Monday, 05 December, 2011Pages: 7 profit.com.pk

Has social media overshadowedtraditional marketing? Page 2

Hold your head high SBP Page 3Banking on Basel – Thecase of Internal RatingBased approach Page 8

KARACHI

GHULAM ABBAS

IN stiff competition with India, Pakistan’s ex-port of rice has been declined by 10 per centduring July-November of the financial year2011-2012.

Tackling compeTiTiTon: As India has re-duced the export price of rice by almost Rs52, it hascreated 16 to 17 per cent difference in price in the in-ternational market for Pakistan. Islamabad has facedalmost 10 per cent reduction in export of rice in termsof quantity, sources in Rice Export Association of Pak-istan (REAP) told Profit. However, as the price of ricein the international market has already increased, es-pecially for Basmati Rice, at least 5 per cent decline in

rice exports in terms of value has been recorded in thelast five months. Pakistan has exported the productworth $725 million by November and under the pres-ent pace of exports the country, it is likely to miss thetarget of 4 million tonnes in rice exports.impacT of indian rupee devaluaTion:Even though the country has a bumper crop thisyear, the record decline in export price of non-Bas-mati rice from India is creating tough competitionfor the country’s products in the international mar-ket. Besides the decline in price of the Indian com-modity, the 15 per cent devaluation of its currencyagainst the dollar in the last four months has alsocreated problems for Pakistani rice, Taufiq AhmedKhan, former vice Chairman REAP. Rice exportswere expected to be enhanced after the flood in Thai-land -the biggest exporter of rice - however the ever

declining export price of rice in Delhi is creatingacute uncertainty in the international market. How-ever, he claimed, the domestic market was stable.fall ouT of Trade liberalisaTion: “Thiswas the reason that the rice exporters here are fearfulabout the liberalised trade with India after granting itMost Favored Nation status,” he said adding that theexporters were still discussing the issue for submittingreply in the ministry of commerce about whether to in-clude rice in the negative list or not. According tosources, the Indian government had reduced the min-imum export price of non-basmati rice after exportsfailed to pick up. The government had allowed limitedexports of non-basmati rice after a bumper crop in2010-11. India had banned exports of rice, except thecostly basmati variety, to beef up supplies in the do-mestic market and cool down soaring prices in April

2008. Presently, the increased domestic productionand lower export of Basmati last year had resulted inabundant availability in the Indian domestic market.These factors brought down prices of this elite variety.power shorTfall, crippling indus-Try: Earlier, Pakistani export of rice declined to 0.862million tonnes during the first four months (July-oc-tober) of this financial year, against 0.977 milliontonnes in the corresponding period last year. The de-cline, despite of the challenge posted by India, was alsodue to the hours long power break downs which wereaffecting the business of almost 400 rice mills inboth Punjab and Sindh. The present situation wouldalso affect the over all exports of the country. It was es-timated earlier that shipments from Pakistan may ex-ceed 4 million tonnes with the production of 6.5 milliontones; an increase of 38 per cent during 2011- 2012.

ISLAMABAD

AMER SIAL

GovERNMENT is likely to appoint aChinese bank lead consortium that alsoincludes leading local banks, asfinancial advisor (FA), for $1.2 billion

Iran-Pakistan (IP) gas pipeline that will bring 1.05billion cubic feet daily (bcfd) of natural gas fromIran’s South Pars gas field to the country.An official source said negotiations with theChinese bank lead consortium were complete andfinal agreement will be signed next week afterholidays. He said given the importance andcomplexity of the project, it was essential that eachaspect of the project was well planned anddocumented to ensure efficiency and transparencyin the project’s implementation. However, he saidnames of the banks could not be revealed till thefinal agreement is signed.United States is exerting pressure on Pakistanfor the last several months to abandon theproject with Iran which is under UN sanctions.However, faced with crippling power shortage of5,000 MW that is causing a loss of three per centin GDP growth for the last few years, the countryis left with no other options but to importnatural gas for affordable power generation.Selection of a Chinese lead consortium as FA will

