In a short span of time, foreign direct investment has declined sharply because of low economic growth, critical shortage of power and vulnerabilities of the external sector.
The transition from military-led regime to constitutional democracy has also enhanced political risks for foreign capital spending.
There is so much more public accountability and judicial activism. And the enormous cost of the war against militancy is consuming funds meant for upgrading social and physical infrastructure that could make the economy globally competitive for trade and investment.
While the government recognises the need for the FDI, it is not clear yet how it will stimulate the economy and create opportunities for business, notwithstanding its efforts, with the IMF on board, to achieve macroeconomic stability. Already, across-the-board incentives to even export sector are being withdrawn except for the targeted segment. The move by a cash-strapped government is intended to do away with unearned incomes.
The economy is also facing multiple risks because of the Great Recession, shrinkage of an overleveraged global financial market, tight liquidity and its squeeze on international trading volumes. It is also not yet known whether the enormous fiscal deficits that developed countries carry, would lead to double-dip recession. The IMF says the economic crisis may be moving into a new phase with rising public debt that threatens to undermine the global financial system. This observation is shared by the World Bank. All this requires a paradigm shift in national economic policies with focus on commodity producing sectors to put the economy back on trajectory of high economic growth.
Because of the severe balance of payments problem and global liquidity squeeze, the process of integration of the domestic economy into the global financial market has been halted. Capital and financial inflows and foreign trade have plummeted. The external sector vulnerability has forced the government to seek credit from the IMF. Not yet out of the IMF programme and with the growth rate low, the signal given to foreign investors is that the economy in distress and they might well seek opportunities elsewhere.
But the key issue is what kind of policies would Pakistan follow in the changing economic world order and how it proposes to resolve its multiple crises. How much space would it provide to foreign investment while focusing on the domestic market. Recently, there has been an uproar against leasing of agricultural land to foreigners. In the past decade, much of FDI has come in the import-oriented industries rather than in export-oriented manufacturing. Perhaps, there is some room for companies producing seeds,dairy products and food chains.
It is, however, crystal clear that foreign assets would be safe from any government seizure. The era of nationalisation is over. But how future policies would unfold is not clear because these are turbulent times.
The main issue is about the rules and regulations that govern foreign investment. Weak regulations and supervision brought about the near-collapse of the Anglo-Saxon global financial system at a time when markets were supposed to discipline governments. They ended by demonstrating that they lacked both financial discipline and business ethics.
Many economists in developed world believe that more value can be expected through change in laws and regulations ruling investment, or they are implemented in such a way that financial returns can be ensured. This, they describe as “policy risk,” for which Harvard scholars advise companies that they “must learn the art of political spin.” The objective should be to “manage policy risks to expand their investment options.”
But these options would not work unless they serve the development needs of the host country. In the past decade or so, the FDI came merely in two or three sectors like telecom and banks. In the wake of global financial crisis, some foreign banks have closed their operations in Pakistan.. As it is, the regulatory authorities in Pakistan are weak and largely ineffective.
Somehow, in the current global environment, foreign investment has become too much risk-prone. There is so much talk of country or sovereign risks, political uncertainties and risks, security concerns, policy risks and uncertainties, regulatory uncertainties and risks. Investors have to hedge against exchange and interest rates volatility. And the policy risks have increased after the Great Recession. They continue to mount with enormous fiscal deficits the developed countries have accumulated.
And when the multinationals press host countries too much for concessions and incentives, they create the impression of foreign meddling and stoke nationalism. Not only that. The change in governments can often lead to re-negotiations of contracts and terms of investment. Hubco’s case is one example. A World Bank study in 2004 said that up to 30 per cent of the private foreign investments worldwide were renegotiated.
Perhaps, it is because of the enormous constraints that the multinationals tend to return to the pre-capitalist mercantilism and prefer acquisitions and mergers to boosting global production. They are focused on management and restructuring, having turned hierarchical and inefficient and unable to monitor effectively their vast business empires in a complex and fast changing business world. There is unmanageable growth of frauds within the financial system. And acquisitions, mergers and alliances at an unprecedented pace are creating monopolies, cartels and oligopolies, making the global market dysfunctional.
The financial giants in the West “too big to fail” had to be bailed out by taxpayers money and “nationalisation” returned for such time they could be back on their own feet. It shows that while the fundamental principles can be guaranteed, there is escape from temporary deviations and break in continuity of policies.
There have been so much of innovations and creativity to preserve the status quo but not much has been done to re-invent capitalism to make it inclusive and to ground it on common good. Over-concentration of national wealth in few hands is a sure recipe for creating a recession. This has what been happened worldwide. And the national wealth so created is evaporating in a deepening economic crisis.
Many eminent social scientists in the West attribute the failure of the market to dogmatic thinking which reflects neither “true capitalism” nor “economic science”. They also assert that lax regulatory regime leads to market failures as demonstrated by the Great Depression of the 1930s and the current Great Recession.
Over several decades, many independent nations with agricultural economies have become semi-industrialised that has reinforced national self-reliance despite frenzied globalisation by many. And the current liquidity crunch in the global financial market and shrinking international trade is forcing the developing countries to focus on the domestic market where foreign investment may be welcomed on a selective basis through public-private partnership in building physical infrastructure or joint ventures with local entrepreneurs for food processing and marketing.
The local and foreign expertise and capital has to be blended to adapt global best practices suited to local conditions to help the host country’s economic development. The global market cannotcannot prosper while ignoring the needs of a nation’s people.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/policy-risks-in-foreign-investment-640
Thursday, April 29, 2010
Cancerous growth of corporate frauds By Muhammad Bashir Chaudhry
The incidence of corporate frauds has swelled in India mainly because of ineffective control systems and diminishing ethical values, according to Fraud Survey Report 2010. The situation in corporate Pakistan may not be very different.
To quote the State Bank of Pakistan data, some 10 per cent increase in fraud and forgery was recorded in the banking system during July-September 2009 as compared to the previous quarter.
The survey reports issued by the KPMG and other experts in India or elsewhere in a way are cancer-like research findings, which offer a set of parameters as to how one can increase chances of avoiding corruption. Control of fraud requires vigilance, at all levels and at all times, supported by scientific tools in the hands of experts. The first step, however, is to understand the nature of fraudulent activities and that of persons who could possibly indulge in such acts.
Fraud has different connotations and is defined as such. One simple definition of fraud is that it is an act or course of deceit deliberately practiced to gain unlawful or unfair advantage.
Corporate fraud is when a corporate entity is involved, though the discussion here is equally applicable to proprietorships, partnerships, trusts and associations. Corporate fraud or unethical activities are divided in three broad categories.
The first category is where a company acts fraudulently or unethically to gain unlawful advantage or benefit by harming or undermining the lawful interest of the government by indulging in evading taxes, smuggling, mis-declarations, valuation frauds, fraudulent claims of refund and rebate etc. Such a company may be committing an economic crime and gaining financially at the cost of the government and consequently the general public. A sample of some of the similar instances is given below:
a) A company producing consumer, intermediate or capital goods or offering services may be promoting its sale at higher prices, offering underhand payments, commissions or kickbacks to the influential persons possibly in the purchase departments of the government or the buyer companies.
b) A company can sometimes benefit from laws, rules, regulations, policies or entities partly developed by undue influence of certain vested interests for their own private benefit.
c) Bribery and corruption have come to be viewed as an inevitable aspect of doing business. Corporate hospitality is one such practice.
d) The company manipulates, against the prescribed rules, its periodic financial statement with the intent of hoodwinking the creditors or the investors while mobilising additional loans or investments. Distortions may be made through acts such as overvaluing of assets, creating fictitious revenue, concealing of liabilities and expenses, deferring expenses, improper revenue recognition, inappropriate omissions or disclosures, hiding conflicts of interest situations or capitalising operating expenses and use of related party transactions to shift profits or losses. The practice of some banks showing loans at lower level on the dates of the quarterly or annual accounts meant for general public, and thus indicating the lower credit risk is also a case in point.
e) Conflict of interest related frauds in the corporate sector, such as awarding contracts to favourites, kickbacks, double book keeping, etc. Actions resulting from conflict of interest generally constitute most costly frauds, since these happen at senior management / governance level.
The second category of corporate fraud is where the company is a victim of the fraudulent activities perpetrated by its employees alone or with the connivance of outsiders or mainly by the outsiders possibly with information or tips passed on by any employee.
The perpetrators of fraud could theoretically be a member of the board, chief executive, member of the senior management team or a lower level employee. Every company is exposed to the risk of fraud in case it has inadequate internal controls, management in the habit of overriding internal controls, ineffective compliance programmes and weak oversight of management by the directors.
The company may be defrauded in various ways such as fictitious medical claims, bid rigging, conflicts of interest, diversion of sales, asset misappropriation, kickbacks in purchases or award of contracts, payroll embezzlement and abuse of expense account.
The employees at lower echelons in a company may perhaps fall prey to the temptation of committing fraud if they see use of company resources for personal gain by members of the board, top management or the members of the group controlling the company, practices that are not entirely legal or ethical.
It is generally easier for an employee to commit fraud as he is aware of the processes and internal controls and it is easier for him to circumvent the controls. The earnings of some top executives are linked to the financial performance of a company; such employees at times resort to cooking up the books.
Certain companies believe that they can detect and control all corporate frauds by employing trustworthy staff, instituting controls and engaging the auditors. These are only myths. According to experts, the reality is that it is the trusted employees who commit fraud when they are given responsibility, authority and independence without adequate monitoring. Moreover, the external auditors engaged for audit of accounts are not responsible for discovering corporate frauds.
The third category of corporate fraud is when a group of people join hands in starting certain dubious investment or other quick money making scheme with the intent of cheating a targeted set of people or the public at large. They may use fake logo or fake letterheads of companies or misrepresent known companies.
The banking and corporate regulators, namely SBP and SECP keep on issuing joint public notices to warn the general public of such dubious schemes.
Measuring the true cost of fraud is not easy. Some frauds are never detected, or only discovered after they have gone on for several years. Many detected are never reported for variety of reasons, including its impact on company’s image.
Ineffective whistle-blowing systems, inadequate oversight of senior management activities by the audit committee and weak regulatory oversight mechanisms are some of the reasons for the increase in the number of frauds that one can see in corporate sector. Moreover, the incidence of frauds is increasing due to difficult economic scenario coupled with diminishing ethical values.
The authorities as well as various regulators keep on introducing new measures to minimise unethical or illegal practices. The corporate entities also try to erect firewalls to safeguard their interest against pilferage or fraud. But individuals as customers, savers or investors are in most cases at the losers’ end. This has to change.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/cancerous-growth-of-corporate-frauds-640
To quote the State Bank of Pakistan data, some 10 per cent increase in fraud and forgery was recorded in the banking system during July-September 2009 as compared to the previous quarter.
The survey reports issued by the KPMG and other experts in India or elsewhere in a way are cancer-like research findings, which offer a set of parameters as to how one can increase chances of avoiding corruption. Control of fraud requires vigilance, at all levels and at all times, supported by scientific tools in the hands of experts. The first step, however, is to understand the nature of fraudulent activities and that of persons who could possibly indulge in such acts.
Fraud has different connotations and is defined as such. One simple definition of fraud is that it is an act or course of deceit deliberately practiced to gain unlawful or unfair advantage.
Corporate fraud is when a corporate entity is involved, though the discussion here is equally applicable to proprietorships, partnerships, trusts and associations. Corporate fraud or unethical activities are divided in three broad categories.
The first category is where a company acts fraudulently or unethically to gain unlawful advantage or benefit by harming or undermining the lawful interest of the government by indulging in evading taxes, smuggling, mis-declarations, valuation frauds, fraudulent claims of refund and rebate etc. Such a company may be committing an economic crime and gaining financially at the cost of the government and consequently the general public. A sample of some of the similar instances is given below:
a) A company producing consumer, intermediate or capital goods or offering services may be promoting its sale at higher prices, offering underhand payments, commissions or kickbacks to the influential persons possibly in the purchase departments of the government or the buyer companies.
b) A company can sometimes benefit from laws, rules, regulations, policies or entities partly developed by undue influence of certain vested interests for their own private benefit.
c) Bribery and corruption have come to be viewed as an inevitable aspect of doing business. Corporate hospitality is one such practice.
d) The company manipulates, against the prescribed rules, its periodic financial statement with the intent of hoodwinking the creditors or the investors while mobilising additional loans or investments. Distortions may be made through acts such as overvaluing of assets, creating fictitious revenue, concealing of liabilities and expenses, deferring expenses, improper revenue recognition, inappropriate omissions or disclosures, hiding conflicts of interest situations or capitalising operating expenses and use of related party transactions to shift profits or losses. The practice of some banks showing loans at lower level on the dates of the quarterly or annual accounts meant for general public, and thus indicating the lower credit risk is also a case in point.
e) Conflict of interest related frauds in the corporate sector, such as awarding contracts to favourites, kickbacks, double book keeping, etc. Actions resulting from conflict of interest generally constitute most costly frauds, since these happen at senior management / governance level.
The second category of corporate fraud is where the company is a victim of the fraudulent activities perpetrated by its employees alone or with the connivance of outsiders or mainly by the outsiders possibly with information or tips passed on by any employee.
The perpetrators of fraud could theoretically be a member of the board, chief executive, member of the senior management team or a lower level employee. Every company is exposed to the risk of fraud in case it has inadequate internal controls, management in the habit of overriding internal controls, ineffective compliance programmes and weak oversight of management by the directors.
The company may be defrauded in various ways such as fictitious medical claims, bid rigging, conflicts of interest, diversion of sales, asset misappropriation, kickbacks in purchases or award of contracts, payroll embezzlement and abuse of expense account.
The employees at lower echelons in a company may perhaps fall prey to the temptation of committing fraud if they see use of company resources for personal gain by members of the board, top management or the members of the group controlling the company, practices that are not entirely legal or ethical.
It is generally easier for an employee to commit fraud as he is aware of the processes and internal controls and it is easier for him to circumvent the controls. The earnings of some top executives are linked to the financial performance of a company; such employees at times resort to cooking up the books.
Certain companies believe that they can detect and control all corporate frauds by employing trustworthy staff, instituting controls and engaging the auditors. These are only myths. According to experts, the reality is that it is the trusted employees who commit fraud when they are given responsibility, authority and independence without adequate monitoring. Moreover, the external auditors engaged for audit of accounts are not responsible for discovering corporate frauds.
The third category of corporate fraud is when a group of people join hands in starting certain dubious investment or other quick money making scheme with the intent of cheating a targeted set of people or the public at large. They may use fake logo or fake letterheads of companies or misrepresent known companies.
The banking and corporate regulators, namely SBP and SECP keep on issuing joint public notices to warn the general public of such dubious schemes.
Measuring the true cost of fraud is not easy. Some frauds are never detected, or only discovered after they have gone on for several years. Many detected are never reported for variety of reasons, including its impact on company’s image.
Ineffective whistle-blowing systems, inadequate oversight of senior management activities by the audit committee and weak regulatory oversight mechanisms are some of the reasons for the increase in the number of frauds that one can see in corporate sector. Moreover, the incidence of frauds is increasing due to difficult economic scenario coupled with diminishing ethical values.
The authorities as well as various regulators keep on introducing new measures to minimise unethical or illegal practices. The corporate entities also try to erect firewalls to safeguard their interest against pilferage or fraud. But individuals as customers, savers or investors are in most cases at the losers’ end. This has to change.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/cancerous-growth-of-corporate-frauds-640
Trade policy and global realities By Dr Ahmad Manzoor
Pakistan has missed out on its due share of the immense wealth that has been created in the world through globalisation of the past two decades. No serious and sustained efforts have been made to integrate the national economy with the international market and all such initiatives have proved to be short-lived.
A look at any international index of globalisation makes this clear. In the Wall Street Journal and the Heritage Foundation Index, Pakistan is currently ranked 117 out of 179 countries, just below Benin and Gabon. In the Swiss KOF Index of globalization, its ranking is below Zambia, Nigeria and Ghana at 104 out of 156.
In the World Bank’s 2010 Logistic Performance Index (LPI), the ranking is 110 among 155 countries with Customs performance being dismally low at 134. The story is the same with all other indexes; we are well below average.
The situation has been deteriorating during the recent years; witness the fall from a rank of 67 in 2007 to 110 in the World Bank’s 2010 LPI. This contrasts with other regional countries which have improved their rankings considerably such as Bangladesh and even Afghanistan.
International trade has changed, making obsolete yesterday’s trade policy models. It is no longer the best policy to focus on producing finished goods within a geographical boundary and to compete on that basis.
Most of the global trade is now carried on as a part of supply chains and production networks. Pakistan’s share of the global trade has been shrinking over the recent years and the situation can be reversed only if trade policy is adjusted to accord with the changed commercial realities.
Over the last two decades, attempts have been made to open up trade. Two of the most significant ones were in the early 1990s and again between 2001 and 2004. First, import licencing was done away with for most goods and a process of reduction in import duties and non-tariff barriers was put in place.
The 2001-04 attempts were initiated on the behest of the IMF as part of the Fund’s conditions attached to the Poverty Reduction and Growth Facility. During this period, import tariffs and non-tariff barriers were steeply reduced and services sectors particularly financial and Information Technology (IT) were opened up. As a result for a short while, exports started increasing at an average of over 15 per cent annually.
However, like the earlier initiative, this was also short lived.
As soon as the IMF-led programme ended after three years, some of the reforms were reversed. This reversal has intensified over the last two years when tariff rates have repeatedly been raised and other non-tariff barriers put in place. All this happened at a time when the global food, fuel and financial crisis began and the impact on the economy was crippling. As the global economy is recovering, countries that have adopted globalisation are managing their economy well, whereas Pakistan’s economy still seems to be in turmoil.
While the policymakers are drawing up plans for the next financial year, it is time to pause and assess what worked and what did not, which policies led to growth and which lead to stagnation. Unfortunately, there is cause for being pessimistic mainly for the following reasons.
First there is a wrong perception that ours is one of the most open economies. In fact our import tariff profile is comparable only to that of Sub-Saharan Africa and globally our economy is ranked as not free.
Second, there is a general perception that imports are bad for our economic development. What has to be realised is that more imports mean more exports, increased economic activity, higher tax receipts, additional FDI and reduced inflation. In any event, more than 85 per cent of our imports comprise essential goods whose import cannot be restricted.
These include crude oil and petroleum products (30pc), machinery (25pc), chemicals including fertilisers (16pc), food products (10pc) and iron and steel (5pc).
