Painful loss for textile industry

With much of our manufacturing sector literally on its knees, it is difficult to see why the TDAP was not more proactive and assertive in protecting our export assets. PHOTO: FILE

There was a time when the Pakistan textile industry was healthy, vibrant and profitable. It is now a shadow of its former self and many of the textile manufacturers have relocated, some to Bangladesh. In large part, the reason for their flight was the ongoing power crisis, with shortages of both gas and electricity cutting the throats of the manufacturers.

Now there is more bad news — the US licensor of Walt Disney has dropped Pakistan from the list of “Permitted Sourcing Countries” as of April 1, 2014. The Walt Disney empire is vast with global reach and immense purchasing power, particularly of cotton goods made in Pakistan. It has now banned any imports from us as we have failed to satisfy the Disney purchasers with regard to our goods as to the governance standards and working conditions within the cotton manufacturing industry; and this is going to cost us in the region of $200 million annually. Globally there is a tightening of standards by purchasing/importing states of cotton goods and garments. A series of factory fires and building collapses in the subcontinent has brought calls for an improvement of working conditions and greater attention to matters of health and safety.

Pakistan was already on a “watch list” and Bangladesh had received an even stiffer warning than had Pakistan, but was able to avoid a ban by getting a waiver as it signed up to the ILO/IFC “Better work programme” that allows close monitoring as part of a social audit. It continues to trade with Disney much to the chagrin of local manufacturers, who are reportedly critical of the Trade and Development Authority of Pakistan (TDAP) for failing to strike a similar deal for Pakistan with the Walt Disney Company. With much of our manufacturing sector literally on its knees, it is difficult to see why the TDAP was not more proactive and assertive in protecting our export assets, but thus far the TDA has offered nothing beyond a ringing silence.

Development: Value chain: a good tool for growth

CREATIVE COMMONS

KARACHI: The agriculture sector is the foundation of Pakistan’s economy. It currently contributes 21 percent to the GDP, generates employment opportunities for 45 percent of the country’s labour force and provides 60 percent of the rural population with livelihood. Furthermore, it plays a crucial role in ensuring food security, generating overall economic growth and reducing poverty.

However, commercial agriculture and agribusiness development in Pakistan faces obstruction on multiple fronts. On the production side, it is hampered by energy constraints, transport issues and a lack of adequate storage infrastructure; and, on the external side, weak institutions, policy issues and a lack of proper governance also present their own challenges. Further worsening the situation is the fact that access to financial and business development services, as well as modern technology, has remained inadequate.

Economic development

Economic development involves the transformation of agriculture-based economies into more urban, industrial and service-based economies. This implies that the flow of resources, goods, services, knowledge and information between urban and rural areas increase. Agricultural production in rural areas and consumption in urban centers are becoming more and more separated. However, it is rural production that has to provide growing cities with affordable and quality food.

Value chain approach

Value chain approach seems to be the keyword in recent debates on agricultural development, rural economic development and agribusiness promotion. Value chains describe productive processes around a product from the provision of inputs to production, transportation, transformation, processing, marketing, trading, and retailing to final consumption. Value chains have developed rural-urban linkages to provide potential benefits for both, rural producers and urban consumers. Value chain promotion provides an effective way of fostering rural-urban linkages.

Firstly, the concept provides a useful analytical framework for market as well as sub-sector analysis. Since production only translates into income once consumers actually buy goods, the value chain approach encourages looking at the production process from the consumer’s perspective. Secondly, the metaphor of the chain emphasises the fact that most goods are produced by a sequence of interlinked actors and activities. The approach focuses on the analysis of the institutional arrangements that link the various economic players. And thirdly, it highlights the importance of private sector development for the purpose of fostering agricultural growth and aligning the agricultural sector development with urban and other trends in society. All in all, it provides a fairly holistic framework, which can encompass a number of different development activities.

Public-private partnership

In this context, the government should develop an enabling environment for private-sector led agribusiness development. This includes interventions at national and provincial levels to redefine roles and responsibilities as well as strengthening regulatory framework in the sector, particularly compliance with international standards, and to create strategic alliances through public-private partnerships to promote sector development.