help avoid US pressure, the source said.Financial advisor will assist Inter State GasSystems Limited (ISGS) in determining anoptimal capital structure and financing plan forthe project and for providing of political andcommercial risk cover. It will be responsible formanaging the entire transaction up to financialclose including help in arranging financing.To avoid US pressure, a segmented approachhas been adopted for the project and both theparticipant countries are responsible forbuilding and operating the pipelinetransportation network relating to the project intheir respective territories. ISGS is responsiblefor the Pakistan segment of the project, which isestimated to cost $1.2 billion based on therecent provisional cost estimates.Estimated gap between demand and supply isprojected to increase from 1.6 bcfd in 2011-12 toover 2.5 bcfd in 2014-15. IP pipeline project willbring in 750 mmcfd gas, first gas flow of which isexpected in 2014. The project involves constructionof 781 km gas pipeline from Iran Pakistan borderto Nawabshah to inject gas into transmissionsystem of the two gas utility companies.Government has been advised to start process forsetting up new Independent Power Producers(IPPs) of 5,000 MW cumulative capacity, so thatthey should be ready for commissioning by the

time natural gas starts flowing from Iran Pakistangas pipeline in December 2014. official estimatesbased on current crude oil price project thatmonthly gas import bill will be in tune of $200-250 million, which was lowest as compared toother options of HSFo and RLNG.Government has already decided to dedicateimported gas through IP pipeline for powersector as power shortage is projected to increaseover 11,000 MW in next few years. The decisionwas made considering economic feasibility ofIranian gas as compared to the price of otheralternatives fuels such as furnace oil, LNG andcoal. Use of IP gas is estimated to result in anaverage annual savings of $1.2 billion againstusing RLNG as alternate fuel at crude price of$100 per barrel. Present value of total savingscomes to $10.9 billion. Using HSFo as analternate fuel indicates that IP gas will result inaverage annual savings of $1.7 billion at crudeprice of $100 per barrel. Present value of totalsavings comes to $15.3 billion.Recently imposed levy on natural gas which helpsgenerate Rs45 billion per annum, which thegovernment plans to use to develop the gasinfrastructure for the imported Liquefied NaturalGas (LNG), Iran Pakistan (IP) gas pipeline andTurkmenistan, Afghanistan, Pakistan and India(TAPI) gas pipeline projects.

Rice exports decline by 10pc in last five months

OGRA aiding gastheft, PetroleumMinistry takes action

ISLAMABAD

AMER SIAL

To curb the rising menace of naturalgas theft, petroleum ministry hasissued strict instructions to oil and

Gas Regulatory Authority (oGRA) to grantno stay in cases where gas meters andconnections were disconnected by gasutility companies. An official source saidstate owned gas utility companies hadraised the issue with the ministry sayingthat intervention of oGRA was not onlyhelping in gas theft but also creating othermalpractices. oGRA was directed not toprocess any such complaints in future and ifthere was need to amend regulations wasrequired it should be done immediately.Rise in unaccounted for gas (UFG) whichmeans difference between total volume ofgas purchased by the companies andvolume of metered gas supplied toconsumers. UFG levels of Sui Southern GasCompany Limited (SSGCL) and SuiNorthern Gas Pipelines Limited (SNGPL)have remained abnormally high of over 13per cent last fiscal year. International benchmark of UFG for companies is four per cent.According to oGRA estimates one per centof UFG of both companies at average priceof fiscal year 2009-10 translated to arevenue loss of Rs2.5b per year. Massivemonetary losses in the form of high UFGlosses are recovered by utilities by passingon the impact to consumers. Effectiveenforcement of UFG benchmarks couldresult in savings for consumers. Bothcompanies, SSGCL and SNGPL, had filedpetitions for review of UFG benchmarks asthey claimed they were facing gas theft dueto law and order situation in certain areas.Government has recently imposed gas theftact which allows imprisonment and finingpeople involved in gas theft. oGRA hasrecently recommended to the governmentan increase of 11 to 14 per cent in gas tariffof two gas utilities from January 01, 2012.oGRA has proposed an increase of Rs43.92per mmBTU in tariff of SNGPL and anincrease of Rs34 per mmBTU in tariff ofSSGCL. If the recommended tariff isincreased by government, domesticconsumers will be most affected. The sourcesaid oGRA wanted to fix UFG at lower levelbut it was opposed by gas companies, asthey wanted it to be maintained on thehigher side to recover their financial lossesdue to theft and increase in staff.Government had forced gas utilises to re-induct 7,000 terminated employees back intheir cadres.

