economic & business review 060709
TRANSCRIPT
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Economic & Business Review
Opting for ethanol mixed fuel
COULD a project that failed earlier succeed now
with the government institutions deeply embedded
in a culture of patronage?
The switch-over to E10 petrol is easier said than
done. This is possible, however, if the government
sticks to its guns with a strong political will.
The economic coordination committee of the
cabinet on May 19, 2009 took a decision to
discourage export of raw molasses by clamping 25
per cent duty and approved a proposal to change
the fuel composition by mixing ten per cent
ethanol.
The decision is said to have been taken to follow
the trend in international energy market, curtail
dependence on fossil fuel and improve the
environmental standards. Ethanol mixed oil is
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considered to be environment-friendly. It reduces
the carbon content in fuel. High carbon content
leads to emission of pollutants when oil is burnt.
It looks logical to opt for alternative energy oil as
imports have proved to be a major drain on
foreign exchange reserves. The average oil import
is $8-9 billion per annum. Last year, at one point
oil was selling at $147 per barrel and Pakistan
spent huge $11 billion on oil imports.
About $1.1 billion could have been saved by using
E10. Brazil uses E90 and India, Thailand,
Philippines and a number of oil-deficient
environment-friendly countries are at different
stages of the switch over. Many nations import
raw material (molasses) or the finished product(ethanol) for using it as an alternative fuel.
Pakistan enjoys natural advantage to move
towards more sustainable energy options, with a
good potential to produce both raw material and
the finished product. We have a sizeable
sugarcane production. There are about 80 sugarmills of which about 19 have distillery units.
According to industry sources, these distilleries
are sufficient to meet the local demand of
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providing ethanol in required quantity. In case of
scarcity, more mills can install dehydration units
at marginal cost. It would increase the demand of
molasses that is currently exported raw tocountries in Europe that charge very high duty on
import of value-added ethanol from the same
origin.
I see it as a failure of the commercial policy that
the government was unable to avert duty imposed
by EU on ethanol imports. These countries import
Pakistani molasses cheap and process them
there, said an MD of a big sugar mill.
Export earnings from molasses almost doubled
from $44 million in 2007-08 to $88 million during
the first 11 months of last fiscal.
Many key players in the oil sector have not yet
been informed of the decision taken five weeks
back.
Secretary Cabinet, Zafar Mehmud told Dawn that
the decision was conveyed to the ministryconcerned. He was, however, not aware if any
official notification had been issued by the
ministry.
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S N A Zaidi, Secretary General, Oil Advisory
Committee said that no notification had been
received by the organisation or any of its
members.
However, some higher-ups in refineries informed
this scribe privately that notification had been
received but they did not see its implementation
anytime soon.
There are both quality and logistic issues
involved here. The government would need to
resolve many hitches before the decision is
implemented, CEO of a private refinery
confided.
K Iqbal Talib, chairman Pakistan EthanolManufacturers Association blamed oil sector and
the petroleum ministry, for lack of progress.
They created hurdles because they felt the move
would end their monopoly over the energy sector.
Every time the government wants to introduce
alternative solutions to lessen dependence on fossilfuel, they get activated. They spare no trick and
usually succeed in persuading the government to
refer the issue to some committee, he said.
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It is incorrect to call the earlier experiment with
E10 a failure. It was a six month project that
generated data and a report was developed with
involvement of all stake holders and that wassubmitted to the government last year, an insider
told Dawn.
A decision to promote the use of E10 was taken
back in 2005. In August 2007, former prime
minister Shaukat Aziz inaugurated a PSO petrol
pump that installed dispenser to sell E10. Some
selected PSO petrol pumps in Karachi, Lahore
were also equipped.
Despite a favourable post-experiment report, the
distribution was subsequently stopped.
Shahid Hamid, ex-CEO Alternative Energy
Development Board, said that vested interests did
not allow a perfectly viable and sustainable energy
option.
The oil sector is part of the energy problem.
Because of their immediate private interests theyare bent upon compromising the countrys long-
term interests, said Shahid Hamid from
Islamabad over phone.
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Our sources in the sugar industry confirmed that
the country has capacity in place to meet the
demand of ethanol locally.
The sources in the oil refineries who spoke to
Dawn on condition of anonymity, said it was
wrong to blame them for the incompetence of the
government.
It is not a joke. A lot of logistic and legal
adjustments will have to be made to switch to E10.
The level of sulphur content in oil products will
have to be reduced before ethanol mixing is done.
To this end, oil refineries will be required to make
investment of roughly about Rs40-45 billion. The
current oil price structure does not allow them to
spare that kind of amount for modernisation, aspokesperson of the oil sector said.
If there is political will everything else will fall in
place in due course and the transformation
towards greener energy source could be made.
The government must let the
ministry of industries handle the project this time
round as the petroleum ministry was not able to
deliver the last time, a pro-E10 enthusiast
commented.
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Experts agree that there is a need to work on a
price formula and to revise the legal framework
governing the industry. A gradual shift shouldstart forthwith accommodating genuine concerns
of all stakeholders.
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Creating a vibrant domestic market
By Nasir Jamal
Monday, 06 Jul, 2009 | 01:20 AM PST |
The trade policy for 2009-10 is expected to spell
out a long-term vision for boosting domestic
commerce to create new opportunities for
investment and push sustainable and pro-poor
economic growth.
The role of exports as the driver of economic
growth is exaggerated, many economists and
businessmen argue. It is always a vibrant domestic
market that drives economic growth and exports,they insist. Both internal and external trade, they
note, should get equal treatment as they represent
two sides of the same coin.
There is no use formulating export-centric trade
policy each year. Other areas of the economy
should also be targeted for sustainable growth,says an economics teacher at a university.
He considered the government policies subsidising
the industry and exports as flawed and
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imbalanced. It is high time that the government
shifted its focus from the industry and exports and
gave equal importance to the promotion of
domestic commerce, he said.
Former Pakistan Institute of Development
Economics (PIDE) director Dr Nadeemul Haq,
who has done extensive work on domestic
commerce, told Dawn last week that the
forthcoming trade policy could prove to be a new
beginning, a departure from the previous ones.
But, he warned, the policy makers would have to
give up their obsession with export promotion.
The new trade policy should focus on outlining a
long-term vision as to what the government wants
to or intends to do over a period of 15 to 20 yearsto promote domestic commerce and internal trade
along with foreign trade, he said.
The trade policy, he said, must also elaborate the
provisions of the import policy besides explaining
as to what the various export promoting bodies,
including the Trade Development Authority ofPakistan (TDAP), had achieved so far after
spending so much of the taxpayers money. The
people have a right to know it, he observed.
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Domestic commerce which is half of our economy
and the largest employer outside agriculture, has
remained neglected in our economic and trade
policies for far too long, Dr Haq argued.Domestic commerce -- retail/wholesale,
transport, construction, leisure/hospitality
industry -- is severely constrained excess
demand for office space in every city, excess
demand for retail space is visible in all
marketplaces, our freight transport is in a poor
condition. There is no room in our cities for large
showrooms or space for warehouses or well
stocked department stores, he said.
The commerce ministry says, the new trade policy,
expected in the middle of this month, will contain
several measures for the promotion of domesticcommerce. But a few believe.
The ministry under Humanyun Akhtar Khan had
produced a detailed study on the state of domestic
commerce in 2005. The study had highlighted
numerous regulatory, tax and other issues
stunting the growth of domestic commerce,particularly retail/wholesale sector, transport,
construction, warehousing, etc. But it was put in
the cold storage and no policy measures were
taken on the basis of its recommendations,, said a
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leading Lahore businessman.
Where are the cold chains and warehouses that
the successive governments promised to createduring the last one decade?, asked the
businessman. The infrastructure that is required
for boosting internal trade is also crucial for
increasing exports. You cannot de-link external
trade from internal trade, he added.
