Currency smuggling

Despite having corroboration from State Bank of Pakistan (SBP) regarding the circulation of counterfeit currency in the country, concerned agencies remain unable to draft mechanism to avert currency smuggling, which is not only creating detrimental impact on economy but may also use for terrorism financing; it was learnt here on Sunday.

According to sources, deputy governor State Bank of Pakistan at a press conference held in Lahore confirmed that anti-state elements were involved in circulating counterfeit Pakistani currency in the country.

Meanwhile, Chairman and Managing Director of Pakistan Security Printing Corporation, Misbah Tunio at a same press conference apprehended that counterfeit Pakistani currency was exclusively being used for terrorist activities in the country.

He further informed that unscrupulous elements were using same paper and ink in the production of fake currency notes, which could only be detected by the experts.

When contacted, officials in Federal Investigation Agency (FIA), Customs Intelligence agency, etc, they remain clueless to identify the gang involved in this business, despite having substantial evidences of the circulation of counterfeit Pakistani currency in the market.

Meanwhile, sources, involved in currency exchange business, informed that counterfeit Pakistani currency especially 500 and 5,000 notes were being smuggled from Dubai via carriers in connivance with the officials of concerned agencies posted at airports.

Moreover, sources said that it was an open truth that carriers, who had connections with officials of FIA, customs intelligence and other agencies, were used to smuggling fabric, currency, IT gadgets, smartphones, etc against fixed amount of bribe.

"Officials of different agencies have no concern what kind of goods are being brought in the country but they are wary about the weight carrying by the carriers; not for the sake of duty and taxes but to raise its share of bribe," sources said.

They further said that fake Pakistani currency was being smuggled through night flights, coming especially from Dubai and added that there were reports that billions of rupees counterfeit Pakistani currency was circulated by the bookies during Cricket World Cup 2015.

When contacted, officials posted at Karachi airport showed in-cognizance about the smuggling of counterfeit Pakistani currency in the country, saying that they had no such information. They said: "We have directives to monitor the movement of foreign currency only," reflecting the non-seriousness of concerned authorities to deal with this grave issue.

Mutual Funds in Pakistan

Perhaps, these aren’t satisfying times for mutual fund investors. With the size of the country’s mutual fund industry being only a fraction of the banking sector’s deposits, even a slight strike to the industry’s assets can perturb its investors. March 2015 saw the size of the mutual fund industry shrinking to Rs453 billion, a fall of nearly three percent over the preceding month. But, don’t fret; the industry size is likely to mend soon.

It should be noted that this is the first decline that has come into sight ever since the beginning of FY15. Barring March 2015, mutual funds have consistently performed better and the expansion in industry size is a strong manifestation of that. Since the beginning of FY15, mutual fund industry size has expanded by over Rs66 billion, a healthy rise of 17 percent.

March’s decline is, however, attributable to the deadening of stock market during the month that sparked selling pressures across the board. KSE100 shed 3,398 points or 10 percent during the month, thereby leaving investors with bleeding hearts. As has been the industry norm during distressed times, equity funds were faced with burgeoning redemption pressures, thereby taking the size of equity fund category down by more than 12 percent over the preceding month. Equity funds now form 21 percent of industry’s assets (Dec’14: 24 percent).

Moreover, the tale of money market funds wasn’t rosy either. Recall that money market funds had enjoyed the heavyweight status in our mutual industry for a long time. But trends are shifting gears now! With the fund size previously boasting the largest share of over 30 percent in the industry, its contribution has dropped to 23 percent (as of March 2015), thereby positioning it as the second largest category.

It seems like the outflows from money market funds are being diverted to income funds with revaluation gains on longer-bonds being investors’ primary consideration. Consequently, income funds now form the bulkiest category in this industry, boasting a preeminent share of 24 percent. The spell is likely to last for some time as with further cuts in interest rates in the offing, investors are likely to harvest better returns on income funds.

However, on a year-on-year basis, assets of mutual fund industry are still higher by 16 percent. Thanks to the strong performance of equity and income funds in general, which have depicted an increase in asset size of 13 percent and 113 percent, respectively.

Be that as it may, the industry size will pick up as soon as the equity market regains its lost strength. Addition of new mutual funds in diverse categories is also an encouraging sign. Since the beginning of CY15, four new mutual funds have been launched, bringing in an additional inflow of Rs4 billion into the industry. So for the investors, a temporary decline in asset size shouldn’t be a cause of concern!

Threats for foreign remittances?

Remittances have been flourishing year after year. The receipts from overseas Pakistanis as per central bank’s data continued to remain upbeat reaching the level of $13.327 billion during the first nine months of FY15, depicting a growth of 15 percent year-on-year. And the remittances touched $1.577 billion in March 2015, recording a growth of 13.3 percent over last year.

Like the oil prices didn’t bring any immediate slowdown in home remittances, the crisis between Yemen and Saudi Arabia might not prove a bottleneck in the short term. In March 2015, receipts from Saudi Arabia increased by 15 percent year-on-year to $489.7 million, while the month-on-month increase corresponded to eight percent rise. Foreign receipts of $411 million from UAE and $196 million from other GCC countries showed a year-on-year growth of 57 percent and 20 percent, respectively. Similarly, there were no signs of slowing down remittances from these countries as the month-on-month changes show an increase of 30 percent and 19 percent, respectively.

