its own conditionality onone of its members."

China export and importgrowth slows, surplus narrows

BeijingReuters

GROWTh in Chinese exports and importsslowed in november, further evidence ofthe faltering demand abroad and at home

that is pushing Beijing towards a more explicit pro-

growth policy.Customs data on Saturday showed exports ex-

panded 13.8 per cent year on year in november,the lowest in nine months, but it was the mostsluggish performance since november 2009 whenthe traditionally volatile month of February isstripped out. Imports increased 22.1 per cent in

the year to november, weaker than a rise of 28.7per cent in October, but stronger than Septem-ber's 20.9 per cent.

economists in the benchmark Reuters pollforecast annual export growth of 11 per cent innovember and a 19 per cent rise in import, witha trade surplus of $14.3 billion. The surplusturned out to be $14.5 billion, narrowing fromOctober's $17.0 billion and the same level as inSeptember. The trade data reinforced a slowingtrend in the world's no. 2 economy, after key in-dicators on Friday showed a serious risk of asharp industrial slowdown -- accompanied by aneasing of inflationary pressure -- that is prompt-ing Beijing to provide more support for growthand jobs. The Communist Party's top leaders saidin a statement hours after the data deluge on Fri-day that they would ensure stable and reasonablyfast economic growth in 2012, fine-tuning policyin tandum with changes in the global economy.

The central bank surprised the market on no-vember 30 with an earlier-than-expected cut inbanks' required reserves, the first such move inthree years, signaling a policy shift, although inwords, China has so far kept its official line ofsticking with a "prudent" monetary policy.

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Markets

weekly review

LAHOREaaHYaN MUMtaZ

DeSPITe political and regulatory uncertainties, the kSe-100 index wit-nessed a 92 point jump (+0.8 per cent WoW). attractive valuationslured in local investors with average daily volumes increasing to 44m

shares (+18 per cent WoW). nonetheless, in a week which saw three tradingsessions due to holidays, the index fluctuations reflected the pressure of polit-ical instability in market sentiments. Foreigners continued with their cautiousapproach offloading a further USD 4.3m worth of equity holdings. Politicalcomplications started with the President’s sudden departure to Dubai on theback of health issues. This absence led to a rise in tensions between the partieswith the opposition intensifying their stance for political upheaval. This addedto the already flaring ‘memogate’ scandal which has brought Pak-US relationsto a new low. In addition, regulatory issues – with SeCP’s surprise concept

paper drawing minimum capital requirementsof PkR 400m in pure equity for bro-

kerage licenses – caused in-vestors to adopt negative

sentiments with concernsover the substantial

quantum. however,SeCP in its paper pro-posed tax incentivesfor new listings,which was a positivefor local investors.Furthermore, talks

over formalizing CGTcollection rules initi-

ated between SeCP anda kSe delegation that

could potentially result in aformalised collection channel

for the tax, mechanism of whichremains ambiguous till now.

It was no surprise thatfertiliser stocks came intothe limelight onceagain given furthergas issues whichproped up. The gassupply to all fertiliserplants on the SnGPLnetwork was cutindefinately; hardly aweek after restorationof feed supply toenGRO’s new plant.as a result, asubstantial urea priceincrease becomesimminent. however,as the curtailmentperiod is not known, asufficient priceincrease in itslef isdifficult to calculate.as a result, enGROfell 9 per cent as thechemical sectorunderperformed themarket by 1.4 percent. FaTIMa on theother hand reslted inending up thebeneficiarry as anyprice increase of urea would be supremely beneficial for itsproduct (Can) given gas supply has been constant.

STOCK SPeCIFIC aCTIvITyResolution of the gas issue iscritical for chemicalstocks recovery.Though the period ofcurtailment has notbeen specified, it isshared that the short-age has linkages withgrowing domestic con-sumption during win-ter seasons. Coupledwith sovereign debt re-payments, this is ex-pected to pose a dragon FX reserves, inturn, exchange rate,which has already seena new low of 89against the USD. Fur-ther deterioration canbe expected, whichwould favor export ori-ented companies inthe coming fewmonths. having saidthat, regulatory devel-opments, especiallywith regard to thepassing of minimumcapital requirementfor brokerages wouldhave an overbearing impact in determining the way market sen-timent moves in the coming week.

g Zardari resignation rumoursrattle KSe

g 62 scrips advance, 143 decline,107 remain unchanged out oftotal 312 scrips traded

g KSe 30 index loses 150.55 points

g ‘Continued gas supply’ fuelsKarachi Stock exchange bulls

g 121 scrips advance, 90 decline,102 remain unchanged of total313 scrips traded

g KSe 30 index bags 173.95 points

g OGDC leads buying frenzyg 101 scrips advance, 102 decline,

96 remain unchanged of total299 scrips traded

g eCC meting, the game changer

FORwaRD lOOKInG exPeCTaTIOnS

KARACHIStaff RepoRt

WITh merely 15‐days remaining beforethe year end, the year to date bench-mark return is still in the negative ter-ritory at 4.4 per cent while average

daily trading volume is hovering at around 81mshares lower by 33 per cent YoY. The investmentarena seems fairly subdued, hence unable to attractinvestors. a number of stocks posted healthy re-turns. The global economic woes alongside local eco-nomic and political volatility continued to negativelyimpact the investor sentiment.