Dr Haq said the products that were not tested in
the domestic market could not develop brand-
names or fetch much value in the international
markets.
McDonalds first became popular in Chicago
before expanding into Illinois and other states ofthe United States. It was long after McDonalds
had created a goodwill for its brand-name in the
home market that the company thought of
expanding into the rest of the world, he noted.
But, he said, Pakistani manufacturers had never
thought of producing for the domestic market
because they have become used to living off thegovernment subsidies.
According to Dr Haq, the bureaucratic controls
on the economy skewed import policies aimed at
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protecting inefficient and uncompetitive industries
like car assemblers and an anti-commerce bias
were also responsible for the stunted growth of
domestic trade. For example, he said, theprotection given to the car industry had blocked
the way of import of trucks, cranes, and other
machinery needed for the development of cargo
transportation. The obsolete city zoning, which
protected the large residential estates of
bureaucrats and their polo and gymkhana clubs in
the heart of major cities like Lahore, had not only
left no space for shopping malls, warehouses,
offices etc but also driven the poorer people to the
peripheries of the city.
He is of the view that the change in the zoning
laws and lifting of government controls thathelped it subsidise and protect incompetent
industries could help a lot in promoting domestic
commerce.
The shifting of focus on domestic commerce, said
Dr Haq, would lead to pro-poor inclusive growth.
But the first step towards this end, according tohim, lay in promoting domestic commerce and
reforming civil bureaucracy by monetising its
perks.
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Issues in rice export
By Mohiuddin Aazim
Monday, 06 Jul, 2009 | 01:20 AM PST |
RICE exports exceeded $2 billion in fiscal year
2009 (despite a fall in international prices) against
$1.8 billion a year ago. Exporters hope to meet the
export target of $2.5 billion for FY10 if riceproduction remains stable.
Rahim Janoo, who heads Rice Exporters
Association of Pakistan (REAP), said that the
average price of Basmati hovered around $1500-
$1550 per tonne in FY08 but fell dramatically in
FY09.
A former REAP vice -chairman Abdul Baseer said
that the average price of various varieties of
Basmati ranged between $1000-1250 per tonne in
FY09. The Food and Agriculture Organisation
also reports that export price of rice from allexporting countries including Pakistan began
sliding from June 2008 after peaking in May.
Market observers believe that rice exports would
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touch $2.5 billion if production does not decline
below 5.7-5.9 million tonnes and if global prices
remain stable or show some growth.
According to official estimates, rice production
totalled 6.9 million tonnes in FY09 up from 5.5
million tonnes in FY08. But the accuracy of data is
under question. Many a times, the government
presents a higher estimate of production but then
we hear that rice is not available, laments H. A.
Majid, ex-chairman of REAP. Our agencies need
to revamp their data collection system.
Commodity experts say rice exports can grow
faster if Geographical Indication of Basmati is
established. Unlike India that has registered GI of
Basmati in its name, Pakistan is yet to do it. ThePresident can do this by issuing an ordinance or
the parliament can pass it into law, explains Haji
Azhar, a former REAP chairman . The absence of
GI constrains exports of rice to EU member
countries.
Comparatively Basmati is expensive compared tonon-Basmati varieties. So a significant increase in
its share in total rice exports could earn far higher
foreign exchange.
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Rice exporters say, they are lobbying with the
government for reduction in withholding tax on
export of rice in retail packing. They are critical
of the government for not doing so in the budgetfor FY10. We hope that it would be announced in
the trade policy, Rahim Janoo said adding that
REAP has recommended reducing of withholding
tax on retail packing to half per cent against one
per cent on bulk packing. The cost of exporting
rice in retail packing is higher than exporting it in
bulk, he explained to justify the exporters
demand.
Lately, Pakistan started selling rice in retail
packing to some non-traditional markets like
South Africa, Singapore, and Dubai. A minimum
withholding tax on rice in retail packing wouldencourage exporters to sell larger quantities of
rice directly to big trading houses and chains of
retail outlets in non-traditional markets. And as
rice in retail packing is costlier than in the bulk,
an increase in its export would translate into a
higher per unit price.
Pakistan has lately focused on export of rice
products like rice cakes and crackers and rice
vermicelli etc. Exporters say export of rice oil can
also fetch some foreign exchange but oil-
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extracting machinery is expensive. Japan being
the only major user of rice oil has sold oil-
extracting machinery to Indian businessmen with
the arrangement to buy back rice oil. Pakistan canalso try this arrangement.
As for FY10, most rice exporters feel confident
about growth in exports but some of them fear a
decline in the crop size due to water shortage
and if that happens exports target of $2.5 billion
might slip by.
Boosting rice exports in the medium-term
requires development of new varieties of rice,
particularly those of Basmati.
Pakistan has so far introduced two varieties ofBasmati namely Basmati-385 in 1988 and Super
Basmati in 1996, notes the State Banks annual
report for FY08. On the other hand India has
introduced various varieties namely Dehra Dun &
41, HBC-19 & 41m Basmati 217 and Pusa
Basmati.
Both growers and exporters of rice say the Trade
Policy for FY10 must address the issue. They say
Pakistan also needs to ensure that the seeds of new
varieties, when developed, are not smuggled into
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India. Because India has in the past used our
seeds to develop a new variety of rice and then
brand-marketing it, reveals Abdul Baseer.
Basically, the government and the private sector
need to join hands and identify the obstacles in
developing rice export sector in the medium-
term.
More importantly, REAP requires a new, pro-
active and transparent role in addressing the
issues facing rice exports. Differences among rice
exporters and rice traders take a toll on the
countrys ability to earn foreign exchange. In the
last fiscal year, for example, Saudi Arabia wanted
to import 400,000 tonnes of Pakistani Basmati but
Pakistan could not meet this export order asrival groups of exporters and REAP office-bearers
fought over on how to handle it, an insider
confided.
A Quality Review Committee of REAP certifies
the variety of the export consignments and that
creates room for REAP officials to manipulatethingsand for their rivals to politicise it.
It is also important for growth of rice exports to
take rice growers into confidence in decision-
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Water scarcity and disputes
By Zulfiqar Halepoto
Monday, 06 Jul, 2009 | 01:19 AM PST |
WITH unprecedented challenges of water scarcity
facing the world, some new approaches have
surfaced to tackle this problem.
The terms like river diplomacy and
environmental peacekeeping are commonly used
in non-traditional human security studies as
tension between riparian states mount on water
sharing, environmental degradation, irrigation
and drinking water shortage and decline in food
security.
Recent research studies on water related bodies
warn that the world may be very close to its first
water war due to the adverse climate change,
energy and food supplies and prices, and troubled
financial markets. Water scarcity is leading topolitical insecurity and inter and intra-state
conflicts.
Glacier melting, global warming, water reservoir
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threshold of 1000 cubic meters of water per
person per year in both countries. Pakistan at
1200 cubic meters per capita is slightly above this
water stress threshold.
The Indus River Basin comprises of almost 1.2
million square km in Tibet, India, Pakistan and
Afghanistan. In the Indus Water Treaty (IWT) of
1960, three eastern rivers, Ravi, Beas and Sutlej
were handed over to India.
In the IWT, India has also been allowed to
develop 13, 43,477 acres of irrigated cropped land
on the western rivers without any restriction on
the quantum of water to be utilised. India has
already developed 7, 85,789, acres for which 6.75
MAF has been used. Thus, for the remaining areaof 5, 75,678 acres, 4.79 MAF would be required on
pro rata basis.
Whereas three western rivers, Indus, Jhelum and
Sutlaj were given for the exclusive use of Pakistan
which irrigate 20 million hectares land out of total
69.6 million hectares land; four million hectares ofland is rain-fed.