Experts have ruled out a significant impact on home remittances from the ongoing crisis in Yemen as long as it remains within Yemen. However, the alarm bells should ring if this crisis spreads across the Middle East and results in displacement of people – in this case Pakistanis working in the region - impacting remittances; GCC countries are the source of about two third of Pakistan’s total remittances, half of which comes from Saudi Arabia.

At the same time, analysts and experts are hoping that the next moth would bring on copious receipts as returning immigrants of Yemen would be bringing home their savings in this time of uncertainty.

One threat for remittances in Pakistan is the prolonging and the spreading out Yemen crisis to other GCC countries including Saudi Arabia. 

Another external vulnerability highlighted by IMF in the sixth review of the extended finance facility is the protracted period of slow growth in key advanced and emerging economies that could impair exports and hurt remittances. The Fund also warns about the risk of the GCC countries decelerating and further reducing the windfall from the oil price plunge, which will impact foreign inflows from Pakistani diaspora.

Oil's Price Drop Hurting Canada

Several of Canada’s central bankers have publicly stated that oil’s price drop will negatively impact their economy.  Deputy Governor Timothy Lane was the first to do so.  In a speech on January 13, he concluded that, “… lower oil prices are likely, on the whole, to be bad for Canada.”  Bank of Canada Central Governor Poloz echoed this sentiment in a March 30 Financial Times interview, calling the net effect of oil's price drop on Canada’s economy “atrocious.”  Recently issued economic indicators confirm these predictions.

     In the last two readings, the Markit Economics Canadian Manufacturing number has shown a contraction.  Although the April 1^st headline number of 48.9 was slightly better than March’s 48.7, the reason for the decline were drops in output, new orders and employment.  Survey respondents primarily blamed weakness on the energy sector.  The Ivey PMI confirms this drop, showing a contraction in the last three readings:

Neither indicator implies a sharp recession is coming.  Instead, they strongly hint at several quarters of growth around 0%.

     Confirming a period of upcoming weakness are survey answers contained in the latest Bank of Canada Business Outlook report.  The number of respondents who see an increase in sales over the next 12 months has declined sharply in the last two readings.      

This is leading to a decline in the number of businesses that will increase capital spending:

Capital spending weakness will lower the Markit and Ivey numbers discussed above.

     The economic numbers are still too fresh to make predictions of imminent recession.  But the beginnings of negative ripple effects are clearly present.  

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer 

HBL: a great asset lost

The response is excellent as both local and international investors have shown confidence in HBL’s management and in the capital market of Pakistan. But that’s no wonder because when you sell the goose that laid golden eggs, opportunists will grab it with both hands. The over whelming interest of investors to bid in the growing stock with lucrative dividend yield was quite expected.

The government disinvestment under the name of privatization has now yielded $1.69 billion after adding $1.1 billion gained from HBL to $680 million earned through selling UBL, ABL and PPL.

It’s good for the stock market as the selling of HBL will increase the free float in the market. Government sold 609 million shares at the strike price of Rs168 per share to earn Rs102 billion. Not all the shares sold will become part of the free float as buying by sponsors and some others will not come in to market for trade. Let’s assume 30 percent (out of 42%) of HBL’s share will become part of the free float and that will increase the stock’s free float from exiting 1.5 percent of KSE100 to six percent. It may help the stock market create space in regional indices as HBL may come into the MSCI frontier market index.

But what is all this for? It will not make the stock market a darling of foreign investors overnight; it may not resolve the chronic fiscal imbalances or mitigate balance of payment woes to take the economy into high growth trajectory. It’s rather a counterproductive strategy to strip off assets for a state whose future liabilities are growing. Pakistan’s fast growing youth calls for building state’s resources. Selling the remaining shares in an already privatized and well-managed company is an irrational approach.

The capital gain booked on it will become part of the SBP’s profits and that will become part of non-tax fiscal revenues. The fiscal deficit may be reduced by 0.3 percent in FY15 and foreign exchange reserves will increase by $764 million as the rest of $242 million are sold to domestic players. It is good for meeting IMF’s target in coming quarters and to secure its own funding, the IMF has been a proponent of selling HBL.

But is it good for the government in the long term? Will this bring positive implications on the fiscal deficit in years to come? No! HBL has a dividend yield of seven percent and growing – if the government was so much in need of money to finance its deficit and foreign inflows to build reserves, it could have issued a bond in international market at a cost which is less than the dividend yield of HBL.

HBL is older than Pakistan and has always remained amongst top banks in the country. Eleven years back, the government privatized the bank by selling 51 percent strategic holding to Agha Khan Group. At that time, its market value was Rs22 billion ($389 million), now the bank’s market capitalization is Rs269 billion ($2.7 billion) – having increased sevenfold.

The privatization in a deregulated regime has reaped fruit. Its disinvestment now will boost government’s non-tax revenues and the fiscal deficit will be low on accounting books in the immediate year followed by forgone dividends in years to come.

Here’s the simple math; the government earned approximately $70 million from HBL’s dividends in CY14 and it gained $46 million from the blue chip company in the previous year. The cumulative annual growth rate of HBL’s dividend from 2008-14 is 25 percent. Let’s assume that the dividend income will grow by 18 percent in coming years. Even after adjusting five percent rupee depreciation every year; in eight years the cumulative dividends would have crossed the total amount received today. Isn’t selling HBL an irrational decision? 
Government will suffer as revenue streams are going to be disposed off !!!!!!!!!!!!!!!!!!!