The FBS recently disclose the inflation numberwhere CPI inflation stands at around 11.1per centand MoM inflation of merely 0.29 per cent. The cur-

rent month inflation is the lowest inflation for thecurrent fiscal year as well as the last few fiscal years.The year to date monthly average inflation is around1.09 per cent which is lower by 20bps over the pre-ceding month. During the last monetary policy SBPdisclosed that current account deficit, IMF pay-ments, export growth and fiscal deficit were themajor concerns. after revision of inflation base yearfrom CY01 to CY08, we believe SBP may not con-sider inflation as a major problem. Furthermore thecurrent slide in rupee parity against dollar also de-picts the same concerns, said Bilal asif at hMFS.

Over the last couple of months, the actual issuefor the bourse is the senate elections rather anythingelse. PPP is likely to be the major beneficiary of thesenate elections and this will definitely affect the up-coming regime policy making power.

During the short week after ashura holidays,the Zardari issue impacted the market sentiment ason Wednesday the index registered a loss of 88points, but soon after the benchmark recoveredfrom the negative sentiment. The volumes re-mained thin as average daily volume was merely43m shares. The index heavy OGDC provided themarket the helping hand to recover. engro was un-able to grow as gas issues and disruption hit theenven plant. With merely 15‐trading days left be-fore the year end we may witness the same dull sen-timent continuing.MONEy MARKET ROUNDUP: Compression innFa has contained the growth of money supply to1.32 per cent despite unabated government borrow-ing bolstering the overall nDa. Seasonal accretionin private sector credit off-take further lifted the

nDa during the preceding week while stock of gov-ernment borrowing for budgetary support hasswelled to Rs3.3t. amidst absence of major inflows,hefty import payments and FPI outflows have re-sulted in reserves attrition whilst the Rupee has al-ready eroded by 3.9 per cent against the green backeven before the end of 1hFY12.

With panning out of base effect for 2hFY12,inflation numbers may be aggravated further withsharp depreciation of the rupee. after SBP kept thekey policy rate unchanged for next two months,benchmark 6 month kIBOR has jumped back upby 17bps to 11.94 per cent. Yields in primary mar-ket are likely to hover around the same level in theupcoming auction as inflation remains a potentthreat amidst weakening of Rupee, said SalmanVidhani at hMFS.

Political volatility, rupee

dollar parity negatively

affects bourse

Pakistan’s cellular service coverage isone of the best in the region as thenumber of cellular subscribers hascrossed 100 million markChairman Pakistan Telecommunicationauthority (PTa), Dr Mohammed yaseen

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07

nEW yORKReUteRS

OIL prices rallied on Friday, after achoppy start, as an agreement for acloser euro zone fiscal union and

news of a Chinese fund for US andeuropean investment lifted the euro andequities markets. Brent and US crudefutures both posted weekly losses, andsources said skepticism about the latesteuropean Union agreement to tackle theirdebt crisis limited crude price gains onFriday, along with weak heating oil futures.Low volume trading helped keep oil tradingvolatile, and oil did not get much of a boostinitially from a report showing USconsumer sentiment rose in earlyDecember to its highest level in six months.all 17 members of the euro zone and sixother countries that aspire to join the blocagreed to negotiate a new deal alongsidethe eU treaty with a tougher deficit anddebt regime to insulate the euro zoneagainst the debt crisis. “The oil complexproved less enthused about the eU summitagreement than was the case with the stockmarket,” Jim Ritterbusch, president atRitterbusch & associates, said in a note.ICe Brent January crude rose 51 cents tosettle at $108.62 a barrel, recovering afterdropping $1, but posting a 1.2 per centweekly loss. US crude futures rose $1.07 tosettle at $99.41 a barrel, recovering from a$97.36 intraday low and having lost morethan 2 per cent on Thursday. It posted a1.5 per cent weekly loss. Brent tradingvolumes were 22 per cent under the 30-day average, and while US crude tradingoutpaced Brent, volume was 6 per centbelow the 30-day average. US heating oilfutures closed lower as unseasonably mildweather and rising distillate inventoriesweighed on prices, while gasoline futuresended higher. Crude oil and refinedproducts stockpiles rose last week, thegovernment reported on Wednesday. Inthe week to Tuesday, speculators raisedtheir net long positions in US crude oilfutures and options position, data fromthe US Commodity Futures TradingCommission showed on Friday.

