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Looking for half truth

Speaking at a news conference, Information Minister Fawad Chaudhry said that Pakistan Tehrik Insaf government has decided to carry out an audit of all power plants set up during the last fiver years of PML-N government, not saying a single word about the shady deals made for setting up furnace oil and diesel fired thermal power plants in the PPP government during 1994-1996. He also did not refer to the reasons of massive default of electricity bills made by the influential political and business elite federal government departments and provincial governments. The cumulative receivables of power sector on this account are well over Rs. 870 billion three-fourth of the amount of circular debt. Putting the entire blame of not observing transparency in thermal power plants agreements on the last PML-N government is a debatable issue.

Justifying the expected decision to increase electricity tariff, Information Minister said the government is facing a daily loss of 1.2 billion by providing subsidy on electricity to the people, adding, that this practice could not be continued for long. “We have not so far taken decision regarding increase in power tariff, but we will have to take this step and we will make every effort to save the poor from facing the brunt,” the minister declared. Saving the poor from the brunt of high electricity price is a strange logic as people of bottom and lower middle class are facing load shedding of longer duration and pay highly inflated bills. Further rise in electricity tariff would add to their woes.

A lopsided power generation policy had been implemented by the elected governments of PPP and PML-N. The clauses in the power purchase agreements with both foreign and local companies about tariff, capacity charges, mark up on loans and purchase of fuel by the PSO were loaded against the national interest. It is the capacity clause envisaging payment on idle capacity of power plants, if federal government fails to provide fuel to private power producers that adds billions of rupees to the hydra headed monster of circular debt. The capacity charges are paid by the government which is not produced and consumed. The electricity load shedding of four hours in cities and 18 hours in rural areas despite the increase of 10600 megawatt in generation capacity reflects that additional power production is not reaching the transmission and distribution system.

The PML-N government made agreements with Chinese power producing companies for coal based thermal and hydel power generation which were not transparent. Capital expenditure (Capex) for coal projects was about 40 percent higher than the international cost and the agreed coal power tariff was 8.4 cent per unit as compared to a tariff in many jurisdictions of five cents and below. In the meantime more evidence has emerged against irrational coal tariff that Chinese power producing companies will charge and for the payment of which the previous government has agreed to create a revolving fund in the banking system to make payment of the electricity either produced or not by thermal power plants of Bhakki, Haweli Bhadar Shah and Sahiwal.

The story does not end on coal based thermal power plants alone. The hydropower projects which are being completed by Chinese under CPEC will alarmingly raise the power tariff in future. A comparative data of different projects shows that per unit cost varies widely. Karot has 2.03 times more than the World Bank financed Dasu hydropower project., Kohala 3.31 times; Azad Pattan 3.97 times; Sukki Kinari 2.38 times; and Mahal 2.50 times more as opposed to the Capes and tariff of Dasu. It shows how merciless the political leadership is to the country and its people.

Power sector seems to be a sinking ship and may turn out a “Titanic” if urgent and drastic reforms are not implemented for lowering electricity tariff. A more vigilant oversight of EPC bidding process has to be introduced. It cannot be left to the discretion of the sponsors because cost and the penalty are passed on to the consumers under cost plus tariff. Breaking the EPC into a number of components and inviting separate bids for them in future hydropower projects will be in order. The focus should shift now on more competitive power generation projects like solar, wind, hydel and solar-wind hybrid. The canon of post audit of power projects should not remain confined to the ones implemented in the PML-N previous government but it should also encompass the IPPs that were built in the decade of 90s and a team of legal experts should be constituted to find a way out for renegotiating the power purchase agreements made with private power producing companies.

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Desperate situation needs desperate measures

The debris of cumulative economic mess of the previous two governments has fallen on the PTI government. To avoid default situation formal request for a bailout package has been made with the International Monetary Fund (IMF). A leading economist and member of Prime Minister’s Economic Advisory Council has expressed his opposition to seeking this bailout at this point of time and pleaded for prudent and tough fiscal measures for revival of the economy. Broadening the tax base by bringing wealthy people under the tax net is one of these measures for generating more revenues from domestic sources.

