01

business

BMonday, 6 May, 2013

Business is never so healthy as when, like a

chicken, it must do a certain amount of scratching

around for what it gets. — Henry Ford

BloomBeRg

Bangladesh’s government, workers, employers and theInternational Labour Organization agreed to a plan toimprove employee rights and safety after more than600 people were killed in a factory building collapselast month.

The ILO proposals, which include better workerprotection and the right to collective bargaining, willbe submitted to parliament during its next session, ex-pected to start in June, the Geneva-based organizationsaid in a statement on its website. The government willcooperate in the implementation of the plan, Com-merce Secretary Mahbub Ahmed said by phone today.EnlargE imagE: Relatives react after identifyingthe body of a family member one killed in last week'sbuilding collapse in Savar, on the outskirts of Dhaka,on May 3, 2013. Photographer: Munir uz Zaman/AFPvia Getty Images “The initiative is a turning point inBangladesh’s history,” Foreign Secretary ShahidulHaque said yesterday at a press briefing in Dhakawhere the ILO proposals were released. “There is aconvergence of interests for bringing about a changein the industry.”

The agreement on steps to improve worker condi-tions comes following Bangladesh’s worst industrial

disaster that killed at least 617people after a building hous-ing garment factories col-lapsed on April 24. The27-nation European Union isconsidering trade sanctionsagainst the country, andmonths before the incident,the U.S. government said itmay revoke the nation’s pre-ferred trade status over treatment of workers. “The onlyway forward is fast implementation of promises the gov-ernment and owners have made,” said Kalpona Akter,executive director of the Bangladesh Center for WorkerSolidarity, an organization that promotes labor rights.“No more of talking. No more of saying it’s high timeto do this and that.”DEath toll: The death toll due to the collapsedRana Plaza building has climbed to 617 as the armycontinues to clear out debris, Imran Khan, aspokesman at the control room supervising the rescueeffort, said by phone today.

The ILO and its partners will “assess by the end of2013 the structural building safety and fire safety ofall active export-oriented ready-made garment facto-ries in Bangladesh, and initiate remedial actions, in-

cluding relocation of unsafefactories,” it said.

Bangladesh’s govern-ment, employers and work-ers have asked the ILO tostart a training program forthose injured in the buildingcollapse, the organizationsaid in the statement yester-day. The government will

recruit 200 additional building inspectors within sixmonths, with the budget to be increased for a minimumof 800 inspectors.DEaDly FirE: The Rana Plaza building collapsecame after at least 112 people were killed in Novemberin a fire at the Tazreen garment factory that was pro-ducing clothes for companies including Wal- MartStores Inc. (WMT) Another deadly blaze in 2006 left54 people dead at KTS Textile and Garments in theport city of Chittagong.

“Just after the Tazreen fire, the government and theowners made a lot of promises -- factory inspectionand safety for workers,” Akter said. “Within fivemonths, the disaster struck again.” As wages have risenin China, companies such as Li & Fung Ltd. (494), theworld’s largest supplier of clothes and toys to retailers,

are tapping Bangladesh and other lower-cost Asiancountries. Textiles contribute more than 10 percent ofBangladesh’s gross domestic product and about 80 per-cent of the nation’s exports, mainly to the U.S. and theEuropean Union, according to Bangladesh GarmentManufacturers and Exporters Association.intErnational PrEssurE: European UnionTrade Commissioner Karel De Gucht yesterday calledfor “immediate” action by the Bangladesh governmentto improve health and safety conditions in the garmentindustry. In the absence of any steps, the commissionwill be ready to start an investigation that may lead tothe suspension of the country’s trade status with the EU,he said on RTBF radio. The U.S. Trade Representative’soffice said in a Jan. 8 notice in the Federal Register that“the lack of progress by the government of Bangladeshin addressing worker rights issues in the country war-rants consideration of possible withdrawal, suspensionor limitation of Bangladesh’s trade benefits.”

Retailers including Wal-Mart and J.C. Penney Co.(JCP) and labor activists have been considering anagreement to improve factory safety in Bangladesh forat least two years. Walt Disney Co. (DIS), the world’slargest entertainment company, which has partners invarious countries that make clothing and merchandise,decided in March to pull out of the country.