The source of water for these two nuclear rivals is
Kashmir, which is a jugular vein for Pakistan
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and for India an integral part. In the
Himalayan mountains of Kashmir high altitude
glaciers are melting an at unprecedented rate.This
phenomenon threatens the security of watersupply of hundreds of millions of people.
The local environment of Kashmir and Himalayan
range is suffering from the decades of military
presence--habitats of snow leopards, brown bears,
ibex are also under threat and garbage is being
dumped into mountain crevasses. Conservationists
and ecologists suggest that Siachan Glacier
mountains be declared as peace camp. This
would not only ensure protection of the landscape,
but would offer the possibility of political
peacemaking as well.
Kashmirs strategic position is turning into a non-
traditional human security protection zone in
terms of water and environment. Pakistan is a
rain scarce country and most of its water depends
on melting Siachen Glacier in the Himalayan
mountains in Kashmir.
In 1990, General (rtd) Pervez Musharraf, then a
brigadier under training at the Royal College of
Defence Studies in London, in a presentation,
argued that the issue of Indus waters had the
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germs of future conflict.
On June 18, 2002, Syed Salahuddin, chairman of
the United Jihad Council and the leader of HizbulMujahideen, said Kashmir is the source from
where Pakistans water resources originate. If
Pakistan loses its battle against India, it will
become a desert.
Few months back in Srinagar the chief of the
Peoples Democratic Party (PDP) Mehbooba
Mufti asked New Delhi to compensate Jammu and
Kashmir on account of the Indus Water Treaty.
She described the treaty as discriminatory and
blocking the progress and economic development.
She also came down heavily on the New Delhi-
owned NHPC for its arbitrary exploitation ofthe states water resources. She said the NHPC
was producing 1,500-MW of power from its
projects in Jammu and Kashmir, but it was
sharing just 180-MW with the state.
Pakistan realised this very late that except for
Indus main and Kabul rivers, all the five vitaltributaries of Indus river system (Jhelum,
Chenab, Ravi, Beas and Sutlej), originate in
Kashmir. Perhaps India knew all along, the
importance of Kashmir and therefore it lied to the
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United Nations that it was prepared to hold a
plebiscite in the valley. This realisation has given a
new and a dangerous, twist to the Kashmir
dispute.
India is also in the process of building the 330
MW Kishanganga dam on river Jhelum and the
450 MW Baglihar dam on river Chenab for hydro
power generation, beside Tulbul (Wollar) barrage
on Jhelum for navigational purposes.
Apart from these, Uri II hydro-electric project on
Jhelum, and Pakul Dul and the huge, 1020 MW
Burser hydro dam, both on Marusunder, a
tributary of river Chenab, are in various stages of
planning and execution.
According to the Indus Water Treaty, the country
which completes the project first, will have the
first rights on the river water. Pakistan has
recently awarded a $1.5-billion contract to a
consortium of Chinas Gezhouba Water and
Power Company and China National Machinery
and Equipment Import and Export Corporationto build the 960-MW project in eight years.
Against the estimated Rs13.36 billion cost, the
NHPC received the lowest bid is of Rs29.60
billion. Officials said they are still negotiating with
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the lowest bidder.
On the other hand, the water availability in our
rivers is highly unreliable. The highest annualwater availability in the recorded history 1922 to
date was 186.79 MAF (million acre feet) in the
year 1959-60 as against the minimum of 95.99
MAF in the year 2001-2002. This includes the
Kabul river which contributes a maximum of
34.24 MAF and a minimum of 12.32 MAF with an
annual average of about 20.42 MAF to Indus
main.
The conflict for controlling Indus river basin be
tween Pakistan and India is increasing. In future,
water is going to be a crucial issue in relationsbetween the two countries, perhaps at par with the
Kashmir question.
President Asif Ali Zardari has warned: The
water crisis in Pakistan is directly linked to
relations with India.
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Establishing right to water
By Nasir Ali Panhwar
Monday, 06 Jul, 2009 | 01:19 AM PST |
AVAILBILITY of water in Pakistan has
alarmingly declined from 5,000 cubic metres per
capita in 1950s to nearly 1,000 cubic metres in
2008, because of increase in population, inefficient
irrigation, mismanagement and unequal water
rights.
The quality of environment for the majority of the
population remains poor. Only 36 per cent of
households had tap water supply in 2006-7. Thedifferences between urban and rural areas are
stark as 62 per cent of urban households have
access to tap water, compared to only 22 per cent
of rural households.
Nearly 75 per cent of the population or some 125
million people have no access to clean drinkingwater. The situation is worse in rural areas. Water
crisis has several serious health, social, and
political implications. Water-borne diseases such
as cholera, gastro, diarrhoea and typhoid cost the
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national exchequer 1.8 per cent of GDP (Rs120bn)
annually because of poor access to safe drinking
water and better sanitation. The situation is
becoming precarious with the passage of time.
Budget allocation for water supply and sanitation
amounts to less than 0.2 per cent of GDP. Over 60
per cent of the population gets their drinking
water from hand or motor pumps, with the figure
in rural areas being over 70 per cent. This figure
is lower in Sindh, where the groundwater quality
is generally saline and an estimated 24 per cent of
the rural population gets water from surface
water or dug wells.
The links between water quality and health risks
are well established. According to Unicef 20 to 40per cent of hospital beds in Pakistan are occupied
by patients suffering from water-borne diseases,
such as typhoid, cholera, dysentery and hepatitis,
which are responsible for one-third of all deaths.
Access to improved drinking water was not only a
basic need but also a basic human right and must
be respected.
Poor water and sanitation is a major public health
concern in the country. Water-borne diseases are
responsible for substantial human and economic
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losses. These include loss of millions of working
hours of productivity annually, and associated
costs for healthcare. Sickness of the main bread-
earner can have a severe economic impact on apoor household, and in case of contagious diseases,
may even affect the whole community.
Water crisis is essentially a crisis of governance.
Lack of adequate water institutions, fragmented
institutional structures and excessive diversion of
public resources for private gain has impeded the
effective management of water supplies. The
protection of the right to water is an essential
prerequisite to the fulfillment of many other
human rights. Therefore, without guaranteeing
access to a sufficient quantity of safe water, other
human rights may be jeopardised.
This serves to demonstrate that the issue of water
and human rights is not a radical or revolutionary
suggestion, but merely a new way of thinking
about well established concepts. Formal
recognition of such a right would mean
acknowledging the environmental dimension,more specifically the water dependent dimension
of existing human rights. Moreover, a formally
recognised right to water would make it
increasingly difficult to disregard international
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river basins, lakes, aquifers, oceans and
ecosystems surrounding watercourses. Therefore,
a right to water cannot be secured without this
broader respect. A failure to recognise water as anenvironmental resource may jeopardise the rights
based approach, which views water pri marily as a
social resource.
If we consider the maintenance of adequate access
to and supply of good quality water, we need to
look at how this is to be achieved beyond the
provision of safe drinking water and sanitation.
Maintaining a safe water supply means that
overall river basin management, agricultural
practices, and other works are important.
If we want to mean ingfully strengthen anduphold any right to water, we need to make
certain that river basins and ground waters are
managed in their entirety. Steps need to be taken
to make provision for environmental flows for
healthy river systems, which means to maintain
downstream ecosystems and their benefits.
The global environmental instruments that
incorporate a right to water point to wider
environmental resource management as
important to respecting such a right. Practically,
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what should be assessed is whether adequate
supplies of water of good quality are maintained
for the entire population of this planet, and if not,
how this can be achieved. If we accept that there isa right to water, guaranteeing this right in the face
of increasing populations and increasing
environmental stresses, becomes increasingly
challenging.
Ensuring this right for present and future
generations requires that a long term view be
taken. A greater integration of environmental
principles and human rights principles
particularly the ecosystem approach will be
required.