The governments drive to broaden tax base by bringing big into the tax net may fail to yield the desired results as it has issued nearly 340 notices to potential tax dodgers without doing proper profiling of cases and without empowering the relevant directorate. The notices have issued by the Directorate General Tax Base wing of the Federal Board of Revenue. But the wing has a presence in three cities and its mandate is limited, according to an official source.

There are over three million registered persons who are still non-filers. The World Bank and the IMF have repeatedly insisted on the utilization of this data to broaden the tax base but the governments turned a deaf ear to the advice of international lending agencies merely because of political expediency and protection of the rich people of the country. In the previous PML-N government 43 percent of listed companies did not filed tax returns and skipped out of the tax net in 2017. The Broadening Tax Base Wing cannot go after the non-filers. The FBR operation wing is responsible to go after these registered people but its workforce is preoccupied with the key function of achieving monthly revenue targets. In President Musharraf era 2.4 million people used to file tax returns and pay taxes under the self assessment scheme. The number of tax payers has dropped to 1.2 million.

A significant majority of the identified High Net Worth individuals belong to areas that do not fall under the federal government tax jurisdiction. Out of the 220 identified cases picked for sending notices in the second phase, about 75 reside in Azad Jammu and Kashmir and exempted federally and provincially administered tribal areas. Like the Panama Papers episode, the tax notices have again been sent on the basis of incomplete information. The notices have been sent on incomplete addresses like Aziz Shaheed Road, without mentioning home numbers or street numbers. Majority of Ishaq Dar team, comprising PML-N loyalists, are still staying put in the FBR. The FBR officials did not inform the finance Minister Asad Umar about these operational difficulties during his maiden visit to this bureau. As of October 10, only 482000 people filed tax returns for the income earned in the last fiscal year. The poor show forces the FBR to give two months extension in the date of filing tax returns. At the beginning of this month, the FBR started civil proceedings by serving tax notices to tax dodgers under section 114 (4) of the Income Tax ordinance. However, the fact remains that in court hearings of the cases under this ordinance the legal teams of tax Commissioner ate most often fail to properly and strongly build up their cases and eventually lose them in the court of law.

FBR said the people who have been served with tax notices have purchased properties over Rs. 20 million or cars of 1800 CC, or have received rent of Rs. 10 million or more in a year time. Out of 340 cases, about 185 notices had been sent in the first phase and the remaining notices have sent in the second phase. Due to incomplete addresses, the courier company could not deliver 90 notices out of 185. These notices have been sent on the basis of collected data from a number of third party sources. Specific details in all these cases are missing. In order to make the tax drive successful, the government needs to give administrative powers to the Directorate General Broadening Tax Base Wing. The government should set up offices of this directorate in all the regional and large taxpayers units. No rocket science is involved for building authentic tax profiles of non-filer wealthy people by getting authentic information about potential tax payers from NADRA. If there is a will there is away. In the current desperate situation comprehensive fiscal measures are needed.

 

 

 

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Engaging India for dialogue

India is not inclined to resume the process of composite dialogue for the resolution of outstanding disputes including the core issue of Kashmir. It showed obduracy to reciprocate the peace gesture of the newly elected Prime Minister of Pakistan Imran Khan. It backed out from its announcement about the meeting of the foreign ministers of both the countries on the sideline of recent UN General Assembly meeting. After calling off this meeting Indian Army Chief hurled the threat of surgical strikes in Pakistan.

India has continued violations on the Line of Control frequently and sometimes on the working boundary killing innocent civilians over the past five years. But Pakistan has once again reiterated its firm resolves for the pursuit of meaningful engagement with it for confidence building measures and avoidance of arms race and risk reduction. Speaking at a conference on Non-proliferation regime at the Strategic Institute in Islamabad, President Arif said that Pakistan would continue to demonstrate restraint and responsibility but no one should doubt our resolve to deny any space for war, adding, nobody should doubt Pakistan’s capability to defend its territorial integrity and sovereignty. The President called upon the international community to take serious note of Indian threats of surgical strikes and limited war. He however, regretted that Pakistan’s postures fore peace have been reciprocated with belligerence. He said the proponents of such reckless fantasies will bear their responsibility and consequences.