Bangladesh, ILO agree labour reform after factory collapse

CAA allows Indian-owned RayyanAir to start domestic operations

KARACHI

Special correSpondent

The Civil Aviation Authority (CAA) has

permitted Rayyan Air, owned by two

Indian nationals Jaidip Merchandani

and Nithin Merchandani for starting

domestic flight operations in Pakistan

as a registered private airline.

The past five years have not only seen

imminent financial collapse of state-owned

PIA, but complete downfall of the Civil

Aviation Authority (CAA), the regulatory body

for all private and commercial aviation

business in Pakistan.

Appointment of corrupt people without any

executive management skills, integrity or

qualifications to head CAA in violation of

ethics and conflict of interests has not only

compromised flight safety, but also declared

national security interests of Pakistan.

The PIA chairman and MD have given almost

50 to 60 percent salary hike to its overstaffed

airline, effectively hiking the year to year

administrative cost by 77 percent, while the

airline has no funds to buy spare parts for its

aircraft, with the result that almost half the

fleet is grounded. PIA losses have escalated

to Rs 160 billion, making it technically

insolvent, yet the past five years have

witnessed an unprecedented rise in

recruitment to all cadres, including pilots,

while rehiring on contract those who have

retired, although both fleet and crew

utilisation of PIA is amongst the

lowest in the world.

Capt Nadeem Yousufzai, a

permanent employee of

PIA, was appointed as

CAA director general

in violation of all

ethics and

ICAO

rules. Not only the principle of conflict of

interest was violated by appointing a pilot on

payroll of an airline to be regulated by CAA,

but serious compromises on flight safety

were allowed by the corruption dominated

mafia within the regulatory body.

During Yousafzai’s tenure, Fazalullah

Pechuhu was made CFO of CAA and hyder

Jalal was hired as consultant to CAA.

Commercial aviation flight safety was

compromised by rampant corruption and

abuse of so-called discretionary powers of

CAA, which were basically given to ensure

strict compliance of ICAO rules by airlines’

regulated by the regulator, but were instead

abused to grant undue favors and

permissions.

There was a loot sale of routes to airlines

willing to oblige the competent executives

within CAA. Grant of routes to airlines is

dictated by bilateral agreements between

countries, with emphasis to protect the vital

commercial interests of state and private-

owned national aviation industry of the

country, while ensuring a level playing field

and offering a competitive choice of fares to

the public. Instead what has been witnessed

is creation of monopolies and cartels such as

the PIA-Saudia hajj/Umrah fare agreement,

which has reaped a bonanza for travel agents

and tour operators in this lucrative religious

tourism business, instead of offering

affordable choice of fares by

competing airlines, with

benefits to pilgrims. By

strange

coincidence almost every politically well

connected individual, who has held senior

executive assignment within PIA or CAA has

strangely opened their own airlines, while the

profitability of state owned national airline

and regulator has declined with passage of

years. This is true for Shahid Khaqan Abbasi,

chairman Air Blue, Arshad Jaleel, MD Bhoja

Air, and now the junior Yusafzai getting

permission for opening yet another airline

immediately following his father’s

tenure as MD PIA and DG CAA.

Shaheen Airlines was

another such airline, but

it was started as a

project of Shaheen, a

subsidiary of PAF.

CAA Pakistan and

its board of

directors, which for

decades has been

placed under

administrative

control of Ministry of

Defence, presumably

to protect the national

security interests of this

country, on grounds that

Pakistan airspace, because of

sensitive geographical strategic

location needs to be strictly administered by

sensitive agencies. The manner in which

aviation accident reports, such as Air Blue,

Bhoja Air accidents have been clouded with

secrecy for benefit of the owners and

disadvantage of heirs of unfortunate victims

of these crashes has exposed the corruption

riddled bureaucracy of CAA, which has failed

to protect the interests of travelling public,

whose taxes contribute to massive profits of

CAA, making it one of the most profitable

state owned corporations of Pakistan. CAA

Pakistan has given four new airlines

permission to start regular commercial flight

operations in Pakistan. One of these airlines

is owned by none other than the son of Capt

Nadeem Yusafzai, who for past five years has

been serving as MD PIA, DG CAA.

