State Bank of Pakistan (SBP) would keep the Policy Rate unchanged

It is increasingly clear that State Bank of Pakistan (SBP) would keep the Policy Rate unchanged in its most eagerly awaited Monetary Policy Statement to be announced on September 13, 2013. With the revelation of Memorandum on Economic and Financial Policies (MEFP) by Ministry of Finance, the state of predicament over the future course of Monetary Policy has ended, at least in the short run.
The Executive Board of the International Monetary Fund (IMF), on September 04, 2013, approved a 3-year arrangement under the Extended Fund Facility (EFF) for Pakistan in an amount equivalent to USD 6.64bn or 425% of Pakistan’s quota to support the country’s economic reform program to promote inclusive growth. In this regard, MEFP as agreed with IMF provides substantial insight into the course of actions to be pursued by SBP over the program term.
From Policy Rate perspective, following excerpts from MEFP surprised markets and economic pundits which envisages continuation of ‘accommodative monetary policy stance’ in the first year of EFF despite projected rebound in inflation.
“Inflation reduction will not be a primary focus of the first year of the program so as to mitigate the impact of the envisaged fiscal contraction.”
“The negative impact on economic activity will be ameliorated by structural reforms to boost growth and a somewhat more accommodative monetary policy stance early in the program than would normally be required given the inflation outlook.”
“To ease some of fiscal adjustment effects, the program initially envisages a moderate monetary policy, with policy tightening in years two and three, as exchange rate pressure eases, to bring inflation down to the 6-7 percent range. To reduce inflation, monetary accommodation of fiscal deficits will be scaled back considerably and policy rates will be set prudently to ensure positive real interest rates.”
“Monetary policy will likely be tightened in later years to help bring inflation down to the 6-7 percent range by the end of the program period.”
“Beginning in 2014/15, monetary policy will aim to reduce inflation while continuing to rebuild foreign exchange reserves.”

Market reaction 

Approval of three year program by IMF executives and accompanied set of economic policy measures has changed the dynamics of both equity and money market for the time being.

The Equity bourse has reacted positively to the anticipated continuation in the accommodative monetary policy stance. The KSE-100 index has rebounded almost 6.11% since the IMF loan approval.

Lately, bond yields have been soaring as market increasingly believed preemptive stance by SBP amid sharp falling of real returns. Following emergence of MEFP containing outlook on interest rates, 1-year and 3-year PIB yields have eased by 20bps and 17bps respectively. However, the impact on 10-year PIB yield remains muted as the MEFP clearly envisages policy tightening in second and third year of IMF program. Inflation and Monetary Policy Outlook As frequently predicted, inflationary expectations in the economy are gaining momentum mainly on the back of fiscal consolidation and weakening exchange rate. Government officials have also realized that recent trend of suppressed inflationary phase is gradually coming to an end which is depicted by following excerpts from MEFP.
“Headline inflation has recently declined sharply, but it is expected to rebound.”
“Inflation will initially increase, due in part to some weakening of the rupee as reserves are rebuilt.”
“To address declining reserves and a projected rebound in inflation, the SBP will adjust monetary and exchange rate policies.”
The SBP has pursued an accommodative monetary policy to stimulate the economy, in view of sustained weak private investment and declining headline inflation. Over the past two years, the SBP has reduced the policy rate by a cumulative 500bps to 9%.
Proposed series of economic measures to be under-taken over the term of IMF program aims to bring fiscal discipline in the economy at the cost of growth. IMF projects GDP growth of 2.5% during FY14 which is substantially lower than government’s estimation of 4.4%.
To alleviate growth prospects of the economy, we anticipate central bank to adopt accommodative stance on monetary policy front in its decision on September 13, 2013. However, we do not rule out marginal interest rate hikes over the next few policies as real interest rate is anticipated to enter negative zone by the end of current calendar year.