India has started arms race in the region with its purchase deals with France for acquiring Rafael jet fighters and SS 400 air defense system from Russia. It does not need these weapon systems neither to counter China nor to bully its small neighbours like Bangladesh, and Myanmar. A proactive diplomacy can build pressure of international community on India.

 

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KPOGCL’s Lakki bloc, trap or treasure

The long awaited Lakki Block has been eventually awarded to KPOGCL to carry on its exploration work for oil and gas and exploit the indigenous resources for the benefit of the province and then country. It is now real test for this provincial Oil and Gas Company to show its professional competence by acquiring state-of-the-art equipments and their usage with high quality expertise. The success narrative has so far been based on concocted stories. The organisation had been a test match ground for the former Chief Minister and former Speaker of Provincial Assembly to hire and fire contractual staff in violation of merit.

It has been the main concern of the people of the province that despite tall claims by KPOGCL and its CEO Mr. Raziuddin, regarding oil and gas production by the company, not a single drop of crude oil or a bubble of gas have been produced in the last five years. But funds of billions of rupees allocated from the taxpayers’ money, which is being placed at the disposal of KPOGCL and its CEO, have been spent on a large fleet of vehicles, ignoring the purchase of much needed equipments. This is something that speaks about the inefficiency and failure of the previous government and former secretary energy and power, barring one minister who had thoroughly transformed Elementary and Secondary Education with his zero tolerance for violation of merit.  However the present provincial government of PTI has appointed a competent ex bureaucrat as adviser to CM regarding Energy affairs. At the same time a competent Secretary has also been posted in the Energy and Power department. Both of them will, hopefully, deliver and at least give some comfort to the people of the province.

Coming back to Lakki Block it has been awarded as a dowry of 18th Amendment with very high commitments of 750 Work Units in addition to around 2 million USD equivalent to 26 crore Rupees spending during the first contract year starting from early September 2018. The work units if translated to Seismic survey are equal to acquisition of around 3 Km seismic drill for each single Work Unit (WU). One Km of Seismic Survey will cost KPOGCL around 12000 to 15000 USD which is equivalent to rupees 15.6 lac to 19.5 Lac. Thus the total cost will be around 30 – 37 million USD, equivalent to Rupees 390 crore 481 crore. On the other hand if the company choose to drill at least two wells against this commitment then the total cost in this area according to experts will be around 15 -20 Million USD per well and thus the total cost will be around 30 – 40 Million USD. In all cases the expenditure recipe is not less than 30 Million USD equivalent to Rupees 390 Crore for KP. At the same time the  people must be aware of the fact that this Block has already cost this unfortunate province around Rs. 15 Crore – 18 Crore on account of salary of a Blue Eyed American National CEO Mr. Raziuddin  at a rate of rupees 3 million per month for the last five years. He is an electrical engineer with zero experience in oil and gas exploration.

The drilling experts believe that 30 – 50 million USD, equivalent t0 390 crore – 650 Crore Rupees, is just normal expenses that usually incur on the exploration. However it remains to be seen that the Lakki block wherein 11 wells have already been drilled with no success does really worth this expenditure and commitment?

Secondly these unsuccessful wells have been drilled by PPL, OGDCL who are not only successful explorers but have also competent teams technical experts to accomplish the job along with several tens years of experience at their back.  The question is that how KPOGCL with very weak or perhaps no competent drilling and exploration team can succeed in finding oil and gas who  has already spent five years with actually no progress on ground despite spending lot of public Money? Moreover people of the province has the right to ask the question that “has the provincial government and KPOGCL were on the same page while agreeing to such heavy commitments for a failed Block and has the provincial government allowed Mr. Raziuddin to go for such a heavy commitment? Do the government or Energy and Power department undertake any exercise to justify such expenses at the hands of foreigners?

The new government which controls the purse of the cash starved province must ask this question as how it can be justified to hand over these funds and responsibilities to a man and his team who have already terribly failed in satisfactorily doing their mandated job.? It is the right time for the incumbent government to take right decisions. Oil and gas exploration effort by KPK government at the hands incompetent personnel can turn in a financial Trap rather than a Treasure for the province which may become Titanic for KPOGCL as well.