While both these organisations have slumped

to new lows, the two cronies of PPP, Capt

Aijaz haroon and Capt Nadeem Yousufzai,

responsible for financial collapse of PIA have

prospered overnight and become business

tycoons. Corruption-riddled CAA,

which like PIA is under the

ministry has given

permission to Rayyan

Air, owned by two

Indian nationals

Jaidip Merchandani

and Nithin

Merchandani for

starting domestic

flight operations

as a registered

private airline, in

spite of clear rules

which debar access

to such flight

operations to an airline

owned by individuals, or

groups who hold Indian

nationality, because such

permission gives them free access to all

Pakistani airspace, designated airports and

alternate airports, some of them in use of

sensitive military aviation services.

earlier, CAA had given Aerospace Consortium

FZe, PO Box 1726, based in Fujairah UAe,

owned by these two Indian nationals to get

their cargo fleet aircrafts registered with CAA

Pakistan, which operate cargo flights under

two different airlines namely Rayyan Air and

Veterans Air mostly used for transporting

NATO /IASF equipment from and to

Bagram Airbase.

RULES DEBAR ACCESS TO AIRLINES OWNED BYINDIVIDUALS OR GROUPS WHOHOLD INDIAN NATIONALITY

Appointment of corrupt people

without any executivemanagement skills,

integrity or qualificationsto head CAA in violation of

ethics and conflict ofinterests has not only

compromised flight safety,but also declared national

security interests of Pakistan

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businessMonday, 6 May, 2013

02

B

Every day I get up and look through the

Forbes list of the richest people in America. If

I'm not there, I go to work. — Robert Orben

hYDeRABAD: People sit in front of closed shops as Muttahida Qaumi

Movement (MQM) observed 'day of peaceful mourning' across the province of

Sindh and requested all citizens to show solidarity against the bombings in

Azizabad near its headquarter 90, leaving three dead and over 45 injured. inp

muHAmmAd omeR HAyAt

IT is no hidden fact that the currentstate of the Pakistani economy is de-plorable. The issue at hand, however,is how the new government will dealwith the challenges of an economy

that is almost on the brink of collapse andglobal default. Keeping in view the currentpolitical climate in the country, it is more thanprobable that the new parliament formedafter the 2013 elections, will be a hung par-liament, with no solid majority achieved byany single political party. Therefore, unpop-ular decisions regarding the economy willnot be taken, even though such unpopular de-cisions will be the need of the hour.

Just to give an overview of things, itwould be pertinent here to discuss what sortof economy will the new government,formed in the latter half of 2013, inherit.Currently, the government is running a fis-cal budget deficit that is a whopping 8.5%of GDP, with foreign exchange reserveshovering around US $8.5 billion. The GDPitself has been growing at around 3-3.5%,just a few percentage points above the pop-ulation growth rate. Therefore per capitaGDP, in effect, has not increased. Thuspoverty and unemployment have soared inthe past few years. The central bank hasbeen following a loose monetary policysince the past year, with consecutive andsignificant decreases in the discount rate inthe hope of reducing the domestic debt lev-els of the government. The most dreadfulaspect is that of the external debt level andits comparison with the depleting foreignexchange reserves of the country. With onlyUS $8.5 billion in reserves, the country isanticipating a balance of payment deficit ofaround US $3.5 billion, and is expected topay-off an installment worth US $ 3.7 bil-lion of the IMF loan by the end of 2013.

Since unpopular decisions will not betaken due to a hung parliament, it would besafe to assume here that the fiscal deficit ofthe government will remain at dangerouslyhigh levels. If the State Bank decides to in-crease the discount rate in the hope of con-trolling the high amount of capital outflowscurrently taking place, the already sky-highlevel of domestic debt will balloon further.Even though this tightening of the mone-tary policy will be required to control cap-ital flight and inflation, it would bedetrimental for the government’s fiscal sit-uation. However, such a decision could betaken by the State Bank if it acts as an in-

dependent entity, separate from the govern-ment, rather than as an extended arm of theMinistry of Finance (as it has been in thelast five years). If the tightening of mone-tary policy is not implemented, capital out-flows from the country will continue,putting further pressure on the already de-pleting value of the rupee.

