Inflationary pressure rise SBP to consider tightening monetary policy

By Muhammad Toori

KARACHI: The central bank has assured the International Monetary Fund (IMF) that it will monitor inflation carefully and if inflationary pressures persist, the monetary policy will be tightened, a statement issued by the IMF mission said.
"The State Bank will monitor inflation carefully and if inflationary pressures persist, monetary policy will be tightened, as needed," the IMF said.
Monetary policy will continue to focus primarily on price stability, while building international reserves, it said and added that inflation has been more persistent than expected, due to higher administered prices and higher inflationary expectations. In its report over Pakistan economy last month it said that inflation pressures have not yet abated. Headline and core inflation (Y-o-Y) dropped in October to 8.9 and 11 per cent, respectively, in part due to the favourable base effect from peak inflation last year, but headline inflation rose to 10.5 per cent in November while core inflation continued to decline and reached 10.6 per cent. The rebound in inflation was due to recent food and petroleum product price increases and the electricity tariff hike in October.
The inflation outlook for full FY10, nevertheless, remains somewhat susceptible to fiscal consolidation efforts and to incipient international commodity price pressures. These include already announced and planned increases in electricity and gas prices. Added to these developments are the difficult-to-assess negative impact of law and order situation and power shortages on the productive capacity of the economy.
These factors influence people's expectations of future price level trends and impart stubbornness to inflation.
The likelihood of an uptick in inflation in the remaining months of FY10 thus seems quite plausible. Based upon these considerations, SBP expects the average CPI inflation for FY10 to remain between 11 and 12 per cent.
Striking a balance between positive macroeconomic developments and ongoing economic challenges, in the first half of FY10, central bank eased the policy rate by a cumulative 150 basis points and then in January Monetary Policy statement it kept discount rate at 12.5 per cent.

Pakistan Gems and Jewellery

By Muhammad Toori

Pakistan, home for over 160 million people, is among those few nations of the world who have competitive advantage in natural resources. Traditionally Pakistan is a good domestic market for Gems and Jewellery and on special occasions, like marriages and other ceremonies, a lot of jewellery is bought and worn, as some say in west that “Asians wear their wealth”.

The country is among major gold importing and consuming countries and the businesses related to gold are always seen flourishing. Be it jewellery making, use of precious stones and diamonds in jewellery making for local consumption as well as for overseas markets through exports.

And gold import in the country is ever increasing depicting the fact that the consumption of gold is also increasing by Pakistanis as well as for jewellery export. Pakistan imported 1,987 kilogramme of gold during July to December 2009 (six months) worth 62 million dollars. The jump is evident from the fact that during the same period in 2008 the country had imported 399 kilogrammes of gold valued 12 million dollars. Increase in the import value of gold is also attributed to the fact that the international prices of precious metal has gone up significantly.

The country has a tradition of jewellery designs and craftsmanship, being part of a rich history of over two thousand years’ old Indus valley civilizations, Aryans and various other dynasties which ruled the subcontinent for a long time.

The country’s jewellery sector is basically retail driven due to a huge local market. Karachi and Lahore are the main centres for jewellery manufacturing while the main exporter of bullion to Pakistan is Dubai. The dominant reason for the purchase of jewellery in Pakistan is marriage, as gold is perceived as a form of savings and it is accumulated for this purpose over several years.

“It is used to fulfil century’s old cultural values, families and especially women start buying gold for their daughters, the day they born ” said Naeem Usman a shop keeper at Sadar karachi.

The range of jewellery items produced and consumed in Pakistan is very wide. The popular items of Pakistan’s jewellery are Teeka, Jhoomer, Bangles, Kara, Pendants, Nose Pin, Bazuband, Earrings (Balian), Ring, Necklace and anklets (Pazeb).

Renowned jewellers tend to have their workshops preferably in Karachi or in Lahore due to exceptional skill level developed over time. Gold jewellery retailing sector faces a seasonality factor that becomes apparent in the sales. Sales tend to peak during the wedding season which run through almost nine months a year.