 

 

 

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IMF bailout request, US reaction

PTI led government made a formal request for acquiring the bailout package from the International Monetary Fund (IMF). The United State gave rather negative response which was not unexpected keeping in view the interview of Secretary of States Mike Pompeo with a TV network a few months ago. Application of carrot and stick has always remained a tool of foreign of policy of the US in its relations with Pakistan, which has honestly performed its role of a dependable ally in cold war era, Soviet invasion of Afghanistan and the ongoing war on terror.

On the contrary, the United States looked at Pakistan through lenses of suspicion and made repeated demand of “do more.” President Donald Trump controversial tweet of accusing accused Pakistan of lies and deceit in return for receiving billion of dollars in economic and security assistance. Now the new government of Pakistan is being pushed to the wall by raising a bogey of massive Chinese debt for CPEC projects, which is being tied to IMF loans. The agreements of energy and road projects under the umbrella of this corridor were made by the Washington’s favourite Nawaz Sharif government and preliminary negotiations about it were held in Musharf era and another US sponsored government of Asif Zardari. But the United States successive administrations and lawmakers did not react so sharply then. Again when in Nawaz Sharif government, the former planning minister Ahsan Iqbal eulogized and overcalled day in and day out CPEC by describing it panacea of all economic woes of the country the Unites States response was a muted one. Why then PTI government is chosen a target for the shady Chinese loans agreements made by the previous government. In fact it was the misappropriation of $ 11.2 billion IMF loans by the PPP government and the $ 6.2 billion assistance from this lending agency by the PML-N government plus short term commercial loans that made the burden of foreign debt unsustainable. That is why the new government has decided to carry out thorough audit of all loans acquired by the previous two governments.

In view of the foregoing, it seems ironical that the United States, who controls 70 percent voting rights, has decided to keep Pakistan’s legs to the fire on the pretext of CPEC debt. A clear hint has been dropped by the US State Department spokesperson Heather Nauret in a press briefing. To a question about Pakistan request for IMF bailout loans package she said, “In all cases, we examine closely from all angels of it including Pakistan’s debt position in evaluating any type of loan program.”Ms Nauret also blamed Pakistan’s loans agreement with China for its current economic woes. “I think part of the reason that Pakistan found itself in this situation is Chinese debt and the fact there is debt that may be thought wouldn’t be so tough to bail them selves not, but has become increasingly tough,” she said. Partially, her argument is correct which pertains to the acquiring of the most expensive loans by the PML-N government from China.

It was also for the Chinese government to have avoided loan agreements of shady nature with a government which was more than half way through of its tenure. They made the same deliberate mistake with Najib Razzaq government of Malaysia and the new Prime Minister Dr. Mahatir Mohammad has to cancel the agreement of $ 20 billion for the construction of coastal railway line. On Tuesday, IMF Chief Economist Maurice Obstfeld urged Pakistan, s new government to review the loans it is receiving from China and avoid excessive debt which can not be repaid.

Recently, a bipartisan group of 16 US senators claimed in a joint statement that China’s Belt and Road Initiative, which also funds projects in Pakistan, was a debt trap. The recipients always found themselves in debt to China and were forced to make painful concessions, they warned. The contention of US Senators is valid in the context of Sri Lankan’s indebtedness to China for which this small South Asian country had to surrender valuable national assets.

In an interview with CNBC TV network in July, Secretary of State Mike Pomeo said that the United States would not allow Pakistan to use the US taxpayer’s dollars to repay China. “Make no mistake, we will be watching what IMF does,” he said. A Pakistan official has rejected the argument that their indebtedness to China is much smaller than imagined. The Planning Commission’s vague rebuttal will not convince the United States and other influential West European member countries of the IMF that the quantum of Chinese loans to Pakistan is small.

 

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Planning Commission’s clarification

The Planning Commission released statement trying to address the worries of the global community about Pakistan’s mounting debts particularly the ones related to the projects under CPEC framework. They feel that high interest bearing loans could turn out to be a “debt trap” for it. The IMF Managing Director disclosed in a press conference in Bali that the fund will demand “absolute transparency” about the debts that Pakistan has acquired. It implied between the lines the Chinese debt for CPEC related projects. The IMF Chief Economist Maurice Obstfeld has already cautioned Pakistan against acquiring excessive debts. A few months ago US secretary of State give a red a red alert that the money of American tax payer is not meant for payment to Chinese bond holders.