Govt to appoint Chinese bank asfinancial Advisor for IP projectg Selection of Chinese lead consortium as FA to help avoid US pressure g Estimated gap between demand and supplyprojected to increase from 1.6 bcfd in 2011-12 to over 2.5 bcfd in 2014-15 g Present value of total savings, $15.3 billion

g Pakistan rice exports worth $725 million by November g 1.4 million tonnes exported during July –November 2011

Stiff competition with india

PRO 05-12-2011_Layout 1 12/5/2011 12:53 AM Page 1

02Monday, 05 December, 2011

debate

HAyA HAMID

Arecent advertising assignment at myuniversity entailed that I locate asmany ads of certain products as I couldin my city. out driving with my siblings

I realised that while I was deliberately scanningthe billboards at every traffic light, they wereboth busy texting. At home, during‘humsafar’s interval, my motherswitched the channel, my father shutdown all pop up advertisements on anywebsite he opened without evenregistering its an ad and when I had tolocate the number of the local vet, Igave up looking for the newspaper tenminutes into my search to go to yellowpages online. It suddenly hit me howall traditional advertising techniques,all techniques that I amstudying presently atschool aresomehow gettinglost in modern daynoise because theaudience they aresupposed to cater to areoblivious to the ad presence. Evenif a brand is lucky enough toestablish recall within its target audience, theassurity that their product offering will berecalled too has become greatly dependant on the‘need’ of the product, rather than the want of it.

Are mArketers evolving?With the traditional advertising touch pointschanging drastically within Pakistani society, thequestion arises if Pakistani marketers andadvertisers are evolving at the same pace as themodes of advertising are. A recent facebookobservation noted that during the two hours of thePTI rally in Lahore, there was an increase of 20,000fans on the page. At the same time, the MQM rallycommanded 0.03% of the total twitter populationglobally. Whether this was the result of pre plannedtelevised campaigns or print promotions, thequestion of advertising pace of ‘official’ marketersdoes get answered with a big negative. According toPTA numbers, nearly 22 per cent of Pakistan’spopulation is online. Given the fact that we rank25th in global facebook presence, generating onlinepromotion and advertising through word of mouthseems to be the safest bet for improved advertisingof companies, and the government.

The Jang group website attracts nearly 1.8 millioneyeballs from within Pakistan, monthly. This ismore readership than their printnewspaper. Thisraises a

fundamental question,especially for the Pakistani government,if investing in TvC’s or print ads is a wise optionespecially if they want to capture themassive urbanised student populationthat is very actively engaged onsocial media. The only timeworking individuals or students pause allactivities to sit in front of the television is duringa Pakistan cricket match, at that time too GPRS

services go on an all time high for telecomcompanies because the audience wants to syncits cyber presence with its physical one. The oddsmake us realise that even in difficult or trying

situations, a

majority of the population wouldprefer to get news updates

online or through theirtelecom services

rather thansitting infront of news

channels forcountless hours.

With 72 million active sim users in Pakistan, and130 per cent growth rate in the telecom industry,

the 3rd largest in the world, it comes as nosurprise that telecom companies would markettheir offerings through text services and gain anedge over traditional modes. They do this mainlyby offering their massive clientele services tosubscribe to news updates, cricket info, weatherreports, and even entertainment all in theirpockets. Even though heavy tablet penetrationstill seems a long way even in official situations,the cell phones have with due respect takenover the paperback market. Does that meanthen that instead of sitting and designing aprint ad, we need to email that to our client,where it may very easily get filtered to theirjunk mail labeled as spam?

Not quite.Though the

modes ofadvertisingare

changing, andthe sensible

thing for advertisersto do is to adapt to the

trends accordingly ahuge question of thequality of ads alsoneeds to be addressed.Pakistan’s mostsuccessful brand interms of globalmarketing is CokeStudio with Ufone

ranking second. Why isit that people who do not watch the

television have all seen Ufone ads, andthey have not you-tubed them like coke

studio either? Quality of advertisements inPakistan either lacks sustainable themes orfails to effectively ally with the moods of the

Nation, leading them to fall from memorywithout a lot of difficulty. What Engro Foodsmanaged during ramazan, year after year is asuccess story of aligning the most surfaceemotive side of Pakistan with their products,and Surf Excel’s ability to change the image ofstains from bad to good can also be credited toeffectively wheedling out emotions duringtheir television commercials. Understanding the target audience as well asthe dynamic and almost explosive marketchanges are the challenges that Pakistaniadvertisers and marketers face today. Withthe ability to change a want into a need, andmore modes of communication open to themthan ever before, it would be a shame if theyare unable to exploit the opportunity both interms of commercial selling and nationalbrand building.

