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Pakistan’s debt skyrockets to Rs62.5tr

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ISLAMABAD:

Statistics released by the central bank, on Wednesday, show that Pakistan’s total debt and liabilities peaked, by an unsustainable 24%, to Rs62.5 trillion at the end of September 2022 – pushing the country into unchartered territory.

According to the State Bank of Pakistan (SBP), the total liabilities of the country, mainly government debt, surged by Rs12 trillion, or 23.7%, compared to a year ago.

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The figures reported in the central bank’s latest debt bulletin suggest that no political party, neither the Pakistan Tehreek-e-Insaaf (PTI) nor the Pakistan Muslim League-N (PML-N), have a solution out of our growing debt problems. With the mounting number of loans, coupled with a lack of resources to repay, the country’s destiny has been placed in the hands of international financial institutions and the global powers.

Now, however, the realisation that Pakistan cannot seem to survive without continued financial support is becoming more apparent to the world powers, creating problems in the political and security spheres.

The central bank did not give the percentage of Pakistan’s total debt and liabilities in terms of size of the economy. The increase in public debt alone, a direct responsibility of the government, was Rs9.7 trillion in the past year. Gross public debt was recorded at Rs51.1 trillion by the end of September 2022, according to the SBP.

None of the three mainstream political parties have managed to bring any meaningful reforms to stop debt accumulation. Instead, in its 43-month rule, the PTI added the largest amount of debt to country ever.

While blaming his predecessors for throwing the country under a pile of debt, former prime minister Imran Khan had promised to curtail debt on priority. When he left office in April 2022, however, his government had mounted Rs19.5 trillion to the federal government’s total debt stock.

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During his visits to China, Saudi Arabia and the United Arab Emirates, Pakistan’s Finance Minister Ishaq Dar pleaded for additional loans so as to meet this year’s gross financing requirements. The government is also in dialogue with foreign commercial banks, the World Bank and the International Monetary Fund (IMF) to secure loans.

There was a clear mismatch between the increase in public debt and the budget deficit, showing the adverse impact of the currency devaluation on the external debt stock.

In terms of US dollars, Pakistan’s total external debt and liabilities remained almost unchanged at $127 billion in the past one year due to the soaring ties between Pakistan, the international financial institutions (IFI) and Washington. However, in terms of the rupee, there was a massive surge in external debt due to the currency’s devaluation.

Pakistan’s total external debt jumped to Rs26.5 trillion as of September-end – an addition of Rs6.8 trillion or 35% compared to last year. Excluding the IMF loans, the federal government’s external debt increased to Rs18 trillion within one year. There was a net increase of Rs1.3 trillion in external debt, largely caused by the depreciation of the rupee and the country’s efforts to build foreign currency reserves via borrowing.

Pakistan’s debt from the IMF increased by 44% within one year to Rs1.7 trillion by the end of September, stated the SBP. This is despite the fact that the IMF has disbursed about $2 billion less than its scheduled releases during this period.

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The federal government’s total domestic debt increased to Rs31.4 trillion, an addition of Rs5 trillion, or 19%, in one year.

The lower-than-targeted tax collection, steep currency devaluation, high interest rates, rising expenditures along with losses incurred by state-owned companies and debt mismanagement were the main reasons for the surge in public debt.

The average exchange rate on the last day of September 2022 was Rs228 to a dollar due to a depreciation of 57.4% in just one year, according to the central bank. This had a huge impact on the government’s external debt.

The direct consequence of the mounting pile of debt is a huge increase in the cost of debt servicing. In just one quarter of the current fiscal year, debt servicing stood at Rs1 trillion. The government’s revised estimates show that the cost of debt servicing may cross Rs4.7 trillion – about Rs750 billion more than the budgeted figure.

Published in The Express Tribune, November 17th, 2022.

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Privatisation fails to meet objectives

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ISLAMABAD:

The success of Pakistan’s privatisation programme has remained limited to only generating $11 billion in sale proceeds, as the country could not achieve the post-privatisation objectives of improving efficiency and competition, says a new independent study.

The findings come amid the International Monetary Fund’s (IMF) push for approval of the State-Owned Enterprises (SOEs) Bill to improve efficiency and management of public sector firms. The finance ministry has requested the holding of a joint session of parliament to approve the law, after the bill was rejected by the Senate.

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In a study titled “Public Sector Enterprises (PSEs) in Post-Privatisation: Evidence from Pakistan”, authors Naseem Faraz and Dr Ghulam Samad concluded that the key objectives of the privatisation programme had remained unfulfilled. The study has been published in the Journal of Applied Economics.

“Our main finding is that the performance of firms has improved in the post-privatisation period but (it is) statistically insignificant,” said the authors. Privatisation has been carried out with the motive of reducing the fiscal burden and increasing the efficiency of the inefficient PSEs. Since 1991, the sale of PSEs has raised revenues of Rs649 billion, or $11 billion.

The $11 billion has been worked out by applying the exchange rate of the year when a privatisation transaction took place.

Pakistan is one of the developing countries where privatisation of a large number of PSEs has taken place, but the post-privatisation effect is yet to be analysed. Second, rather than focusing on one or a few sectors, the study considers all the privatised PSEs.

The study showed that the performance of a few firms improved in the post-privatisation period but it largely remained negative.

