Erosion of the Rupee

Market uncertainty is increasingly being cited as the major reason for the erosion of the rupee, the decline in foreign direct investment during the past four months, the decline in investor confidence and the plunge in the country's stock markets. And this uncertainty is the outcome of the sustained failure of the PTI administration to present a set of economic policies required to provide a comfort level to economic players in the country.

To date, the government has not eased concerns about whether it would seek an International Monetary Fund (IMF) programme with all its associated policies in the form of pre-programme as well as during the programme conditions; or whether it has definitively decided to go it alone which implies a set of policies targeted to dealing with the existing economic impasse that would almost certainly require the implementation of several politically challenging policy decisions that may not markedly differ from what the IMF would have recommended but without the bailout package that may have allowed the government to negotiate a slowdown in the reform process.

As matters stand today, the policies announced by the PTI government are disturbingly similar to what were in effect during the previous administration. The supplementary budget of the incumbent government sought to decrease development expenditure and raise current expenditure with obvious negative implications on growth. The budget did not take advantage of the fact that the civilian and military leadership are on the same page for the first time since 2008 or of the need to negotiate a freeze on the income of the civil service for the duration of the current crisis. Additionally, revenue is to be generated from existing taxes, from those who are filers rather than from the non-filers and sadly, there have been no major developments in reforming the tax structure to make it fair and non-anomalous though the public has been informed that an exercise to that effect is ongoing.

The export package has been carried over from the Abbasi-led government as have the subsidies on tube-wells and fertilizers. Sugar exports would be provided a subsidy given that costs of production in the domestic market are higher than in the international market - a decision that may lead to continued rising area under sugarcane cultivation as opposed to cotton which, in turn, accounts for high imports of raw cotton to meet domestic demand. And unfortunately, claiming foreign direct investment is flowing into the economy in the aftermath of a change in government without taking into account agreements and request for incentives by existing investors that predate the installation of the Khan administration.

The question of whether the State Bank of Pakistan is to be allowed autonomy to meet its stated terms of reference notably to reduce inflation through an independent monetary policy and allow the currency rate to be set by market conditions was recently publicly compromised (though SBP has never enjoyed meaningful autonomy in the past irrespective of claims to the contrary by previous administrations). Additionally, government after government has used SBP not as the lender of the last resort but of the first resort (a policy that an autonomous SBP would not have supported) with the Khan administration already borrowing nearly 2.8 trillion rupees this year (as opposed to 1.8 trillion rupees in the comparable period last year). There needs to be some legislation on how much the government should be allowed to borrow from SBP.

Imran Khan has assured the public he would not take decisions that would hurt the poor, insists he would raise employment opportunities and provide housing to the poor, and take measures that would be pro-poor and pro-economic growth. These are salutary objectives; however, he must understand that taxing the already taxed is not the way forward. He must ponder whether or not all those who receive government largesse - be they the civil servants or be they industrialists to be able to compete abroad, or be they rich farmers who the constitution allows not to be taxed by the federal government - paying taxes justly and righteously.

To conclude, Imran Khan is relying on his considerable popularity to defer decisions that are fuelling uncertainty. He would do well to look at what is happening in France to the considerable popularity of President Emanuel Macron after he raised fuel taxes even though over 57 percent of all French government revenue is directed into public service. Public patience even that of one's supporters is likely to dissolve once their disposable incomes shrink.

Car sales fall on back of price hikes

Locally produced vehicle sales, especially cars of small engines, fell in November 2018 as multiple price hikes and restriction on non-filers of tax returns discouraged many buyers.

Sales of the low-end vehicle segment, 1,000cc and below, dropped heavily on the back of a deteriorating macroeconomic situation in the country and challenges faced by the auto sector.
Sales of 800 to 1,000cc cars declined 25% year-on-year and 37% month-on-month in November, according to monthly data of the Pakistan Automotive Manufacturers Association (PAMA) released on Tuesday.
 he major low-end segment has been affected more by the recent situation, however, high and mid-tier segments are also going to go through the same situation,” said research analyst Faizul Sultan at BMA Capital Management Limited.