The writer is an undergraduate student at the

Nust Business School.

Has social media overshadowedtraditional marketing?

Greater horizonS, unexplored optionS

cAptUring UrbAnised stUdents

telecom indUstry

UnderstAnding tArget AUdience

Major paradigm shiftin Telecom sectormarketing strategies

Ad-men need toevolve with theexplosive marketto survive

Pakistan’s most successful brand in terms

of global marketing isCoke Studio with Ufone

ranking second

KennetH Rogoff

Iam often asked if the recent global financialcrisis marks the beginning of the end of mod-ern capitalism. It is a curious question, be-cause it seems to presume that there is a viable

replacement waiting in the wings. The truth of thematter is that, for now at least, the only serious al-ternatives to today’s dominant Anglo-American par-adigm are other forms of capitalism.

Continental European capitalism, which com-bines generous health and social benefits with rea-sonable working hours, long vacation periods, earlyretirement, and relatively equal income distribu-tions, would seem to have everything to recommendit – except sustainability. China’s Darwinian capital-ism, with its fierce competition among export firms,a weak social-safety net, and widespread govern-ment intervention, is widely touted as the inevitableheir to Western capitalism, if only because of China’shuge size and consistent outsize growth rate. YetChina’s economic system is continually evolving.

Indeed, it is far from clear how far China’s polit-ical, economic, and financial structures will continueto transform themselves, and whether China willeventually morph into capitalism’s new exemplar. Inany case, China is still encumbered by the usual so-cial, economic, and financial vulnerabilities of a rap-idly growing lower-income country. Perhaps the realpoint is that, in the broad sweep of history, all currentforms of capitalism are ultimately transitional. Mod-ern-day capitalism has had an extraordinary run sincethe start of the Industrial Revolution two centuriesago, lifting billions of ordinary people out of abject

poverty. Marxism and heavy-handed socialism havedisastrous records by comparison. But, as industrial-ization and technological progress spread to Asia (andnow to Africa), someday the struggle for subsistencewill no longer be a primary imper-ative, and contemporary capital-ism’s numerous flaws may loomlarger. First, even the leading cap-italist economies have failed toprice public goods such as cleanair and water effectively. The fail-ure of efforts to conclude a newglobal climate-change agreementis symptomatic of the paralysis.

Second, along with greatwealth, capitalism has producedextraordinary levels of inequal-ity. The growing gap is partly asimple byproduct of innovationand entrepreneurship. People donot complain about Steve Jobs’ssuccess; his contributions are ob-vious. But this is not always thecase: great wealth enables groupsand individuals to buy politicalpower and influence, which inturn helps to generate even morewealth. only a few countries –Sweden, for example – have been able to curtail thisvicious circle without causing growth to collapse.

A third problem is the provision and distributionof medical care, a market that fails to satisfy severalof the basic requirements necessary for the pricemechanism to produce economic efficiency, begin-

ning with the difficulty that consumers have in as-sessing the quality of their treatment.

The problem will only get worse: health-care costsas a proportion of income are sure to rise as societies

get richer and older, possibly ex-ceeding 30% of GDP within a fewdecades. In health care, perhapsmore than in any other market,many countries are strugglingwith the moral dilemma of how tomaintain incentives to produceand consume efficiently withoutproducing unacceptably large dis-parities in access to care.It is ironic that modern capitalistsocieties engage in public cam-paigns to urge individuals to bemore attentive to their health,while fostering an economicecosystem that seduces many con-sumers into an extremely un-healthy diet. According to theUnited States Centers for DiseaseControl, 34% of Americans areobese. Clearly, conventionallymeasured economic growth –which implies higher consumption– cannot be an end in itself.