All other items, including manufactured products, constitute less than 15 per cent of our imports. The third major factor is the popular desire for self-reliance and import substitution to which our policies were geared in the 1980s. This concept has lost its appeal even in countries such as India and Brazil, which were its great champions, but our leaders and civil society continue to associate patriotism with import substitution.
The writer is Pakistan’s ex-ambassador to the WTO.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/trade-policy-and-global-realities-640
A look at any international index of globalisation makes this clear. In the Wall Street Journal and the Heritage Foundation Index, Pakistan is currently ranked 117 out of 179 countries, just below Benin and Gabon. In the Swiss KOF Index of globalization, its ranking is below Zambia, Nigeria and Ghana at 104 out of 156.
In the World Bank’s 2010 Logistic Performance Index (LPI), the ranking is 110 among 155 countries with Customs performance being dismally low at 134. The story is the same with all other indexes; we are well below average.
The situation has been deteriorating during the recent years; witness the fall from a rank of 67 in 2007 to 110 in the World Bank’s 2010 LPI. This contrasts with other regional countries which have improved their rankings considerably such as Bangladesh and even Afghanistan.
International trade has changed, making obsolete yesterday’s trade policy models. It is no longer the best policy to focus on producing finished goods within a geographical boundary and to compete on that basis.
Most of the global trade is now carried on as a part of supply chains and production networks. Pakistan’s share of the global trade has been shrinking over the recent years and the situation can be reversed only if trade policy is adjusted to accord with the changed commercial realities.
Over the last two decades, attempts have been made to open up trade. Two of the most significant ones were in the early 1990s and again between 2001 and 2004. First, import licencing was done away with for most goods and a process of reduction in import duties and non-tariff barriers was put in place.
The 2001-04 attempts were initiated on the behest of the IMF as part of the Fund’s conditions attached to the Poverty Reduction and Growth Facility. During this period, import tariffs and non-tariff barriers were steeply reduced and services sectors particularly financial and Information Technology (IT) were opened up. As a result for a short while, exports started increasing at an average of over 15 per cent annually.
However, like the earlier initiative, this was also short lived.
As soon as the IMF-led programme ended after three years, some of the reforms were reversed. This reversal has intensified over the last two years when tariff rates have repeatedly been raised and other non-tariff barriers put in place. All this happened at a time when the global food, fuel and financial crisis began and the impact on the economy was crippling. As the global economy is recovering, countries that have adopted globalisation are managing their economy well, whereas Pakistan’s economy still seems to be in turmoil.
While the policymakers are drawing up plans for the next financial year, it is time to pause and assess what worked and what did not, which policies led to growth and which lead to stagnation. Unfortunately, there is cause for being pessimistic mainly for the following reasons.
First there is a wrong perception that ours is one of the most open economies. In fact our import tariff profile is comparable only to that of Sub-Saharan Africa and globally our economy is ranked as not free.
Second, there is a general perception that imports are bad for our economic development. What has to be realised is that more imports mean more exports, increased economic activity, higher tax receipts, additional FDI and reduced inflation. In any event, more than 85 per cent of our imports comprise essential goods whose import cannot be restricted.
These include crude oil and petroleum products (30pc), machinery (25pc), chemicals including fertilisers (16pc), food products (10pc) and iron and steel (5pc).
All other items, including manufactured products, constitute less than 15 per cent of our imports. The third major factor is the popular desire for self-reliance and import substitution to which our policies were geared in the 1980s. This concept has lost its appeal even in countries such as India and Brazil, which were its great champions, but our leaders and civil society continue to associate patriotism with import substitution.
The writer is Pakistan’s ex-ambassador to the WTO.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/trade-policy-and-global-realities-640
Budget blues By Humair Ishtiaq
SOCIETY seems to have come a long way from the days when the annual budget season used to make people excited about what surprise, or surprises, it may or may not bring in its fold. A brief chat with a cross-section of population suggests that life today is all about managing the domestic budget.
Other than the policymakers, for obvious reasons economists and trade associations are the only ones interested in what the government is trying to do and what it might end up doing under pressure from one lobby or the other.
Beyond that, most segments of society have hardly any concern about, say, either the rise or fall of the GDP. Inflation, debt servicing, foreign exchange reserves, tax-to-GDP ratio and all such things are nothing but mere jargon that is unintelligible to the common citizenry.
People just want a budget that could provide them basic necessities of life at cheaper costs. However, they are realistic enough to concede in the same breath that it is not going to happen at least in their lifetimes.
“Ten years ago, the federal budget had some relevance to my life. Today, it has none,” said Zahid Karam Ali, a mechanical engineer in his late 40s who manages a North Nazimabad household of six – his wife, three children and his widowed mother.
“In fact, it was even earlier that the budget had the capacity to have an impact on my life. Then came the era of mini-budgets, but now things are apparently on an auto mode,” he said, adding: “I don’t know the specific reason, but things are clearly beyond the control of the authorities. There are cartels controlling the market and they determine the course of my domestic budget more than the government does.”
Shah Mahmood, a doctor who works for a private facility in the mornings and does his own clinic in Malir area in the evenings, voiced similar sentiments, but gave a new twist to the argument when he called into question the insistence of successive governments on practising good governance in each year’s budget speech.
“We have all heard of what they say on the floor of the house about controlling unnecessary expenditure on the administrative side. It certainly makes for “good news”, but the worth of such pronouncements is quite obvious after all these years. Budget today is a mere formality as far as the common man is concerned. What I know for sure is that the prices will keep going up and it will be always up to me to somehow keep the household up and running,” he said with a touch of finality – if not fatality – about his tone.
Even when the government talks of ameliorating the lot of the poor with one poverty-alleviation programme or the other, no one seems to be quite impressed – not among the poor at least.
The proceedings of a recent meeting in Islamabad were narrated to a handful of those struggling to survive on the poverty line, and the result, almost every single time, was some sarcastic comment.
At the said meeting, Prime Minister Syed Yousuf Raza Gilani directed his economic team to prepare a “pro-poor and relief-oriented” budget “in line with the commitment of the government”.
The meeting was attended among others by Adviser on Finance Dr Hafeez Sheikh who “apprised the prime minister of the progress … and specifically mentioned that the objective before the economic team was to gradually move towards economic self-reliance.”
The premier, in turn, advised the team to keep in mind the commitments with the IMF while coming up with a budget that should be “growth-oriented and supportive of business, industry and agriculture”. And, while doing all this, the finance ministry “should provide adequate resources to fund immediate relief measures for the poor and the marginalised segments of society”.
In conclusion, Mr Gilani made it clear to the committee that “the poor had the first right on the national exchequer”, and asked the economic team to “scale down inflation to provide relief to the common man”.
These laudable guidelines, however, are not received with the warmth and appreciation that people in authority would have expected. The poor are not just doubtful about what may actually happen; they are absolutely certain that their “right on the national exchequer” will be suppressed by those who have been asked to “keep in mind commitments with the IMF”.
The argument is simple: IMF and the poor don’t go together. The tone in which the argument is uttered is generally of scorn. However, the biggest roar of laughter and load of cynicism is unleashed once people are told of the government’s declared commitment to “overcome” the challenge of power crisis “in the near future”, and the directive of the premier to the ministry concerned “not to delay plans due to financial constraints”.
At their wits’ end, people across the board are trying to get witty about something on which they have no control except to fend for themselves, wherever they can. There can be no further discussion on the issue once the power crisis is mentioned along with the government’s commitment to make things better in the forthcoming budget.
The owner of a restaurant – a tea-shop, actually – in one of city’s peripheral areas said people used to watch the budget speech on the television set in his shop along with a cup of tea. “Now even if I want to watch the speech, those present on the occasion insist on switching over to some other channel showing movie, music or cricket. Anything will do except the budget speech. It has no relevance to the life of those who come here. It has no relevance to my life either,” he said, underlining the widening gap between the government and the governed.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/budget-blues-640
Other than the policymakers, for obvious reasons economists and trade associations are the only ones interested in what the government is trying to do and what it might end up doing under pressure from one lobby or the other.
Beyond that, most segments of society have hardly any concern about, say, either the rise or fall of the GDP. Inflation, debt servicing, foreign exchange reserves, tax-to-GDP ratio and all such things are nothing but mere jargon that is unintelligible to the common citizenry.
People just want a budget that could provide them basic necessities of life at cheaper costs. However, they are realistic enough to concede in the same breath that it is not going to happen at least in their lifetimes.
“Ten years ago, the federal budget had some relevance to my life. Today, it has none,” said Zahid Karam Ali, a mechanical engineer in his late 40s who manages a North Nazimabad household of six – his wife, three children and his widowed mother.
“In fact, it was even earlier that the budget had the capacity to have an impact on my life. Then came the era of mini-budgets, but now things are apparently on an auto mode,” he said, adding: “I don’t know the specific reason, but things are clearly beyond the control of the authorities. There are cartels controlling the market and they determine the course of my domestic budget more than the government does.”
Shah Mahmood, a doctor who works for a private facility in the mornings and does his own clinic in Malir area in the evenings, voiced similar sentiments, but gave a new twist to the argument when he called into question the insistence of successive governments on practising good governance in each year’s budget speech.
“We have all heard of what they say on the floor of the house about controlling unnecessary expenditure on the administrative side. It certainly makes for “good news”, but the worth of such pronouncements is quite obvious after all these years. Budget today is a mere formality as far as the common man is concerned. What I know for sure is that the prices will keep going up and it will be always up to me to somehow keep the household up and running,” he said with a touch of finality – if not fatality – about his tone.
Even when the government talks of ameliorating the lot of the poor with one poverty-alleviation programme or the other, no one seems to be quite impressed – not among the poor at least.
The proceedings of a recent meeting in Islamabad were narrated to a handful of those struggling to survive on the poverty line, and the result, almost every single time, was some sarcastic comment.
At the said meeting, Prime Minister Syed Yousuf Raza Gilani directed his economic team to prepare a “pro-poor and relief-oriented” budget “in line with the commitment of the government”.
The meeting was attended among others by Adviser on Finance Dr Hafeez Sheikh who “apprised the prime minister of the progress … and specifically mentioned that the objective before the economic team was to gradually move towards economic self-reliance.”
The premier, in turn, advised the team to keep in mind the commitments with the IMF while coming up with a budget that should be “growth-oriented and supportive of business, industry and agriculture”. And, while doing all this, the finance ministry “should provide adequate resources to fund immediate relief measures for the poor and the marginalised segments of society”.
In conclusion, Mr Gilani made it clear to the committee that “the poor had the first right on the national exchequer”, and asked the economic team to “scale down inflation to provide relief to the common man”.
These laudable guidelines, however, are not received with the warmth and appreciation that people in authority would have expected. The poor are not just doubtful about what may actually happen; they are absolutely certain that their “right on the national exchequer” will be suppressed by those who have been asked to “keep in mind commitments with the IMF”.
The argument is simple: IMF and the poor don’t go together. The tone in which the argument is uttered is generally of scorn. However, the biggest roar of laughter and load of cynicism is unleashed once people are told of the government’s declared commitment to “overcome” the challenge of power crisis “in the near future”, and the directive of the premier to the ministry concerned “not to delay plans due to financial constraints”.
At their wits’ end, people across the board are trying to get witty about something on which they have no control except to fend for themselves, wherever they can. There can be no further discussion on the issue once the power crisis is mentioned along with the government’s commitment to make things better in the forthcoming budget.
The owner of a restaurant – a tea-shop, actually – in one of city’s peripheral areas said people used to watch the budget speech on the television set in his shop along with a cup of tea. “Now even if I want to watch the speech, those present on the occasion insist on switching over to some other channel showing movie, music or cricket. Anything will do except the budget speech. It has no relevance to the life of those who come here. It has no relevance to my life either,” he said, underlining the widening gap between the government and the governed.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/budget-blues-640
Oil groups turn focus back to traditional fields by TOM BERGIN
ARTICLE (April 27 2010): The six-metre high red, blue and gold ball recently painted on the side of the Alwyn alpha rig is the largest Total logo in the world - a sign of Big Oil's growing focus on its heartlands. Across a 73-metre steel bridge, the Alwyn bravo platform, its blastwalls glistening in the Spring sunshine, processes 100,000 barrels equivalent of oil and gas a day.
Even though it is well past its peak, the North Sea accounts for 25 percent of Total's production and the French oil major's investment in the area is growing. While common sense might suggest the biggest oil companies should concentrate on the biggest undeveloped fields, Total's focus on the heavily tapped North Sea reflects a broader trend.
Twenty years ago, Western oil majors saw their future in Africa, Latin America and the Former Soviet Union (FSA), which political change and new technologies were opening to them. However, a wave of resource nationalism, spurred by a surge in oil prices from $40/barrel in 2004 to over $147/barrel in 2008, undermined this strategy, and the oil majors are now more focused on opportunities closer to home.
"We are not afraid to be in places like Africa but in the OECD we have less political risk and more predictable tax," said Patrice de Vivies, Total's Northern Europe exploration boss, casting an eye north toward the wisps of smoke drifting from the flame towers of the platforms on the Brent field 30 km away.
While companies still eye deals in the Middle East, Africa, Latin America and the FSU, there is a broad acceptance that attractive opportunities in these areas will be scarce. Europe's largest oil company by market value, Royal Dutch Shell Plc has said it plans to direct 60-70 percent of its investments into the industrialised countries of the Organisation for Economic Co-operation and Development (OECD).
"We want a certain portion of investment in the OECD .. because we think, long term, we have more political and fiscal stability there," Shell Chief Executive Peter Voser told a press conference last month. Previously, big projects in Russia and Nigeria meant the ratio of investment in OECD countries to non-OECD countries was lower, Chief Financial Officer Simon Henry added.
BROAD PULLBACK Spanish oil major Repsol, which in 2006 had gas fields in Bolivia nationalised, has made rebalancing its portfolio toward the OECD a cornerstone of its strategy, prompting new ventures in the Gulf of Mexico, Alaska and Canada, a spokesman said.
Exxon Mobil, which pulled out of Venezuela due to the seizure of its assets there, and which said it would not put any more money into Russia until its rules on foreign investment became clearer, signalled its focus with a $27-billion agreed bid for US gas producer XTO Energy in December.
Chevron said it expects its OECD production to rise. This has contributed to muted bidding and unawarded licences at auctions in Venezuela and Algeria in the past four months. Increased investment and production in the United States and Europe supports the desire of political leaders there to boost security of energy supplies but, for the companies, the motivation is entirely economic.
"There's little benefit in over-committing to resource-rich countries if the value proposition does not stack up to other options in your portfolio," said Iain Brown, upstream vice-president at consultants Wood Mackenzie in Edinburgh. The much-drilled OECD is attractive despite the fact that discovery sizes are typically smaller and costs higher.
Production costs in non-OECD countries are much lower but taxes and royalties are high and production sharing agreements often give the host government the lion's share of profits. Talisman Energy said last year that finding and development (F&D) costs were $34 per barrel of oil equivalent (boe) in North America and $39/boe in the North Sea.
By contrast, TNK-BP, the Russian oil producer, half-owned by London-based BP, said last year it had F&D costs of under $4/boe and analysts put F&D costs in Saudi Arabia at $1-2/boe. But some non-OECD countries, including Saudi Arabia, reserve their oil fields for their state oil companies and the others demand tough terms - Russia levies taxes of 90 percent on profits above $30/barrel oil.
There are also costs attached to non-OECD political unrest: in Nigeria, civil violence has shut down a third of production. The willingness of Western oil companies to forgo opportunities rather than agree to unprofitable fiscal demands has helped Chinese state-owned oil companies to expand. Beijing has charged its companies with securing energy sources for China's fast-growing economy and is not so concerned about high political risk and poor economic terms.
TECHNOLOGY HELPS: A five-minute helicopter ride south of Alwyn, in calm, Norwegian waters, a drilling rig, distinguishable from the crowded production platforms by its flat deck, dominated by a lone drilling derrick, sits above the Hild field. Hild was found 30 years ago but only now, thanks to modern seismic surveys, can the complex structure be developed.
Indeed, new technology has underpinned the shift to OECD reserves. New methods for freeing natural gas from low-permeability shale rock have led to a surge in US gas output, cutting US reliance on imports. Exxon's bid for XTO, a big player in shale gas, is about giving the world's largest non-government controlled oil company by market value a leading position in shale gas.
Similarly, new ways to extract natural gas from coal seams has attracted billions of dollars of investment into Australia and led to the rare sight of onshore rigs drilling in Europe. Better seismic techniques and platform design has facilitated more exploration in the deep water of the Gulf of Mexico - resulting in multi-billion barrel finds such as BP's Tiber and Kaskida fields - and in the North Sea.
The oil majors' retreat to the OECD is not unprecedented. When Saudi Arabia, Iraq, Kuwait and Iran threw them out in the 1970s, the companies regrouped in the North Sea and Alaska. Similarly, analysts expect that, if non-OECD resource-holders start to offer more generous and numerous opportunities, Western oil executives will quickly return. Nodding amidst the loud hum of the Alwyn rig's gas processing machinery, Total's de Vivies agrees. "We are not trying to reduce our presence in non-OECD. It is simply that the OECD is where the opportunities are now."
Source: http://www.brecorder.com/index.php?id=1049845&currPageNo=1&query=&search=&term=&supDate=
Even though it is well past its peak, the North Sea accounts for 25 percent of Total's production and the French oil major's investment in the area is growing. While common sense might suggest the biggest oil companies should concentrate on the biggest undeveloped fields, Total's focus on the heavily tapped North Sea reflects a broader trend.
Twenty years ago, Western oil majors saw their future in Africa, Latin America and the Former Soviet Union (FSA), which political change and new technologies were opening to them. However, a wave of resource nationalism, spurred by a surge in oil prices from $40/barrel in 2004 to over $147/barrel in 2008, undermined this strategy, and the oil majors are now more focused on opportunities closer to home.
"We are not afraid to be in places like Africa but in the OECD we have less political risk and more predictable tax," said Patrice de Vivies, Total's Northern Europe exploration boss, casting an eye north toward the wisps of smoke drifting from the flame towers of the platforms on the Brent field 30 km away.
While companies still eye deals in the Middle East, Africa, Latin America and the FSU, there is a broad acceptance that attractive opportunities in these areas will be scarce. Europe's largest oil company by market value, Royal Dutch Shell Plc has said it plans to direct 60-70 percent of its investments into the industrialised countries of the Organisation for Economic Co-operation and Development (OECD).