Water, as an environmental resource, needs to befurther promoted and managed within the
framework of a river basin and ecosystem
approach. The rights based approach is based on
an essentially human centered view as it promotes
water as a social resource.
However, a human right to water would not only
mean the expansion of existing human rights andduties in the context of achieving access to water
by all, but also an acknowledgement that healthy
functioning of river systems and ground waters
are essential for people, plants and animals.
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Dip in the textile export
By Humair Ishtiaq
Monday, 06 Jul, 2009 | 01:19 AM PST |
FIGURES for the last month of the 2008-09 fiscal
are yet to be collated, but there is no ambiguity
about the fact that export targets have been
missed.
These include not just the ones that were set at the
start of the year, but also the revised and
provisional ones that were configured during the
year on the basis of monthly and quarterly
performance of various sectors.
Being the longstanding mainstay of the national
export profile, textiles represent a relevant case
study to make sense of where we might be headed
and what it shall take to reverse the trend. From
around 60 per cent of overall exports in 2007-08,
cotton and its various categories are expected todisplay a 7-8 per cent dip in share this year once
the data for June has been added up.
Another worrying factor in this context is that
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within the textile sector itself, raw material
accounts for as much as 70 per cent of the exports,
while the rest of the 30 per cent includes garments
and made-ups; an indication that value-addition isnot our forte yet.
According to people in the field, there is not much
hope for improvement because, one, the cost of
doing business is higher; two, goods needed for
value-addition machinery, buttons, zippers etc.
have to be imported as opposed to giants like
China which have these of their own; and, three,
because international trade system offers
preferential categories to countries like
Bangladesh which falls under GPS+ that gives it
zero-rated access to European markets.
As one goes around there are two divergent
opinions that one hears on the issue of exporting
raw material instead of making the most of it
ourselves. One group insists on cutting down the
export of raw material and, instead, bringing the
cost down, suggesting that the market of textile
made-ups should be taken to the grassroots byconverting it into a sort of cottage industry. This
can happen through sub-contracting in which
quality control in managed. It would bring the
cost down enough to target the international
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market of finished textile products.
The rival point of view is that by doing so, the
quality factor would come into play and may wellnegate the very purpose. Besides, regardless of
what one might do, China will ahead in terms of
both quality, quantity and per-piece pricing
mechanism. But there are a few things that we can
do to counter the threat posed by Bangladesh,
which in the first half of the last fiscal was the
leading importer of raw cotton from Pakistan and,
together with yarn and fabric, imported raw
material worth about $210 million and used it to
encroach upon Pakistans share in the global
market of finished products.
Mujeeb Ahmed Khan, who heads the WTO Cell atthe Trade Development Authority of Pakistan
(TDAP), thinks it is absolutely pointless to even
make an attempt to cut the local cost factor. There
are two things that he says must be kept in mind
while working out a method of dealing with the
Bangladesh threat.
Labour in Bangladesh is cheaper. If we stop
exporting raw material to them, somebody else
will fill the gap which will work negatively
towards Pakistans own prospects.
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What we need to do is to keep working on
improving our own market access, but, more than
that, we need to strategise our approach towardsthe issue. Locally, we shall go for adopting the
Best Business Practice module at the industry
level, while on the international stage the
government machinery should raise issues that
are of concern to the West; like, for instance,
labour laws and environmental violations.
If we can do that properly and consistently, the
pressure will be on Bangladesh and its cost factor
will experience a spike that will work to our
advantage, says Mujeeb Khan.
What he, and, indeed, others of his ilk, is sayingdoes make sense because it is close to what the
world did to Pakistan in terms of its sports goods
manufacturing sector. It all started in 1995 when
an American news channel attacked a leading
sports brand for making footballs with the help of
child labour in Sialkot. At the time, Pakistan was
producing as much as 90 per cent of worldsfootballs. It was all a home-based activity in which
entire households were involved. Women did it at
their own convenience after taking care of
household chores, men did it as part-time activity
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after being through with their main commercial
engagements, and children did it mostly on return
from
school.
What happened after the intervention turned it
upside down. Afraid of bad press, the brand
managers sitting in the headquarters forced the
local partners to formalise the football stitching
activity by investing money in erecting centralised
units for the purpose. This in a way masculinised
the trade, with children not allowed inside and
women not willing to work outside their homes
because of traditional preferences.
The cost of this implanted corporate structure massive infrastructure in line with the standards
set by the global brands, internal monitoring and
ILO registration was borne by the locals in the
hope that the business will survive.
However, when the cost went up from Rs20-25
per ball to Rs50-55 the assurances by theinternational buyers turned out to be nothing
more than mere verbal commitments.
They shifted their buying elsewhere. It will take a
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Empowering farmers
By Tahir Ali
Monday, 06 Jul, 2009 | 01:19 AM PST |
TO improve farm productivity, the federal
government has started a phased crop
maximisation project-II (CMP).
NWFP project director Allahdad Khan told this
scribe that Rs1bn would be spent in NWFP under
the programme over next five years. He said
Rs151.25 million had been disbursed to the
project management and Rs16.2 million to 50village organisations as a revolving fund..
The CMP project was formally launched in 2007
but initially it started its work this year in five
districts of the province Peshawar, Charsadda,
Swabi, Bannu and Dera Ismail Khan.
The project aims at improving and expanding
agriculture including livestock and horticulture. If
quality inputs are easily and timely made
available at reasonable rates to farmers, and
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proper marketing of produce is ensured, it will
raise their income. Crop-maximisation will be of
two kinds. One, more crops will be grown in areas
(apart from existing ones) suitable to them. Two,efforts will be made to increase per hectare yield
of existing crops, said Khan.
The project will target 32 villages, in each of the
selected districts. So far, 71 village organisations
(VOs) of the 160 targets have been registered. The
organisations are being formed with the help of
Sarhad Rural Support Programme (SRSP). Its
membership is open to small farmers owning less
than 15 acres.
VO is formed with member-farmers giving Rs50
as registration fee and Rs250 as share money peracre on yearly basis for five years. The
government adds a matching grant to this fund
which will be used for buying inputs and giving
credit facilities to member farmers. Farmers will
also be provided training, guidance and credit
facility to start businesses locally to earn more
money for their families. Empowerment offarmers is our motive, said Khan.
The project aims at opening agriculture
inputs/marketing centres for every 5-20 villages
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which will be owned by VOs. This will, it is hoped,
decrease the role and impact of middlemen. The
money earned through transactions and services
would be put at the disposal of the VOs.
The project has conducted a baseline survey (BS)
in five selected districts. This BS will serve as
yardstick for appraisal of the CMPs performance
after its completion.
NWFP has comparative advantage in per hectare
yield (PHY) of fruits and vegetables. In onion,
tobacco, peach and apple, the province performed
well with positive growth of 28.4, 23.7, 90 and 65.7
per cent as compared to rest of the country.
According to the BS, the per hectare yield (PHY)for wheat crop in Peshawar, Charsadda, Swabi,
Bannu and DI K in 2006-07 was recorded at 2218,
434, 1882, 1877 and 1479kg respectively. For
maize, the PHY stood at 1,817; 2,290; 2,067; 1,817
and 1830 in that order.
When Khan was asked why areas where the PHYwas much lower were neglected and instead the
robust districts were selected, he said the
government wanted to attend to the high growth
potential areas first to increase food grain. He
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hoped the PHY would be increased by about five
per cent each year and within the five years, it
would be jacked up by 40 per cent.
Normally project funds are wasted on non-
developmental expenditures, but Khan said in his
project 80 per cent fund would be utilised for
bringing positive changes in the lives of farmers.
The project is part of the public sector
development programme (PSDP) and is
dependent on yearly allocation. If the project is
not dropped with the change in government and
funds are made available, it may prove fruitful,
said a farmer Zawar Husain from Peshawar.