However, in the recent past the country has witnessed another positive for this business that is export of gold jewellery. This is also supported by the export of precious stones as Pakistan is fortunate to have huge reserves of gems, but the potential is still under utilised.

In case of Gems, fortunately Pakistan is strategically located close to some of the major markets such as Thailand and Sri Lanka. In addition, it has one of the largest deposits of gemstone variety, including some highly priced and demanded gemstones like Emerald and Ruby.

There is a large variety in gemstone deposits of Pakistan including Emeralds of Mingora, Gujar Killi and Shamozai, Pink and Golden Topaz of Mardan and Aquamarine of Chitral and Neelam Valley and Peridot of Dassu, which are well known for their colour and clarity.

With this, the country has emerged as the fifth largest country for the occurrence of gemstones on the world map. Main cluster of gemstone processors is in the Namak Mandi in Peshawar where exhibition of raw, semi finished and finished gems are showcased for local as well as foreign buyers on a regular basis. Furthermore, Karachi also houses a large gem industry, catering to the needs of local as well as export markets. Lahore is another emerging market of gems trade.

A number of studies made by various government departments suggests that Pakistan has enormous potential to increase its exports of gem and jewellery manifolds, and could become one of the major players in the 40.7 billion dollars world gem market.

Although, Pakistan does not have any significant position in export market, yet in the recent years’ export of gem and jewellery was registering growth. The country has exported gold jewellery worth 278.97 million dollars during July to December 2009 (six months) compared to 100.33 million dollars in the same period in 2008, an increase of 178 per cent. Whereas the export of gem which was on the rise previously has suffered during the same period and was down by 12.72 per cent to 1.4 million dollar from 1.65 million dollar.

According to an exporter, buyers of Pakistani gold jewellery are primarily Pakistanis settled abroad, mainly America, UK and some European countries. Pakistani products are yet to draw attention of foreign buyers.

Under the policy for the gem and jewellery industry, the government has allowed duty free imports of all the equipment used in manufacturing and finishing of gems and jewellery.

Yet, the potential is still under utilised, industry sources said adding more needs to be done to support mining, cutting, polishing and manufacturing the gold and gem products.

“Pakistan needs to work in value addition of its gems and use them in designs liked by foreign buyers. The country can only take full advantage of the potential once we match international manufacturing and design standards,” an exporter said.

It is good to see that awareness and realisation of importance to mould Pakistan gem and jewellery products in accordance to international standards, he said adding that emerging investment opportunities, jewellery is now gaining preference as more of a fashion symbol.

Besides, branding and proper marketing is a must to penetrate in the international market for which government’s support is a needed.

The private sector and the government both needs to put extra efforts to make this industry not only grow but become a major export earning sector through introducing Pakistan in the international gem and jewellery market and get its due share.

Agriculture in focus Ministry suggests tax to increase fiscal space

By Muhammad Toori

KARACHI: The Ministry of Finance (MoF) has suggested bringing agriculture into tax net and cutting subsidy by ten billion rupees in the next fiscal year to create fiscal space, a ministry official said.
The subsidies provided to the agriculture sector in current fiscal year stand at 12 billion rupees which must come down if the government wants to increase the fiscal space and phasing out of exemptions (to broaden the tax base and ensure horizontal equity in the tax system) is necessary, he added.
Ministry suggested that for further enhancement to the revenue base could potentially derive from introduction of tax on agriculture income, capital gains tax on real estate, on stock market and review of exemptions other than the GST/VAT. Pakistan is confronted with low tax to GDP (at market prices) ratio during the past few years. The ratio of federal taxes administered by the Federal Board of Revenue is below 10 per cent which is low even in relation to other emerging countries. Number of factors are responsible like narrow tax base, wide spread exemptions, low contributions of major sectors as compared to their contributions in the GDP.
In order to curtail these issues government is focusing on new sectors to bring them into tax net through new laws like cotton and rice trading would be taxable under the new law, provided annual turnover exceeds 7.5 million rupees. Agriculture trading like the agricultural machinery, cotton trading and rice trading would be taxable under the VAT. It is estimated that around 120-150 billion rupees would be collected following enforcement of the Federal VAT Act in the first year and the collection would gradually improve with the expansion of the tax base under the new law.