"We want a certain portion of investment in the OECD .. because we think, long term, we have more political and fiscal stability there," Shell Chief Executive Peter Voser told a press conference last month. Previously, big projects in Russia and Nigeria meant the ratio of investment in OECD countries to non-OECD countries was lower, Chief Financial Officer Simon Henry added.
BROAD PULLBACK Spanish oil major Repsol, which in 2006 had gas fields in Bolivia nationalised, has made rebalancing its portfolio toward the OECD a cornerstone of its strategy, prompting new ventures in the Gulf of Mexico, Alaska and Canada, a spokesman said.
Exxon Mobil, which pulled out of Venezuela due to the seizure of its assets there, and which said it would not put any more money into Russia until its rules on foreign investment became clearer, signalled its focus with a $27-billion agreed bid for US gas producer XTO Energy in December.
Chevron said it expects its OECD production to rise. This has contributed to muted bidding and unawarded licences at auctions in Venezuela and Algeria in the past four months. Increased investment and production in the United States and Europe supports the desire of political leaders there to boost security of energy supplies but, for the companies, the motivation is entirely economic.
"There's little benefit in over-committing to resource-rich countries if the value proposition does not stack up to other options in your portfolio," said Iain Brown, upstream vice-president at consultants Wood Mackenzie in Edinburgh. The much-drilled OECD is attractive despite the fact that discovery sizes are typically smaller and costs higher.
Production costs in non-OECD countries are much lower but taxes and royalties are high and production sharing agreements often give the host government the lion's share of profits. Talisman Energy said last year that finding and development (F&D) costs were $34 per barrel of oil equivalent (boe) in North America and $39/boe in the North Sea.
By contrast, TNK-BP, the Russian oil producer, half-owned by London-based BP, said last year it had F&D costs of under $4/boe and analysts put F&D costs in Saudi Arabia at $1-2/boe. But some non-OECD countries, including Saudi Arabia, reserve their oil fields for their state oil companies and the others demand tough terms - Russia levies taxes of 90 percent on profits above $30/barrel oil.
There are also costs attached to non-OECD political unrest: in Nigeria, civil violence has shut down a third of production. The willingness of Western oil companies to forgo opportunities rather than agree to unprofitable fiscal demands has helped Chinese state-owned oil companies to expand. Beijing has charged its companies with securing energy sources for China's fast-growing economy and is not so concerned about high political risk and poor economic terms.
TECHNOLOGY HELPS: A five-minute helicopter ride south of Alwyn, in calm, Norwegian waters, a drilling rig, distinguishable from the crowded production platforms by its flat deck, dominated by a lone drilling derrick, sits above the Hild field. Hild was found 30 years ago but only now, thanks to modern seismic surveys, can the complex structure be developed.
Indeed, new technology has underpinned the shift to OECD reserves. New methods for freeing natural gas from low-permeability shale rock have led to a surge in US gas output, cutting US reliance on imports. Exxon's bid for XTO, a big player in shale gas, is about giving the world's largest non-government controlled oil company by market value a leading position in shale gas.
Similarly, new ways to extract natural gas from coal seams has attracted billions of dollars of investment into Australia and led to the rare sight of onshore rigs drilling in Europe. Better seismic techniques and platform design has facilitated more exploration in the deep water of the Gulf of Mexico - resulting in multi-billion barrel finds such as BP's Tiber and Kaskida fields - and in the North Sea.
The oil majors' retreat to the OECD is not unprecedented. When Saudi Arabia, Iraq, Kuwait and Iran threw them out in the 1970s, the companies regrouped in the North Sea and Alaska. Similarly, analysts expect that, if non-OECD resource-holders start to offer more generous and numerous opportunities, Western oil executives will quickly return. Nodding amidst the loud hum of the Alwyn rig's gas processing machinery, Total's de Vivies agrees. "We are not trying to reduce our presence in non-OECD. It is simply that the OECD is where the opportunities are now."
Source: http://www.brecorder.com/index.php?id=1049845&currPageNo=1&query=&search=&term=&supDate=
Debt's reach grows globally By NIELS C SORRELLS AND SHABTAI
ARTICLE (April 26 2010): The ranks of countries teetering on the edge of what could be crippling debt levels seems to grow every month. The US, Britain, Greece and Dubai are only some of those whose budgets are threatened by a sea of red ink.
But while these countries will need to sort out domestically how they hope to pay off their debt while maintaining economic growth, there is reason to think that the aftershocks of their debt problems might be felt globally.
Indeed, no country - even those that have built up foreign reserves and surpluses - will be able to ignore the problems of the debtors or enjoy too much schadenfreude at their expense.
"Debt consolidation in one part of the world will be amplified," said Sotiria Theodoropoulou, a policy analyst at the European Policy Centre. "If recovery does not pick up, then the exports of the emerging economies will also suffer."
Which means it is in everyone's interest for the struggling Western economies to get their houses back in order. The question, thus, becomes how.
Marc Ostwald, an analyst with Monument Securities in London, notes that today's situation is a near complete reversal of the situation 30 years ago. Then, many developing economies were heavily indebted, dependent upon loans from the West to stay financially afloat.
But, thanks to splurging in the West, debt levels there have ballooned while emerging economies - many of them sensitive to debt after a series of crises - have managed to acquire piles of cash and are now in a situation where they are loaning money to the West.
"We've transferred a lot of wealth in their direction. They've now become our bank managers," Ostwald says. "What we've done in the space of about 30 years is probably change the balance of the world, which is probably more logical when you look at it in terms of population."
Nonetheless, he notes: "We can't go on like this."
Not only does greater debt mean Western countries - ie, the potential customers for wares exported from the now cash-rich exporter nations - are too busy digging themselves out of their debt hole to borrow more money, but that they have become greater credit risks.
"What used to be risk-free is suddenly put very much in question. The benchmark government bonds were not questioned in the big economies for a very long time, but now there is a bigger question if risk-free is indeed risk-free," said Thomas Herrmann, an economist at Credit Suisse in Zurich.
That means bond yields - or the amount of interest countries will have to pay out to entice investors to lend them money - are likely to shift higher, he said.
Thus, not only will potential customers in the West be preoccupied with paying off their debt, they will need to set aside some of their funds to pay higher interest rates. If any country were to find itself in a position like Buenos Aires, where it has to default on its debt, those lending options could become even more stringent.
"In theory, if money becomes scarcer, then the cost of borrowing will go up, but we don't know yet exactly how this will affect trade," notes Willy Alfaro, a senior counsellor on trade policy at the World Trade Organisation.
That makes it in the interests of some of the save nations - China, for example - to start spending more money, hopefully buying products from indebted nations to help them with their economies.
Alexander Koch, an economist with Unicredit, notes that China has made some tentative steps in this direction, most notably with a programme to extend health benefits, thus freeing up pocket money for its citizens. But more could be done.
The key will be communication, says Felix Roth, a research fellow within the economic policy unit at the Centre for European Policy Studies.
"The imbalance is just causing dangers to the global economy. On a global level, one has to sit together at the G20 and discuss that. "We should be able to communicate in this sense. That, in this world, we want to avoid economic crisis."
But he also acknowledges that talks are not guaranteed to equal unanimity. He notes that the members of the European Union long ago agreed on the need to become more competitive. But while some nations - like Germany - have done so, others who have lagged have started to criticise Germany for doing too good a job and making their economies seem uncompetitive.
Which means, the debt situation could worsen the global economy in the short term. "This recovery may not be sustainable," said Alfaro. "We are concerned in the sense that the recovery is there, but not out of the woods yet."
Source: http://www.brecorder.com/index.php?id=1049549&currPageNo=1&query=&search=&term=&supDate=
But while these countries will need to sort out domestically how they hope to pay off their debt while maintaining economic growth, there is reason to think that the aftershocks of their debt problems might be felt globally.
Indeed, no country - even those that have built up foreign reserves and surpluses - will be able to ignore the problems of the debtors or enjoy too much schadenfreude at their expense.
"Debt consolidation in one part of the world will be amplified," said Sotiria Theodoropoulou, a policy analyst at the European Policy Centre. "If recovery does not pick up, then the exports of the emerging economies will also suffer."
Which means it is in everyone's interest for the struggling Western economies to get their houses back in order. The question, thus, becomes how.
Marc Ostwald, an analyst with Monument Securities in London, notes that today's situation is a near complete reversal of the situation 30 years ago. Then, many developing economies were heavily indebted, dependent upon loans from the West to stay financially afloat.
But, thanks to splurging in the West, debt levels there have ballooned while emerging economies - many of them sensitive to debt after a series of crises - have managed to acquire piles of cash and are now in a situation where they are loaning money to the West.
"We've transferred a lot of wealth in their direction. They've now become our bank managers," Ostwald says. "What we've done in the space of about 30 years is probably change the balance of the world, which is probably more logical when you look at it in terms of population."
Nonetheless, he notes: "We can't go on like this."
Not only does greater debt mean Western countries - ie, the potential customers for wares exported from the now cash-rich exporter nations - are too busy digging themselves out of their debt hole to borrow more money, but that they have become greater credit risks.
"What used to be risk-free is suddenly put very much in question. The benchmark government bonds were not questioned in the big economies for a very long time, but now there is a bigger question if risk-free is indeed risk-free," said Thomas Herrmann, an economist at Credit Suisse in Zurich.
That means bond yields - or the amount of interest countries will have to pay out to entice investors to lend them money - are likely to shift higher, he said.
Thus, not only will potential customers in the West be preoccupied with paying off their debt, they will need to set aside some of their funds to pay higher interest rates. If any country were to find itself in a position like Buenos Aires, where it has to default on its debt, those lending options could become even more stringent.
"In theory, if money becomes scarcer, then the cost of borrowing will go up, but we don't know yet exactly how this will affect trade," notes Willy Alfaro, a senior counsellor on trade policy at the World Trade Organisation.
That makes it in the interests of some of the save nations - China, for example - to start spending more money, hopefully buying products from indebted nations to help them with their economies.
Alexander Koch, an economist with Unicredit, notes that China has made some tentative steps in this direction, most notably with a programme to extend health benefits, thus freeing up pocket money for its citizens. But more could be done.
The key will be communication, says Felix Roth, a research fellow within the economic policy unit at the Centre for European Policy Studies.
"The imbalance is just causing dangers to the global economy. On a global level, one has to sit together at the G20 and discuss that. "We should be able to communicate in this sense. That, in this world, we want to avoid economic crisis."
But he also acknowledges that talks are not guaranteed to equal unanimity. He notes that the members of the European Union long ago agreed on the need to become more competitive. But while some nations - like Germany - have done so, others who have lagged have started to criticise Germany for doing too good a job and making their economies seem uncompetitive.
Which means, the debt situation could worsen the global economy in the short term. "This recovery may not be sustainable," said Alfaro. "We are concerned in the sense that the recovery is there, but not out of the woods yet."
Source: http://www.brecorder.com/index.php?id=1049549&currPageNo=1&query=&search=&term=&supDate=
Government borrowing By ANJUM IBRAHIM
ARTICLE (April 26 2010): For most major policy decisions - be they in the realm of monetary or indeed fiscal policy - it has become almost routine for the government officials to refer to the commitments made to the International Monetary Fund (IMF) under the Stand-By Arrangement (SBA) as the raison d'etre.
There is little manoeuvrability, so argues the present government, given the huge triple deficits that it inherited - budget deficit, current account deficit and the trade deficit. All require cash injections to successfully turn the economy around, so goes the argument, and the international community has not been supportive in that regard with the exception of the IMF. And yet while this forced us to follow the IMF prescriptions yet reliance on deficit financing or borrowing internally remains a component of Pakistani government's attempts to meet its annual expenditure.
The IMF, in turn, is fairly immune to public criticism of its prescriptions and relies on economic theory to provide the required justification. Many analysts have challenged the IMF prescriptions with the main criticism being that the prescriptions are not poor friendly. It is, perhaps, for this reason that the IMF has been at pains to support the Benazir Income Support Programme - a programme that is grossly inadequate to meet the financial needs of a family of four, conservative by Pakistani standards, for one week leave alone one month.
Be that as it may it is a first for a Pakistani government and does reflect to some extent the human face of the government expenditure and the IMF's SBA. The devil will, of course, be in the implementation and the World Bank has already voiced objections about the selection of beneficiaries of this programme - an objection which has led to some delays as the government tries to resolve these objections.
So what would the government need to do to appease the IMF concerns with respect to following a reform agenda - reforms that would require borrowing domestically? One major IMF prescription on which there is unanimity in this country is the need to bridge the budget deficit gap, though there is no unanimity on how to best achieve this objective. Budget deficits are neither new nor indeed unique to Pakistan. However, there is intense debate on how to finance these deficits in the country. Post 9/11 for a period of five to six years, the Musharraf government did not have to deal with huge budget deficits as money to fight the Taliban began to flow in.
However, aid injections, inclusive of grants and loans, were not used to develop the critical infrastructure sectors notably energy, and were diverted to current expenditure. Proof of this contention is evident from the statistics released by the State Bank in its 2008/09 annual report: expenditure rose from 1001 billion rupees in 2005 to 1364.5 billion rupees in 2007 (364 billion rupee rise) while development outlay increased from 149 billion to 299 billion rupees for the two years. The tax-to-GDP ratio, however, remained appallingly low, indicating that the Musharraf government did not bother with reforming the tax system like its predecessors and unfortunately its successor.
In the past, the governments relied on borrowing from the State Bank, which is a highly inflationary policy. In the first letter of intent (LoI), submitted by the government of Pakistan to the IMF Board in November 2008, a prerequisite for the approval of the SBA, the government "committed to limiting SBP financing of the budget to zero on a cumulative basis during October 1, 2008-June 30, 2009. During this period, the fiscal deficit will be fully financed by available external disbursements (which have already been committed), the acceleration of the privatisation process, the issuance of treasury bills, and other domestic financing instruments, including Pakistan Investment Bonds, Ijara Sukuk, and National Savings Schemes". So how did the government reduce the budget deficit? It certainly did not increase its revenue collection significantly and the tax-to-GDP ratio remains appallingly low.
External disbursements, consisting of the April 2009 Tokyo pledges, have yet to find their way into Pakistan. Senior members of the country's executive, including the President, appear to have abandoned their sole focus on these pledges as a means to resolve the country's poor resource mobilisation capacity even though these pledges were included as part of revenue in the budget for fiscal year 2009/10.
This is indicated by recent statements of the President of Pakistan, who in the early days of his electoral victory, had in international as well as domestic fora argued that the democracy dividend must include grant assistance of the fantastic amount of 100 billion dollars. More recently, the President is on record arguing that Pakistan needs trade and not aid.
In fiscal year 2006, around 135 billion rupees were borrowed from the State Bank of Pakistan. This was brought down to 58.6 billion in 2007. However, in 2008, the first year the PPP government came to power reliance on borrowing from the State Bank rose to a mammoth 688 billion rupees. The PPP stalwarts would be at pains to blame the Musharraf government for this rise by pointing out that he endorsed the policy of heavy subsidisation of oil as a deliberate attempt to win the February 2008 elections. As the international price of oil continued to rise till July of 2008, so did the subsidy payable by the government, which raised the government's indebtedness to the SBP.
However, the PPP needs to take blame for this policy attributable to their procrastination with respect to lifting the heavy oil subsidy, which accounted for a major increase in borrowing from the SBP. The government did not go on the IMF programme till November of the same year and it is indeed unfortunate that it relied so heavily on borrowing from the State Bank - a highly inflationary form of borrowing.
But so argue many an analyst the inflationary impact on the common man of the IMF programme was more and certainly not less than the borrowing from the State Bank. There is some credence to this view even though total inflationary statistics prove otherwise as inflation has come down from over 20 percent to less than 13 percent. With the rise in utilities, notably energy (due to steady withdrawal of all subsidies) and transport (due to increased reliance on petroleum levy to meet the budget deficit), the common man's income continues to erode to this day. And with the failure of the government to contain the profiteers and smugglers of essential items food, inflation continues to be high.
In 2009, the government in line with the IMF condition reduced reliance on borrowing from the State Bank to 130 billion rupees and in the current year reliance has been further curtailed to 128.5 billion rupees. Those who argue that this implies lower borrowing need to be reminded that Pakistan was recently placed in third position globally with respect to the riskiest sovereign credit.
So where did the government borrow from if not the State Bank? Not from commercial banks either - data shows that there was a doubling of this debt from 2006 to 2007 - 68 to 160 billion rupees. But by 2008, the government borrowed 134.2 billion rupees from commercial banks, 185.5 billion rupees in 2009 and 172.8 billion rupees up to March of this year.
The government's main source of additional borrowing was from NSS schemes - the least inflationary form of borrowing: from 6 billion rupees in 2006 to 267 billion rupees in 2009 and the government had borrowed 149 billion rupees from July-February in the current fiscal year. This was made possible through enhancing rates of return on these schemes as well as aggressively marketing NSS products. While borrowing from the NSS is less inflationary than the borrowing from the SBP or from the commercial banks, yet to argue that this has no inflationary impact is not correct.
Money borrowed from the NSS is injected right back into the economy by the government, thereby increasing the money supply in circulation and the higher rate of return translates into extra income allowed to those who placed their money in the NSS schemes, which also increases the circulation of money. Loadshedding, however, is responsible for a decline in output. The result: inflation remains high.
Pakistan's total domestic debt has risen from 2601 billion rupees in 2007 to 3851 billion rupees in 2009 - an unprecedented rise even for our debt ridden past governments. And total external debt rose from 33.3 billion dollars in 2004 to 50.7 billion dollars in 2009. If this is a reflection of what the present government claims is home-grown remedy, then there is an urgent need to revisit the definition of home-grown, which must contain a large element of a massive slash in current expenditure, and a rise in the tax-to-GDP ratio.
Source: http://www.brecorder.com/index.php?id=1049548&currPageNo=1&query=&search=&term=&supDate=
There is little manoeuvrability, so argues the present government, given the huge triple deficits that it inherited - budget deficit, current account deficit and the trade deficit. All require cash injections to successfully turn the economy around, so goes the argument, and the international community has not been supportive in that regard with the exception of the IMF. And yet while this forced us to follow the IMF prescriptions yet reliance on deficit financing or borrowing internally remains a component of Pakistani government's attempts to meet its annual expenditure.
The IMF, in turn, is fairly immune to public criticism of its prescriptions and relies on economic theory to provide the required justification. Many analysts have challenged the IMF prescriptions with the main criticism being that the prescriptions are not poor friendly. It is, perhaps, for this reason that the IMF has been at pains to support the Benazir Income Support Programme - a programme that is grossly inadequate to meet the financial needs of a family of four, conservative by Pakistani standards, for one week leave alone one month.