The orange produced in Mansehra, MankiSharif, Rutam, Palay, Swabi, Dir and Ghazi, to
name a few, is of best quality. Swat peaches are
also worlds best but marketing and
transportation are the main problems. We need
air-conditioned vehicles and storage facility.
Similarly, the guava grown in Kohat, Bannu,
Haripur and Dargai are of high quality which canearn precious foreign exchange, said Niamat
Shah, vice-president of the Tillers Association,
NWFP.
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He lamented that old orchards were chopped
province-wide and new ones were not grown.
Soil and climate of the Frontier province areappropriate for year-round agriculture. But its
real potential is yet to be tapped. He said NWFP
could have three to four crops of potato in a year.
One crop could be grown from September to
January, the other from February to July and the
next in May to September in Kalam and the other
in Bahrain from April to July.
The province produced 300 tons of tomato, 350
tons of onions and 250 tons of potato in 2007.
Yield of all these crops could be doubled easily by
meeting the resource needs of the farmers.
The problem is that of the 1.36 million farms
province-wide, 1065 or 85 per cent of them are
below five acres owned by small farmers who have
no money to buy inputs and modernise farming.
The inputs are costly and hardly affordable these
days - a bag of DAP is available at Rs3,000 and
seeds are also costly. Water tax in the province isdouble that of Punjab. These problems will have
to be solved if we want to see the dream of
agriculture growth realised, said Hussain.
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Diversifying the financial sector
By Rauf Nizamani
Monday, 06 Jul, 2009 | 01:19 AM PST |
THE financial system has grown rapidly in recent
years but it is relatively small when compared to
the size of economy and many other countries.
The small size or lack of depth of the financial
sector implies that financial needs of the economy
cannot be fully met and that much of the
countrys potential remains unrealised. Another
drawback is that more than 72 per cent of the
total assets of the financial sector is concentratedin the banks.
The ratio of financial assets to GDP is commonly
used as a measure of development of a countrys
financial system. In June 2008, total financial
sector assets amounted to Rs7.6 trillion. On a net
basis the amount of financial assets is substantiallysmaller, as debt securities and debt are included
as assets of other financial institutions and thus
double counted.
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The stock of net financial assets has been
relatively stagnant if the bubble in stock market
capitalisation is excluded. This means that
although financial assets have grown rapidly innominal terms, they have not expanded that much
in relation to the real economy as measured by
GDP, especially in the last few years.
The financial sector expressed as a percentage of
GDP, is roughly half the size of financial sector of
India or average of all emerging market countries
(EMCs) and represents an even smaller fraction
when compared with China.
The financial sector needs to be almost doubled in
size( in nominal terms) from the present ratio of
112 per cent of GDP to to the level implied by theratios for India (202 per cent) or the average for
all EMCs world wide (216 per cent). Such a
doubling would imply a massive increase in
financial intermediation i.e. financial savings and
credit flows in the economy.
If the financial sector is to reach its potential, itwill require broad-based growth not only of the
banking sector but also of other financial
institutions and markets such as government debt,
private debt, and equity markets etc. Banking
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and some even have access to foreign capital
markets.
The level of financial exclusion from the realsector is dramatic, especially in rural areas. While
two-third of population resides in rural areas only
25 per cent bank depositors and 17 per cent of
bank borrowers are served by banks. In value
terms, the share of rural customers are even
smaller i.e. only 10 and seven per cent of total
deposits and advances respectively. There is a
very low level of branch penetration in rural areas
where there are less than 2500 branches for a
population of 105 million or an average 42000
inhabitants per branch. This has held back the
growth of savings and access to credit.
There is an enormous pool of companies to be
included in the formal financial sector. There are
an estimated three million companies of which
only some 50000 are registered with the SECP
including 650 that are listed in stock exchanges.
Some 80000 companies borrow from the formal
financial sector mainly banks. This implies thatthere is a huge pool of potential company
customers to be tapped by the banking sector.
These are only some of the underserved areas of
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the economy which need the attention of the
financial sector and there is a huge potential for
the expansion of the financial sector.
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World commodities
Oil
Oil prices fell more than $2 on July 2 in the
London market to below $67 a barrel. London
Brent crude dropped to $66.76. Rising gasoline
stocks and a far bigger than expected rise in US
unemployment drove oil markets down.
Some analysts are still relatively bullish, however,
and say the Organisation of the Petroleum
Exporting Countries has been very successful in
stabilising the market.
Oil has rallied from a low of $32.40 in December
last year to highs above $70 a barrel in June,
although it is only around half last Julys record
of more than $147. Over the second quarter of this
year it gained around 40 per cent the strongest
quarterly gain since 1990.
The International Energy Agency, an adviser to
oil-consuming nations, cut five-year forecasts for
global crude demand because of the economic
slump, predicting consumption wont regain last
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years levels until 2012.
The IEA cut its oil demand estimates for every
year through 2013 by about three million barrelsa day, it said in its Medium-Term Oil Market
Report. Consumption will average 86.76 million
barrels a day in 2012, the first year it will rise
above 2008s level of 85.76 million barrels a day,
according to the Paris-based agency.
Oil demand in 2014 will rise to 88.99 million
barrels a day, according to the IEA. From 2009,
when oil demand will fall the fastest since the
early 1980s, that represents an average annual
increase of about 1.4 per cent, or 1.2 million
barrels a day. From 2008 levels it represents an
average increase of 0.6 per cent or 540,000 barrelsa day.
Consumption in developed economies will shrink
1.1 per cent a year to 44.4 million barrels a day in
2014, even under the higher GDP scenario,
according to the IEA estimates. According to the
lower economic growth estimate, OECD demandmay shrink as much as 1.5 per cent.
Demand in developing economics outside the
Organization for Economic Cooperation and
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Development will rise through 2014. Oil use in
those countries will increase an average 2.6 per
cent a year to 44.6 million barrels a day, according
to the IEA.
While the economic slump tempers gold demand
growth, it my also cause supply to shrink as lower
exploration and production spending delays
projects and reduces spare capacity, according to
the IEA.
Supplies from outside Opec are forecast to decline
by 0.4 million barrels a day between 2008 and
2014, compared with six-year growth of 1.5
million barrels a day forecast in the last report,
the IEA said. The biggest revisions are in the
former Soviet Union and North America, whereprojects to develop Canadas oil sands are being
delayed, the IEA said.
The group predicts that non-Opec supply will
peak at 51.12 million barrels a day in 2011 and
start declining thereafter, reaching 50.22 million
barrels a day by 2014.
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Gold
GFMS Limited (formerly known as Gold Fields
Mineral Services, an independent consultancygroup, predicts that identifiable gold investment
will exceed 1500 tonnes by the end of this year.
This estimate would represent a significant 36 per
cent increase over identifiable gold investment
demand in 2008.
In dollar terms, GFMS expects gold investment
demand to increase 57 per cent over last year to
nearly $50 billion. As a result of this surge in
investment demand, GFMS expects gold prices to
break through the nominal high of $1,032 an
ounce, with was set back in Spring 2008. GFMS
reported that global gold demand will experiencea massive increase this year, particularly from net
investment and official coins components as a
result of rising fears over the long-term inflation
threat in western nations.
Investment demand has been one of the main
reason for the rally in gold that has taken the
precious metal from around $250 in early 2001 to
around $940 today.
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Total identifiable gold investment during the first
quarter of this year totaled 595.9 tonnes, a
historical high and increase of 248 per cent
compared to the first quarter of 2008. In dollarterms, this represented a net inflow of $17.4
billion, up from $5.1 billion (or 42 per cent) a year
earlier.
At the same time, silver prices are expected to
outperform gold for the same reason.