Govt debt to reach 60pc of GDP in 2010-11

By Muhammad Toori

KARACHI: The total government debt will reach 60 per cent of the gross domestic product (GDP) in 2010-11, Finance Ministry officials said here on Tuesday.
The total public debt, excluding IMF obligations, is expected to rise to around 55 per cent of GDP at market prices. However, the IMF obligations are estimated to increase the total debt to more than 60 per cent of GDP at market prices for 2010-11 which has implications on the Fiscal Responsibility and Debt Limitations Act.
The country's public debt both in rupee and foreign currency grew by almost 27 per cent to 7,605 billion rupees in 2008-09, from 6,005 billion rupees a year before, thus showing an increase of 1,600 billion rupees in just one year as against 1,300 billion rupees in the last five years.
"This is a horrifying sign with immense socio-economic implications for the country going forward," said Ashfaque Hassan Khan, former economic adviser, while talking to Business Day. According to the SBP's first quarterly report for the current fiscal year, the country has added almost 500 billion rupees to public debt, reaching as high as 8,100 billion rupees.
Ashfaque Hassan Khan explained: first, the exchange rate depreciation has emerged as a dominant source of the rise in public debt; and, second, the contribution of foreign currency debt has surpassed the rupee component of public debt for the first time in the history of Pakistan. Such a development makes the economy, budget and balance of payments, highly vulnerable to external shocks.
The government intends to establish a legal and institutional framework for debt management. In this regard a debt management committee has been formed to oversee the management of market risks embedded in the debt portfolio, and formulate a debt strategy based on medium-term fiscal framework. While explaining a possible risk and its implications, a ministry official said, "Severe impact on public sector development programme (PSDP) high-level borrowings from domestic and external sources will make it difficult to sustain debt in the medium-term."

Fall in benchmark’s cut-off yield Monetary policy likely to remain unchanged

By Muhammad Toori

KARACHI: The cut-off yield of the six-month treasury paper fell to 11.8970 per cent as compared to 12.0547 per cent on January 13 in an auction conducted here on Wednesday, the State Bank of Pakistan (SBP) said.
The decline in the benchmark's yield is making some analysts optimistic about the discount rate cut in the forthcoming monetary policy statement, which will be announced on Saturday, January 30.
Some other analysts are pessimistic on the inflation front.
"Decline in the benchmark T-bills gave a room to the central bank for further decline in the discount rate, but increase in inflation remains a concern, so I see 50 basis points decline or no change in the policy rate," said a banker.
On the other hand, Mozammil Aslam, an economist at the JS Global Securities, said, "I am sure that there will be a 50 to 100 basis points decline in the discount rate because it is a consecutive decline in six-month yield."
Mohammed Sohail, chief executive of Topline Securities, said, "I don't think that the discount rate will change because of the non-IMF inflows uncertainties and inflation which is now on the irse."
"We believe that the central bank needs a little more room and more time and while a rate adjustment is likely towards the second half of the fiscal year, it will only weaken the central bank's position with respect to inflation," said Khurram Shehzad, head of Invest Capital.
He said, "Economic indicators and our outlook suggest that while progress has been made on the inflationary front, inflationary pressures are likely to persist in the short-term.
On the positive side, inflationary adjustments such as subsidy elimination will no longer remain a factor. Oil prices at the current or lower levels within the next six months will also help on two key fronts: inflation and external account deficit."