Horticulture policies must emphasise on promoting greater participation of the private sector and convergence of the programmes and project implementation by various development agencies and government departments within the sub-sector at the provincial level. Further, provincial policies should emphasise on prioritising crops and products based on a resource audit and comparative advantage followed by formulating an action plan with realistic time horizons to implement the policies.

Road to development

The value chain approach is becoming increasingly relevant due to the increasing rural-urban disconnect that is adversely affecting Pakistan’s economy. By analysing the various processes and activities that exist from when production begins to the point when the finished good is consumed, value chain approach provides the impetus required to increase efficiency, and production, while simultaneously decreasing costs. Increasing efficiency is but one path to economic development but if Pakistan’s transformation to an industrialised economy is to be completed, then the value chain approach is an important tool to have.

The author is a development professional and Editor of book ‘Sindh at the Cross Roads of Disasters’

Future outlook: Steel producers pin hopes on mega projects

Steel players in formal sector often complain that the ship breaking industry often dodge tax collectors. PHOTO: FILE

KARACHI: Improving macroeconomic indicators and expected investments in infrastructure has rekindled hopes of steel producers in Pakistan who see a major jump in steel consumption in the next few years.

“The country is going to see a big jump in construction activity. Therefore, Pakistan’s annual steel consumption can hit 10 million tons from the present 6.5 million tons in the next two years,” said Abbas Steel Group (ASG) Chief Executive Officer (CEO) Khalid Khan in an interview with The Express Tribune.

Khan pinned hope on the upcoming infrastructure projects the government is undertaking including dams, highways, housing schemes among others. Besides this, what is more important is that the expected rise in steel demand has already drawn the attention of steel producers who are looking to expand operations.

“I am sure leading steel producers can easily add a production capacity of 1 million tons provided the government listens to the recommendations of the local industry,” said Khan.

The country’s annual steel consumption is just around 6.5 million tons out of which it produces 4.5 million tons. It imports the rest, a total of 2 million tons, through different channels. Slow economic growth rate and inadequate spending on infrastructure has resulted in low per capita steel consumption in the country. Pakistan’s per capita steel consumption is just around 40kg – one of the lowest in the world – while the world average is 200kg.

Khan said that Pakistan’s formal steel manufacturing sector is already in a very depressing position due to unfair competition by the local ship breaking industry, which only pays sales tax on 70.5% of the total weight of the scrap ships. Steel players in formal sector often complain that the ship breaking industry often dodges tax collectors especially in paying the sales tax of 29.5%.

Last year, the government increased power tariffs for industrial consumers that hit the steel industry. According to Khan, around 50 steel units have already closed down their production mainly owing to tax anomalies in tax system, smuggling and high electricity rates.

The industry officials say that the cost difference between ship-plates, produced by the ship breaking industry, and steel billets, produced by the steel melters, should not exceed Rs1,200 per ton. Currently, the difference in costs hovers around Rs10,000-Rs12,000 per ton, making the local steel manufacturers vulnerable and subject to unfair competition at the hand of the ship breaking industry.

Khan believes that Pakistan needs manufacturing and not trade to provide employment opportunities to its big population.

“We need to discourage the mindset in Pakistan that prefers trade over manufacturing,” he said, “Unfortunately, for the last two decades policy makers in Pakistan have preferred trade over manufacturing, which is now hurting the country.”

Citing the example of his company, Khan said that we have 1,500 employees. If we were in trade, we would need only five employees to run Abbas Steel Group (ASG). With big population, Pakistan cannot afford trade. It is manufacturing that can only increase employment opportunities in the country, he added

Islamic financial system: Shariah prohibits discounts, premiums in debt trading

PHOTO: FILE

LONDON: Dominant Shariah opinion prohibits selling debt for a price other than its face value. This prohibition covers both discounts and premiums in the sale and purchase of debt.

Thus an individual, corporate or any other institution (eg government) is not allowed to sell to a third party the debt a debtor owes to it, for a price other than the face value of the debt. Furthermore, there is a clear prohibition on selling debt for debt even if the two (deferred counter-values) are equal.