In the latest quarterly report, GFMS pointed out
that investment demand accounted for only 50
tonnes in 2008. However, silver investment
demand was quite strong in the first quarter as
investors mobbed the metal as a cheaper
alternative to gold.
Silver investment demand is anticipated to be such
that it could account for between one quarter and
one fifth of total consumption in 2009. Meanwhile,
silver supply is expected to decline this year, with
mine output, scrap and government sales all
softening.
On July 3, in the London market, gold fell below
$930 per ounce as the dollar rose against a basket
of six currencies after a larger than expected drop
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in US non-farm payrolls, which prompted some
buying of the currency as a haven from risk.
The worse-than-expected data spurred safe-havenflows into the dollar, making gold pricier for
holders of other currencies.
Riskier assets, such as equities and some
currencies, slipped in the wake of the numbers.
While gold is often seen as a safe haven asset,
moves in the dollar are taking precedence as the
metals main price driver.
US gold futures for August delivery fell to $930.10
an ounce, down more than one per cent from the
settlement on the COMEX division of the New
York Mercantile Exchange.
In the New York market, gold climbed above $940
an ounce, as news that China has asked to debate
proposals for a new global reserve currency sent
the dollar reeling, highlighting the status of gold
as a hedge against a falling US currency. Investors
have recently viewed the dollar as a safe haven.
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Copper
In the London market, on July 2, copper fell, as
grim US and European data underlined concernthat global economic recovery could be a long way
off and as a firmer dollar added pressure. Copper
for three month delivery on the London Metal
Exchange closed at $5035 a tonne from $5090 a
day earlier.
Copper earlier fell as much as 2.4 per cent to a
session low of $4,966.50. But the metal pared
earlier losses to close about one per cent lower,
with sentiment helped by data that showed new
orders for US manufactured goods jumped 1.2 per
cent in May, their largest increase in nearly a
year. But analysts warn economic recovery is notyet within reach.
A slew of mixed data has provoked erratic trading
trends in recent weeks as investors have struggled
to gauge the economic climate. By and large,
however, sentiment is improving.
Euro zone economic sentiment improved more
than expected in June, data showed on June 29,
while Japanese industry output rose for the third
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month in a row. But policy makers and analysts
stress that a potential recovery would be
complicated and protracted. There are also
worries that Chinese imports will not sustain themarket.
Chinese buying has helped copper rally some 65
per cent in 2009, but this restocking drive is
slowing, and markets are now entering the quieter
summer period. China imported 1.4-million
tonnes of copper in the first five months of this
year.
China had stopped buying metal for government
stockpiles after prices surged and middlemen
cashed in on an initiative meant to support the
domestic industry. Chinas State ReservesBureau amassed a lower than expected 235,000
tonnes of copper in recent months.
Copper still has surged 52 per cent this year,
making it the second-best performer in the
Reuters/Jefferies CRB Index of 19 raw materials.
Only gasoline futures outperformed copper on theCRB index. Record refined-copper imports by
China, the worlds largest user of the metal, drove
much of the increase.
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KESC projects on the back burner
By Engr Hussain Ahmad Siddiqui
Monday, 06 Jul, 2009 | 01:19 AM PST |
KARACHI experienced the worst-ever power
breakdown for almost 36 hours, on June 17-18, as
electricity generation, transmission and
distribution systems came to a standstill.
Civic life, trade, industry and transport etc were
paralysed. Millions braced daily 6-8 hours load-
shedding and frequent power outages.
The KESC blamed the thunderstorm that hitPEPCOs Jamshoro-Dadu and Jamshoro-Hub
500kv transmission lines, for the blackout.
However, PEPCO in turn, criticised the utility for
the absence of any reliable back-up system. The
reality is that the existing electricity transmission
and distribution systems are outdated and
inefficient.
Basically the power crisis is an outcome of the
utility firms inaction to improve its infrastructure
that, once again, highlights the non-transparent
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KESC privatisation. The ownership and
management have changed hands a number of
times unauthorisedly to the disadvantage of the
consumers. The government is not effectivelymonitoring the KESCs performance and ignoring
agreements it had signed with the private sector
owners on divestment and transfer of
management.
According to the Implementation Agreement, the
KESC was committed to invest more than $800
million in three years-from July 2006 to June
2009, which would have resulted in the
turnaround of the company too. The capital
investment programme had three major
components:
* Rehabilitation, augmentation and expansion of
the existing transmission and distribution
infrastructure;
* Rehabilitation, revamping and up-gradation of
the existing power generation capacity at Bin
Qasim power plant, and;
*Creating an additional power generation
capacity of 795 MW, by installing gas-fired
combined cycle power plants at Korangi (220
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MW) and at Bin Qasim (575 MW).
The KESC had announced its plans in July 2006
to undertake overhaul of the entire powertransmission and distribution system and service
lines network and to set up new power plants. The
company has not been able to achieve any
significant milestone by the end of programme
period ending June 2009.
In the first phase, 11kv cables were to be replaced
and 13 new grid stations to be set up and existing
grid stations were to be improved. The system
improvement plan was initiated by the
government in 2004, having allocated Rs22 billion.
The government however had agreed, as per
provisions of the Implementation Agreement, toprovide to the KESC an amount of Rs10 billion as
first installment of 2006-07. The new owners of the
KESC were required to contribute additional Rs3
billion towards implementation of this component
of the development plan.
Only two new grid stations have been completed,whereas work on another two is in hand. Even
land for the remaining new grid stations have not
be purchased. Again, only partial replacement of
11kv cables and distribution transformers and
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installation of new capacitors in limited areas has
been carried out. The company announced in July
2008 that agreements were being signed with
contractors to upgrade existing transmission anddistribution systems. There has been no further
progress in spite of the Asian Development Bank
(ADB) extending $150 million loan in June 2007
for the purpose.
Likewise, rehabilitation and upgradation of the
existing power generation capacity at Bin Qasim
power plant could not be undertaken properly.
The maintenance of various units of Bin Qasim
has deteriorated, resulting in frequent tripping,
and sometimes shut down of the units. A few units
were retired, creating substantial shortfall in
power generation capacity. A sum of Rs12 billionwas to be invested by the KESC management in
financial year 2006-07 for creating additional
power generation capacity as per plan.
There was no progress on the construction of 220-
MW new power plant at the existing Korangi
facilities for long for which the EPC contract wassigned with a Greek company in January 2007.
The International Finance Corporation had
offered $125 million loan to the KESC for its
construction. The plant was rescheduled to be
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operational by March 2008 but yet not fully
commissioned. The combined cycle project,
consisting of General Electrics four gas turbines
of 48-MW capacity each and one steam turbine of28 MW, has been further delayed. Currently, the
plant is operating partially, in simple-cycle mode,
generating 144 MW of electricity.
Tendering process for the gas-fired combined
cycle power plant at Bin Qasim (575 MW) was
initiated as late as in May 2007. It was announced
that contract would be finalised in October 2007.
The new plant would be operational by 2010.
Nothing was heard of this project, until July 2008
when the company announced that agreement was
being signed with the contractor. Though there is
no physical progress on the project, the contracthas been signed for $378 million. Three gas
turbines of 129 MW each will be installed during
May-July 2011, whereas with the installation of a
steam turbine of 185-MW capacity-- the combined
cycle power plant-- will be fully operational in
January 2012.
Aiming to minimise power shortage, the KESC
decided to install a new barge-mounted power
plant of 45-MW capacity, which was scheduled to
be operational by September 2006. This plant,
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2,021 MW or de-rated capacity of 1,625 MW,
according to the recent revisions made in the
generation license granted to the KESC by the
Nepra. The KESC planned to replace old gasturbines installed at Korangi and SITE power
plants, of cumulative capacity of 180 MW, by July
2009, but there are no indications of its
implementation.