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“In particular, the privatised PSEs in energy, cement and chemical sectors do not show positive gains in the post-privatisation period. However, the telecom and textile sectors have experienced a positive change in the performance of the privatised PSEs.” “Similarly, the results also showed that the efficiency of firms did not increase significantly.”

The authors said that according to their assessment through the Key Informant Interviews, the malfunctioning of regulatory environment led to the market failure that eventually resulted in market exploitation.

Regulations and regulators are captured by the market, bureaucrats, judiciary and politicians. An effective regulatory environment does not exist to force the privatised entities to have higher efficiency and develop a competitive environment.

Government intervention in the regulatory sphere is dominant. Every regulatory authority has a board member from the government. This practice is clearly not aligned with the privatisation regulations.

The government intervention (secretary sitting as a board member) creates conflict of interest by having ownership and management together.

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The privatised banking and energy companies have failed to bring in the benefits of sell-off, according to the study. The process of privatisation and rewards distribution favoured mainly the buyers, while the government faced risk and cost.

According to the authors, the privatised companies earned a higher average rate of return on assets compared to their fully government-owned counterparts, as measured by the total net profits-to-sales ratio.

The higher returns on assets suggest a favourable effect of privatisation. On the contrary, the profitability or productivity measure (net profits-to-sales ratio) was relatively higher for the privatised firms but it was statistically insignificant compared to the period when the firms were fully government owned.

“The privatised firms experience a mild increase in productivity compared to their pre-privatisation period. This difference in performance is not statistically significant.”

Privatisation also did not enhance the efficiency of the privatised firms in terms of increase in sales. It suggested that the efficiency improvement was merely coming through the reduction in cost of production.

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The study identified weak regulators as a reason for the failure to achieve the privatisation objectives.

“Unfortunately, the regulator Pakistan Telecommunication Authority (PTA) did not influence PTCL and other related entities to work in a regulated market environment.”

The role of the PTA is limited to overseeing the determination of market prices. PTCL’s privatisation was not a fair deal. It lost $800 million and also did not improve the market in terms of competition.

“The government sold 26% shares to Etisalat and also transferred the management, which is against the rule, which requires 51% shares,” emphasised the authors.

The government had agreed that Etisalat would pay $2.6 billion by making upfront payment of $1.4 billion and the remaining $1.2 billion in nine installments of $33 million each. For the deal, the government received only $1.8 billion and the remaining $800 million was never paid.

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“The monopoly of the telecom sector persisted despite the privatisation and drove away billions of dollars.”

The privatisation of KESC, now KE, also did not achieve the objectives. Though the main reason of the privatisation was to get rid of the loss-making enterprise, unfortunately the government is paying more after privatisation, according to the study.

Published in The Express Tribune, November 24th, 2022.

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Tractor maker faces legal action over fraud

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KARACHI:

The Federal Tax Ombudsman (FTO) has ordered legal action against a tractor manufacturing company as the Federal Board of Revenue (FBR) reported a fraud of more than Rs10 billion.

According to FBR sources, the tractor company has allegedly committed a fraud of over Rs10 billion under the previous government’s initiative to provide tractors at a lower cost to the farmers.

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As part of the subsidy scheme, the government gave billions of rupees to the deserving and underprivileged farmers for the purchase of tractors.

Sources said that the tractor manufacturer had claimed sales tax refunds on fake documents and flying invoices. The FBR then referred the case to the FTO.

They added that the FBR recommended the application of the Benami Transactions Act while taking legal action against the tractor manufacturer.

“The respondent company misused pay orders of the complainant by issuing bogus and fake sales tax invoices to other persons for obtaining fraudulent adjustment and refund,” a notification of the FTO office read.

The FBR has initiated legal proceedings against the owners and dealers of the tractor manufacturing company for the recovery of money obtained through fraudulent means.

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The Directorate General of Intelligence and Investigation, Inland Revenue has been tasked with investigating the fraud and tax evasion case.

Published in The Express Tribune, November 24th, 2022.

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G7 looking at Russian oil price cap of $65-70

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BRUSSELS:

The Group of Seven nations (G7) are looking at a price cap on Russian sea-borne oil in the range of $65-70 per barrel, a European Union (EU) diplomat said on Wednesday.

Views in the EU are split, with some pushing for a much lower price cap and other arguing for a higher one. The G7, including the United States, as well as the whole of the EU and Australia, are slated to implement the price cap on sea-borne exports of Russian oil on December 5.

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“The G7 apparently is looking at a $65-70 per barrel bandwidth,” the EU diplomat said.

“Poland, Lithuania and Estonia consider this too high because they want the price set at the cost of production, while Cyprus, Greece and Malta find it too low, because of the risk of more deflagging of their vessels, which might mean the G7 has found a good middle-ground,” the diplomat said.

Some 70%-85% of Russia’s crude exports are carried by tankers rather than pipelines.

The idea of the price cap is to prohibit shipping, insurance and re-insurance companies from handling cargos of Russian crude around the globe, unless it is sold for no more than the maximum price set by the G7 and its allies.

Because the world’s key shipping and insurance firms are based in G7 countries, the price cap would make it very difficult for Moscow to sell its oil – its biggest export item accounting for some 10% of world supply – for a higher price.

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At the same time, because production costs are estimated at around $20 per barrel, the cap would still make it profitable for Russia to sell its oil and in this way prevent a supply shortage on the global market.

Brent crude front-month future oil prices initially fell to $86.54 from $87.30 on the news.

Published in The Express Tribune, November 24th, 2022.

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