Be that as it may it is a first for a Pakistani government and does reflect to some extent the human face of the government expenditure and the IMF's SBA. The devil will, of course, be in the implementation and the World Bank has already voiced objections about the selection of beneficiaries of this programme - an objection which has led to some delays as the government tries to resolve these objections.
So what would the government need to do to appease the IMF concerns with respect to following a reform agenda - reforms that would require borrowing domestically? One major IMF prescription on which there is unanimity in this country is the need to bridge the budget deficit gap, though there is no unanimity on how to best achieve this objective. Budget deficits are neither new nor indeed unique to Pakistan. However, there is intense debate on how to finance these deficits in the country. Post 9/11 for a period of five to six years, the Musharraf government did not have to deal with huge budget deficits as money to fight the Taliban began to flow in.
However, aid injections, inclusive of grants and loans, were not used to develop the critical infrastructure sectors notably energy, and were diverted to current expenditure. Proof of this contention is evident from the statistics released by the State Bank in its 2008/09 annual report: expenditure rose from 1001 billion rupees in 2005 to 1364.5 billion rupees in 2007 (364 billion rupee rise) while development outlay increased from 149 billion to 299 billion rupees for the two years. The tax-to-GDP ratio, however, remained appallingly low, indicating that the Musharraf government did not bother with reforming the tax system like its predecessors and unfortunately its successor.
In the past, the governments relied on borrowing from the State Bank, which is a highly inflationary policy. In the first letter of intent (LoI), submitted by the government of Pakistan to the IMF Board in November 2008, a prerequisite for the approval of the SBA, the government "committed to limiting SBP financing of the budget to zero on a cumulative basis during October 1, 2008-June 30, 2009. During this period, the fiscal deficit will be fully financed by available external disbursements (which have already been committed), the acceleration of the privatisation process, the issuance of treasury bills, and other domestic financing instruments, including Pakistan Investment Bonds, Ijara Sukuk, and National Savings Schemes". So how did the government reduce the budget deficit? It certainly did not increase its revenue collection significantly and the tax-to-GDP ratio remains appallingly low.
External disbursements, consisting of the April 2009 Tokyo pledges, have yet to find their way into Pakistan. Senior members of the country's executive, including the President, appear to have abandoned their sole focus on these pledges as a means to resolve the country's poor resource mobilisation capacity even though these pledges were included as part of revenue in the budget for fiscal year 2009/10.
This is indicated by recent statements of the President of Pakistan, who in the early days of his electoral victory, had in international as well as domestic fora argued that the democracy dividend must include grant assistance of the fantastic amount of 100 billion dollars. More recently, the President is on record arguing that Pakistan needs trade and not aid.
In fiscal year 2006, around 135 billion rupees were borrowed from the State Bank of Pakistan. This was brought down to 58.6 billion in 2007. However, in 2008, the first year the PPP government came to power reliance on borrowing from the State Bank rose to a mammoth 688 billion rupees. The PPP stalwarts would be at pains to blame the Musharraf government for this rise by pointing out that he endorsed the policy of heavy subsidisation of oil as a deliberate attempt to win the February 2008 elections. As the international price of oil continued to rise till July of 2008, so did the subsidy payable by the government, which raised the government's indebtedness to the SBP.
However, the PPP needs to take blame for this policy attributable to their procrastination with respect to lifting the heavy oil subsidy, which accounted for a major increase in borrowing from the SBP. The government did not go on the IMF programme till November of the same year and it is indeed unfortunate that it relied so heavily on borrowing from the State Bank - a highly inflationary form of borrowing.
But so argue many an analyst the inflationary impact on the common man of the IMF programme was more and certainly not less than the borrowing from the State Bank. There is some credence to this view even though total inflationary statistics prove otherwise as inflation has come down from over 20 percent to less than 13 percent. With the rise in utilities, notably energy (due to steady withdrawal of all subsidies) and transport (due to increased reliance on petroleum levy to meet the budget deficit), the common man's income continues to erode to this day. And with the failure of the government to contain the profiteers and smugglers of essential items food, inflation continues to be high.
In 2009, the government in line with the IMF condition reduced reliance on borrowing from the State Bank to 130 billion rupees and in the current year reliance has been further curtailed to 128.5 billion rupees. Those who argue that this implies lower borrowing need to be reminded that Pakistan was recently placed in third position globally with respect to the riskiest sovereign credit.
So where did the government borrow from if not the State Bank? Not from commercial banks either - data shows that there was a doubling of this debt from 2006 to 2007 - 68 to 160 billion rupees. But by 2008, the government borrowed 134.2 billion rupees from commercial banks, 185.5 billion rupees in 2009 and 172.8 billion rupees up to March of this year.
The government's main source of additional borrowing was from NSS schemes - the least inflationary form of borrowing: from 6 billion rupees in 2006 to 267 billion rupees in 2009 and the government had borrowed 149 billion rupees from July-February in the current fiscal year. This was made possible through enhancing rates of return on these schemes as well as aggressively marketing NSS products. While borrowing from the NSS is less inflationary than the borrowing from the SBP or from the commercial banks, yet to argue that this has no inflationary impact is not correct.
Money borrowed from the NSS is injected right back into the economy by the government, thereby increasing the money supply in circulation and the higher rate of return translates into extra income allowed to those who placed their money in the NSS schemes, which also increases the circulation of money. Loadshedding, however, is responsible for a decline in output. The result: inflation remains high.
Pakistan's total domestic debt has risen from 2601 billion rupees in 2007 to 3851 billion rupees in 2009 - an unprecedented rise even for our debt ridden past governments. And total external debt rose from 33.3 billion dollars in 2004 to 50.7 billion dollars in 2009. If this is a reflection of what the present government claims is home-grown remedy, then there is an urgent need to revisit the definition of home-grown, which must contain a large element of a massive slash in current expenditure, and a rise in the tax-to-GDP ratio.
Source: http://www.brecorder.com/index.php?id=1049548&currPageNo=1&query=&search=&term=&supDate=
In Los Angeles's financial crisis, don't mention the B-word By ANDY GOLDBERG
ARTICLE (April 25 2010): The B-word is back in vogue in Tinseltown, and it's not a reference to the aggressive ego-centric women who are so prominent in the capital of the US entertainment industry. Rather, the new B-word is something far more scary to most residents of Los Angeles than the usual misogynist insult, signifying as it does not only the city's huge financial problems, but the deeper economic problems that will make any attempts to reform the national US economy such a daunting task.
Bankrupt. Broke. Bust. Those are the B-words that are causing residents of the City of Angels to lose sleep at night. Hampered by the national recession, the backlash of the region's huge run up in housing prices, a drop in jobs and tax revenues, and most importantly a huge increase in the cost of benefits to government workers, Los Angeles may have little option but to declare bankruptcy in the next few months, a growing number of experts believe.
The crisis reached a peak last week when Mayor Antonio Villaraigosa announced that the city would be unable to pay its bills starting in May as it grappled with an unfunded 212-million-dollar deficit. His proposal of a two-day per week city shutdown was only averted when it transpired that the city enjoyed higher than expected tax revenue and an injection of funds from the city-owned utility company.
But that still leaves Los Angeles with a structural imbalance that all agree is unsustainable in the long run, despite plans to slash 4,000 municipal jobs. The budget crisis has also meant a wholesale slashing of overtime hours for the city's police force, which has been left so short handed that it is hardly able to conduct more than cursory investigations into murders, according to the Los Angeles Times.
"It has a serious impact on our ability to respond to some of the large, violent incidents we've been experiencing lately," said Los Angeles Police Department Chief Charlie Beck. "That is especially true of homicide investigations because of the long hours they demand."
Most observers agree that generous benefits and pensions wrested from the city by powerful unions are one of the major causes of city's budget crisis. According to the Los Angeles Times, the city will need to come up with 423 million dollars this year to cover unfunded pensions, rising to 1 billion in another five years.
Such huge shortfalls can only be dealt with by the city declaring bankruptcy, which would allow Los Angeles to renegotiate its pension agreements to more reasonable levels, argues former mayor Richard Riordan. "The city, the way it is going, is unsustainable. If they don't do it this year, they are going to have to do it in the next four or five years," he told the Los Angeles Daily News.
But Villaraigosa says that day will never come, saying it will be disastrous for the city's economy and its image as a world-leading metropolis. "We're never going into bankruptcy," Villaraigosa said last week. "I am duty bound to make sure the city continues to operate and that we not go that route. It is not going to happen."
Jack Kyser, chief economist for the Los Angeles County Economic Development Corp agrees that the B-word would be a disaster. "We need to sit back and take a deep breath. Declaring bankruptcy would be horrible for the city, horrible for LA County and horrible for all of Southern California. The rest of the world would be looking at us and say, 'Those people are out of control.'"
Source: http://www.brecorder.com/index.php?id=1049305&currPageNo=1&query=&search=&term=&supDate=
Bankrupt. Broke. Bust. Those are the B-words that are causing residents of the City of Angels to lose sleep at night. Hampered by the national recession, the backlash of the region's huge run up in housing prices, a drop in jobs and tax revenues, and most importantly a huge increase in the cost of benefits to government workers, Los Angeles may have little option but to declare bankruptcy in the next few months, a growing number of experts believe.
The crisis reached a peak last week when Mayor Antonio Villaraigosa announced that the city would be unable to pay its bills starting in May as it grappled with an unfunded 212-million-dollar deficit. His proposal of a two-day per week city shutdown was only averted when it transpired that the city enjoyed higher than expected tax revenue and an injection of funds from the city-owned utility company.
But that still leaves Los Angeles with a structural imbalance that all agree is unsustainable in the long run, despite plans to slash 4,000 municipal jobs. The budget crisis has also meant a wholesale slashing of overtime hours for the city's police force, which has been left so short handed that it is hardly able to conduct more than cursory investigations into murders, according to the Los Angeles Times.
"It has a serious impact on our ability to respond to some of the large, violent incidents we've been experiencing lately," said Los Angeles Police Department Chief Charlie Beck. "That is especially true of homicide investigations because of the long hours they demand."
Most observers agree that generous benefits and pensions wrested from the city by powerful unions are one of the major causes of city's budget crisis. According to the Los Angeles Times, the city will need to come up with 423 million dollars this year to cover unfunded pensions, rising to 1 billion in another five years.
Such huge shortfalls can only be dealt with by the city declaring bankruptcy, which would allow Los Angeles to renegotiate its pension agreements to more reasonable levels, argues former mayor Richard Riordan. "The city, the way it is going, is unsustainable. If they don't do it this year, they are going to have to do it in the next four or five years," he told the Los Angeles Daily News.
But Villaraigosa says that day will never come, saying it will be disastrous for the city's economy and its image as a world-leading metropolis. "We're never going into bankruptcy," Villaraigosa said last week. "I am duty bound to make sure the city continues to operate and that we not go that route. It is not going to happen."
Jack Kyser, chief economist for the Los Angeles County Economic Development Corp agrees that the B-word would be a disaster. "We need to sit back and take a deep breath. Declaring bankruptcy would be horrible for the city, horrible for LA County and horrible for all of Southern California. The rest of the world would be looking at us and say, 'Those people are out of control.'"
Source: http://www.brecorder.com/index.php?id=1049305&currPageNo=1&query=&search=&term=&supDate=
Drowning in debt: US foreclosures hit rich and poor By ANDY GOLDBERG
ARTICLE (April 25 2010): It used to be famous as the breadbasket of America. Now California's massive Central Valley, long renowned for its fertile fields, is notorious as the epicentre of the housing crisis,a place where ordinary folks have seen their American dreams drown into billions of dollars in debt.
"It turns your life upside down, it affects everything you do and everything you believe in," says Janine Wells, whose home in the farming town of Stockton is being sold by the bank for half the 540,000 dollars she paid in 2005. At the time, Janine was a hospital clerk who had just had her first child. Her husband Rick was a well-paid construction worker.
"We thought we were kings of the world," she recalled with a bitter laugh on a recent rainy afternoon, surrounded in her suburban living room by packing boxes. In just two days she was to move from the fancy four-bedroom two-bathroom home to a tiny two-bedroom apartment.
"We took out loans to buy cars and go on vacations," she sighed. "The day we bought the house, we took out a loan on it because our realtor said it was already worth 50,000 dollars more than we paid for it. Now we learnt the hard way, what goes up must come down." Cities in the Central Valley, including the troubled California state capital of Sacramento, occupy four of the top ten spots nationally for foreclosure rates.
In Modesto, 6.6 per cent of all houses were in foreclosure in January - sold off by the mortgage holder for a cut price after the owner fell too far behind on payments. Many more foreclosures are waiting in the pipeline. According to figures released in early March, almost 20 per cent of all the home loans in the city were delinquent for 90 days or more.
The situation is similar in neighbouring Stockton, where 6 per cent of homes were in foreclosure and 18 per cent of homeowners were 90 days or more late. According to the Central Valley Business Times eight out of ten homes in the town are underwater - meaning they are worth less than their outstanding mortgage. Many families just decide to walk away in such cases.
Stockton ranked second on the Forbes List of America's Most Miserable Cities. While it was briefly a symbol of California's boom times in the roaring 1990s, it now ranks behind only the perennial rust belt dinosaur Cleveland. The survey judged the nation's 200 largest cities on aspects like taxes, pollution, unemployment, violent crime, weather and schools.
"The only good news is that we're not No 1 in the nation anymore," said Stockton Mayor Ann Johnston. "We were a community that experienced rapid growth in the 2000s. When everything crashed in the recession, those people lost their jobs and lost their homes."
In Sacramento, where the state government is the city's largest employer, the situation is somewhat better, probably because - despite its notorious budget crises - Governor Arnold Schwarzenegger's government has yet to resort to large scale firings.
Still, 12 per cent of mortgages there are delinquent, and almost 4 per cent of Sacramento homes are in foreclosure. The housing crisis cuts across race and class lines. Though the initial impact was strongest on poor families who took advantage of lax credit rules to take out mortgages they could never afford - so- called subprime loans - the current victims can be found all over the socio-economic map.
"It's hitting the middle class, the working class and the upper class. Whoever was overextended is finding themselves in deep trouble," says mortgage broker Jim Chubb. "I'm seeing tons of foreclosures on million-dollar homes." The fallout has even hit Hollywood celebrities. Actor Nicholas Cage has been forced to surrender much of his extensive real estate portfolio to the bank, while actor Stephen Baldwin also saw his house foreclosed on last year.
Even Nadya Suleman, the world famous octo-mom is facing the prospect of life on the streets after failing to meet payments on her 450,000 dollar house. "The lesson is that no one's immune," says Chubb. "A job loss, a medical emergency or just bad spending habits. The credit market is so tight these days that even relatively minor problems can cause people to lose their homes."
Source: http://www.brecorder.com/index.php?id=1049304&currPageNo=1&query=&search=&term=&supDate=
"It turns your life upside down, it affects everything you do and everything you believe in," says Janine Wells, whose home in the farming town of Stockton is being sold by the bank for half the 540,000 dollars she paid in 2005. At the time, Janine was a hospital clerk who had just had her first child. Her husband Rick was a well-paid construction worker.
"We thought we were kings of the world," she recalled with a bitter laugh on a recent rainy afternoon, surrounded in her suburban living room by packing boxes. In just two days she was to move from the fancy four-bedroom two-bathroom home to a tiny two-bedroom apartment.
"We took out loans to buy cars and go on vacations," she sighed. "The day we bought the house, we took out a loan on it because our realtor said it was already worth 50,000 dollars more than we paid for it. Now we learnt the hard way, what goes up must come down." Cities in the Central Valley, including the troubled California state capital of Sacramento, occupy four of the top ten spots nationally for foreclosure rates.
In Modesto, 6.6 per cent of all houses were in foreclosure in January - sold off by the mortgage holder for a cut price after the owner fell too far behind on payments. Many more foreclosures are waiting in the pipeline. According to figures released in early March, almost 20 per cent of all the home loans in the city were delinquent for 90 days or more.
The situation is similar in neighbouring Stockton, where 6 per cent of homes were in foreclosure and 18 per cent of homeowners were 90 days or more late. According to the Central Valley Business Times eight out of ten homes in the town are underwater - meaning they are worth less than their outstanding mortgage. Many families just decide to walk away in such cases.
Stockton ranked second on the Forbes List of America's Most Miserable Cities. While it was briefly a symbol of California's boom times in the roaring 1990s, it now ranks behind only the perennial rust belt dinosaur Cleveland. The survey judged the nation's 200 largest cities on aspects like taxes, pollution, unemployment, violent crime, weather and schools.
"The only good news is that we're not No 1 in the nation anymore," said Stockton Mayor Ann Johnston. "We were a community that experienced rapid growth in the 2000s. When everything crashed in the recession, those people lost their jobs and lost their homes."
In Sacramento, where the state government is the city's largest employer, the situation is somewhat better, probably because - despite its notorious budget crises - Governor Arnold Schwarzenegger's government has yet to resort to large scale firings.
Still, 12 per cent of mortgages there are delinquent, and almost 4 per cent of Sacramento homes are in foreclosure. The housing crisis cuts across race and class lines. Though the initial impact was strongest on poor families who took advantage of lax credit rules to take out mortgages they could never afford - so- called subprime loans - the current victims can be found all over the socio-economic map.
"It's hitting the middle class, the working class and the upper class. Whoever was overextended is finding themselves in deep trouble," says mortgage broker Jim Chubb. "I'm seeing tons of foreclosures on million-dollar homes." The fallout has even hit Hollywood celebrities. Actor Nicholas Cage has been forced to surrender much of his extensive real estate portfolio to the bank, while actor Stephen Baldwin also saw his house foreclosed on last year.
Even Nadya Suleman, the world famous octo-mom is facing the prospect of life on the streets after failing to meet payments on her 450,000 dollar house. "The lesson is that no one's immune," says Chubb. "A job loss, a medical emergency or just bad spending habits. The credit market is so tight these days that even relatively minor problems can cause people to lose their homes."
Source: http://www.brecorder.com/index.php?id=1049304&currPageNo=1&query=&search=&term=&supDate=
The disputed VAT By MUHAMMAD AFZAL
ARTICLE (April 25 2010): It is believed by many that the federal value-added tax is a requirement of time. The value-added tax (VAT) will be enforced and the IMF will only expedite the enforcement of this tax. Since there is no avoidance of value-added tax, therefore, what is being enacted in the name of VAT Act 2010, needs to be carefully studied.