The planning commission official claimed on Thursday that the scope of CPEC is being widened and its implementation speed is being streamlined. But he forgot that Chairman WAPDA had told the Senate Standing Committee last year that China’s conditions for financing Diyamer Basha Dam construction were irrational and unacceptable, therefore, the project was withdrawn from the umbrella of CPEC. The Planning Commission spokesman said that repayments of Chinese debts will commence in 2021 with the annual installment of about $300-400 million annually which will gradually rise to about $3.5 billion by fiscal year 2024-25.  He said that repayment of total debt will be completed within 25 years, giving no details of the total amount of debt. Initially, when the cost of CPEC was $ 46 billion the total amount of debt to be repaid was $ 92 billion. Its cost went up to $ 62 billion just in two years.

The planning commissioned clarification tried to allay the impression that “CPEC is not imposing any immediate burden with respect to loans repayment and energy sector outflows.” It argued that all debt related outflows will be outweighed by the benefits the investments accrued to the Pakistan’s economy. The statement, however, did not give any figures about the quantum of the outflows or their timeline. The new government is revisiting the Nitti Gritty of CPEC. Railway Minister Sheikh Rashid Ahmad has told about reduction of $ 2 billion in the construction cost Main Railway Line from the Port city of Karachi to Peshawar.

The commission reiterated that CPEC is a “flagship” project of Belt and Road Initiative. It stated that 22 projects worth $28 billion have been actualized over the past four years. “The project has no comparison with Chinese overseas investment in Sri Lanka or Malaysia as frameworks and financial modes of CPEC are altogether different in nature,” the statement continued.

According to Planning Commission, CPEC finances are divided in government to government loans, investment and grants. Infrastructure sector is being developed through interest free or government concessional loans. Gwadar Port is grant-based investment which means the Government of Pakistan does not have to pay back the invested amount for the development of the port. Energy projects are being executed under Independent Power Producers (IPPs) mode and finances are mainly taken by the private companies from China Development Bank and China Exim Bank against their own balance sheets, therefore, any debt would be borne by the Chinese investors instead of any obligation on part of the Pakistani government. It is pertinent to mention that the IPP contracts made by the PPP government are a major factor of circular debt accumulation. The IPP style agreement with Chinese power companies will further compound the chronic problem of circular debt. That is why additional amount of power generation of 10600 megawatt does not enter in the transmission and distribution system and the menace of electricity load shedding has not gone away.

The Planning commission statement claims that Pakistan has opted for Chinese investment under CPEC due to the favorable financing arrangements. “China stepped forward to support Pakistan’s development at a time when foreign investment had dried up, and economic activities were being crippled by energy shortages and infrastructure gaps.” The statement described CPEC as catalyst for economic growth and said that it will boost Pakistan’s GDP growth by 2 to 3pc. This is what a Pakistani economist serving in the World Bank had predicted. The mode of CPEC financing will generate further controversy with issuance of long winded statements by the Planning Commission unless and until the agreement is placed before the parliament.

 

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FATF action plan, political expediency

Not impressed with the progress made so far, a delegation of Asia Pacific Group (APG) has asked Pakistan to do more and get its house in order so that it may get out grey-list of Paris based Financial Action Task Force. Apparently, the group found the legal frame work insufficient and the institutional arrangements weak.  The delegation feared that the set up installed for the scrutinizing the activities of non-profit organisations, brokerage houses, exchange companies and donations of corporate entities—registered under companies act—was not robust enough.

The APG believed that even areas where legal framework appeared vigorous, the implementation mechanism was not geared up to track down the financial flows of entities in question, because the agencies involved were not well connected. This weakness is prominent in the real estate brokerage where larger transactions remained outside the ambit of legal record. A team of Security Exchange Commission of Pakistan (SECP) reported to the APG that brokerage houses were largely documented through real estate dealers and their operations were outside its area of regulation.