Economic Powerhouse

Chancellor Angela Merkel has been thrust into leading Europe back from the financial brink, but Germany remains reluctant to take on global clout to match its economic prowess.
Beyond crisis efforts to save the euro, Europe's top economy and export powerhouse remains unable or unwilling to pull its weight on major international crises, analysts say.
Its foreign policy is still defined by "caution, pragmatism, a reluctance to strike out new paths", said Constanze Stelzenmueller of the German Marshall Fund of the United States.
Josef Joffe, writing in influential weekly Die Zeit, summed up German engagement abroad in a commentary headlined "Nothing but words", charging that "Germany follows the crises in the world according to the motto 'hurt no-one, least of all oneself'".
Germany, shamed by its World War II aggression, stepped lightly on the world stage for decades after, refusing to send troops abroad and avoiding muscular diplomacy.
It has since joined interventions in Kosovo and Afghanistan, where it has the third-biggest foreign contingent. But it disappointed NATO allies again in 2011 by refusing to back the Libya campaign, abstaining alongside Russia and China.
Merkel's erstwhile political mentor, ex-chancellor Helmut Kohl who oversaw German reunification, at the time complained that Germany lacked "a compass" in foreign policy and was "no longer a reliable force, internally or externally".
Merkel's former defence minister Karl-Theodor zu Guttenberg recently criticised Germany's "culture of reluctance" in foreign and security matters in a joint New York Times editorial.
Leaders across Germany's political spectrum still believed the nation's economic might helped compensate for its failure to pull its weight in NATO and elsewhere, wrote zu Guttenberg, who resigned in 2011 over a plagiarism scandal.
He also argued that "'chequebook diplomacy' by the biggest European Union member is not a viable substitute for contributing military assets to the joint defence of our common values and interests".
The new flare-up in the Syrian crisis -- just weeks before Germany's September 22 elections -- again put Merkel on the spot, as she seeks to reassure allies that Germany is a reliable partner without spooking a history-scarred and mostly anti-war electorate.
Berlin ruled out joining any US-led military strike but stressed the need for a united international response to an alleged chemical attack by the Damascus regime.
Spiegel Online said Merkel "has to dispense her views on an American attack in such a way that they are seen as criticism in Germany and support in the United States.
"It's a method Merkel has, to a certain degree, perfected."
Although Merkel conspicuously refrained from joining the United States and other allies among the G20 in urging a "strong" response on Syria last week, a day later Germany said it had signed on after EU foreign ministers forged a united position that also backed a strong reaction but stopped short of endorsing military action.
Germany has recently contributed to Western military efforts. Some 400 soldiers operate Patriot air defence batteries to protect NATO member Turkey from any conflict spillover from Syria, and Germany also took part in an EU-led training mission in Mali.
But Berlin is also usually quick to point to its legal restrictions in taking part in deployments abroad, which require a parliamentary mandate that can impede its ability to act quickly.
Hans Kundnani, of the European Council on Foreign Relations, said the Bundeswehr armed forces were also limited by their equipment.
"In essence, it's a choice, I think," he told AFP.
"I think in some ways a lot of people have, kind of, given up on Germany on these issues anyway."
While it has stayed on the sidelines of military conflicts, Germany as Europe's dominant economy was thrown into the thick of the eurozone crisis, where its power has sparked an ambiguous response from neighbours.
When Berlin became the go-to capital, it was at once criticised for imposing diktats on Europe and failing to provide leadership.
Merkel's "tough love" of loans in return for painful reforms drew fire especially in Greece, Spain and Portugal.
At home her centre-left election rival Peer Steinbrueck has called for a "Marshall Plan II" so Germany can repay some of the post-World War II solidarity it was shown.
Germany's real foreign policy priority has been to promote commercial and trade interests, said one Western diplomat, who asked not to be named.
"Priority goes to the economy," he said, highlighting Merkel's multiple trips to China and even resource-rich Mongolia.
Germany has widened its arms exports under Merkel, especially to the Gulf countries including Saudi Arabia, where, for decades, Berlin declined to sell heavy weapons because of human rights concerns and fears for Israel's security.
Kundnani also said Germany had stopped being "apologetic" over its security stance and instead feels its own approach is better than its "way too trigger-happy" allies with their higher defence spending.
"There is a growing sense among German officials, I think, that the nuclear deterrent that Britain and France have is a complete waste of money."