There is a simple rationale behind it. Islam does not allow re-pricing of debt even if it is between the initial creditor and debtor. This is so because pre-agreed (contractual) re-pricing of debt is likely to give rise to the pre-Islamic practice of interest, known as riba, which Islam prohibited.

Although a creditor enjoys discretion to offer an early payment rebate to the debtor, Shariah does not allow formalising this discretion in the original debt agreement between the two parties. In the case of late payment by the debtor, classical Shariah opinion disallows a penalty, although the contemporary Shariah view is flexible.

In modern day practice of Islamic banking, default penalty is allowed, as long as it is used only as a deterrent to wilful non-payment or delay. In practice, this means that the creditor should not benefit, directly or indirectly, from the amount of the penalty, rather it should be given away as charity. Discretionary rebate is normally applied to early payment but may also be exercised if payments remain in accordance with the contractual schedule. It is equally permissible (rather preferred) for the debtor to pay more than he borrowed, as long as it remains discretionary on the part of the debtor and there is no contractual agreement on it.

In both the rebate and penalty cases, effectively the debt agreement is re-negotiated – potentially shortening the contract in the case of rebate and prolonging in the case of late payment or default.

Third party

Although re-pricing and limited re-negotiation of debt contracts is possible between a creditor and debtor even in Islamic finance, the mechanisms of doing so do not allow creditors to sell their debt in a meaningful way to a third party for a discounted price.

For example, consider bank A that owns a Murabaha asset with a face value of $100, which was created by selling a Shariah-compliant asset to client C on a deferred payment basis. Applying the prohibition of discounted trading in debt, bank A can sell the Murabaha asset (debt in the form of receivable) to a third party B for a price no other than $100, which must be paid on the spot (by B). If A wants to sell this debt to B for a lower price, say $90, it could do so only after unilaterally forgiving (or writing off) $10 from the debt owed by C, and then selling the remaining debt for its face value of $90. Of course, this makes little sense for B who would otherwise wish to benefit from the discount.

Having said that, there might be cases where parties A and B still wish to proceed with the transaction, which would be in compliance with Shariah.

Debt collecting agent

While discounted sale of debt is prohibited, Shariah allows partial transfer of debt through agency-based debt collection. Thus, it is permissible for creditor A to appoint a third party B as its agent to collect its debt receivable against a fixed fee and/or variable rate determined by B’s performance.

In practice, a combination of undiscounted trading in debt and the agency-based debt collection contracts can affect the economic effects of discounted trading in debt.

For example, a corporate owning a debt-based portfolio worth $100 may wish to “sell” it off by selling 50% of it to a third party for its face value, ie, $50. In addition, it appoints the same third party as its agent to collect the remaining 50% of the debt from its debtors against an agency fee of 50% of the amount collected.

This combination of debt sale and debt collection gives rise to a Shariah-compliant way of achieving the economic effect of selling $100 worth of debt, with a 25% discount.

Shariah vs conventional

There are two differences between this Shariah-compliant solution and the conventional discounted trading in debt. First, during the term of the contract between the creditor and its agent, the debt (50% of the total in this example) remains on the creditor’s balance sheet until it is paid off (ie, it is collected by the agent).

Second, the combination of (undiscounted) sale of debt and agency for debt collection is a performance-based arrangement, as the amount of “discount” very much depends on the recovery and collection of debt. If the agency fee was a fixed percentage of the amount recovered, the combination model would offer a variable “discount” depending on the performance of the agent.

The writer is an economist and PhD from Cambridge University

Ukraine threatens to go to court

Jump: $485.50 per 1,000 cubic metres, is what Russia’s natural gas giant Gazprom raised the price of Ukrainian gas to. PHOTO: FILE

KIEV: 

Ukraine on Saturday rejected Russia’s latest gas price hike and threatened to take its energy-rich neighbour to arbitration court over a dispute that could imperil deliveries to western Europe.

Prime Minister Arseniy Yatsenyuk said Russia’s two rate increases in three days were a form of “economic aggression” aimed at punishing Ukraine’s new leaders for overthrowing a Moscow-backed regime last month.