By now, it is common belief that the FBR is trying to use the VAT Act 2010 as a vehicle to acquire and take draconian powers, which are not otherwise required for tax collection, but will only bring harassment and unending corruption channels.
It has been suggested at various forums that the power to arrest defaulters should not be granted to the FBR officials as proposed and is being enacted through Section 72 of the VAT Bill under consideration of the Parliament.
The speakers including Zubair Motiwala, at the Chambers of Commerce and Industry seminar held last week have recommended that the section granting power of arrest like Section 72 should be deleted from the VAT Bill and appropriate amendment should also be made in Sections 69 and 61 of the bill.
The power of arrest or the right to challenge this action in the normal courts provided in Section 87 of the VAT Bill is not the subject of this article. The VAT should be enforced, but excluding the draconian powers of the FBR. Under the VAT Bill, the FBR can very easily impose disputed tax on any person and recover forcefully this disputed tax from his father, mother, brother, sister, spouse, other relations or associates.
The list of persons who can be forced to pay other person's disputed tax, is very large. The bill includes the concept that the disputed tax, imposed on one person, can be recovered from his relatives who may have nothing to do with the business of the person on whom disputed value-added tax has been imposed.
Section 61of the value-added tax bill gives powers to enforce recovery and this section very clearly states that recovery of disputed tax imposed can also be made from the associated persons and the word associated persons has been defined in Section 3 of the bill. When Section 3 reads in conjugation of Section 61 of the bill, it becomes more than clear that the disputed value-added tax, imposed on one person, can be recovered from the relatives of the person and the list of relatives affected is almost unending.
This has been achieved by using the word associated person in Section 61, dealing with the recovery of the disputed tax and defining the word associated person in another Section 3 of the bill, which includes the relatives in the definition of associated persons. This will become clear by reference to the wording of the two sections 61 and 3 of the bill.
"Section 61. Recovery of arrears of tax: (1) Where any amount of tax is due from any person, the officer of Inland Revenue, authorised by the Board or Commissioner in this behalf, may take all or any of the following actions to recover such amount, namely:
-- (a) deduct the amount from any money owing to defaulter at his disposal or under his control or under the control of any other officer of Customs or Inland Revenue; (b) require any person who holds or may subsequently hold any money for or on account of the defaulter to pay the amount; (c) stop removal of any goods from the business premises of the defaulter or the associated person till such time the recoverable amount is paid or recovered in full; (d) require any person to stop clearance of imported goods or manufactured goods; (e) attach bank accounts of the defaulter or his associated person;"
There are other powers also granted by Section 61 for recovery of disputed demand, but for the sake of brevity we will limit it to the above extent. In Section 61 quoted above, which is giving multiple powers to the FBR official for the recovery of disputed VAT, the word "Or An Associated Person" has been used again and again.
This means the disputed VAT tax imposed on one taxpayer can also be recovered from the associate person of the taxpayer. Clause (c) of Sub-Section (1) of Section 61 quoted above empowers the VAT official, which includes the inspector to seal the business premises of the associated person and stop removal of any goods from the business premises of the associated person till such time the disputed tax is paid or recovered in full. This mean the business of the associated person, including his business premises and stock of goods, can be taken over for the recovery of tax imposed on some other person and the affected associated person is even forbidden to challenge this action in the normal court of law as per section 87 of the VAT bill.
Similarly, Clause (e) of sub-section (1) of Section 61 quoted above empowers the VAT official which includes the inspector to attach bank accounts of the associated person till such time the disputed tax imposed on somebody else is paid or recovered in full.
From the above, it become very clear that as per Section 61 of the Bill the disputed VAT imposed on one taxpayer can be recovered by attaching the bank account of any person associated with the taxpayer or the VAT officer can seal the business premises of the associated person and stop the removal of any goods from the business premises of the associated person till such time the disputed amount is paid or recovered in full.
Now the question is what is meant by the word "Associated person" under the VAT Bill 2010 and for this we have to refer to Section 3 of the bill, which includes all the blood/ancestral relation, besides common partners and others into the definition of the word Associated Person. This cannot become clear without reference to the wording of Section 3 of the VAT Bill 2010 which is quoted as under:
"3. Associated persons: (1) For the purpose of this act, two persons are "associated persons" if the relationship between them is such that one can reasonably be expected to act in accordance with the intentions of the other, or both can reasonably be expected to act in accordance with the intentions of a third person.
(2) The following are presumed to be "associated persons" (a) an individual and a relative of the individual; and (4) "relative" in relation to an individual, means:
-- (a) An ancestor, a descendant of any of the grandparents, or an adopted child, of the individual;
-- (b) an ancestor, a descendant of any of the grandparents, or an adopted child, of a spouse of the individual; or
-- (c) a spouse of the individual or of any person specified in sub-paragraph (a) or (b)."
Section 3 of the Bill defines the word Associated Person and it is very lengthy and includes many more persons in the definition of Associated person, but for the sake of brevity we will limit it to the above extent Associated person includes a person or the spouse's relations by blood as per the definition of the word Associated Person quoted above as given in Section 3 of the bill.
It is known that the FBR has drafted this bill and FBR is trying to take powers, which have nothing to do with the efficiency of the bill for collection of tax, but the FBR is trying to get a bill enacted through which it has the power to harass the people which, in turn, will make this bill extremely prone to corruption. For this, one has to refer only to the definition of the word Associated Person who has been made responsible to make the payment of disputed tax imposed upon another person or relative.
The disputed tax imposed can be recovered from the individual or any relative of the individual while the relative means (a) an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual; (b) an ancestor, a descendant of any of the grandparents, or an adopted child, of a spouse of the individual; or (c) a spouse of the individual or of any person specified in aforesaid (a) or (b).
This means each and every relative or their spouses as associated persons are exposed and any time their bank accounts can be ceased or if any one of them is in business, the stock or business of the such relative can be sealed or confiscated. or their imports can be stopped.
This is a law for imposing disputed tax and then makes all the relatives under the sun to pay the disputed amount of tax of a distant relative, who may not even have met for years. As per the VAT Act 2010, the command is that "Thou shall pay thy relative's disputed value-added tax," well that is what the law says.
Should the law permit such a clause in any tax law where you will be made to pay the disputed tax of any of your relatives, The answer is a big no. Not only all relatives from any side and their spouses have been made responsible for the payment of disputed tax of a distant relative and one can have personal bank account ceased any time or have the business sealed because somebody from ones own or wife's side relative has to pay some tax to the FBR. Can any sane person allow this law to be made. Yes it will be made if voice is not raised now.
The definition of the word associated person does not stop here at relatives. It also includes many more persons in the category of Associated Persons as given in Section 3 of the VAT Bill and the following are also "associated persons".
ASSOCIATED PERSONS OTHER THAN RELATIVES
"- (a) A member of an association of persons and the association, if the member, either alone or together with an associate or associates under another application of this section, controls 50 percent or more of the rights to income or capital of the association.
-- (b) A trust and any person who benefits or may benefit under the trust.
-- (c) A shareholder in a company and the company, if the shareholder, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons(i) 50 percent or more of the voting power in the company.
-- (d) two companies, where a person, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons (i) 50 percent or more of the voting power in both companies."
So the concept of Associated Person as defined in the bill makes a large number of persons as liable for the payment of disputed tax imposed on others. Section 61 and Section 3 if read separately do not elaborate the full meaning of the concept of making the associated person as the person from whom the disputed tax can be recovered. When Section 3 is read together with Section 61, it hits the point that disputed tax demand of a very distant relative can be recovered from you or your spouse even if you are living in another country and have nothing to do with the business of your relative.
But one can say that it has been committed and the VAT Act has to be enacted so what is the solution. It is, therefore, advised that the word Associated person, appearing twice in Section 61 should be deleted along with the addition of a proviso in section 61 and the definition of the Word" Associated Person" given in section 3 of VAT Act should be reworded and Section 3 and Section 61 should read as under:
"(3)Associated persons: (1) For the purpose of this Act two persons are "associated persons" if the relationship between them is such that one can reasonably be expected to act in accordance with the intentions of the other, or both can reasonably be expected to act in accordance with the intentions of a third person.
(2) Whether or not sub-section (1) applies, the following are "associated persons":
-- (a) A member of an association of persons and the association, if the member, controls fifty per cent or more of the rights to income or capital of the association.
-- (b) A trust and any person who benefits or may benefit under the trust.
-- (c) A shareholder in a company and the company, if the shareholder, controls:
(i) Fifty percent or more of the voting power in the company;
(ii) Fifty percent or more of the rights to dividends; or
(iii) Fifty percent or more of the rights to capital;
-- (d) two companies, where a person, , controls either directly or through one or more interposed persons:
(i) Fifty percent or more of the voting power in both companies;
(ii) Fifty percent or more of the rights to dividends in both companies; or
(iii) Fifty percent or more of the rights to capital in both companies.
(3) Two persons are not associated persons solely because one of them is an employee of the other or both are employees of a third person."
So to make the VAT Bill enforceable, amend the definition of the word "associated person" with the definition as given above and the problem will dilute without affecting the efficiency to collect tax by the tax man. With this simple amendment, you will have more tax and much less corruption and you will not be called upon to pay somebody else's value added tax. But to achieve this objective without any lacuna, Section 61 will also have to be re-worded as given below.
"61. Recovery of arrears of tax: (1) Where any amount of tax is due from any persona as per return filed or as per the invoices issued or otherwise, the officer of Inland Revenue authorized by the Board or Commissioner in this behalf, may take all or any of the following actions to recover such amount, namely after giving 30 days notice to the person:-
-- (a) deduct the amount from any money owing to defaulter at his disposal or under his control or under the control of any other officer of Customs or Inland Revenue;
-- (b) require any person who holds or may subsequently hold any money for or on account of the defaulter to pay the amount;
-- (c) stop removal of any goods from the business premises of the defaulter till such time the recoverable amount is paid or recovered in full;
-- (d) require any person to stop clearance of imported goods or manufactured goods;
-- (e) attach bank accounts of the defaulter;
-- (f) seal the business premises of the defaulter till such time the recoverable amount is paid or recovered in full;
-- (g) attach and sell or sell without attachment any moveable or immovable property including taxation goods of the defaulter; or
-- (h) recover such amount by attachment and sale of any moveable or immovable property including taxable goods of the guarantor, person, company, bank or financial institution where a guarantor or any other person, company, bank or financial institution fails to make payment under such guarantee, bond or instrument.
Provided that clauses (c) to (g) of sub-section (1) will not be applicable unless the appeal filed by the person against the order imposing tax has been decided by the Commissioner."
Unless these bare minimum amendments in Section 3 and Section 61 as suggested above are made the Value-Added Tax Act will only mean harassment and corruption The civil society, media, the legal fraternity and the business community have to wake up and approach the right quarters so that one relative is not made to pay somebody else's tax and the FBR is only granted powers, which are necessary for tax collection and not for harassment.
(The writer is Chief Consultant, Osmani & Afzal Associates)
Source: http://www.brecorder.com/index.php?id=1049303&currPageNo=1&query=&search=&term=&supDate=
By now, it is common belief that the FBR is trying to use the VAT Act 2010 as a vehicle to acquire and take draconian powers, which are not otherwise required for tax collection, but will only bring harassment and unending corruption channels.
It has been suggested at various forums that the power to arrest defaulters should not be granted to the FBR officials as proposed and is being enacted through Section 72 of the VAT Bill under consideration of the Parliament.
The speakers including Zubair Motiwala, at the Chambers of Commerce and Industry seminar held last week have recommended that the section granting power of arrest like Section 72 should be deleted from the VAT Bill and appropriate amendment should also be made in Sections 69 and 61 of the bill.
The power of arrest or the right to challenge this action in the normal courts provided in Section 87 of the VAT Bill is not the subject of this article. The VAT should be enforced, but excluding the draconian powers of the FBR. Under the VAT Bill, the FBR can very easily impose disputed tax on any person and recover forcefully this disputed tax from his father, mother, brother, sister, spouse, other relations or associates.
The list of persons who can be forced to pay other person's disputed tax, is very large. The bill includes the concept that the disputed tax, imposed on one person, can be recovered from his relatives who may have nothing to do with the business of the person on whom disputed value-added tax has been imposed.
Section 61of the value-added tax bill gives powers to enforce recovery and this section very clearly states that recovery of disputed tax imposed can also be made from the associated persons and the word associated persons has been defined in Section 3 of the bill. When Section 3 reads in conjugation of Section 61 of the bill, it becomes more than clear that the disputed value-added tax, imposed on one person, can be recovered from the relatives of the person and the list of relatives affected is almost unending.
This has been achieved by using the word associated person in Section 61, dealing with the recovery of the disputed tax and defining the word associated person in another Section 3 of the bill, which includes the relatives in the definition of associated persons. This will become clear by reference to the wording of the two sections 61 and 3 of the bill.
"Section 61. Recovery of arrears of tax: (1) Where any amount of tax is due from any person, the officer of Inland Revenue, authorised by the Board or Commissioner in this behalf, may take all or any of the following actions to recover such amount, namely:
-- (a) deduct the amount from any money owing to defaulter at his disposal or under his control or under the control of any other officer of Customs or Inland Revenue; (b) require any person who holds or may subsequently hold any money for or on account of the defaulter to pay the amount; (c) stop removal of any goods from the business premises of the defaulter or the associated person till such time the recoverable amount is paid or recovered in full; (d) require any person to stop clearance of imported goods or manufactured goods; (e) attach bank accounts of the defaulter or his associated person;"
There are other powers also granted by Section 61 for recovery of disputed demand, but for the sake of brevity we will limit it to the above extent. In Section 61 quoted above, which is giving multiple powers to the FBR official for the recovery of disputed VAT, the word "Or An Associated Person" has been used again and again.
This means the disputed VAT tax imposed on one taxpayer can also be recovered from the associate person of the taxpayer. Clause (c) of Sub-Section (1) of Section 61 quoted above empowers the VAT official, which includes the inspector to seal the business premises of the associated person and stop removal of any goods from the business premises of the associated person till such time the disputed tax is paid or recovered in full. This mean the business of the associated person, including his business premises and stock of goods, can be taken over for the recovery of tax imposed on some other person and the affected associated person is even forbidden to challenge this action in the normal court of law as per section 87 of the VAT bill.
Similarly, Clause (e) of sub-section (1) of Section 61 quoted above empowers the VAT official which includes the inspector to attach bank accounts of the associated person till such time the disputed tax imposed on somebody else is paid or recovered in full.
From the above, it become very clear that as per Section 61 of the Bill the disputed VAT imposed on one taxpayer can be recovered by attaching the bank account of any person associated with the taxpayer or the VAT officer can seal the business premises of the associated person and stop the removal of any goods from the business premises of the associated person till such time the disputed amount is paid or recovered in full.
Now the question is what is meant by the word "Associated person" under the VAT Bill 2010 and for this we have to refer to Section 3 of the bill, which includes all the blood/ancestral relation, besides common partners and others into the definition of the word Associated Person. This cannot become clear without reference to the wording of Section 3 of the VAT Bill 2010 which is quoted as under:
"3. Associated persons: (1) For the purpose of this act, two persons are "associated persons" if the relationship between them is such that one can reasonably be expected to act in accordance with the intentions of the other, or both can reasonably be expected to act in accordance with the intentions of a third person.
(2) The following are presumed to be "associated persons" (a) an individual and a relative of the individual; and (4) "relative" in relation to an individual, means:
-- (a) An ancestor, a descendant of any of the grandparents, or an adopted child, of the individual;
-- (b) an ancestor, a descendant of any of the grandparents, or an adopted child, of a spouse of the individual; or
-- (c) a spouse of the individual or of any person specified in sub-paragraph (a) or (b)."
Section 3 of the Bill defines the word Associated Person and it is very lengthy and includes many more persons in the definition of Associated person, but for the sake of brevity we will limit it to the above extent Associated person includes a person or the spouse's relations by blood as per the definition of the word Associated Person quoted above as given in Section 3 of the bill.
It is known that the FBR has drafted this bill and FBR is trying to take powers, which have nothing to do with the efficiency of the bill for collection of tax, but the FBR is trying to get a bill enacted through which it has the power to harass the people which, in turn, will make this bill extremely prone to corruption. For this, one has to refer only to the definition of the word Associated Person who has been made responsible to make the payment of disputed tax imposed upon another person or relative.
The disputed tax imposed can be recovered from the individual or any relative of the individual while the relative means (a) an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual; (b) an ancestor, a descendant of any of the grandparents, or an adopted child, of a spouse of the individual; or (c) a spouse of the individual or of any person specified in aforesaid (a) or (b).
This means each and every relative or their spouses as associated persons are exposed and any time their bank accounts can be ceased or if any one of them is in business, the stock or business of the such relative can be sealed or confiscated. or their imports can be stopped.
This is a law for imposing disputed tax and then makes all the relatives under the sun to pay the disputed amount of tax of a distant relative, who may not even have met for years. As per the VAT Act 2010, the command is that "Thou shall pay thy relative's disputed value-added tax," well that is what the law says.
Should the law permit such a clause in any tax law where you will be made to pay the disputed tax of any of your relatives, The answer is a big no. Not only all relatives from any side and their spouses have been made responsible for the payment of disputed tax of a distant relative and one can have personal bank account ceased any time or have the business sealed because somebody from ones own or wife's side relative has to pay some tax to the FBR. Can any sane person allow this law to be made. Yes it will be made if voice is not raised now.
The definition of the word associated person does not stop here at relatives. It also includes many more persons in the category of Associated Persons as given in Section 3 of the VAT Bill and the following are also "associated persons".
ASSOCIATED PERSONS OTHER THAN RELATIVES
"- (a) A member of an association of persons and the association, if the member, either alone or together with an associate or associates under another application of this section, controls 50 percent or more of the rights to income or capital of the association.
-- (b) A trust and any person who benefits or may benefit under the trust.
-- (c) A shareholder in a company and the company, if the shareholder, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons(i) 50 percent or more of the voting power in the company.
-- (d) two companies, where a person, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons (i) 50 percent or more of the voting power in both companies."
So the concept of Associated Person as defined in the bill makes a large number of persons as liable for the payment of disputed tax imposed on others. Section 61 and Section 3 if read separately do not elaborate the full meaning of the concept of making the associated person as the person from whom the disputed tax can be recovered. When Section 3 is read together with Section 61, it hits the point that disputed tax demand of a very distant relative can be recovered from you or your spouse even if you are living in another country and have nothing to do with the business of your relative.