The free-fall of the rupee will continue,although this free-fall could be sloweddown. Either way, the rupee is bound tolose more value against international cur-rencies in the coming year. This is becauseof a net outflow of capital, depleting re-serves, the IMF loan repayment, and a con-tinuously worsening balance of paymentposition. The country’s industrial exportsectors will suffer since there will be noshort solution to the shortages of electricityand gas, which have hit these industrieshard. Thus industrial output will remainlow, and so will the country’s exports. Aweakening rupee will also lead to an in-crease in the import bill, further worseningthe current account deficit. The net flow ofcapital will depend on the discount rate (set

by the central bank) and more importantlythe investment climate in the country. Thelatter cannot be improved within a fewmonths, and will improve only graduallyeven if it is one of the top priorities of thenext government. Add to that the country’sinternational reputation as an exporter ofterrorism. Therefore, foreign investors willstay away from Pakistani markets even inthe near future. Terrorism has already di-verted investment that was supposed tocome into Pakistan to countries such asBangladesh, Sri Lanka, Vietnam and India.The IMF loan repayment will further de-plete reserves, and any statement issued bythe current government that the loan couldbe restructured or its payments delayed isan outright lie. The World Bank and IMFare preferred creditors, and therefore theirloans can neither be restructured, nor theirpayments delayed.

The almost certain depreciation of therupee will in turn lead to a price hike, espe-cially in sectors that are dependent on im-ported inputs. The depreciation of the rupeewill also increase the amount of foreign debt

that is to be repaid. Since electricity/gasshortages and regular shutdowns due to theworsening law and order situation will keepindustrial output low, the country will notbe in a position to take benefit of this depre-ciation by increasing exports. Thus, the de-preciation of the rupee will hit the alreadybruised and battered economy hard.

The global economy is projected topick up during the next quarter. India’seconomy is back on the road to expansion,and while China’s growth may have sloweddown, it is still expanding at a decent rate.Other developing countries’ economiessuch as Bangladesh, Sri Lanka, Brazil andArgentina are also expanding. All of thesefactors will lead to an increase in the de-mand for crude oil, thereby increasing itsprice in the world market. Thus, Pakistan’simport bill will increase since crude oil im-port makes a huge chunk of it. Furthermore,rising fuel prices will further fan the fire oninflation. Lastly, the impact of rising crudeoil prices in the world market will lead tofurther shortages in the power supply, sincePakistan relies heavily on thermal powered

electricity plants.Another task for the next government

would be narrowing the budget deficit. Inorder to do that, some tools available with thepolicy makers would be to increase tax rates,increasing the number of people in the taxbracket and/or reducing overall expenditure.Since increasing tax rates appears to be anunpopular decision, it is unlikely to be taken.Taxing agricultural income would also bedifficult because a large part of the land own-ing class would be sitting in the Parliament.In order to achieve the desired goal, the Fed-eral Board of Revenue (FBR) requires struc-tural reforms with regards to curtailing taxevasion. Considering the fact that powerfulpeople in Pakistan are tax evaders, the moveseems unlikely. Reducing expenditure hasgenerally not been the strength of any pastgovernments in Pakistan, and it would besafe to assume that expenditure levels will in-crease or in a better speculated state of theworld, remain at existing levels. Given thesefactors, it is highly probable that the budgetdeficit will increase or at least remain at thecurrent level. This directly implies furtherpressure on inflation and will also reducecredit for the private sector.

So to sum up, economic projections forthe first few months of the next govern-ment are far from decent. A depleting rupeecoupled with huge external debt levelscould well lead the economy into globalbankruptcy. Domestic debt levels too willrise, for reasons discussed above. Thesewill leave little credit for the private sector,further strangling domestic industries thatare already suffering due to power short-ages and the law and order situation. Cap-ital outflow will continue, whether it maybe due to a bad investment climate, terror-ism or a low discount rate. GDP growthwill remain abysmal, and may even fallbelow the level of population growth, in-creasing unemployment and poverty. Infla-tion will remain high, due to rising fuelprices, a depleting rupee (leading to moreexpensive imported inputs) and a huge fis-cal deficit. Pakistan will most probablyhave to request IMF for a bailout package.Foreign reserves could however increaseand the depleting rupee situation could beavoided if foreign remittances rescue theeconomy, as they have done in the past. Itis a fact to be accepted that the last fiveyears have done significant and perhapspermanent damage to the economy of Pak-istan, and the road to recovery will be along and torturous one to say the least.

‘Economic projections for the new govt’s first sixmonths, given the prevailing economic scenario’

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