Overall, automobile sales dipped 17% year-on-year to 17,442 units in November 2018 whereas sales dropped 30% to 17,442 units on a month-on-month basis against 24,850 units in October.
The fall was in line with market expectations due to a worsening economy, the law barring non-filers of tax returns from vehicle purchase and multiple price increases because of rupee depreciation against the dollar, according to a report of Topline Securities.
The interest rate hikes have also hit vehicle sales in the country. The benchmark interest rate has been raised by 425 basis points since January 2018 to 10%, according to the State Bank of Pakistan (SBP).
Sales of Pak Suzuki Motor Company, which caters to almost 50% of the market and meets mostly the demand from low-end customers, plunged 25% to 8,511 units in November against 11,285 units in the corresponding period of last year. Among different models of the company, sales of Swift fell 7%, Mehran 44%, Bolan 39% and Ravi 28% while Cultus sales grew 13%.
Pak Suzuki’s sales declined 37% to 8,511 units in November on a month-on-month basis from 13,346 units last month.

Indus Motor recorded a yearly decline of 7% in sales, which reached 5,479 units in November. On a month-on-month basis, its sales fell 15% to 5,479 units from 6,409 units in October
Toyota Corolla sales grew 9% year-on-year while sales of Hilux and Fortuner decreased 46% and 15%, respectively.
Honda’s sales nosedived 23% to 3,452 in November against 4,456 units in the same period of last year. On monthly basis, Honda sales witnessed a steep fall of 31% to 3,452 units from 5,005 units in October.
During first five months of the current fiscal year, auto sales were recorded at 100,643 units, down 4% against 104,901 units in the same period of last year, which was the first decline in five years.

Pak Suzuki sales declined 11% to 51,425 units against 57,776 units in the same period of last year.
Indus Motor sales rose 7% to 27,307 units compared to 25,558 units in the same period of previous year.
Honda witnessed a meagre 2% increase in car sales, reaching 21,911 units against 21,567 units in the corresponding period of last year. Honda BR-V sales plunged 76% and City and Civic sales on a cumulative basis decreased only 2% year-on-year.

 

Sugar Industry in Pakistan

Elementary economics dictates that when input prices increase without a commensurate increase in output price, supply should fall. Not so in Pakistan’s sugar industry. During the last marketing year, sugar milling sector increased production by 38 percent, even as retail price of sugar remained unchanged.

Was it the export potential of domestic sugar that led to the ramped-up production? Not unless foreign buyers love procuring the sweetener selling at roughly 30 percent premium to prices in international market. Like its physical form, domestic demand of white sugar is sticky too; which is probably a good thing considering no causal relationship has been discovered in increase in consumption of sweetener and economic growth of nations.
Sugar millers privately hint that actual domestic demand may be underreported by as high as 20 percent. And millers are forced to report lower output and show losses because the minimum support price is detrimental to their business. Granted, but the high levels of year-end inventory reported by almost all listed players cannot just disappear from the go-downs.

But look closely, and one may notice nice segmentation of market among players, big and small. While the available data is limited to major listed players, listed players constitute on average 40 to 50 percent of total sugary output in Pakistan. Year on year increase in output by these players increased on average by 46 percent over the last two reported marketing years; barring Habib Sugar, which recorded a two percent decline. Why would every player ramp up production only to be forced to dump its stock at depressed retail price in absence of any demand growth?
While output level naturally varies year-on-year, market share (in terms of share in production) of most listed players records little variance over the years. The biggest dog in the neighbourhood has an average share of 11 percent, which deviates less than one percentage point during the five-year period under review. The next two players have a similar story, with on average 4.5 and four percent share of the market, respectively.
But even if the industry players have neatly segmented the market amongst themselves that is of little benefit when supply exceeds demand, and domestic retail prices refuse to budge. However, one miller provides a hint: the segmentation has little to do with the domestic market as at current levels of output and price, there is little money to be made catering to the local demand.
Millers ramp up production in expectation of receiving subsidy on export quota, which is partly determined on the levels of output. Thus, while no miller wishes to increase ‘reported’ production so much that it is penalized for inordinate increase in absence of forecasted demand growth; every player has an incentive to at least maintain its market share at previous year’s level, such that its export quota does not decline.

E-commerce growth: Sale value reaches Rs100b

ISLAMABAD: Pakistan has witnessed reasonable growth in e-commerce activities over the past few years as sale value of industry is on rise and reached Rs100 billion mark.
According to State Bank of Pakistan, the sales of local and international e-commerce merchants were Rs20.7 billion in 2017 and Rs 40.1 billion in 2018 with an encouraging growth of 93.7 percent.
Fishry.com, an e-commerce platform that provides services to trading companies, organised a one-day conference EcomX Pakistan in association with Microsoft and Pakistan Software Houses Association.
A large number of experts belonging to the IT sector, business start-ups, logistics companies and small and medium enterprises participated in the event. They discussed comprehensive digital solutions to the challenges faced by the rapidly growing e-commerce industry.
The conference was aimed at strengthening e-commerce in Pakistan by highlighting its core components ie connectivity, technology, inventory, supply chain, logistics and online payments.