But one can say that it has been committed and the VAT Act has to be enacted so what is the solution. It is, therefore, advised that the word Associated person, appearing twice in Section 61 should be deleted along with the addition of a proviso in section 61 and the definition of the Word" Associated Person" given in section 3 of VAT Act should be reworded and Section 3 and Section 61 should read as under:
"(3)Associated persons: (1) For the purpose of this Act two persons are "associated persons" if the relationship between them is such that one can reasonably be expected to act in accordance with the intentions of the other, or both can reasonably be expected to act in accordance with the intentions of a third person.
(2) Whether or not sub-section (1) applies, the following are "associated persons":
-- (a) A member of an association of persons and the association, if the member, controls fifty per cent or more of the rights to income or capital of the association.
-- (b) A trust and any person who benefits or may benefit under the trust.
-- (c) A shareholder in a company and the company, if the shareholder, controls:
(i) Fifty percent or more of the voting power in the company;
(ii) Fifty percent or more of the rights to dividends; or
(iii) Fifty percent or more of the rights to capital;
-- (d) two companies, where a person, , controls either directly or through one or more interposed persons:
(i) Fifty percent or more of the voting power in both companies;
(ii) Fifty percent or more of the rights to dividends in both companies; or
(iii) Fifty percent or more of the rights to capital in both companies.
(3) Two persons are not associated persons solely because one of them is an employee of the other or both are employees of a third person."
So to make the VAT Bill enforceable, amend the definition of the word "associated person" with the definition as given above and the problem will dilute without affecting the efficiency to collect tax by the tax man. With this simple amendment, you will have more tax and much less corruption and you will not be called upon to pay somebody else's value added tax. But to achieve this objective without any lacuna, Section 61 will also have to be re-worded as given below.
"61. Recovery of arrears of tax: (1) Where any amount of tax is due from any persona as per return filed or as per the invoices issued or otherwise, the officer of Inland Revenue authorized by the Board or Commissioner in this behalf, may take all or any of the following actions to recover such amount, namely after giving 30 days notice to the person:-
-- (a) deduct the amount from any money owing to defaulter at his disposal or under his control or under the control of any other officer of Customs or Inland Revenue;
-- (b) require any person who holds or may subsequently hold any money for or on account of the defaulter to pay the amount;
-- (c) stop removal of any goods from the business premises of the defaulter till such time the recoverable amount is paid or recovered in full;
-- (d) require any person to stop clearance of imported goods or manufactured goods;
-- (e) attach bank accounts of the defaulter;
-- (f) seal the business premises of the defaulter till such time the recoverable amount is paid or recovered in full;
-- (g) attach and sell or sell without attachment any moveable or immovable property including taxation goods of the defaulter; or
-- (h) recover such amount by attachment and sale of any moveable or immovable property including taxable goods of the guarantor, person, company, bank or financial institution where a guarantor or any other person, company, bank or financial institution fails to make payment under such guarantee, bond or instrument.
Provided that clauses (c) to (g) of sub-section (1) will not be applicable unless the appeal filed by the person against the order imposing tax has been decided by the Commissioner."
Unless these bare minimum amendments in Section 3 and Section 61 as suggested above are made the Value-Added Tax Act will only mean harassment and corruption The civil society, media, the legal fraternity and the business community have to wake up and approach the right quarters so that one relative is not made to pay somebody else's tax and the FBR is only granted powers, which are necessary for tax collection and not for harassment.
(The writer is Chief Consultant, Osmani & Afzal Associates)
Source: http://www.brecorder.com/index.php?id=1049303&currPageNo=1&query=&search=&term=&supDate=
Turkey, Serbia find credit cards can soon mean huge debts By BORIS BABIC AND YIGAL SCHLEIFER
ARTICLE (April 24 2010): Consumer debt has, by far, been one of the main contributors to the recent debt explosion around the world. Thanks to the recent financial crisis, the residents of many Western countries are now struggling to get their consumer debt under control. But there are signs that history could be repeating itself in some of the world's up-and-coming economies.
World-wide, consumer credit card debt has ballooned to almost 1.7 trillion dollars in 2009, up from 1.1 trillion in 2001. Two growing contributors to that trend are Turkey and Serbia. In both places, aggressive marketing by banks and credit card companies have led to record numbers of credit card users. Meanwhile, high interest rates and economic trouble have led to a growing number of consumers falling behind on their payments.
To call the growth of Turkeys credit card industry robust would be an extreme understatement. Credit cards only started to really take hold in the country in the early 1990s. But in the last few years, their level of use has skyrocketed as has the number of people finding themselves in financial trouble because of their new high-interest debts. Between 2002 and 2009, the number of credit cards in circulation in Turkey grew by a whopping 203.4 percent, from 15.7 million cards to 47.7 million.
Even more stunning has been the growth during that period in credit card spending, 762 percent, up from 16 billion Turkish lira in 2002 to 138 billion in 2009. Turkey is becoming a kind of new consumer society," says Andrew Neeson, head of research at the London-based Lafferty Group, which specialises in consumer finance and credit card research.
Five or 10 years ago, it was a kind of prospective credit card market, but now its one of the top four markets in Europe." Card issuers and banks have come up with all kinds of different ways to encourage people to spend, to give incentives to go out and use their cards," he adds.
But this growth has had its dark side. Turkeys economy is no longer the crisis-prone mess it was a decade ago. But the unemployment rate is among the highest in Europe and wages in the country have remained flat. At the same time, interest rates on unpaid credit card loans can reach 42 percent.
If you get caught up in this thing, you cannot really get away. You cannot really pay it back. If you fall behind on your credit card payments, you are dead meat," says Alpay Dinckoc, a banking analyst with Istanbuls Oyak Securities. From the consumer point of view, there should be concerns."
In Serbia, the average consumer now finds that credit card debt takes up more than one-fifth of his wage. Many are unable to rid themselves of their cards. According to data from the Serbian Banking Union, the average per capita debt via credit cards in Serbia is 5,600 dinars (75 dollars), which is a major chunk of the average 30,000-dinar wage.
Unlike other typical debts, credit card holders have access to new money immediately after making a payment - but at a huge, though well-concealed, interest rate of up to 33 per cent annually. Few paid attention or cared until the pinch of the tumbling dinar and a high inflation rate. Now, many cannot get out.
"I am simply, plainly unable to close that debt. I don't have enough to close it and pay other debts and feed the family," says Dragana Markovic, 43, a nurse and mother of three. "It's like STD (sexually transmitted disease) - you had your fun, now pay!" Markovic repeats well-rehearsed acrobatics every month: when the salary arrives, she deposits cash to her credit card account, then immediately withdraws it - minus the interest, of course.
The revolving credit on her 100,000-dinar limit costs her around 3,000 dinars each month. But she says she and her husband, on a combined income of around 70,000 dinars, are too deeply indebted and will deal with it once they service "loans that have an end to them."
In recent years, the Turkish press has increasingly featured stories of families that have been destroyed by credit card debt. In one famous case, a policeman shot himself in the head on an Istanbul street, despondent over his 40,000 dollars in unpaid debts. Credit card defaults surged in 2008, from 192,266 the year before to 602,648, an increase of 213 percent. The number rose to 1.1 million in 2009.
The Turkish government has tried to step in, passing a law in 2006 that put a cap on interest rates and made it harder for banks to issue credit cards. But critics say the government should go further. Its a vicious cycle of debt. Nobody can get out of it," says Aydin Agaoglu, an official with Consumers Union, a Turkish advocacy group that has been pushing for stricter government controls on the credit card industry. The growing debt is becoming a social problem, not just an economic one."
Source: http://www.brecorder.com/index.php?id=1048939&currPageNo=1&query=&search=&term=&supDate=
World-wide, consumer credit card debt has ballooned to almost 1.7 trillion dollars in 2009, up from 1.1 trillion in 2001. Two growing contributors to that trend are Turkey and Serbia. In both places, aggressive marketing by banks and credit card companies have led to record numbers of credit card users. Meanwhile, high interest rates and economic trouble have led to a growing number of consumers falling behind on their payments.
To call the growth of Turkeys credit card industry robust would be an extreme understatement. Credit cards only started to really take hold in the country in the early 1990s. But in the last few years, their level of use has skyrocketed as has the number of people finding themselves in financial trouble because of their new high-interest debts. Between 2002 and 2009, the number of credit cards in circulation in Turkey grew by a whopping 203.4 percent, from 15.7 million cards to 47.7 million.
Even more stunning has been the growth during that period in credit card spending, 762 percent, up from 16 billion Turkish lira in 2002 to 138 billion in 2009. Turkey is becoming a kind of new consumer society," says Andrew Neeson, head of research at the London-based Lafferty Group, which specialises in consumer finance and credit card research.
Five or 10 years ago, it was a kind of prospective credit card market, but now its one of the top four markets in Europe." Card issuers and banks have come up with all kinds of different ways to encourage people to spend, to give incentives to go out and use their cards," he adds.
But this growth has had its dark side. Turkeys economy is no longer the crisis-prone mess it was a decade ago. But the unemployment rate is among the highest in Europe and wages in the country have remained flat. At the same time, interest rates on unpaid credit card loans can reach 42 percent.
If you get caught up in this thing, you cannot really get away. You cannot really pay it back. If you fall behind on your credit card payments, you are dead meat," says Alpay Dinckoc, a banking analyst with Istanbuls Oyak Securities. From the consumer point of view, there should be concerns."
In Serbia, the average consumer now finds that credit card debt takes up more than one-fifth of his wage. Many are unable to rid themselves of their cards. According to data from the Serbian Banking Union, the average per capita debt via credit cards in Serbia is 5,600 dinars (75 dollars), which is a major chunk of the average 30,000-dinar wage.
Unlike other typical debts, credit card holders have access to new money immediately after making a payment - but at a huge, though well-concealed, interest rate of up to 33 per cent annually. Few paid attention or cared until the pinch of the tumbling dinar and a high inflation rate. Now, many cannot get out.
"I am simply, plainly unable to close that debt. I don't have enough to close it and pay other debts and feed the family," says Dragana Markovic, 43, a nurse and mother of three. "It's like STD (sexually transmitted disease) - you had your fun, now pay!" Markovic repeats well-rehearsed acrobatics every month: when the salary arrives, she deposits cash to her credit card account, then immediately withdraws it - minus the interest, of course.
The revolving credit on her 100,000-dinar limit costs her around 3,000 dinars each month. But she says she and her husband, on a combined income of around 70,000 dinars, are too deeply indebted and will deal with it once they service "loans that have an end to them."
In recent years, the Turkish press has increasingly featured stories of families that have been destroyed by credit card debt. In one famous case, a policeman shot himself in the head on an Istanbul street, despondent over his 40,000 dollars in unpaid debts. Credit card defaults surged in 2008, from 192,266 the year before to 602,648, an increase of 213 percent. The number rose to 1.1 million in 2009.
The Turkish government has tried to step in, passing a law in 2006 that put a cap on interest rates and made it harder for banks to issue credit cards. But critics say the government should go further. Its a vicious cycle of debt. Nobody can get out of it," says Aydin Agaoglu, an official with Consumers Union, a Turkish advocacy group that has been pushing for stricter government controls on the credit card industry. The growing debt is becoming a social problem, not just an economic one."
Source: http://www.brecorder.com/index.php?id=1048939&currPageNo=1&query=&search=&term=&supDate=
Easy come, easy go? With debt, not necessarily so By NIELS C SORRELLS
ARTICLE (April 23 2010): The party, it would seem, is over. Worse yet, most of the partygoers were out of cash when it came time to pay the bill. If nothing else, the last few years have taught broad swaths of Westerners some truths that their grandparents might have held for self-evident. A house is not a line of credit; a credit card is not the same as cash; and bills cannot be deferred indefinitely.
Perhaps worse - we're not done yet. Even as private borrowers have retreated from mortgages and credit card debt in the US and Western Europe (only to be replaced by new credit card seekers in some emerging countries), national governments have gone even deeper into debt, hoping to borrow enough money to boost lagging economies.
And recent weeks have shown that, even with a country as financially troubled as Greece, investors are still willing to take a chance and lend it money ... provided that the country provides a high enough interest rate for the lender's troubles.
In short, the rich world has become the borrowing world and the emerging world has become the lending world. If nothing else, this ensures that some things are going to have to change in the near future. "The required adjustment is formidable," said International Monetary Fund Director Dominique Strauss-Kahn in an April 10 speech.
"Public debt in the advanced economies is forecast to rise by about 35 percentage points on average, to about 110 per cent of GDP (gross domestic product) in 2014. Reversing this increase will be a tremendous challenge - let alone reducing debt below pre-crisis levels, which may be needed to leave enough fiscal space to tackle future crises."
His opinions are fairly universal. "Trying to pay down some of the debt we've amassed while trying to have somewhat reasonable growth prospects - the two things don't sit happily with one another," said Marc Ostwald, a market analyst with Monument Securities in London.
"If we're going to pay down the debt, we have to pay more taxes. We're still trying to have strong growth. "We accumulated a lot of debt at the same time, initially at the customer level, now at the government level. We're beginning to realize that all of it doesn't add up to a picture that equals reasonable growth if we're going to borrow less and get our books in order."
The most commonly recommended cure-all is rebalancing. Countries that splurged too much (think Britain, Greece and the US) are going to have to learn to live within their means while countries sitting on huge stockpiles of savings (think China and Germany) are going to have to consume more.
Only then will some of the money trapped in the savers' bank account be released back into markets, hopefully buying up some of the wares offered up by the debtors, in turn helping them to pay off their debts. That, at least is the theory. Whether it will be possible to convince Americans to give up their spending or Germans to give up their savings is an entirely different question.
Some are pessimistic. "There's a huge problem here. They won't change," says Felix Roth, a research fellow with the economic policy unit at the Centre for European Policy Studies.
Event the optimists are only slightly less pessimistic, noting that the only way to fix the situation is to rebalance, arguing that world leaders will have to figure out the solution before global growth stagnates. After all, notes Sotiria Theodoropoulou, a policy analyst at the European Policy Centre, "if recovery does not pick up, then the exports of the emerging countries will also suffer."
Until then, the world will have to muddle through. Ongoing adjustments in the US, Greece and Britain - everything from foreclosed homes to massive slashes in government benefits -highlight what may lie ahead as nations learn to deal with life on a reduced budget.
But what is also clear is that there are multiple ways to deal with the debt. Argentina defaulted on its debt earlier this century. Japan has some of the highest debt levels in the world, but has largely borrowed from its own citizens, keeping it from falling at the mercy of foreign creditors. Meanwhile, other countries are just starting to learn about the dangers of credit and debt, hinting that the whole cycle could be primed to start over again someday. In which case, most would argue, it's best to learn some lessons now, to be better prepared for the next crisis.
Source: http://www.brecorder.com/index.php?id=1048503&currPageNo=1&query=&search=&term=&supDate=
Perhaps worse - we're not done yet. Even as private borrowers have retreated from mortgages and credit card debt in the US and Western Europe (only to be replaced by new credit card seekers in some emerging countries), national governments have gone even deeper into debt, hoping to borrow enough money to boost lagging economies.
And recent weeks have shown that, even with a country as financially troubled as Greece, investors are still willing to take a chance and lend it money ... provided that the country provides a high enough interest rate for the lender's troubles.
In short, the rich world has become the borrowing world and the emerging world has become the lending world. If nothing else, this ensures that some things are going to have to change in the near future. "The required adjustment is formidable," said International Monetary Fund Director Dominique Strauss-Kahn in an April 10 speech.
"Public debt in the advanced economies is forecast to rise by about 35 percentage points on average, to about 110 per cent of GDP (gross domestic product) in 2014. Reversing this increase will be a tremendous challenge - let alone reducing debt below pre-crisis levels, which may be needed to leave enough fiscal space to tackle future crises."
His opinions are fairly universal. "Trying to pay down some of the debt we've amassed while trying to have somewhat reasonable growth prospects - the two things don't sit happily with one another," said Marc Ostwald, a market analyst with Monument Securities in London.
"If we're going to pay down the debt, we have to pay more taxes. We're still trying to have strong growth. "We accumulated a lot of debt at the same time, initially at the customer level, now at the government level. We're beginning to realize that all of it doesn't add up to a picture that equals reasonable growth if we're going to borrow less and get our books in order."
The most commonly recommended cure-all is rebalancing. Countries that splurged too much (think Britain, Greece and the US) are going to have to learn to live within their means while countries sitting on huge stockpiles of savings (think China and Germany) are going to have to consume more.
Only then will some of the money trapped in the savers' bank account be released back into markets, hopefully buying up some of the wares offered up by the debtors, in turn helping them to pay off their debts. That, at least is the theory. Whether it will be possible to convince Americans to give up their spending or Germans to give up their savings is an entirely different question.
Some are pessimistic. "There's a huge problem here. They won't change," says Felix Roth, a research fellow with the economic policy unit at the Centre for European Policy Studies.
Event the optimists are only slightly less pessimistic, noting that the only way to fix the situation is to rebalance, arguing that world leaders will have to figure out the solution before global growth stagnates. After all, notes Sotiria Theodoropoulou, a policy analyst at the European Policy Centre, "if recovery does not pick up, then the exports of the emerging countries will also suffer."
Until then, the world will have to muddle through. Ongoing adjustments in the US, Greece and Britain - everything from foreclosed homes to massive slashes in government benefits -highlight what may lie ahead as nations learn to deal with life on a reduced budget.
But what is also clear is that there are multiple ways to deal with the debt. Argentina defaulted on its debt earlier this century. Japan has some of the highest debt levels in the world, but has largely borrowed from its own citizens, keeping it from falling at the mercy of foreign creditors. Meanwhile, other countries are just starting to learn about the dangers of credit and debt, hinting that the whole cycle could be primed to start over again someday. In which case, most would argue, it's best to learn some lessons now, to be better prepared for the next crisis.
Source: http://www.brecorder.com/index.php?id=1048503&currPageNo=1&query=&search=&term=&supDate=
Tuesday, April 20, 2010
Fiscal stress and cash budgeting By Dr Abdul Karim
HE government’s fiscal position is a major problem as reflected in the yawning fiscal deficit. The federal government accounts for the bulk of it. To deal with this issue, an attempt has been made to set a ceiling on deficit-GDP ratio under the Fiscal Responsibility Act.
More important is the discipline imposed by the IMF Standby arrangement. One of the important IMF conditionalities is the fiscal deficit-GDP ratio to be observed not only at the end of the fiscal year but on a periodical basis to qualify for the release of loan installments.
Pakistan has an interesting history of abiding by that conditionality. Instead of tightening the belt, the authorities often turn to postponing payments and advancing receipts and other accounting devices to show compliance. If that did not do in the past, they do not hesitate to resort to figure fudging.