The APG also noted shortcomings in commodity trading and the effectiveness of laws against money laundering through cross verification of service providers. The delegation asked the relevant authorities to issue deadline for resolving the flagged weaknesses so that the problem could be remedied and future performance evaluations could be made on the proposed matrix. The authorities would also to properly record the number of donation boxes placed by the religious and other organisations at restaurants and business centers among other places. Besides this, all currency and real estate dealers would to record every transaction—both small and large.

The purpose of mutual evaluation on site visits is to assess the effectiveness of Pakistan’s anti-money laundering and counter terror financing regime. In June, 2018 Pakistan made a high level political commitment to work with FATF and the APG to strengthen its anti-money laundering and counter terrorism financing regime and to address it s strategic counter terrorism financing related deficiencies by implementing the 10 points action plan. The successful implementation of FATF action plan and its verification by the APG is a prerequisite for the removal of Pakistan from the grey-list. Earlier in August, the APG as a part of mutual evaluation had identified a series of weaknesses in Pakistan’s anti-money laundering and counter terrorism financing mechanism. By the end of September next year Pakistan must comply with the 10 points action plan it committed it committed to with the FATF or else it would fall into the black-list.

The authorities are required to upgrade agencies and their human resource assets to be able to handle foreign requests to block terror financing and free illegal assets. The authorities are working on strengthening laws for extradition of those involved in terror financing and money laundering on request from FATF. By January next year, Pakistan will identify and assess domestic and international terror financing risks to and from its system to strengthen investigation and improved inter-agency cooperation, the FIA, the SBP, the SECP, banks and the attached departments under the ministry of interior as well as the ones associated with federal and provincial agencies.

It appears that the FATF action plan may fall prey to the political expediency like the 20 points National Action Plan approved in 2015. The PTI led coalition government may not get the required support from the opposition parties in the parliament to make comprehensive legislation for the implementation of the FATF action plan for effectively curbing money laundering and terror financing. The leadership of two mainstream political parties is facing probes and trial on the charges of money laundering. It was because of this reason that the PML-N backtracked on the implementation of National Action Plan despite having a two-third majority in the lower house of the parliament and assured support of the main opposition party, the PPP which had a majority in the upper house. The most important points that were buried for ever pertain to strict action against the militant outfits and armed gangs; strengthening of National Counter Terrorism Authority (NACTA); choking of finances for terrorist organisations; curbing the re-emergence of proscribed organisations under other nomenclatures; registration and regularization of religions seminaries; zero tolerance for militancy in Punjab; and reforming the justice system. The provisions of UN Security resolutions numbering 1267 and 1373 are binding on the member countries and the political leadership of all parties should realize the fact that non-compliance of the agreed action plan will further compound economic woes of the country if it is put on the black-list.

 

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IMF warning

After discussing various aspects of  getting finances from the bilateral and multilateral sources, PTI government thought it feasible to seek the International Momentary Fund (IMF) bail out package although it was initially indecisive about it. Prime Minister Imran Kan has directed his cabinet ministers to take people and parliament into confidence about the disastrous economic mess created by two previous governments and the possible way out from this quagmire.

Taking benefit from the communication gap about the decision to seek IMF support programme, the Leaderships of PML-N and ANP have raised a hue and cry against it as if Pakistan is seeking IMF bail out for the first time in the 70 years history of the country. The governments of PPP and PML-N obtained IMF, s loan packages but did not implement that component of structural reforms which hit the wealth and resources of feudal and mercantile classes and left the economy at the verge of bankruptcy. The appointment Dr. Farrukh Saleem as spokesman on finances and energy will slam the door of communication gap about important decisions.

This time the IMF Chief Economist Maurice Obstfeld has cautioned has cautioned Pakistan against increased Chinese involvement in the economy. Perhaps he was drawing the attention of the new government in Pakistan about economic disaster wrecked by Chimes involvement in the economies of Sri Lanka and Maldives and the decision of Malaysian Prime Minister Dr. Mahatir Mohammad about the cancellation of $ 20 billion railway project.

Addressing a news conference at the International Monetary Fund and World Bank annual meeting in the Indonesian city of Bali, Obstfeld warned that increasing Chinese role in financing project could bring both benefits and risks. He stressed Pakistan was facing financing gaps as it has been hit by large fiscal and current account deficits, a low level reserves and a currency he described as “too rigid” and overvalued.