Fourth, today’s capitalist systems vastly undervalue thewelfare of unborn generations. For most of the erasince the Industrial Revolution, this has not mattered,as the continuing boon of technological advance hastrumped short-sighted policies. By and large, each gen-eration has found itself significantly better off than the

last. But, with the world’s population surging aboveseven billion, and harbingers of resource constraintsbecoming ever more apparent, there is no guaranteethat this trajectory can be maintained.

Financial crises are of course a fifth problem, per-haps the one that has provoked the most soul-searchingof late. In the world of finance, continual technologicalinnovation has not conspicuously reduced risks, andmight well have magnified them. In principle, none ofcapitalism’s problems is insurmountable, and econo-mists have offered a variety of market-based solutions.A high global price for carbon would induce firms andindividuals to internalize the cost of their polluting ac-tivities. Tax systems can be designed to provide agreater measure of redistribution of income withoutnecessarily involving crippling distortions, by minimiz-ing non-transparent tax expenditures and keeping mar-ginal rates low. Effective pricing of health care,including the pricing of waiting times, could encouragea better balance between equality and efficiency. Finan-cial systems could be better regulated, with stricter at-tention to excessive accumulations of debt.

Will capitalism be a victim of its own success inproducing massive wealth? For now, as fashionableas the topic of capitalism’s demise might be, the pos-sibility seems remote. Nevertheless, as pollution, fi-nancial instability, health problems, and inequalitycontinue to grow, and as political systems remainparalyzed, capitalism’s future might not seem so se-cure in a few decades as it seems now.

Kenneth Rogoff is Professor of Economics andPublic Policy at Harvard University, and was

formerly chief economist at the IMF

Is modern capitalism sustainable?

As industrialisation andtechnological progress

spread to Asia (and now toAfrica), someday the strugglefor subsistence will no longer

be a primary imperative,and contemporary

capitalism’s numerous flawsmay loom larger

PRO 05-12-2011_Layout 1 12/5/2011 12:53 AM Page 2

GAS curtailment can certainly be in therunning for the most hated word of theyear, if there ever was one. Amongstthose who have a particular disliking forthe phrase, fertiliser manufacturers

must be at the top, facing a cumulative 55 per cent cur-tailment YTD in 2011. Like some other facets of Pakistanilife, news flows of gas being restored is met with ironicjoy and relief – albeit short lived. Everyone seems to com-plain; from industrialists to CNG stations to householdconsumers. With all pun intended, give them gas man!

But I often ask myselfwhy should fertiliser manu-facturers complain somuch? Fine, gas is the pri-mary feed for urea produc-tion, but compared toothers, they seem to be at avantage point in so far miti-gation from supply short-ages is concerned. This isbecause fertiliser manufac-turers have the real businessluxury of increasing productprices as soon as their off-

take drops owing to production constrains. This em-anates from considerable demand inelasticity and adecent gap between local and international urea prices –the result being that the bottom line effect is a protectionof margins. We have seen this over the past year wherethe industry has been subject to this phenomenon. Whatwould be very interesting is to value this ‘real option’; justa side consideration for the more financially inclined ofyou. But anyway, this advantage exists and is expected tobe a feature for the imminent future unless our gas sup-plies are replenished somehow or the authorities decideto eliminate the CNG fad that keeps gripping the country.The latter is not a bad idea but that’s talking on a differenttangent altogether.

Back talking about urea price increases, another, per-haps somewhat less talked about question springs tomind. Fertiliser prices for all companies move in tandem;possibly defying the stereotype dynamics of a competitivestructure. The fertiliser sector can be categorised in two:(i) those who are supplied gas from the SNGPL networkand (ii) those plants which are on the SSGC network. The

two gas providers have different curtailment schedulesand so their user companies have been subject to differ-ent levels of supply shortages. But whenever one com-pany increases prices owing to additional curtailment,other companies replicate the move in the pursuit ofhigher prices. What happened to the economic principleof lower price would result in higher demand? or doesthis not apply in this case?