Russia’s natural gas giant Gazprom this week raised the price of Ukrainian gas by 81 percent — to $485.50 from $268.50 for 1,000 cubic metres — requiring the ex-Soviet state to pay the highest rate of any of its European clients.

The decision threatens to further fan a furious diplomatic row over Ukraine’s future between Moscow and the West that has left Kremlin insiders facing sanctions and more diplomatic isolation than at any stage since the 1989 fall of the Berlin Wall.

“Political pressure is unacceptable. And we do not accept the price of $500 (per 1,000 cubic metres of gas),” Yatsenyuk told a cabinet meeting called to get a handle on the economic crisis that threatens to escalate tensions in the culturally splintered nation of 46 million.“Russia was unable to seize Ukraine by means of military aggression. Now, they are implementing plans to seize Ukraine through economic aggression.”

Yatsenyuk said Ukraine was ready to continue purchasing Russian gas at the old rate of $268.50 because this was “an acceptable price”.

But he added that Ukraine must prepare for the possibility that “Russia will either limit or halt deliveries of gas to Ukraine” in the coming weeks or months. Gazprom’s western European clients saw their deliveries limited in 2006 and 2010 when the gas giant — long accused of raising the rates of neighbours who seek closer ties to the West — halted supplies to Ukraine due to disagreements over price.

The state gas company supplies about a third of EU nations’ demand despite efforts by Brussels to limit energy dependence on Russia amid its crackdown on domestic dissent and increasingly militant foreign stance.

Boeing, GE get licence to sell spare parts to Iran

A Boeing spokesperson said his company received the licence this week and would now contact officials in Iran to determine which parts were needed. PHOTO: FILE

PARIS / WASHINGTON: 

Boeing Co, the world’s biggest airplane maker, and engine manufacturer General Electric Co said they had received licences from the US Treasury Department to export certain spare parts for commercial aircraft to Iran under a temporary sanctions relief deal that began in January.

GE spokesman Rick Kennedy said the Treasury had approved the company’s application to service 18 engines sold to Iran in the late 1970s. They will be serviced at facilities owned by GE or Germany’s MTU Aero Engines, which is licenced to do the work. He said GE officials would meet with officials from Iran flag carrier Iranair and MTU in Istanbul next week to discuss Iran’s needs.

A Boeing spokesman said his company received the licence this week and would now contact officials in Iran to determine which parts were needed. He said the licence covered only components needed to ensure continued safe flight operations of older Boeing planes sold to

Iran before the 1979 revolution, and did not allow any discussions about sales of new aircraft to Iran.

“It’s very limited,” said the spokesman. The sales would be the first acknowledged dealings between US aerospace companies and Iran since the 1979 US hostage crisis led to US sanctions that were later broadened during the dispute over Iran’s nuclear activities.

Reuters reported in February that both Boeing and GE had applied for permission to export aircraft parts to Iran during a six-month window agreed by Iran and six world powers in Novembe

Hazard: If my wife tells me to go to PSG I'd consider it

The Ligue 1 champions are reportedly interested in signing the Belgian this summer and he says he would think about a move to the French capital if his partner insists on it

Chelsea star Eden Hazard has revealed he would consider joining Paris Saint-Germain if his wife insisted on moving to the French capital.

Hazard provided Chelsea's only beacon of light in their 3-1 defeat at the Parc des Princes on Wednesday evening, scoring a penalty and hitting the post with a volley.

Much of the build-up to the match was dominated by PSG's reported interest in signing Hazard this summer, with boss Laurent Blanc admitting his admiration for the Belgian.

And Hazard told French documentary series Interieur Sport: "If my wife tells me to go to Paris then I'll have to take this into consideration."

The Belgian was also very complimentary about the Parc des Princes, adding: "The Parc des Princes is a real stadium and a special place where I've known my first sensations as a player."

Chelsea face PSG in the second leg of their Champions League quarter-final at Stamford Bridge on Tuesday, hoping to overturn a 3-1 deficit.