Oil rallies witheuro, equitieson eu deal

It is essential that the mutual funds industryincreases its outreach and penetration inboth the urban and rural sectors, becausemutual funds are an extremely easy andeffective mode of investing for the massesCeO JS Investments Rashid Mansur

Mutual Fund Rating – Performanceevaluation or statistical optimism?

nAWAzISH MIRzA

The skills of mutual fund managers are evalu-ated by comparing their portfolio risks and re-turns. This risk reward relation is quantifiedusing Sharpe ratio that compares average re-

turns for the investment period with the standard devia-tion (risk) of these returns. In Pakistan, mutual fundindustry has grown substantially in the last decade andconsequently warranted an independent opinion on theperformance of fund managers to facilitate investors. Thelocal rating agencies provide a mutual fund rating (alsocalled star ratings) employing quantitative comparison ofreturns based on net asset value and their standard devi-ations. Sharpe ratio is no doubt an important benchmarkfor assessing performance but there are some fundamen-tal limitations that cannot be ignored especially when itis used for critical investment decisions. The rating agen-cies claim this quantitative measure to be free of estima-tion biases. Their methodologies describe the allegedsuperiority of this ratio but never disclose the limitationsthat will make use of this methodology questionable. It isworth noting that nobel Prize winning economist WilliamSharpe in 1994 acknowledged the estimation issues in useof Sharpe ratio that he developed some thirty years ear-lier. Therefore, it is important for investors, fund man-agers and regulators to understand the inherentdeficiencies in this methodology to evaluate the opinionsthat are based on application of this technique.

The basic problem with Sharpe ratio lies in the use ofstandard deviation as measure of risk. If the risk parameteris not a true representative of risk, the resulting ratio couldgive us misleading conclusion about the performance. evenif we ignore the statistical details, standard deviation in prac-tice becomes controversial for at least two reasons. First,when we evaluate Sharpe ratio, apparently it will penalisemanagers for taking high risks with low returns. however,the anatomy of this ratio presents a different picture. Stan-dard deviation represents the distance of each return fromthe mean value for the investment period. This implies thatpositive deviations from mean are treated similar to negativedeviation. The positive deviations are penalised on the per-ception that there was an equal possibility of these becomingnegative thus increasing the risk. Isn’t this ridiculous thatwhile fund managers are enjoying bonuses on large positivedeviations, their performance is being penalised by theSharpe ratio? Similarly, in dynamic investment strategieswhere portfolios are continuously rebalanced, standard de-viation cannot capture time varying volatility of returns.

Second, unlike returns, standard deviation is an esti-mate and not directly observable and calculated from a timeseries of returns using ending net asset value. Our local rat-ing firms propose use of ending monthly net asset values

for a year to calculate returns and standard deviation. Thisestimate is not a measure of risk for the fund manager un-less it is representative of all possible time series of returns.Therefore, standard deviation can be a meaningful measureif underlying returns are stationary and they follow a nor-mal distribution. The stationarity refers to the propertywhere returns have constant skewness and kurtosis. Forfund managers, this implies that they have consistent in-vestment style throughout their investment period. Thefund managers who demonstrate their skills by exploitinganomalies to yield high returns with little investment willmake underlying returns non stationary making Sharpestyle variation inappropriate. Therefore, given the dynamicnature of markets and increase in skills, investment stylecannot remain constant and we cannot expect statisticalcharacteristics to remain stable challenging the use ofSharpe ratio for performance evaluation.

The normal distribution of returns is the only situationwhere Sharpe style performance valuation will work. a sim-ple violation to normal distribution will be an investmentstrategy that yields small returns for successive periods withoccasional but large losses. The Sharpe ratio will overstatethe performance in all periods before the loss has realised.hence, normal distribution violations will be violated if

volatility is varying over time. The last decade has witnessedextreme turbulence in asset returns with volatility clusteringand speculative valuations. In such investment environ-ment it is redundant to believe that normal distribution willprevail and standard deviation will reflect the risk for mu-tual funds. This discussion provides insight into the basiclimitations of using one single measure for assessing theperformance of funds managers. These limitations are rel-evant for practitioners as none of it is theoretical, ratherthese are the issues related to applying a theoretical conceptto practice. The severity is magnified when rating agenciesbase their opinions on a technique which is fundamentallyflawed in practice. The possible solution could be to developappropriate statistical techniques that correlate with the re-turns distributions in a turbulent economy rather than as-suming a heavenly Gaussian distribution. The central bankshould be diligent about such flaws otherwise performanceevaluation ratings will be no more than statistical optimism.