First of all, the fertiliser sector is hardly a competitiveindustry. The industry constitutes seven producers withthe top three (FFC, ENGRo, FFBL) holding 80 per centmarket share of urea capacity. The HHI for the industrycomes out to be around 2,500 and if we factor in cross-holdings amongst certain manufacturers, concentrationmay in reality be higher. Urea may seem to be a homoge-nous product but this does not provide reason for prices tomove together in the wake of shortage instigated pricehikes. That’s because an important aspect of product dif-ferentiation is easy access to substitutes. This is a featurethat farmers cannot enjoy as it remains costly to purchasefrom other manufacturers owing to transport costs ratherthan purchase from close proximity distributors even if aprice differential exists. But let’s suppose for argument sakethat these transport costs are eliminated. Does it seem thatcartelisation in present in the fertiliser sector or is therestill a case for similar price movement across the board?

The answer may lie in competition behaviour forwhich a little bit of game theory needs to be examined. As-suming that one company increases its price and the otherdoes not, then theoretically the latter should capture theformer’s client base. However, factoring in the currentsetup of distribution implying limited access to substi-tutes, the benefit from keeping prices low diminishes.Therefore, the more profitable thing to do is to increaseyour price as well. When this is applied across the board,theory suggests that all manufacturers should be followingsuit whenever one company increases its price as the ben-efit of improving margins outweighs the prospect of cap-tured demand in a supply shortage environment. But thisdoes not imply that the opposite should be true nor shouldall urea prices be at the same level. This is what we haveobserved over the past year; upward price movementshave been in tandem while manufacturers maintain dif-ferent urea price levels, bound by the maximum differencethat can be kept till it is feasible for the customer to shiftto other suppliers. Rivalry between fertiliser manufactur-ers does exist but it does not manifest itself due to the dy-namics of the industry itself; what is the point of engagingin competitive activity where there is no economic reasonto do so? other factors, such as barriers to entry and bar-gaining power of buyers, also play roles which are indeedreal influencers. often the action of increasing prices isconfused with collusion but surely the maxim of guilty tillproven innocent does not apply here.

The writer is a financial analyst with PakistanCredit Rating Agency (PACRA)

RISING external and internal debtputs the government in aprecarious position. The problemis compounded because a)borrowed amounts are

increasingly channeled towards non-development expenditure, b) the government’sown revenue generation capability – tax andexport receipts – is severely compromised andc) reckless borrowing of today will have to berepaid tomorrow, putting the current accountand currency strength in grave danger only tofund the government’s day to day functioning.That is not good.

Wherever there is debt, especially non-productive debt, there is sure to be austerity.And increasingly, as is seen practically acrossthe world presently, those who consume thedebt are far removed those whose labour ismilked to pay for it. Governments overflowingwith debt quickly form an addiction for freemoney (it’s not very likely they will hold power

when time comes to pay the debt back). Andhowever much they borrow, much more stillwill have to be paid back. The ‘going’ solution,of course, is public austerity, which meansincreasing taxes on the few that care to paythem to fund political ineptitude. That isunsustainable.

Pakistan, with its debt nearly doubling inthe short time this government has held office,is now well down this particular, painful road.Soon, people’s cost of living will registerunnerving advances because of thegovernment’s stubbornness on the debt issue.Practically every day Islamabad borrowsmillions just for the government to function.Most of these funds are not invested. They willnot engineer second round returns. Yet theywill have to be repaid. Already, this wrong-headedness has undone a good year of firsttight and then easy monetary policy. Saneheads need to prevail and the debt bubbledeflated sooner rather than later.

Debt, bubble and austerity

What happened to theeconomic principle oflower price wouldresult in higherdemand?

Luxury of increasingproduct prices

Aahyan mumtaz

Islamic interbank benchmark rate

Dr Dar has shared a lot of valuable knowl-edge with the readers. Any person who hassome interest in Islamic banking and financeknows very well the importance and urgencyof an Islamic benchmark for pricing financialproducts in the Islamic banking market. Infact, it was long awaited. And as suggested bythe writer, Islamic Interbank BenchmarkRate (IIBR) needs to be scrutinised fromShari’a and economic perspective. There ishigh time for Muslim world to contribute inthe development of Islamic banking by par-ticipating in Islamic banking transactionsand activities and to segregate Islamic bank-ing from conventional banking for goodorder sake and purity.

nAWAB ALI SHAH

LAHoRE

Trade-with-India argument

After long term reliance on USA, nowPakistan has to open up itself to othercountries as well, especially neighboringcounties. Pakistan already enjoys FTAwith China and India shall not be ig-nored. The main argument against MFNstatus to India is that Pakistani local in-dustry will suffer; however, this is notthe case. Due to MFN, Pakistan’s com-petitiveness in agricultural goods will in-crease and it will be able to competewith Indian goods. Trade is the solutionto many problems between countries,which should be considered becauseonly trade can resolve conflicts betweenIndia and Pakistan. We cannot affordlong term enmity with India.