Another major cause for power shortfall is that of
heavy line losses due to technical reasons and
power theft. The line losses of over 34 per cent of
revenue in 2005 were targeted by the management
to be reduced to 20 per cent by 2008, but the losses
have instead gone up to over 40 per cent by early
2009. The utility company somehow failed to plan
proper load management, to improve distributionnetwork and upgrade the grid system using
underground cables, as envisaged, which could
have lowered losses.
As monsoon approaches, the KESC consumers
should expect the worst power outages in the
coming weeks, while continuing to sufferpersistent load-shedding. The irony is that the
government remains indifferent to the alarming
situation, except forming a few committees and
issuing political statements. The federal
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government had appointed in May a special
committee headed by the financial advisor
Shaukat Tarin to evaluate KESCs performance.
It has not concluded its proceedings even after alapse of two months.
The reported governments intention to take over
the KESC control again, does not seem probable,
given its special favours, concessions and generous
subsidies to the utility in the garb of ensuring
uninterrupted power supply to the consumers.
It is shocking that the government is privatising
PEPCOs Jamshoro and Photo by Arsalan
Kotri power plant, learning nothing from the
experience of the KESC privatisation.
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Budget to initiate next phase of reforms
By Anand Kumar
Monday, 06 Jul, 2009 | 01:18 AM PST |
THE economic policies of the United Progressive
Alliance (UPA) government (version 2.0) will be
unveiled today by veteran Congressman and
finance minister Pranab Mukherjee, when he
presents the union budget in parliament.
Mukherjee, who handled the key finance portfolio
between 1982 and 1984 when Euromoney
magazine rated him as the worlds best finance
minister was ironically Manmohan Singhs boss
at that time.
The current prime minister was the governor of
the Reserve Bank of India (RBI), the countrys
central bank in the early 1980s, and would report
to Mukherjee. Singh was picked up as finance
minister by P.V. Narasimha Rao after he became
prime minister in 1991, at a time when thecountry was facing enormous problems on the
economic front. Rao then made Mukherjee the
deputy chairman of the Planning Commission,
before elevating him to the cabinet as the external
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affairs minister.
Mukherjees supporters claim that he was the
original reformer in India, initiating the reformsprocess way back in the early 1980s, when the
country was firmly in the grip of the licence-raj
era. The73-year-old politician, who was re-elected
from the Jangipur parliamentary constituency in
West Bengal in May, has been a Congress trouble-
shooter for the past decade, heading innumerable
committees and panels set up to tackle contentious
issues.
Analysts expect Mukherjees maiden budget in his
second-term as the finance minister to be
pragmatic, ensuring a proper balance between the
demands of Indian industry and big business (andreformers), and the pro-poor commitments of the
Congress. Party president Sonia Gandhi has been
emphasising the need for an all-inclusive
approach while tackling the current economic
crisis.
The UPA in its first term (2004 to 2009) initiatedseveral left-of-centre policy changes including
launching a massive National Rural Employment
Guarantee scheme (NREGS) and waiving off farm
loans. Mukherjee is expected to substantially step
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up allocations for the UPAs flagship programmes
in his budget speech on Monday, even at the cost
of widening the fiscal deficit.
Importantly, the government is also expected to
allocate huge sums for a new food security
legislation that would ensure the supply of 25 kg
of rice or wheat every month at Rs3 a kg to every
below-the-poverty-line (BPL) family in India.
Likewise, the government plans to expand its
NREGS programme and also offer incentives to
farmers who have been prompt in repaying their
loans.
Many see Mukherjee as the most appropriate
candidate in the finance ministers post, at a time
when global economic crisis has started hurtinggrowth in India. The minister has his task cut out
for him: accelerating economic reforms,
expanding the allocations for the social sector,
balancing the budget and ensuring rapid
economic growth.
* * * * *
THE annual economic survey that Mukherjee
presented to parliament last week reflects the
dilemma facing the government. The survey
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presents the overall economic scenario in the
country, comes out with suggestions
recommending further deepening of the reforms
process, and also warns about the dangers ofpursuing populist policies.
The speed at which the Indian economy returns
to high-growth path in the short term depends on
the revival of the global economy, particularly the
US economy and the governments capacity to
push some critical policy reforms in the coming
months, notes the survey. If the US economy
bottoms out by September, there could be a good
possibility for the Indian economy repeating last
financial years performance.
For the year ending March 31, 2009, Indias GDPexpanded by 6.7 per cent, remarkable considering
the contraction being witnessed by most developed
economies, but a set-back for an economy that had
been chugging along at over nine per cent over the
previous four years.
The survey notes that there are positive signs thatIndian industry may have weathered the most
severe part of the shock and is moving toward a
recovery. The survey forecasts the economy
could grow by seven per cent, with a margin of
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error of plus/minus 0.75 per cent. But it all
depends on the monsoon. The south-west
monsoon, which sets in over the country in June,
has been disastrous in the first month. Thegovernment hopes there would be good rainfall
over the next two to three months to make up for
Junes deficit.
Mukherjee is cautiously hopeful that the monsoon
would be normal, ensuring a seven-plus per cent
growth in the current fiscal.
But the economic survey does not mince words
when it seeks a further deepening of the reforms
process. India should be back on the new trend
growth path of 8.5 to 9 per cent per annum
(economic growth) provided the critical policy andinstitutional bottlenecks are removed, points out
the survey. It is, therefore, imperative that the
government revisit the agenda for pending
economic reforms in the first instance.
Successive governments in India have realised
that economic reforms can be pursued vigorouslyonly during the first two or three years of its
tenure. The last two years of the five-year term
are spent on wooing the electorate by rolling out
concessions and rolling back some of the reforms
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measures.
* * * * *
LAST week saw the Manmohan Singh
government revert to a much-criticised practice of
raising the price of government-controlled
commodities such as petrol and diesel, days before
the presentation of the budget.
Raising petrol and diesel prices is always a nasty
job for any government in India. When the BJP-
led National Democratic Alliance government was
in power between 1998 and 2004, it faced a similar
dilemma: how to jack up petroleum product
prices to ensure that the state-owned refiners did
not go bankrupt. The Congress, which was in theopposition, would stoutly oppose any such moves.
Now that the Congress-led UPA is in power, the
BJP and other opposition parties are equally
vehement in their opposition to price hikes
though both petrol and diesel are largely
consumed by affluent Indians. (Most MercedesBenz cars, Volvo buses and other high-powered
vehicles in India run on diesel).
The government last week went in for a stealthy
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price increase, raising the price of petrol by Rs4 a
litre and diesel by Rs2. Petroleum product prices
were reduced sharply just before the elections,
with the government citing the sharp fall in theprice of international crude oil over the previous
few months. Last week, it again cited the spurt in
crude oil prices for the increase.
But the economic survey lashed out at the
government for its imperfect handling of oil
pricing. It called on the government to decontrol
petrol and diesel prices, even suggesting that the
price of LPG (liquefied petroleum gas, used for
cooking purposes) should not be subsidised.
Several committees have over the years urged the
government to withdraw all subsidies on petrol,diesel and LPG. Most of the BPL families cannot
afford vehicles, nor do they buy LPG. Public
transport, including railways, is heavily subsidised
anyway, so it is only the affluent who benefit
because of the subsidy in petroleum products.
The survey also urged the government to maintainfinancial discipline by sticking to the fiscal deficit
target of three per cent. Last fiscal, the deficit shot
up to 6.2 per cent as the government went on a
spending spree, investing in social sector projects,
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writing off farm loans and wooing the electorate
just before the elections.
It also urged the government to withdrawsubsidies on a host of other commodities and
goods including sugar and fertiliser and even
decontrol drug prices. Prodding the government
to move ahead on the reforms path, it sought for a
significant hike in foreign direct investment (FDI)
levels in the insurance sector from the current
26 per cent to 49 per cent, and even 100 per cent
in the case of health and weather insurance.