The author holds a PhD in Quantitative Financefrom Paris Dauphine. He is Associate Professor of

Finance at Lahore School of Economics and providesconsultancy on risk management through

Synergistic Financial Advisors.

SHAn SAEED

eURO is not an economic currencybut a political currency fightingfor its survival. Visiting economichistory, the possibility of the

break up of the euro area was already beingmooted even before the single currencyexisted in Jan-1999. Different countries canabandon the euro for various reasons. Onecan imagine a country like Portugal,suffering from high labour costs and chronicdecline in GDP growth, reintroducing theescudo in the effort to engineer a sharpinternal devaluation — reducing prices andwages to boost competitiveness.

I have analysed, that there are at least77 examples of countries leaving currencyunions and establishing their own moneysince 1945. In most cases establishing anindependent currency allowed the countryconcerned to set more sensible interest ratesand exchange rates to help them grow. Inevery case it gave them more independence,strengthening their ability to make their

own decisions free of foreign interference.Depreciating currencies can help them withexports and increase the overall GDP size.

The euro remains under hugepressure. Decision makers are not willingto print money to buy back bonds. eCB isnot willing to budge under pressure. Thestrategic role of central bank is to act asthe lender of last resort. That means itacts as the lender who supplies cash tocommercial banks in its jurisdiction ifthey are solvent but in need of temporaryloans. They are lent money at a penaltyrate to see them through. It is not the jobof a Central Bank to act as lender of lastresort to countries that have run out ofcredit and whose solvency is in doubt likeGreece, Italy, Ireland, Spain and Portugal.

Saving the euro is ultimately apolitical decision for the leadingcountries in it. Saving it means findinga way of relieving pressure on the bondmarkets for the weaker countries. Thatin turn means the richer countriesbeing prepared to send money to the

poorer parts as transfer payments andgrants. alternatively the richercountries need to agree to use theirmore favourable credit ratings toborrow and lend the money on to theweaker countries at subsidised rates. ECONOMIC HISTORy OF LEAVINGCURRENCIES: There is a pervadingfeeling to allow Greece an exit from theeurozone since economically speaking it’sa weak country in europe. They fudgedfigures to get into euro single currency.Within Western europe the Latin currencyunion led by France and the Scandinaviancurrency union both broke up withoutgreat calamity at the time of the FirstWorld War. Between 1945 and 2007according to my research and talking tovarious key people at IMF/ World Bank, 69countries have left currency unions. Thisfigure leaves out a good number, includingthe break up of the rouble currency in theearly 1990s. It also excludes the split ofCzech and Slovak currencies in 1993. Itincludes the ones which left the sterling

area, like new Zealand in 1967 and Irelandin 1979. It happened by agreement with arelatively smooth transition. Some likeBangladesh left the Pakistan currencyunion. Others left former colonial unions:Mozambique for example left thePortuguese union in 1977 and algeria leftthe French franc area in 1969. again thesechanges caused so little disruption thatmost have forgotten they ever happened.LATVIA SUCCESS STORy: It was withmore sense of turmoil and crisis that therouble broke up in the period 1992-5. Globaleconomy thought, it would be a real messfor Central asian republic. 16 members ofthe Rouble union broke away forming theirown new currencies. This includes Russiathat established a new differently valuedRouble for herself. Latvia, for example, didit in two stages. First she created a LatvianRouble, which started at a one to oneexchange with the old common Rouble.Then she launched a new currency, the lat,to replace the Latvian Rouble. It workedand allowed her economy to develop well

for the ensuing few years.BREAKING NEWS: GeRManY anD FRanCe WanT PIIGS[PORTUGaL, IReLanD, ITaLY,GReeCe anD SPaIn] TO LeaVe eUROSInGLe CURRenCY

Inside news is that Germans andFrench political players are in no moodto finance these PIIGS economies. Thequestion is why the German tax payersshould bail out Greece and Italiangovernment for their economic mess.Rationale is very solid. The German andthe French want these sick countries togo bust, to start all over again, to mendtheir economic ways and to standpolitically on their feet.

The decision rests with Germany andFrance to decide the fate of sick childrenof europe who are becoming parasites forthem. Good news is that if the Germansalong with the French make the strategicdecision to change the membership,history shows it can be done and it neednot be too disruptive. It is surprisinglycommon for countries to leave commoncurrencies and continue economically.Best or worst case scenario: What ifGermany and France decide to leave eurozone? Is anybody prepared for that.

Shan Saeed is a financial marketeconomist and commodity expert. A

graduate from University of Chicagoand IBA, he has 12 years of financial

market experience. For comments andqueries: For Blogs, visit

www.economistshan.blogspot.com

Economic cost of leaving eurozone and the global impact

CurrenCies Can Make an exit froM a union regiMe

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