WAHAB KHAn KHAttAK

pESHAwAR

e d i t o r i A l

Hold your head high SBP

IT seems that SBP put on its capof wisdom this time around,quite a turnaround from theprevious statement, if one mayconsider thankfully so. While

inflation may always be monetary phe-nomenon, in the case of Pakistan, thelast two years show that growth is not.The time now demands, a knock onKeynes’ grave and a plea of invocation.very little would be possible otherwise.

The Keynesian school of thought laysit simply; budget deficits are acceptable if

the economy seeks revival. This impliesthat if the economy is trapped in a lowgrowth slump, then the onus lies on thegovernment to take broad leaps of “invest-ment”. The irony of this proclamation hassomehow made it binding on all govern-ments across the global to run hugedeficits and subsequently take on massivelevels of debt without fulfilling the im-pending remaining condition; creation ofcapital. In the case of Pakistan, all fully re-alize that PSDP, synonymous with capitalexpenditure, is a residual variable. If itwere not, then it would not be so conve-niently revised down each year. For in-stance, expenditure to be incurred underthe pretext of PSDP by the federal govern-ment initially amounted to Rs446 billionin FY10 to be subsequently revised downto Rs310 billion. Similarly, the designatedamount for FY11 stood at an even lowerRs290 billion to finally arrive at Rs196 bil-lion only. Adding to this predicament isthe lack of transparency; who knows what

‘human’ road, bridge and hospital thisamount is feeding.

The SBP, in most monetary policystatements has gravely stressed uponthe need to increase the tax to GDPratio to reduce the need to borrow.What it does not list is that the govern-ment needs to thank its lucky stars thatmost of the money that it spends doesnot come from the average person’spocket. Else no one would spare whipsand blows on the government’s over-sized pot belly for spending their moneyon adding more layers of unwanted fat.Today, out of a population of more than170 million, only 1.7 million people paytaxes. of this pinch of salt, more than1.6 million belong to the lowest taxbracket, an insignificant lot especiallyin terms of demanding any sort of ac-countability from the government.

Doing some basic calculations canbuild an interesting hypothesis; if there areabout 168 million people who do not pay

tax and about 111 mil-lion people (60 per centof the population) wholive below the povertyline, then there areabout 57 million peoplewho are evading taxesin some form or enjoysome sort of illegalprivileges which some-how exempt them fromcontributing anything to the national ex-chequer. The tax to GDP ratio, has hoveredin the around nine per cent since the lastdecade, implying that non-tax payers con-tinue to enjoy impunity come what may.

Narrowing the analysis to take intoaccount demographics, labor force sur-veys indicate that the workforce num-bers in Pakistan lie somewhere inbetween 5-6 million people. If 45 percent of these people are employed in theundocumented agriculture sector, thenabout 3.3 million people are employed

in the industrial andservices sector. Andhalf of them pay taxes!This could primarilymean that others earnso little that they donot even fall in thetaxable category!

one can only hopethat this consumptivegovernment realises

that it would be able to extort, only ifthe people have something to offer.Thus the major incentive and a fun twistto corruption would be to give peoplesomething to start with.

In all this, one can only empathisewith SBP, the government’s most rebel-lious pawn, for trying to play its bitfairly, at times.

The writer is an economic researcherand freelance financial journalist. She can

be reached at sakina.husain@gmail.com

sakina Husain

For comments, queries and contributions, write to:

Email: profit@pakistantoday.com.pk Ph: 042-36298305-10 Fax: 042-36298302 Website: www.pakistantoday.com.pk

BABUR SAGHIRcreative Head

HAMMAD RAZAlayout designer

SHAHAB JAFRYbusiness editor

ALI RIZVInews editor

MUNEEB EJAZlayout designer

m o n d a y, 0 5 d e c e m b e r, 2 0 1 1

monetary policystatements gravelystress upon the need toincrease the tax to gdpratio to reduce the needto borrow