Finance Minister Asad Umar said on Monday that government would seek to open talks with IMF in Bali this week for emergency financial assistance. Prime Minister Imran Khan had earlier sought alternatives to second bail out programme in five years from IMF as it imposes austerity and restrictions on his vision of an Islamic welfare state. Keeping in view the bitter experience of backtracking by the PPP and PML-N governments on structural reforms, Obstfeld categorically said that if IMF does enter into talks with Pakistan this week on a possible new financing programme, the goal would be reforms that would help Pakistan reach its “immense potential.”But he stopped short of telling the specific details which are not difficult to perceive after looking at the earlier reforms agenda tied IMF programmes like taxing the wealth classes, bringing the non-filers into the tax net, gas and power sector reforms. The successive elected governments dominated by feudal and mercantile classes raised gas and power tariffs, increased sale tax rate, flooded the utility bills with a barrage of surcharges and withholding tax. But avoided expansion of tax base by imposing agriculture income tax, brokers’ income tax.  It also did not utilise the data of 3.8 million wealthy non-filers for levying direct taxes like income tax, wealth tax and capital gains tax on them.

The IMF Chief Economist said that the new government has expressed its desire to break the cycle of Pakistan’s financial support from the fund. He said Pakistan needs more infrastructure development support, adding, the country could benefit from China’s role in supporting its project financing. But China’s involvement could bring potential risks. “It is important that the designs of the projects should be solid and should not carry a hevy baggage of excessive debt, which cannot be repaid,” he said.

Pakistan has cut the size of the biggest Chinese “Silk Road” project in Pakistan, reconstruction main railway line beaten the Port city of Karachi and Peshawar in the North West by $ 2 billion, citing government concerns about the country’s unsustainable debt level. About the slashing down the inflated reconstruction cost of main railway line, Railway Minister said in a Private TV current affairs programme “G for Gharida” that the cost of the project was brought down by eliminating the kick backs and commissions of the previous government.

The changes in the CPEC related projects are part of the prudent efforts of the incumbent ‘made in Pakistan” government to rethink Belt and Road Initiative, to which China has pledged about $ 62 billion in financing. The mode of financing is largely based on highly expensive loans. Initially, when the cost of project under the CPEC framework was $ 46 billion, Pakistan would have born the burden of debt repayment of $ 92 billion. The cost escalation of $ 16billion within just two years would have added an additional burden of $ 30 billion. The IMF Chief Economist has struck the right cord about the grave risks of Chinese loans extended to Pakistan.

 

 

 

 

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APG scrutiny

The Asia Pacific Group—an FATF style regional body on Monday urged Pakistan to intensify action against the non-profit organisations suspected of giving financial aid to terrorist groups, and bring more transparency in the steps it is taking over proliferation matters. Technical experts of APG started the third Mutual Evaluation process of Pakistan that will end on 19th of this month. The technical experts from the US, the UK, Turkey Maldives, Indonesia and China have started assessing the steps taken by Pakistan to meet the FATF recommendations.

The purpose of the APG 10 day visit to gauge the effectiveness of Pakistan’s anti-money laundering (AML) and counter terror financing (CFT) regime under the FATF effectiveness methodology. Plenary meeting of this international watchdog on anti-money laundering and counter terror financing will start in Paris from 14th of this month. Pakistan is exposed to the scrutiny of APG and FATF after being grey-listed with effect from June this year. In Paris a joint group would submit its analysis report to FATF’s International Cooperation Review Group (ICRG) and its recommendations on the basis of Pakistan’s action plan.

The APG delegation met the officials of Financial Monetary Unit (FMU), the Federal Investigation Agency (FIA) and Anti Narcotics Force (ANF). The FMU informed the delegation about the legal and regulatory changes that Pakistan has made in the past couple of months. Pakistan has also to decide to enact a law to create deterrence against the transfer of money through non-banking channels by enhancing punishments. The Pakistani authorities have decided to bring amendments to the FIA Act 1974, the Foreign Exchange Regulation Act 1947, and the Anti-money laundering Act 2010. Moreover, the use of cash in Pak-Afghan trade would be discouraged in order to curb currency smuggling across the border.