The current IMF Standby stipulates the limit for the fiscal deficit and this is expected to be observed by reducing development expenditure. Accordingly, the PSDP for the current year is being reduced sharply. Even so, it has been difficult to live by the Fund conditionality. Waivers have been sought and given by the Fund.
The fiscal problem has reached the point where it is obstructing the normal functioning of the economy. The telling poof of it is the current acute energy crisis. A major contributory factor is the circular debt and large arrears of electricity charges. The arrears of the public sector, particularly of government departments, are large and even reach the Presidency.
The hard fact is, nobody either in the government or outside, knows the actual liabilities of the public sector. In fact, there is no system to determine that. budget is prepared on “cash basis”, which means that government transactions are recorded when cash payment is made and this need not coincide with actual use of real resources.
In other words, receivables and unpaid bills are not taken into account. At the same time, money drawn to avail the lapsable budgetary provisions and put in the bank is shown as expenditure. The government deposits with scheduled banks account for 11 per cent of the total deposits. They are 44 per cent in time deposits, 33 in saving accounts and 21 in current accounts.
The cash basis of budgeting may facilitate cash management but undermines fiscal management, hence the mess. For better fiscal control, budgeting needs to be shifted from “cash” to “accrual” basis. That it takes into account liabilities as and when they are incurred and receivables the moment they become due to establish the claim.
This provides a complete balance sheet. Pakistan would not be the first country to try this method but would join many other countries. This will certainly give a better handle but would not eliminate fiscal deficit for which other measures would be required.
The fiscal deficit indicates that the government is not living within its means It can certainly increase its means by additional taxation but there is a limit set by the nature of the economy and country’s tax culture. Pakistan’s tax-GDP ratio is not only very low but has declined in recent years despite economic growth. Without playing down the importance of the revenue side of budget, attention is here focused on the expenditure side which does not receive due attention.
The public expenditure reflects national attitude towards public money which, in turn, is determined by the moral fibre of the society or its values. It is a painful fact that greed has become predominant making foul fair and fair practically foul. In this perspective, public money, which in fact, is “poor tax payers’ money”, is taken as nobody’s money and is up for grabs by any means. Public also begins to look up to government to do every thing for them. The result is increase in government expenditure regardless of resources.
In Pakistan, public office is sought not to serve the public, verbal claims apart, but to satisfy the ego to rule and to advance personal economic interests. The spoils are shared to curry favour of those who are considered indispensable for continuance in office. This mindset must change for ensuring financial and economic stability.
The first and foremost requirement for effectively dealing with the current fiscal mess is to reduce the size of the government, starting with the cabinet. Austerity should be the basic rule and leaders should be first to set an example. Free and practically unlimited facilities available to some government functionaries, often grossly misused, should be replaced by appropriate specific cash allowance. This would not only relieve the budget but also save real resources unnecessarily consumed in the process.
At times, government expenditure is incurred not as a function of the state but to woo some groups. Performance of Haj pilgrimage at the state expense was introduced by late General Zia-ul-Haq to win over religious minded Muslims. There is no justification for this and must be stopped. Haj is no doubt obligatory for Muslims but for those who can afford. The Quran says, “And pilgrimage to the House is a duty which men-those who can find a way thither-owe to Allah.” (Al-Imran, 3:98)
The government expenditure can be saved through public-private partnership. Two important areas worth trying are education and health. Buildings for these purposes cost a lot even if there is no corruption. Locals should be made responsible for construction of buildings and their upkeep, if need be on self-help basis, while government provides teachers and doctors along with the necessary equipment. In order to make the best use of buildings, schools should run two shifts, one for boys and the other for girls.
In sum, the fiscal mess can be cleared only if there is full realisation at all levels that public money comes from “poor tax payers” and it is sincerely treated as a sacred trust not to be squandered away. This demands strict financial discipline not only by way of living within the budget provision but also in terms of cost effectiveness.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/fiscal-stress-and-cash-budgeting-940
More important is the discipline imposed by the IMF Standby arrangement. One of the important IMF conditionalities is the fiscal deficit-GDP ratio to be observed not only at the end of the fiscal year but on a periodical basis to qualify for the release of loan installments.
Pakistan has an interesting history of abiding by that conditionality. Instead of tightening the belt, the authorities often turn to postponing payments and advancing receipts and other accounting devices to show compliance. If that did not do in the past, they do not hesitate to resort to figure fudging.
The current IMF Standby stipulates the limit for the fiscal deficit and this is expected to be observed by reducing development expenditure. Accordingly, the PSDP for the current year is being reduced sharply. Even so, it has been difficult to live by the Fund conditionality. Waivers have been sought and given by the Fund.
The fiscal problem has reached the point where it is obstructing the normal functioning of the economy. The telling poof of it is the current acute energy crisis. A major contributory factor is the circular debt and large arrears of electricity charges. The arrears of the public sector, particularly of government departments, are large and even reach the Presidency.
The hard fact is, nobody either in the government or outside, knows the actual liabilities of the public sector. In fact, there is no system to determine that. budget is prepared on “cash basis”, which means that government transactions are recorded when cash payment is made and this need not coincide with actual use of real resources.
In other words, receivables and unpaid bills are not taken into account. At the same time, money drawn to avail the lapsable budgetary provisions and put in the bank is shown as expenditure. The government deposits with scheduled banks account for 11 per cent of the total deposits. They are 44 per cent in time deposits, 33 in saving accounts and 21 in current accounts.
The cash basis of budgeting may facilitate cash management but undermines fiscal management, hence the mess. For better fiscal control, budgeting needs to be shifted from “cash” to “accrual” basis. That it takes into account liabilities as and when they are incurred and receivables the moment they become due to establish the claim.
This provides a complete balance sheet. Pakistan would not be the first country to try this method but would join many other countries. This will certainly give a better handle but would not eliminate fiscal deficit for which other measures would be required.
The fiscal deficit indicates that the government is not living within its means It can certainly increase its means by additional taxation but there is a limit set by the nature of the economy and country’s tax culture. Pakistan’s tax-GDP ratio is not only very low but has declined in recent years despite economic growth. Without playing down the importance of the revenue side of budget, attention is here focused on the expenditure side which does not receive due attention.
The public expenditure reflects national attitude towards public money which, in turn, is determined by the moral fibre of the society or its values. It is a painful fact that greed has become predominant making foul fair and fair practically foul. In this perspective, public money, which in fact, is “poor tax payers’ money”, is taken as nobody’s money and is up for grabs by any means. Public also begins to look up to government to do every thing for them. The result is increase in government expenditure regardless of resources.
In Pakistan, public office is sought not to serve the public, verbal claims apart, but to satisfy the ego to rule and to advance personal economic interests. The spoils are shared to curry favour of those who are considered indispensable for continuance in office. This mindset must change for ensuring financial and economic stability.
The first and foremost requirement for effectively dealing with the current fiscal mess is to reduce the size of the government, starting with the cabinet. Austerity should be the basic rule and leaders should be first to set an example. Free and practically unlimited facilities available to some government functionaries, often grossly misused, should be replaced by appropriate specific cash allowance. This would not only relieve the budget but also save real resources unnecessarily consumed in the process.
At times, government expenditure is incurred not as a function of the state but to woo some groups. Performance of Haj pilgrimage at the state expense was introduced by late General Zia-ul-Haq to win over religious minded Muslims. There is no justification for this and must be stopped. Haj is no doubt obligatory for Muslims but for those who can afford. The Quran says, “And pilgrimage to the House is a duty which men-those who can find a way thither-owe to Allah.” (Al-Imran, 3:98)
The government expenditure can be saved through public-private partnership. Two important areas worth trying are education and health. Buildings for these purposes cost a lot even if there is no corruption. Locals should be made responsible for construction of buildings and their upkeep, if need be on self-help basis, while government provides teachers and doctors along with the necessary equipment. In order to make the best use of buildings, schools should run two shifts, one for boys and the other for girls.
In sum, the fiscal mess can be cleared only if there is full realisation at all levels that public money comes from “poor tax payers” and it is sincerely treated as a sacred trust not to be squandered away. This demands strict financial discipline not only by way of living within the budget provision but also in terms of cost effectiveness.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/fiscal-stress-and-cash-budgeting-940
The saner alternative By A B SHAHID
ARTICLE (April 20 2010): On April 15, the Federal Board of Revenue (FBR) disclosed that the estimated the cost of replacing the general sales tax (GST) with value-added tax (VAT) would be Rs 50bn (a fraction of current GST revenue), and in spite thereof, implementing the VAT regime would yield a 'net gain' of Rs 125bn during 2010-11. In other words, additional revenue of Rs 175bn would flow from the un-taxed retail sector.
Given the growing fiscal stress, this sounded promising even though deceptively because the preconditions were that the VAT must be levied at 15 percent at the retail level as well, while the Senate wanted the rate to be 12.5 percent. Later, the estimate of additional revenue was lowered because a question mark hanging thereon was that the bulk of the retail sales constitute sale of the hard-to-tax food items.
Recovering the VAT on the packaged/branded food items isn't a problem, but recovering it on the sale of unpacked food items certainly is. Besides, it is a sensitive issue right now; the ongoing rise in CPI (largely the handiwork of retailers and supply chain mafia that the state can't check) leaves little room for the VAT recovery at the retail level without escalating social tensions.
Street violence is already testing the law-enforces to the hilt; in the coming days politicians will fan more of it to achieve their aims after filing of petitions, challenging the constitutional changes legislated by the 18th Amendment, release of the UN report on Benazir Bhutto's assassination, ongoing power loadshedding, and leaks about malpractices in the award of huge tenders for purchase of goods and services by the state.
Besides, by July 1, will even the 6,200 or so retailers who reportedly have annual sales of Rs 7.5 million or more, get the electronic 'cash registers' (that the FBR proposes to provide free of cost) to calculate, record and print cash memos for their customers? Even if the FBR provides the cash registers, will electricity always be there to operate them and, will the ordinary Pakistanis accept the new levy submissively?
At present, the GST is printed by manufacturers/processors on packed items to eliminate the need for its calculation, and ordinary buyers don't question it either. But there will be disputes over prices of unpacked items sold on open market prices. Sensing these problems, the FBR now requires tax invoices to be issued only for 'taxable' supplies made by one registered person to another.
Section 50 of the VAT Bill 2010 requires a registered person (a retailer) to issue a receipt to an unregistered person (a citizen) only if the transaction value exceeds Rs 25,000. The FBR also expects retailers to offer discounts to attract buyers and, impliedly, will collect less VAT. Good for retailers and their customers, but will this retailer-buyer nexus and exempting the truly 'retail' sales ensure collection of Rs 175bn at the retail level?
Atop thereof are the realistic proposals to exempt VAT on basic food items. No responsible Pakistani wants the FBR to fail in collecting the amount of taxes it must collect to rationalise the skewed distribution of wealth and provide the state with resources it needs to responsibly perform its duties. But will the imposition of the VAT at the retail level with an unclear system for its collection help achieve these solemn objectives?
Time for self-deceiving number games is over; it is time to act responsibly and meaningfully. The current scenario, wherein people doubt the sincerity and competence of the administration, the saner alternative is to effectively and visibly plug the leaks in the existing tax collection system, not experimenting with systems that can't be implemented purposefully without an effective monitoring infrastructure.
Section 75 of the VAT Bill provides only for lawful access to the taxpayers' records and premises; there is no hint about clearly defined random checks of procedural compliance with the system. These measures fit societies wherein morality and social responsibility are widely practised values. We all wish it applied to us as well but, until the FBR makes it clear that it won't let any tax evader to go scot-free, that wish won't materialise.
Don't the tax frauds that we hear about frequently justify a stiff monitoring system? Or is it that the FBR knows it lacks the resources for netting wrongdoers in the huge retail network? Shouldn't the FBR also accept the genuine limitations - illiteracy, lack of cheap advisory - that most retailers have? Shouldn't the FBR publish (in provincial languages) the formats of standard retail books of accounts and guide books on maintaining them?
This technical support to the retail sector is long overdue. Then there is a huge category of tax evaders - the lot that must be made to realise that it can't get away with smart tricks. This corrective effort can succeed only in case of taxes about assessing and collecting which the FBR staffers have a fair idea, not new taxes that may be imposed virtually overnight at the vast, inaccessible retail sector.
The saner course is to closely monitor the collection, recording, and surrender of the GST and WHT - the big tax revenue contributors with potential for higher contribution. Experience gained in unearthing evasion of these taxes should assure the FBR a better chance of raising the tax-to-GDP ratio. The other plus is that these taxes are collectible from already registered medium/large taxpayers, not ones whose ability-to-pay is unknown.
All that the FBR requires is much improved vigilance, and reconciliation of sales records with recorded tax liabilities, and evidence of their timely payment to the FBR - jobs FBR staffer know and can be prodded into improving upon via stricter accountability and better rewards than those they get now. The same goes for collecting the customs tariffs, and paying export rebates and duty refunds, wherein the leaks are huge.
Other venues for increasing revenue from existing sectors are a graduated rise in taxes on salaries but on annual brackets of Rs 1.2 million and above, and capital gains on real estate and shares. The industry can't pay higher taxes, given the rapid withdrawal of subsidies on fuel and electricity. Above all (and as promised last year), it is time to tax income on agriculture now that this sector is also getting 'international' market prices for its crops.
Launching the VAT at the retail level at present is a mirage; the FBR doesn't have a credible database of retailers nor can most retailers quickly learn to comply with the IT-based systems and procedures. This project can be launched meaningfully only with a two-year preparatory effort, of which the retail sector must be an integral part to assure a workable understanding of what is expected of the retailers.
Source: http://www.brecorder.com/index.php?id=1047275&currPageNo=1&query=&search=&term=&supDate=
Given the growing fiscal stress, this sounded promising even though deceptively because the preconditions were that the VAT must be levied at 15 percent at the retail level as well, while the Senate wanted the rate to be 12.5 percent. Later, the estimate of additional revenue was lowered because a question mark hanging thereon was that the bulk of the retail sales constitute sale of the hard-to-tax food items.
Recovering the VAT on the packaged/branded food items isn't a problem, but recovering it on the sale of unpacked food items certainly is. Besides, it is a sensitive issue right now; the ongoing rise in CPI (largely the handiwork of retailers and supply chain mafia that the state can't check) leaves little room for the VAT recovery at the retail level without escalating social tensions.
Street violence is already testing the law-enforces to the hilt; in the coming days politicians will fan more of it to achieve their aims after filing of petitions, challenging the constitutional changes legislated by the 18th Amendment, release of the UN report on Benazir Bhutto's assassination, ongoing power loadshedding, and leaks about malpractices in the award of huge tenders for purchase of goods and services by the state.
Besides, by July 1, will even the 6,200 or so retailers who reportedly have annual sales of Rs 7.5 million or more, get the electronic 'cash registers' (that the FBR proposes to provide free of cost) to calculate, record and print cash memos for their customers? Even if the FBR provides the cash registers, will electricity always be there to operate them and, will the ordinary Pakistanis accept the new levy submissively?
At present, the GST is printed by manufacturers/processors on packed items to eliminate the need for its calculation, and ordinary buyers don't question it either. But there will be disputes over prices of unpacked items sold on open market prices. Sensing these problems, the FBR now requires tax invoices to be issued only for 'taxable' supplies made by one registered person to another.
Section 50 of the VAT Bill 2010 requires a registered person (a retailer) to issue a receipt to an unregistered person (a citizen) only if the transaction value exceeds Rs 25,000. The FBR also expects retailers to offer discounts to attract buyers and, impliedly, will collect less VAT. Good for retailers and their customers, but will this retailer-buyer nexus and exempting the truly 'retail' sales ensure collection of Rs 175bn at the retail level?
Atop thereof are the realistic proposals to exempt VAT on basic food items. No responsible Pakistani wants the FBR to fail in collecting the amount of taxes it must collect to rationalise the skewed distribution of wealth and provide the state with resources it needs to responsibly perform its duties. But will the imposition of the VAT at the retail level with an unclear system for its collection help achieve these solemn objectives?
Time for self-deceiving number games is over; it is time to act responsibly and meaningfully. The current scenario, wherein people doubt the sincerity and competence of the administration, the saner alternative is to effectively and visibly plug the leaks in the existing tax collection system, not experimenting with systems that can't be implemented purposefully without an effective monitoring infrastructure.
Section 75 of the VAT Bill provides only for lawful access to the taxpayers' records and premises; there is no hint about clearly defined random checks of procedural compliance with the system. These measures fit societies wherein morality and social responsibility are widely practised values. We all wish it applied to us as well but, until the FBR makes it clear that it won't let any tax evader to go scot-free, that wish won't materialise.
Don't the tax frauds that we hear about frequently justify a stiff monitoring system? Or is it that the FBR knows it lacks the resources for netting wrongdoers in the huge retail network? Shouldn't the FBR also accept the genuine limitations - illiteracy, lack of cheap advisory - that most retailers have? Shouldn't the FBR publish (in provincial languages) the formats of standard retail books of accounts and guide books on maintaining them?
This technical support to the retail sector is long overdue. Then there is a huge category of tax evaders - the lot that must be made to realise that it can't get away with smart tricks. This corrective effort can succeed only in case of taxes about assessing and collecting which the FBR staffers have a fair idea, not new taxes that may be imposed virtually overnight at the vast, inaccessible retail sector.
The saner course is to closely monitor the collection, recording, and surrender of the GST and WHT - the big tax revenue contributors with potential for higher contribution. Experience gained in unearthing evasion of these taxes should assure the FBR a better chance of raising the tax-to-GDP ratio. The other plus is that these taxes are collectible from already registered medium/large taxpayers, not ones whose ability-to-pay is unknown.
All that the FBR requires is much improved vigilance, and reconciliation of sales records with recorded tax liabilities, and evidence of their timely payment to the FBR - jobs FBR staffer know and can be prodded into improving upon via stricter accountability and better rewards than those they get now. The same goes for collecting the customs tariffs, and paying export rebates and duty refunds, wherein the leaks are huge.
Other venues for increasing revenue from existing sectors are a graduated rise in taxes on salaries but on annual brackets of Rs 1.2 million and above, and capital gains on real estate and shares. The industry can't pay higher taxes, given the rapid withdrawal of subsidies on fuel and electricity. Above all (and as promised last year), it is time to tax income on agriculture now that this sector is also getting 'international' market prices for its crops.