Apart from Pakistan’s IT firms, regional and global IT experts from Facebook, Google and Microsoft also participated in the conference.
Speaking on the occasion, the experts called for framing policies to provide a sound basis for e-commerce in Pakistan and suggested the creation of a necessary regulatory environment. Debates, chaired by a panel of experts, on various technical products were also held.
While highlighting the deterioration in Pakistan’s exports, the experts emphasised that businesses should shift their focus from the business-to-business approach to business-to-customer connectivity.
"For countries like Pakistan, which face difficulty in connecting to international businesses, it is important to invest in e-commerce and digital solutions so that through digital correspondence catering to the international market becomes easier,” an expert said.

Keeping in view the growing number of internet users in the region, experts have estimated the turnout of e-commerce business to reach up to $1 billion which is at present limited to $300 million.

The exports of services from Pakistan

The exports of services from the country surged by 14.28 percent to $470 million in October against the exports during same month of previous year.
The trade deficit of services also fell sharply by 49.05 percent during the month as it decreased to $195 million against the trade deficit of $382 million in same month of previous year, according to latest data of Pakistan Bureau of Statistics (PBS).
The imports of services declined by 16.25 percent to $665 million in the corresponding month as compared to import of $794.02 million in October 2017.
Meanwhile the trade deficit of services during first four months of current fiscal year (2018-19) also shrank by 33.75 percent as exports increased by 2.13 percent and imports fell by 15.47 percent during the period under as compared to the period from July-October (2017-18).
The data shows that the service trade deficit contracted to $1.099 billion during July-October 2018-19 from $1.658 billion in same period of last year.
The services exports also increased to $1.76 billion from $1.723 billion in first four months of previous year whereas the imports during the period under review were recorded at $2.859 billion against imports of $3.38 billion in the corresponding period of last year. It is pertinent to mention here that merchandize exports during first five months of current fiscal year increased by 1.29 percent as compared to the exports of corresponding period of last year.
The exports from the country during the period under review reached to US$ 9.12 billion against exports worth of $9.004 billion during same period of previous year, according to latest data released by Pakistan Bureau of Statistics (PBS) on Tuesday.
The trade deficit during July-November (2-018-19) shrank by 2.03 percent to $14.513 billion against $14.814 billion recorded during first five months of last fiscal year.

Pakistan-Iran trade

Trade with Iran is at record low levels. Import data from SBP indicates Pakistan imported just $59,000 worth of goods from January to October this year. This is why Iranian news of exports to Pakistan of $860 million come as a shock.

Iran’s Trade Promotion Organization (TPO) reports that the value of its exports to Pakistan in the first eight months of the current Iranian calendar (March – November) rose 58 percent YoY from $539 million last year.
The report was based on comments by Iran’s Commercial Attache to Pakistan, Mahmoud Haji Yousefipour.

A certain amount of discrepancies in trade data reporting is normal because of difference in valuation. Generally, exports are reported on a free on board (FOB) basis and imports on the basis of cost, insurance and freight (CIF). Time of recording, processing errors and accuracy and quality of data provided by reporting countries also result in inconsistencies. UN COMTRADE estimates that FOB and CIF alone account for 10 to 20 percent of discrepancy.

Pakistan has a history of trade discrepancies with PBC estimating Pakistan China trade figures inconsistency to be at around $3.5 billion due to under invoicing. A 2016 study by Lahore Journal of Economics estimated more than $92.7 billion in losses from 1972 to 2013 for 52 major traded commodities for trade with 21 partners due to mis-invoicing.
But this is different. The ITC figures have been taken for comparison since Iran’s TPO links up with TradeMaps. Based on SBP and ITC comparison, Pakistan has been reporting nearly non-existent imports whereas Iran’s figures place it at around $1 billion since 2010 when trade with Iran peaked and tapered off due to sanctions.
While it is often contended that oil is smuggled over the border, by its very nature smuggling is hard to quantify because of the lack of its paper trail. Differences in official trade figures cannot be accounted for by it.
Lack of formal banking channels is often cited as one of the biggest handicaps regarding trade with Iran. But if trade is being prevented through lack of financials pathways, then how is Iran reporting nearly a billion dollar of exports to Pakistan?