However, China became one of the world's top three investors for the first time last year as its foreign investment soared to a new record, the government said Monday.
The Asian giant's overseas direct investment rose 17.6 percent last year from 2011 to $87.8 billion, according to a statement jointly released by the Ministry of Commerce, the National Bureau of Statistics and the State Administration of Foreign Exchange.
Globally, outbound direct investment fell 17 percent, it said, and the contrasting developments made China one of the world's top three investors, said the statement.
Last year's increase represented an acceleration from 8.5 percent in 2011, when the global economic recovery was weak in the face of continuing financial turmoil in Europe and the United States.
Beijing has been encouraging Chinese companies to "go international" as the country's economy steams ahead, with its appetite expanding for both resources and global market share.
The government has set goals of increasing overseas direct investment at an average annual rate of 17 percent through 2015 to $150 billion.
By the end of 2012, China's total outstanding overseas direct investment stood at $531.9 billion, the 13th highest in the world, said the statement.
The figure was small compared with developed countries as "China's outbound direct investment took off rather late", the statement said, noting that US overseas investments were 10 times larger and Britain's more than three times the size.
"The sectors (China) has invested in are broad and comprehensive, although (the value) is rather concentrated in some industries," it said.
The top destination for overseas Chinese investment last year was Hong Kong, while the US rose to second place with $4.05 billion invested, surging 123.5 percent from 2011.
By end of of 2012, Chinese companies employed 1.49 million staff overseas, about half of whom foreign citizens, the report added.

Asian Development Bank and Turkey assures investment in energy sector

ANKARA: Turkish Minister for Energy and Natural Resources Taner in a meeting here with Ambassador of Pakistan Muhammad Haroon Shaukat assured full support of his government for initiating various development and investment projects in the energy sector.  

The meeting took place in the backdrop of the forthcoming Turkey visit of the Prime Minister of Pakistan.

Haroon Shaukat recalled the recent successful “Pakistan Energy Forum” which the Pakistan Embassy organized in Istanbul. Senior officials from Pakistan briefed the leading Turkish energy sector executives about the huge energy market in Pakistan and the incentives offered by Pakistan to investors.

Haroon informed that Pakistan Energy Forum was instrumental in sensitizing the Turkish investors about various projects in hydel, coal, and renewable energy sectors. 

Pakistan and the Asian Development Bank (ADB) on Monday signed an agreement to invest $245 million on improving the country's power distribution systems.

Secretary Economic Affairs Division (EAD) Nargis Sethi and ADB's Country Director for Pakistan Dr. Werner E. Liepach signed the loan agreement.

"The investment will help upgrade Pakistan's aging power distribution infrastructure allowing power generated to reach the consumers," said Werner Leapach, while speaking on the occasion.

"These power projects to be completed by June 2016 will augment the network and improve performance of the power distribution system, which is critical to increase the overall energy efficiency and to bridge the widening energy gap in Pakistan," he added.

The loan is meant for Tranche-3 of the Power Distribution Enhancement Investment Program under the Multi-tranche Financing Facility (MFF).

The MFF was approved in 2008 to invest $810 million ($800 million OCR and $10 million ADF) in priority areas to improve distribution systems and help Pakistan meet its pressing energy needs.

The program aims to rehabilitate, augment and expand power distribution systems and remove system bottlenecks.

"Success of the project depends on effective and timely implementation; therefore, we will continue to focus on timely completion of the power distribution enhancement projects," said Nargis Sethi.

She urged the agencies and distribution companies involved to make sure that the targets are achieved within the implementation time frame.

Senior Project Officer (Energy) at ADB's Pakistan office, Adnan Tareen said the project would add 1,881 megavolt-amperes (MVA) of transformer capacity, 791 kilometers (km) of new transmission lines and up-gradation of 399 km of the existing transmission lines, which would bring stability in the distribution network.

The first tranche of $252 million ($242 million OCR and $10 million ADF) and second tranche of $242 million were released on January 13, 2009 and 28 January 2011, respectively.

Under the existing four MFFs, the ADB is investing $2.9 billion in Pakistan's power sector over a ten year period (2008-2017).

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth and regional integration. Established in 1966, it is owned by 67 members -- 48 from the region.

Yamaha in Pakistan

Yamaha Motor Co. will build a motorcycle plant in Pakistan with the aim of starting production in 2015, in an attempt to expand its business in an untapped emerging market, company President Hiroyuki Yanagi said Friday in an interview with Kyodo News.
Yamaha will first invest 1.3 billion yen in the Pakistani plant before increasing the amount to a total of 10 billion yen by 2020 to raise its production capacity to 400,000 units a year.
"Motorcycles sold now in Pakistan are mainly Chinese-made, but they are very old," Yanagi said. "We'd like to stimulate the market by introducing new models."
Yamaha has set its initial production target at 40,000 units per year.
The motorcycle market in Pakistan is expected to double to 3 million units in 2020 from the 2013 level of 1.5 million, according to the Japanese manufacturer.
The contract with DYL (Dawood Yamaha Ltd.) has come to an end. DYL will use engine of YAMAHA but will not display logo/monogram of Yamaha anywhere on the motorcycle. They will sell under their own brand names.