Launching the VAT at the retail level at present is a mirage; the FBR doesn't have a credible database of retailers nor can most retailers quickly learn to comply with the IT-based systems and procedures. This project can be launched meaningfully only with a two-year preparatory effort, of which the retail sector must be an integral part to assure a workable understanding of what is expected of the retailers.
Source: http://www.brecorder.com/index.php?id=1047275&currPageNo=1&query=&search=&term=&supDate=
Proposed VAT legislation By HAMMAD RAZA ZAIDI
ARTICLE (April 19 2010): A Value Added-based sales tax to be introduced in Pakistan effective from July 2010 if the bill to that effect is translated into an act of the Parliament. The Federal Board of Revenue (FBR) has posted on its website the VAT legislation proposed through the bill to replace the present sales tax with a view to maximising revenue from this major source of indirect taxation.
Pakistan is in dire need to enhance its tax revenue. The composition of revenue shows that there has been more reliance on indirect taxes (Customs duty, Federal Excise and Sales Tax) rather than the direct tax (income tax or wealth tax). In the 2008-09 financial year, the tax administration (Federal Board of Revenue) collected about 1208 billion rupees as tax revenue. This included about 405 billion rupees in the form of sales tax (collected under the Sales Tax Act, 1990). There is a huge potential of expanding not only sales tax, but also consequential income tax if collection of sales tax is enhanced.
Pakistan has been cognisant of its low tax-to-GDP ratio, which is dismally straggling around 9%. No one could argue the importance of a raise in its tax-to-GDP ratio. It has set upon a host of reforms, stretching over a decade's time to optimise revenue. Now it has decided to improve phenomenally by introducing value-added tax (through proposed bill named Value Added Tax, 2010) by replacing the existing Sales Tax Act, 1990 and sales tax on services introduced by the federating units. Whether this radical shift in the paradigm shall materialise, the tax administration in particular and the government in general is to be tested by time. However, certain areas may be deliberated to make this shift direct to the best interests of the country.
Before analysing the modalities envisaged through the proposed bill, it is deemed appropriate to have a fair idea why the ratio of revenue to the GDP diminished from over 11% in six to seven years earlier to the present 9%. It is evident that over the years (in recent past) this ratio has registered a decrease.
The factors contributing to this downward trend include the following:
-- The economy did register increase in the last decade, though the pace of growth has slackened owing to the law and order situation faced by the entire country in the aftermath of the "war on terror". The investors feel insecure to invest in the country, as they cannot properly project the yields from the new enterprises.
-- The projects having long gestation period have particularly been unattractive enterprises to the investors not only of the foreign origin, but also the local ones.
-- There has been phenomenal increase in investments in neighbouring countries like India and Bangladesh. Because of better business-friendly environment, these countries have attracted such investments as well as would have been made in Pakistan, had there been congenial law and order situation. Agro-based industry is one of the sectors, which otherwise provide Pakistan a comparative edge over its neighbours and other South Asian countries.
-- The expansion of the economy, though itself not upto an appreciable level, has been without relative increase in quantum of tax revenue.
-- There is a huge "parallel economy" of undocumented sector. Owing to lack of proper documentation, the "unorganised sector" does not make proper records of transactions. Resultantly taxes are not deposited in proportion to the business done or the profits gained.
-- The "tax culture" has still not taken roots in the ethos of the society. The tax evader is not looked down upon. The high rates of taxes could be excuse for evasion or at time avoidance, yet even the holders of public offices do not care for tax payments and proper accounting for their incomes. If the society as whole disdains tax evasion, the level of non-payments might dwindle to a sizeable level in spite of other administrative loopholes in the tax administration.
-- Owing to loopholes in the system of tax administration and lack of objective enforcement across the board, the compliant taxpayers have time and again been burdened with additional taxes and duties while the delinquent ones have not been strictly pursued.
-- Probably, this lack of enforcement by tax administration has been outcome of an "audit free" environment to the taxpayers registered with the department and an avowed lethargy towards broadening the tax base.
-- Additionally, a host of exemptions have also paved the way for a "spree" for seeking exemption on one plea or the other.
-- Zero-rating of local supplies of certain sectors has also diminished sales tax collection from these sectors.
Ambitious outreach:
The proposed legislation on the VAT by replacing the present sales tax laws is not a step forward to bring improvement to the existing system of sales tax collection, but a paradigm shift completely doing away with the existing legislation and replacing it with a new one.
The salient features of this shift are mainly as follows:
-- The coverage of the VAT is to be extended to both goods and services;
-- It has been presumed that the federating units shall toe the line of action envisaged in the Federal VAT bill;
-- The exemption regime has been drastically slashed. It appears as if the business community has agreed to it so as to ensure voluntary compliance.
-- Sector-based zero-rating has also been proposed to be done away with. The experience of massive refunds to the exporters is to be witnessed again on abolition of zero rating to their supplies.
-- The cover of zero-rating in case of local supplies of export-based sector has also been proposed to be abolished. It is not clear whether the stakeholders shall accept this scheme with an open heart.
-- Medley of excise duty is there, though conceptually the VAT and excise duty ought not to be treated at par.
Option of steady progress:
If the scope of sales tax in Pakistan is strengthened, it can deliver more revenues. Perhaps, the people, especially the business people, have started to understand and accept the sales tax. The tax itself did exist but in 1990 it was patterned on a VAT system in that it contained a host of provisions aimed at allowing input credits, taxation on the basis of consumption, refunds to exports, neutrality to profit and loss etc. However, its scope is limited to goods under the Sales Tax Act, 1990 under item 49 of the Federal Legislative List under Fourth Schedule to the Constitution of Pakistan.
Selected services were given "sales tax treatment" through different measures enumerated below:
-- As the Federation cannot levy sales tax on services under Sales Tax Act, 1990, the tax cover was extended to the selected services through the Federating units (provinces and the Islamabad Capital Territory), which brought them to dales tax. Hotel services, advertisement on TV, subject to certain exceptions, attract sales tax at the rate of 16% through provincial ordinances of sales tax on services.
-- The provisions of Sales Tax Act, 1990 are applicable for enforcement of sales tax on advertisement on TV and other services brought to tax by the federating units on uniform pattern and have been entrusted to the FBR for collection.
-- Levy of duty of excise on services is within the constitutional power of the federation stipulated under item 44 of Part I of the said schedule. It may be appreciated that the federation alone is competent to legislate on the matters stipulated under the Federal Legislative List. In exercise of the aforesaid constitutional powers, the Parliament legislated Federal Excise Act, 2005 (rescinding the Central Excise Act 1944). Certain services, including telecommunication services, are liable to duty of excise by virtue of Section 3 of the said act. The said levy is excise duty and the same collected in sales tax mode in terms of Section 7 of FED Act, 2005 read with SRO 550(1)/2006 dated 05.06.06.
Addressing constitutional constraints
The March appears not only hasty, but also not free from risks on counts, inter alia, the following:
-- Levy and collection of sales tax on goods is within the constitutional jurisdiction of the federation in terms of item 49 of Part I of the Fourth Schedule to the Constitution read with section 3 of the Sales Tax Act 1990. There is a constitutional constraint on the federation to levy sales tax on services. Levy of duty of excise on services is within the constitutional competence of the federation stipulated under item 44 of Part I of the aforesaid schedule to the Constitution read with Section 3 of the Federal Excise Act 2005.
-- Distribution of constitutional powers between the federation and federating units also converge on certain very significant areas to be deliberated upon at length before shifting to new legislation. In particular electricity, gas and telecom, have been contentious issues. It may be appreciated that electricity and gas are goods respectively classifiable under PCT Headings 2716 and 2711. The federation is competent to tax them under item 49 of Federal Legislative list of the Fourth Schedule to the Constitution as mentioned above. If the provinces also tax electricity, it shall be undue encumbrance upon the consumers.
-- Issues relating to taxation of distribution of collection to the headquarters of the entity or to its branches where tax accrued need to be addressed.
-- It has been envisaged that the informal sector, especially the retailers, would come to the tax-fold easily. This is an over-ambitious assumption.
-- The special procedures, which had been introduced because of the administrative exigencies, have been done away with altogether. Their absence may curtail revenue optimisation.
-- A host of issues shall also crop up in administration as well as in payment of tax due.
They may include:
(i) Accounting for the revenues under different types of taxes shall be a highly difficult task as inter-tax adjustment has been allowed.
(ii) In short span of time, the people cannot be educated about the modalities of new laws.
(iii) The informal sector cannot be shunted out by simplification of legislation at the cost of the revenues as well as the competitive disadvantage to the organised sectors.
(iv) Input adjustment matters, especially because of general payment as per practice in vogue, must be taken care of.
(v) Other administrative issues like return filing where there a number of locations where services are provided, have to be resolved.
(vi) Late payment and penalty issues need to be addressed.
However, there should be no haste in outright rescinding the existing sales tax laws. They could be fine-tuned in the short run. After addressing the constitutional constraints, further improvements could be brought. Pakistan is a federation, comprising Federal Capital (Islamabad Capital Territories), provinces, Fata and Pata. Our proposed legislation has been made without aptly taking into consideration this texture of the federation. It is, therefore, viewed that the stakeholders be taken into confidence. The FBR may hold conferences and seminars with the business community, the trade bodies, chambers, chartered/cost and management accountants and tax lawyers. There must be deliberations by the Parliamentary Committee, which should debate and discuss diverse dimensions of new legislation and its harmony with the proposed legislation to be made by the federating units (provinces/ICT) as well as areas having special status like AJK and Gilgit-Baltistan. It is imperative that input of the stakeholders is procured with open mind so that their legitimate interests are aptly guarded.
(The writer is Chairman of Karachi Branch, Council of ICMAP.)
Source: http://www.brecorder.com/index.php?id=1047008&currPageNo=1&query=&search=&term=&supDate=
Pakistan is in dire need to enhance its tax revenue. The composition of revenue shows that there has been more reliance on indirect taxes (Customs duty, Federal Excise and Sales Tax) rather than the direct tax (income tax or wealth tax). In the 2008-09 financial year, the tax administration (Federal Board of Revenue) collected about 1208 billion rupees as tax revenue. This included about 405 billion rupees in the form of sales tax (collected under the Sales Tax Act, 1990). There is a huge potential of expanding not only sales tax, but also consequential income tax if collection of sales tax is enhanced.
Pakistan has been cognisant of its low tax-to-GDP ratio, which is dismally straggling around 9%. No one could argue the importance of a raise in its tax-to-GDP ratio. It has set upon a host of reforms, stretching over a decade's time to optimise revenue. Now it has decided to improve phenomenally by introducing value-added tax (through proposed bill named Value Added Tax, 2010) by replacing the existing Sales Tax Act, 1990 and sales tax on services introduced by the federating units. Whether this radical shift in the paradigm shall materialise, the tax administration in particular and the government in general is to be tested by time. However, certain areas may be deliberated to make this shift direct to the best interests of the country.
Before analysing the modalities envisaged through the proposed bill, it is deemed appropriate to have a fair idea why the ratio of revenue to the GDP diminished from over 11% in six to seven years earlier to the present 9%. It is evident that over the years (in recent past) this ratio has registered a decrease.
The factors contributing to this downward trend include the following:
-- The economy did register increase in the last decade, though the pace of growth has slackened owing to the law and order situation faced by the entire country in the aftermath of the "war on terror". The investors feel insecure to invest in the country, as they cannot properly project the yields from the new enterprises.
-- The projects having long gestation period have particularly been unattractive enterprises to the investors not only of the foreign origin, but also the local ones.
-- There has been phenomenal increase in investments in neighbouring countries like India and Bangladesh. Because of better business-friendly environment, these countries have attracted such investments as well as would have been made in Pakistan, had there been congenial law and order situation. Agro-based industry is one of the sectors, which otherwise provide Pakistan a comparative edge over its neighbours and other South Asian countries.
-- The expansion of the economy, though itself not upto an appreciable level, has been without relative increase in quantum of tax revenue.
-- There is a huge "parallel economy" of undocumented sector. Owing to lack of proper documentation, the "unorganised sector" does not make proper records of transactions. Resultantly taxes are not deposited in proportion to the business done or the profits gained.
-- The "tax culture" has still not taken roots in the ethos of the society. The tax evader is not looked down upon. The high rates of taxes could be excuse for evasion or at time avoidance, yet even the holders of public offices do not care for tax payments and proper accounting for their incomes. If the society as whole disdains tax evasion, the level of non-payments might dwindle to a sizeable level in spite of other administrative loopholes in the tax administration.
-- Owing to loopholes in the system of tax administration and lack of objective enforcement across the board, the compliant taxpayers have time and again been burdened with additional taxes and duties while the delinquent ones have not been strictly pursued.
-- Probably, this lack of enforcement by tax administration has been outcome of an "audit free" environment to the taxpayers registered with the department and an avowed lethargy towards broadening the tax base.
-- Additionally, a host of exemptions have also paved the way for a "spree" for seeking exemption on one plea or the other.
-- Zero-rating of local supplies of certain sectors has also diminished sales tax collection from these sectors.
Ambitious outreach:
The proposed legislation on the VAT by replacing the present sales tax laws is not a step forward to bring improvement to the existing system of sales tax collection, but a paradigm shift completely doing away with the existing legislation and replacing it with a new one.
The salient features of this shift are mainly as follows:
-- The coverage of the VAT is to be extended to both goods and services;
-- It has been presumed that the federating units shall toe the line of action envisaged in the Federal VAT bill;
-- The exemption regime has been drastically slashed. It appears as if the business community has agreed to it so as to ensure voluntary compliance.
-- Sector-based zero-rating has also been proposed to be done away with. The experience of massive refunds to the exporters is to be witnessed again on abolition of zero rating to their supplies.
-- The cover of zero-rating in case of local supplies of export-based sector has also been proposed to be abolished. It is not clear whether the stakeholders shall accept this scheme with an open heart.
-- Medley of excise duty is there, though conceptually the VAT and excise duty ought not to be treated at par.
Option of steady progress:
If the scope of sales tax in Pakistan is strengthened, it can deliver more revenues. Perhaps, the people, especially the business people, have started to understand and accept the sales tax. The tax itself did exist but in 1990 it was patterned on a VAT system in that it contained a host of provisions aimed at allowing input credits, taxation on the basis of consumption, refunds to exports, neutrality to profit and loss etc. However, its scope is limited to goods under the Sales Tax Act, 1990 under item 49 of the Federal Legislative List under Fourth Schedule to the Constitution of Pakistan.
Selected services were given "sales tax treatment" through different measures enumerated below:
-- As the Federation cannot levy sales tax on services under Sales Tax Act, 1990, the tax cover was extended to the selected services through the Federating units (provinces and the Islamabad Capital Territory), which brought them to dales tax. Hotel services, advertisement on TV, subject to certain exceptions, attract sales tax at the rate of 16% through provincial ordinances of sales tax on services.
-- The provisions of Sales Tax Act, 1990 are applicable for enforcement of sales tax on advertisement on TV and other services brought to tax by the federating units on uniform pattern and have been entrusted to the FBR for collection.
-- Levy of duty of excise on services is within the constitutional power of the federation stipulated under item 44 of Part I of the said schedule. It may be appreciated that the federation alone is competent to legislate on the matters stipulated under the Federal Legislative List. In exercise of the aforesaid constitutional powers, the Parliament legislated Federal Excise Act, 2005 (rescinding the Central Excise Act 1944). Certain services, including telecommunication services, are liable to duty of excise by virtue of Section 3 of the said act. The said levy is excise duty and the same collected in sales tax mode in terms of Section 7 of FED Act, 2005 read with SRO 550(1)/2006 dated 05.06.06.
Addressing constitutional constraints
The March appears not only hasty, but also not free from risks on counts, inter alia, the following:
-- Levy and collection of sales tax on goods is within the constitutional jurisdiction of the federation in terms of item 49 of Part I of the Fourth Schedule to the Constitution read with section 3 of the Sales Tax Act 1990. There is a constitutional constraint on the federation to levy sales tax on services. Levy of duty of excise on services is within the constitutional competence of the federation stipulated under item 44 of Part I of the aforesaid schedule to the Constitution read with Section 3 of the Federal Excise Act 2005.
-- Distribution of constitutional powers between the federation and federating units also converge on certain very significant areas to be deliberated upon at length before shifting to new legislation. In particular electricity, gas and telecom, have been contentious issues. It may be appreciated that electricity and gas are goods respectively classifiable under PCT Headings 2716 and 2711. The federation is competent to tax them under item 49 of Federal Legislative list of the Fourth Schedule to the Constitution as mentioned above. If the provinces also tax electricity, it shall be undue encumbrance upon the consumers.
-- Issues relating to taxation of distribution of collection to the headquarters of the entity or to its branches where tax accrued need to be addressed.
-- It has been envisaged that the informal sector, especially the retailers, would come to the tax-fold easily. This is an over-ambitious assumption.
-- The special procedures, which had been introduced because of the administrative exigencies, have been done away with altogether. Their absence may curtail revenue optimisation.
-- A host of issues shall also crop up in administration as well as in payment of tax due.
They may include:
(i) Accounting for the revenues under different types of taxes shall be a highly difficult task as inter-tax adjustment has been allowed.
(ii) In short span of time, the people cannot be educated about the modalities of new laws.
(iii) The informal sector cannot be shunted out by simplification of legislation at the cost of the revenues as well as the competitive disadvantage to the organised sectors.
(iv) Input adjustment matters, especially because of general payment as per practice in vogue, must be taken care of.
(v) Other administrative issues like return filing where there a number of locations where services are provided, have to be resolved.
(vi) Late payment and penalty issues need to be addressed.
However, there should be no haste in outright rescinding the existing sales tax laws. They could be fine-tuned in the short run. After addressing the constitutional constraints, further improvements could be brought. Pakistan is a federation, comprising Federal Capital (Islamabad Capital Territories), provinces, Fata and Pata. Our proposed legislation has been made without aptly taking into consideration this texture of the federation. It is, therefore, viewed that the stakeholders be taken into confidence. The FBR may hold conferences and seminars with the business community, the trade bodies, chambers, chartered/cost and management accountants and tax lawyers. There must be deliberations by the Parliamentary Committee, which should debate and discuss diverse dimensions of new legislation and its harmony with the proposed legislation to be made by the federating units (provinces/ICT) as well as areas having special status like AJK and Gilgit-Baltistan. It is imperative that input of the stakeholders is procured with open mind so that their legitimate interests are aptly guarded.
(The writer is Chairman of Karachi Branch, Council of ICMAP.)
Source: http://www.brecorder.com/index.php?id=1047008&currPageNo=1&query=&search=&term=&supDate=
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