The PTI government does not have two-third majority to make new legislation required for the passage of a compressive anti-money laundering counter terror financing legislations. The main opposition party PML-N and PPP would not cooperate with government to pass these laws from both the houses of the parliament as their top leadership of PML-N facing trial in the NAB court and PPP leadership is facing probe in money laundering through fake bank accounts.

The new government may not stand the political pressure if it takes action against the non-profit organisations suspected of giving financial aid to terrorist groups and bring more transparency over proliferation matters. It remains to be seen how far the new government succeeds in implementing the FATF action plan for effectively curbing money laundering and terror financing. The cosmetic measures like banning voluntary trust organization will not convince the FATF to remove Pakistan from the grey list. A consensus among the political parties is essential for effective legislations to streamline the anti-money laundering and counter terror financing regime.

 

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Donors’ favourable response

Multilateral international lending agencies including the World Bank and Asian Development Bank have always extended soft loans with a fairly long repayment schedules. On the contrary bilateral sources sanctioned loans to Pakistan on exorbitant rate of interest. A comparative analysis of the world Bank funded Dasu hydroelectric project and the ones financed by Chinese loans under CEPEC including Suki Kenari, Mahal and Pattan reveals wide discrepancies in capital expenditure and electricity tariff.

Asian Development Bank (ADB) Vice President Wencai Zhang met finance minister Asad Umar, Planning and Development Minister Khusro Bakhtiar, Education Minister Shafqat Mehmood and Advisor to Prime Minister on institutional Reforms besides high government officials. He affirmed ADB’s support for the Government of Pakistan’s new development and reforms agenda. The bank announced a financial assistance of 7.1 billion dollars for sustainable economic development, which will be disbursed over a period of three years. Along with continued focus on energy, infrastructure development and institutional reforms, ADB is also reengaging in education and health and further strengthening social safety net through income support programme.

Zhang noted the country’s economic growth momentum in recent years, driven by domestic demand and improvement in security, energy supply and public health infrastructure. However, the widening current account and fiscal deficits are key challenges to the economy. He stressed the importance of economic stability and structural reforms and offered ADB’s support in job creation and exports, private sector development, and institutional reforms.

The track record of ruling political leadership, executing agencies and nation building departments reveal their dismal failure in the transparent, judicious and in time utilisation of funds provided by multilateral donors agencies. The recent example is the dilly dallying in decision to utilise the ADB $ 400 million loan for the installation of smart electricity meters to control the power theft and improve the power sector revenue collection. With only nine months left in closing of the project of advanced metering infrastructure (AMI) the government has not taken a final decision either to spend this amount or cancel this loan. The amount is a part of $ 5 billion package for replacing manual electricity meters with smart meters in only those power distribution companies where it is economically and financially viable.  The major component of $ 4.6 billion is meant for the modernization obsolete power transmission and distribution system to tackle the chronic problems of power outages, system failure and line losses.

The ADB had approved the loan in November 2015 and as of end of March this year there was no physical progress on the project. Pakistan has been paying commitment charges on the undisbursed amount from the scarce resources raised from the taxpayers’ money. The original closing date is June next year. The Economic Affairs Division had expressed concerns that the decision to cancel the loan might also affect future lending to Pakistan’s dilapidated power transmission and distribution system. The stated objectives of $ 5 billion loan are reducing line losses and improving revenue collection, which runs contrary to the vested interest of political and business elite who are addicted to electricity theft and default of electricity bills. The ADB is pushing the project on the premise that prepaid electricity meters will control the flow of electricity and ensure 100 percent collection of bills.

It is encouraging that ADB has promised another tranche of $ 7.1 billion for mitigating the economic woes of Pakistan, infrastructure development and institutional reforms. The Manila based lending agency and Pakistan have a more than 50-year strong history of strong partnership it has always extended valuable financial assistance in the form of concessionary loans. It would be worthwhile that the new government should focus attention on the capacity building of nation building departments, utilize the earlier loan package for power sector reforms and upgrading the power transmission and distribution system to raise the trust level of multilateral donor agencies. The country will need massive funding for Diamer Basha Dam and other big water storage and power generation projects.