 According to ARY News on 11-09-2013:

Karachi : The Board of Investment Chairman, Muhammad Zubair on Tuesday said Japanese company Yamaha would invest $ 150 million to establish a motorcyle manufacturing plant in Karachi. ARY Nerws reported.

This would help boost the foreign direct investment and technology transfer in the country, the Board of Investment (BoI) Chairman said while addressing a press conference here.
 

He said the company had applied in 2009 for establishing its  plant in Pakistan, but it was not given permission by the last regime despite persistent efforts.

He said a delegation of Yamaha approached Federal Finance Minister Muhammad Ishaq Dar and apprised him of the situation.

The minister took up the matter at a meeting of the Economic Coordination Committee (ECC) of the Cabinet, which after detailed deliberations and expediting the process, allowed the company to  set up the plant.

He said the government during the first three months in office, had formulated a motorcycle policy by taking all the stakeholdesr on board and offered incentives to both local and foreign companies for introducing the latest technologies to attract foreign direct investment and development of the local industry.

The BoI Chairman said the local motor cycle manufacturing industry  would have to introduce the modern technology to get benefit from the new policy.

He said that Yamaha would start production by December 2014 as it would invest US$ 150 million during next five years and initially it would produce 25 percent motorcycles here, with 15 percent increase in capacity each year.

Muhammad Zubair said that;

The decision of Yamaha to establish its plant in Pakistan will encourage other famous brand to invest in different sectors of the economy as the country offers more lucrative business opportunities as compared to the regional countries.

He said that FDI was recorded at 23 percent of GDP in 2007 which came down to 13 percent of the GDP showing a decline of US$ 20-24 million during the tenure of last government.

Besides, he said that government was negotiating with the laptop manufacturers to establish their plants in Pakistan to fulfill its domestic requirements as demand and use of the laptops were increasing day by day.

The government is determined for the revival of nation economy by improving the investment climate, attracting FDI and encouraging local investors and famous brands, he added.

He further said that government has taken several steps and announced short medium and long term solution to overcome the energy crisis to promote and develop the local industry.

 

Yamaha to invest $150m for setting up plant in Karachi: BoI Chairman

BoI Chairman Muhammad Zubair yesterday said Japanese company Yamaha would invest $ 150 million to establish a motorcyle manufacturing plant in Karachi.

This would help boost the foreign direct investment and technology transfer in the country, the Board of Investment (BoI) Chairman said while addressing a press conference here. He said the company had applied in 2009 for establishing its plant in Pakistan, but it was not given permission by the last regime despite persistent efforts. He said a delegation of Yamaha approached Federal Finance Minister  Muhammad Ishaq Dar and apprised him of the situation. The minister took up the matter at a meeting of the Economic Coordination Committee (ECC) of the Cabinet, which after detailed deliberations and expediting the process, allowed the company to set up the plant.–APP

 

Board of Investment Chairman Muhammad Zubair on Tuesday announced that the government has granted permission to Yamaha Company to establish motorcycle plant in Karachi and the company would invest $150 million during the next 5 years but would start operations in December 2014.
He, while praising the performance of current regime, said that the last government of Pakistan People’s Party did not issue license to Yamaha that was  applied in 2009 but under the new government, BoI in just 3 months made it possible. This would help boost the foreign direct investment and technology transfer in the country, he said.
He said in a media briefing that Ishaq Dar took up the matter in Economic Coordination Committee of the Cabinet that after detailed deliberations and expediting the process, allowed the company to setup the plant. Yamaha at the initial stages would produce 25 percent motorcycles in Pakistan that will be increased with the passage of time.
Muhammad Zubair said that the government had formulated a motorcycle policy just in 3 months while taking all the stakeholders on board. He said that government has offered incentives to local and foreign companies for introducing latest technologies.
All steps are being taken to attract foreign direct investment and development of local industry. But local industry would have to introduce modern technology to be the beneficiary of new policy formed by the government, he added.
Muhammad Zubair said that decision of Yamaha to establish its plant in Pakistan will encourage other famous brands to invest in different sectors of the economy as the country offers more lucrative business opportunities as compared to the regional countries.
He also said that government was also negotiating with laptop manufacturers to establish their plants in Pakistan. He mentioned that Foreign Direct Investment fell significantly during the tenure of previous government.