The survey also reminded the government about
the need to push pending legislation relating to
pensions, insurance and forward contracts. Will
Mukherjee, in his second avatar as financeminister, bite the bullet and accelerate reforms?
His budget will reveal his plans for the next stage
of reforms.
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Managing growth with full employment
By Mahmud Ahmed
Monday, 06 Jul, 2009 | 01:18 AM PST |
THE common man is badly hit by high prices and
rising unemployment following a dramatic drop in
economic growth.
Inflation and joblessness directly impact on his
livelihood.If prices go up, his purchasing power
falls. He is most vulnerable to price hikes.
If he is unemployed, there is no source of income
or independent livelihood. Things become worsewhen an educated youth cannot find a job The
investment made on his education becomes
unproductive.
High employment and low wages are squeezing
the consumers purse and also the size of the
domestic market. Unemployment for the poor isworse than low incomes eroded by high prices
Even in normal times, business houses tend to
shed labour while upgrading technology and skills
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under the prevalent flexible labour policy or when
shedding their fat.
They do not offer life- time career. Thegovernment focuses on physical and social
infrastructure projects that provide temporary
jobs. There is no growth strategy to provide full
employment. There is no concept of common good
in government policies formulated under deep
external influences apart from offering doles to
the most vulnerable. It is time to provide the
common man an enabling environment to fend for
himself.
If millions remain unemployed, their labour
cannot be put into productive use, national wealth
cannot be multiplied quickly and the nationaleconomy suffers. Labour, an asset, turns into a
liability. under present economic model. Economic
strategies that do not envisage full employment,
particularly in developing countries with scarce
capital and surplus labour, cannot achieve
sustainable growth.
In the current global crisis of capital, it is the
human skills that have a key role to play, with
ideas and creativity in all spheres and at all levels
of economic activity. With full employment and
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better income distribution, Pakistan could be a big
prosperous market for goods and services
produced within the country. It means focusing on
labour-intensive projects and producing primarilyfor domestic market. Poverty offers economic
agents a massive potential for economic
development.
The current policy package links interest and
exchange rates to the inflation rate. High inflation
rate translated into higher interest and lower
exchange rates discourages investment and
production. Depreciation of rupee encourages
cheaper exports for foreign buyers and costlier
imports for local consumers. It depresses domestic
demand in order to create more surplus for
exports at the cost of domestic consumption. Itmakes the market shrink for domestic production.
While with right policies, increased production
that provides full employment, should increase
supply and stabilise prices. There is no system
better than full employment to distribute incomes.
While there can be no two opinions about the
importance of macroeconomic stability, views can
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differ on how to go about it. The recourse to IMF
credit helps fire fighting and its programme
gives a semblance of stability for a while, only to
be eroded by economic recovery. Only stabilitygenerated from increased production can be
durable as evident in case of China.
No doubt imbalances occur in the process of
economic growth but they become chronic when
they remain unattended and not corrected
promptly. In the recent years, fiscal trade and
current account deficits were allowed to fester in
the pursuit of consumerism, mercantilism and
casino games.
This benefited a renter class. It was a deliberate
attempt to put the country back under the IMFprogramme.
The outcome was: high interest rates, huge
depreciation of rupee, sharp decline in investment,
under-utilisation of industrial capacity and
dramatic fall in growth rate. If a country is under
the IMF programme, the message sent across theworld is that it is in trouble. It scares away foreign
investors.
Instead of raising domestic resources , policy
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makers borrow from the IMF. This reduces the
space for sovereign decision-making and genuine
reforms to shore up the economy.
As a lender, the fund prescriptions are aimed at
improving balance of payment. The macro-
economic stability is achieved at the cost of
economic growth. Other issues are of no
consequence to the fund. And the price is paid by
the common man.
Not too long ago, economists used to say that
rising production increases supply of goods and
services and helps bring price stability. Now
consumers are told that growth breeds a high rate
of inflation. This is the outcome of the Anglo-
Saxon financial model that has dominated theglobal financial market for the past few decades
and is now crumbling under its own weight. It is a
hurdle in turning money into productive capital
and misdirects cash towards speculative activity.
Moreover, the growth under this model spurs
imports, widens trade and current account deficitsand creates an unfavourable balance of payments.
This growth has not come about by boosting
domestic savings, investment, production and
exports. Rather, it is artificially stimulated by
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external capital and financial inflows.
A major drawback in foreign debt-driven
economic growth is that it stalls the need for basicreforms that could help remove structural
imbalances, holding back sustainable economic
and social progress.
Foreign money protects the status quo by being an
alternative option. So, there is no need to tax farm
incomes even when the governments policies have
resulted this year in transferring an extra Rs294
billion to the rural economy. Speculative
investment enjoys a tax holiday while
manufacturing, an engine of economic growth,
provides over 60 per cent of the tax revenue. The
government needs revenue badly to undertake amassive development programme to shore up
economy and provide jobs.
But the tax- to- GDP ratio is constantly declining
and tax revenue is down to nine per cent of the
GDP. Even when the economic growth was high in
recent years, the tax-to-GDP ratio was on thedecline. The efficiency of the tax administration is
at the lowest ebb. Tax collection is over-
centralised with two tiers of the government at the
provincial and district levels dependent on the
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federal government for 90-100 per cent of their
revenues.
In an environment of poor governance, the
federating units and the districts are accountableto an inefficient administrative set-up at the
federal level rather than to the tax payers for
whose benefit they are supposed to work and to
whom they should be accountable.
Officials in Islamabad accuse the provincial
governments of being inefficient and incompetent
while they themselves fail to deliver. The
centralisation of tax collection and distribution is
politically motivated and cannot resolve issues in a
complex and diversified economy.
The unitary system of tax collection anddistribution needs to be abolished.
The over-centralised system denies fiscal
autonomy to provinces and the districts. The
system is not accountable to taxpayers, nor to the
beneficiaries whom it claims to serve from the
revenues raised from taxes .
Over 80 per cent of tax revenue comes from
indirect taxes if withholding tax, passed on to the
consumers as an expense, is included. But the axe
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falls on development programme, particularly in
the social sector, in case of financial constraints,
that too in an age where human resource
development, rather than capital, is the first pre-requisite to modernise the economy. The
regressive taxation system works against the
common citizen.
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Setting priorities for industrialisation
By Shahid Javed Burki
Monday, 06 Jul, 2009 | 01:18 AM PST |
THIS may be a good time to reflect on some of the
basic assumptions that have governed the making
of public policy with respect to industrialisation.
It is now recognised by economists and policy
analysts that industrialisation its pace, scope and
content responds to public policy.
This is one reason why Islamabad, working closely
with the private sector, should carefully define thecontent of public policy in order to determine the
direction the country should take. The focus
should be on three aspects of structural change in
the sector of industry. As industrialisation gathers
pace, what should industries produce?
Where should industries be located; shouldindustrialisation be used to lift the more backward
regions of the country as was attempted during
the period of President Ayub Khan (1958-69) or
should the question of location be left to the
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private sector?
And, where should the products of
industrialisation be sold? The last question leadsto another issue: how much emphasis should be
placed on export promotion as an objective of
industrialiation?
Economists have also begun to recognise that since
countries have different histories and different
structural characteristics, appropriate policies will
differ and evolve differently. There is no one-side-
fits all public policy approach to industrialisation.
In Pakistans case, the initial direction of
industrialisation was influenced by the trade war
with India that broke out in 1949 over the issue ofthe rate of exchange between the currencies of the
two countries. For legitimate reasons, Pakistan
had refused to devalue its currency with respect to
the dollar, a step that was taken by all countries of
the British Commonwealth.
That changed the rate of exchange between thetwo c