Trade bodies hit out at monetary policy stance

By Muhammad Toori

KARACHI: Trade bodies have criticised the monetary policy announced by the central bank and termed it against the industrial growth.
"We take it as an unfortunate decision as there is no justification for keeping the policy rate unchanged," said Federation of Pakistan Chambers of Commerce and Industries (FPCCI) president Sultan Chawla following the monetary policy announcement.
He added, "Controlling inflation through the tool of the policy rate has historically been a useless exercise which, thus far, just added to the miseries of people in general and industrialists in particular. I am sure that it will not do any good in future as well…It will only push the cost of doing business higher."
Traders are of the view that the central bank should rather control money supply by other home-made fiscal disciplines and should match the growth in money supply with real growth in the economy.
Another trader pointed out that the act of controlling money supply through discount rate is a failed strategy as far as the national economy is concerned. "We are facing supply shortages but when the central bank creates new money out of thin air, it would add to our pain," he said.
"I see no foreign direct investment (FDI) coming in with this policy and even the local investor is reluctant to invest. Our export target will definitely be out of reach and the electricity, gas and law-and-order outlook is too bleak. In this scenario, the SBP decision is disappointing," said Anjum Nisar, a former president of Karachi Chamber Of commerce and Industry (KCCI).

Trade bodies lament over fuel price hike

By Our Correspondent

KARACHI: Trade bodies criticised the recent increase in petroleum products’ prices and termed it negative for the industry and people.
The increase was made by the Oil and Gas Regulatory Authority (Ogra) on Sunday, with a substantial hike of 6.10 rupees per litre in petrol prices.
Federation Pakistan Chamber of Commerce and Industry (FPCCI) president Sultan Chawla has strongly condemned this increase made by Ogra. The increase of between five to nine per cent, including increase in kerosene oil, would hit the society, much of it living below the poverty line and also the industrial and agricultural sectors, the main drivers of economic growth.
He termed the increase as totally unjustified, ostensibly reflecting increased international oil price while in reality, aimed at meeting the IMF-dictated revenue target, which could have been met through other available means, including cuts in government expenses.
Karachi Chamber of Commerce and Industries (KCCI) president Haji Abdul Majeed said, “The increase in prices of petroleum products will further undermine industrial growth already reeling under power shortages and outages.
A number of industrial units are already closed or are operating at below optimum levels. Ogra must revise its decision and withdraw the increase with immediate effects.”
Transporters and general public sharply reacted to the huge increase in petroleum products’ prices, saying that the fresh hike in oil prices is not acceptable. Transporters threatened that if the increase was not withdrawn, they will call for a strike.
In a statement, Pakistan Businessmen and Intellectuals Forum (PBIF) president Mian Zahid Hussain said that the Oil and Gas Regulatory Authority (Ogra) had decided to allow over six rupee per litre increase in petrol prices when the global oil prices were on the decline.
“Ogra’s decision shows that the oil prices revision has no relation with the price fluctuation internationally but to mint some extra bucks to continue with the government’s lavish spending at the cost of the poor man’s hard earning,” Zahid said, adding that massive increase in POL prices will add to the woes of the public as it will result into skyrocketing of the prices of all essentials and a big blow to the economy.
The PBIF chief said that frequent increase in gas, power tariffs, transport fares and oil prices had already accelerated capital flight and discouraged local and foreign direct investment.
The IMF gave a stand-by facility of 7.6 billion dollars, agreed in November 2008 which was increased afterwards to 11.3 billion dollars in July, to avert a balance of payments crisis. Fund has so far disbursed over five billion dollars under this facility.
The country’s foreign exchange reserves hit a record high of 16.5 billion dollars in October 2007 but fell to 6.6 billion dollars by November 2008, derived by imports, which caused the country to go under IMF umbrella.
While the fund in its country report for Pakistan, released on January 07 2010, wrote, “The rebound in inflation was due to recent food and petroleum product price increases and the electricity tariff hike in October.”
Investors and traders are expecting that this new price hike in POL prices is likely to increase discount rate in the forthcoming monetary policy stance.