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.

FBR collects Rs684bn in first seven months

By Muhammad Toori

KARACHI: The Federal Board of Revenue (FBR) has collected around 684 billion rupees during the first seven months of the fiscal year 2009-10, sources told Business Day quoting provisional figures.
According to the sources, during January, the revenue body has collected 104 billion rupees against the target of 124 billion rupees, whereas during the first six months of the current fiscal year it had collected 580 billion rupees.
During the last fiscal year, the revenue body had collected 628 billion rupees during the first seven months (July-January), and only 529 billion rupees in the remaining five months (February-June) were collected, with the revised target of 1,179 billion rupees.
In the current fiscal year if the annual revenue target is fixed at 1,396 billion rupees, the FBR will have to collect 712 billion rupees in the remaining five months (February-June) of FY2009-10, which would be, relatively, a big target to meet.
The Revenue Advisory Council (RAC) has opposed additional revenue generation measures of the FBR, keeping in view the current economic situation in the country. It was discussed in detail at the meeting of RAC, headed by Dr Hafeez Pasha, last month.
According to the council, the new taxation measures will not be recommended as it will adversely affect the general public and, therefore, it will not favour any new taxation measure.
The council has estimated that the revenue body can collect nearly 1,374 billion rupees against the target of 1,380 billion rupees by the end of the current fiscal year.
It also approved to bring down the revenue collection target of four per cent capital value tax (CVT) on immovable property on one kanal to five billion rupees against the target of 15 billion rupees for 2009-10, but now due to the directives of the International Monetary Fund (IMF) the new target is set at 1,396 billion rupees, which, according to the RAC, would be difficult to achieve.

Sindh going for a tax adventure: FBR

By Muhammad Toori

KARACHI: The Federal Board of Revenue said on Monday that though provinces were incapable of collecting taxes, the Sindh government wanted to go for a ‘taxadventure’. On the contrary, other provinces realising the futility of such a move have surrendered their respective demands of collecting GST.
A senior FBR official told Business Day that all the provinces would take three years to build capacity for collecting sales taxes and for the time being, on Sindh’s demand, only ‘sales tax on services’ was given to the provincial government.
The Sindh government is establishing Sindh Revenue Services to collect general sales tax (GST) on services. This service would work as an independent organisation, having capacity to undertake modern IT-based tax collection system with qualified staff.
Initially, the Sindh Revenue Services would collect GST on services, whereas it would collect other taxes as well afterwards.
The Finance Ministry is continuously trying to convince the Sindh government for the collection of value added tax (VAT) on services by the federal government for the implementation of a broad-based integrated VAT Law from July 2010. This issue has been discussed in the meeting of revenue advisory council as well.
The provinces were entitled to collect the sales tax according to NFC, however, since the provinces have been incapable of tax collection so far, the federal government is reluctant to give this responsibility to the provincial authorities at least for the coming fiscal year.
The official said, “We expect the National Assembly to pass this law by April this year. Then the process of approval in the respective provincial assemblies will start, which is a long process ahead of us.”
“We are trying to convince the Sindh government to allow the federation to collect VAT on services till the provincial government was able to develop the required infrastructure and enough capacity to effectively collect the levy on services,” the sources added.
Therefore, the federal government would collect the VAT on the behalf of provinces and transfer the due share to the provincial governments. Once the provinces would have the necessary capacity to collect, implement and monitor the VAT, they will be entitled to do so. “A uniform system of implementation of VAT is necessary in all four provinces, however, if one province would not agree over the procedure, it would hinder implementation VAT and change in new tax law would be required”, he added.
The purpose of the provincial VAT-2010 is to introduce and implement a broad-based tax on sales and purchases of services to be integrated with the federal taxes and terminal taxes on goods, taxes on their railways, sea or air fares and freights, in which each tax will be cross-credited against the other to form a broad-based tax on consumption

FBR starts scrutiny of Boulton Market victims’ claims

By Muhammad Toori

KARACHI: The Federal Board of Revenue (FBR) has begun scrutinising the claims of victims of the arson attacks in Boulton Market in order to broaden the tax base and to ensure that tax-payers’ money is going into the hands of the victims, FBR officials said on Wednesday.
Earlier, the officials advised the provincial government to restrain from compensating the arson-hit shop owners without ascertaining the validity of the claims. “We advised the provincial government that businessmen who are not paying liabilities to the exchequer should not be compensated,” the FBR officials said.
“We advised the provincial government to verify that the claimants are taxpayers and sales-tax registered,” he added.
The Sindh government was also requested to ask the victims if they had an insurance, stock or inventory balance sheet to claim the losses, he said.
The federal government announced three billion rupees and remitted 1.5 billion rupees to the provincial government for the compensation of the arson-attack victims.
The official further added that the amount was the taxpayer’s property and should not be used to compensate tax evaders.
“If the victims want to receive full compensation, they should at least produce their national tax number (NTN) or sales tax registration,” he said, adding that the government should otherwise disburse a nominal amount as a token of sympathy.
According to the revenue body official, since the process of disbursement has started, the FBR will also assess the claims and validate the data.
The trade bodies in the city said around 4,000 businessmen were affected due to the arson attacks at M A Jinnah Road’s wholesale markets, whereas the provincial government had received only 1,700 claims so far. The Karachi Chamber of Commerce and Industry (KCCI) former president Siraj Kassem Teli termed the requirement of NTN against the compensation as absurd, adding that the victims should be provided relief immediately.
“The victims should be given a chance and can be brought under the tax net for future assessment after they are compensated for their loss,” he added. However, KCCI acting president Rasheeduddin Rashid said that President Asif Ali Zardari had earlier assured that the FBR would not be given the details of the claims to assess claims. While explaining their reluctance about the FBR’s involvement, he said, “It can be used for some other purposes in establishment and this is the reason for our reluctance.”
Rashid further stated that claims worth four billion rupees were submitted initially, which came down to 1.25 billion rupees after scrutiny. The officials, however, perceived this as an attempt of misguiding the government. Rashid said that a pay order worth 780 million rupees had been received and disbursed so far among 1,400 victims. At least 250 to 300 million rupees still remained to be disbursed among 150 victims who claimed more than 1.5 million rupees in loss. Furthermore, 150 to 200 million rupees will be used for construction purposes, he added.
A bomb exploded the Ashura procession at M A Jinnah Road on December 28, 2009, which claimed 44 lives. Later, some miscreants set ablaze business premises in surrounding areas inflicting a loss of billion of rupees. Initial estimates by different trade bodies revealed that around traders suffered 30 billion rupees in losses in the arson attacks.

State Bank to issue new 500-rupee denomination note

By Muhammad Toori

KARACHI: The State Bank of Pakistan (SBP) is launching a new currency note of 500 rupee denomination after a number of security flaws and complaints were found about the current currency note in circulation.
Syed Wasimuddin, a SBP spokesman, has confirmed that the central bank would soon launch a new version of 500 rupee currency note with enhanced security features.
"SBP will shortly launch a new currency note of 500 rupee denomination with an anti-counterfeiting feature of Optical Variable Ink (OVI) used in modern currency by different central banks of the world," Wasimuddin told Business Day on Monday.
The current note carries around 26 security features.
The OVI security feature displays two distinct colours depending on the angle the bill is viewed at. The new feature is particularly useful as an anti-counterfeiting measure as it is not widely available and its major manufacturer is a Swiss company called SICPA.
Colour-shifting inks reflect various wavelengths in white light differently, depending on the angle of incidence to the surface. An unaided eye will observe this effect as a change of colour change while the viewing angle is changed. A colour copier or scanner can copy a document only at one fixed angle relative to the card's surface.
The government had issued its first notes on October 1, 1948 in the denominations of five, 10 and 100 rupees printed in Intaglio process by Thomas De La Rue & Co London.
The first notes of two and one rupee denomination were got printed in Litho process from Bradbury Wilkinson & Co London. These were issued on March 1, 1949. Subsequently, banknotes printed by Thomas De La Rue & Co in the denominations of five and 10 rupee were put into circulation on September 1, 1951 and 100 rupee on September 15, 1953. These notes remained in circulation until their replacement started following printing by Pakistan Security Printing Corporation in 1953-54.
The portrait of Quaid-e-Azam was initially introduced on 100-rupee denomination note from the December 24, 1957.