KUNWAR KHULDUNE SHAHIDsub-editor

MAHEEN SYEDsub-editor

PRO 05-12-2011_Layout 1 12/5/2011 12:53 AM Page 3

Monday,05 December,2011

04newS

Petroleum Minister, Dr Asim Hussain

The supply of gas will improve inJanuary next year and situation canonly improve with effectivemanagement of the utility

KARACHI

ISMAIL DILAwAR

CENTRAL bank pumped ahuge sum of Rs329 bil-lion, in local banking sys-tem which after dryingup of foreign financing

had appeared to be the only source thatwas catering the funds-starved govern-ment’s budgetary expenditures. Centralbank, in its monetary policy decisionon Wednesday, said it had no option

but to keep injecting “substantial liq-uidity” in the currency market to helpbanks cater prevailing demand formoney, the main user of which, StateBank said, was the government.

It said by the 28th of last month (No-vember), outstanding amount of liquid-ity injected by central bank aggregated toRs340 billion. And that excludes is-suance of Rs391 billion government se-curities to settle lingering circular debtand commodity loans, cash-strappedgovernment had borrowed Rs317 billion

from SBP as well as scheduled banksduring a period ranging from 1st July to18th November this year.

“In this context where government isthe main user of the system’s liquidityand banks remain hesitant to extendcredit to the private sector, SBP faces adilemma,” conceded the regulator.

Bank said any effort to scale downliquidity injections could have implica-tions for settlement of payments in theinter-bank market, which was an impor-tant consideration given SBP’s mandate

of maintaining financial stability.Friday saw SBP injecting another

Rs329 billion in the rupee market at11.59 per cent rate of return. Fresh liq-uidity money was injected by the regula-tor through conducting its reverse repoopen market operations in market treas-ury bills and Pakistan Investment Bondsof 7-day maturity.

Scheduled banks still remain risk-averse, as State Bank called them, andprefer investment in risk-free govern-ment papers instead of extending ad-vances to growth-oriented private sector.Banks in Friday’s auction offered bids ofRs373.500 billion but SBP accepted bidsworth Rs329 billion.

Rate of return for SBP’s reverse repo

operations is constantly increasing withcurrent operation seeing the regulatorcentral bank setting it at 13.35 per centagainst 13.26 per cent and 13.22 per centof the previous operations. Quotationrange for current injection ranged be-tween 11.71 per cent and 11.58 per cent,State Bank reported.

About its money injection operations,central bank said, the same was signifi-cantly higher than normal and appearedto have developed characteristics of a per-manent nature at this point in time. Thebank said marginally increasing trend ofthese liquidity injections also carried in-flationary risk which was not consistentwith the objective of achieving and main-taining price stability.

SBP PUMPS RS329 BILLION TO CATER TOGOVERNMENT’S BUDGETARY EXPENDITURESg Rate of return for SBP’s reverse repo operations constantly increasingg Quotation range for current injection ranges between 11.58 and 11.71 per cent

Oracle announces availabilityof Oracle WebLogic Server

KARACHI

STAFF REpoRT

oRACLE has announced oracleWebLogic Server, 12 c, latestrelease of the number one ap-

plication server for conventional sys-tems, engineered systems and cloudenvironments. According to a statementissued by the company, oracleWebLogic Server 12 c provides signifi-cant enhancements to help customersand partners lower their total cost ofownership and derive more value fromtheir current application infrastructure,while accelerating development cycle

and reducing time-to-market for theirapplications.

oracle WebLogic Server has re-cently achieved world record bench-mark results for multi-node; dual-node;and highest EjoPS per core whereasGartner, Inc. has placed oracle in theleaders’ quadrant of its 2011 report,“Magic Quadrant for Enterprise Appli-cation Servers.”

oracle WebLogic Server is opti-mised to run as a high performance,mission critical, elastic cloud infrastruc-ture on oracle Exalogic Elastic Cloud,world‘s first and only engineered systemfor cloud computing. oracle ExalogicElastic Cloud is tested and tuned by or-

acle to provide the best foundation forJava applications, oracle applicationsand other enterprise applications withblazing performance.

“With oracle WebLogic Server 12 c,customers can leverage the number oneapplication server to get more out oftheir existing infrastructure, dramati-cally simplify application deploymentand management and accelerate time-to-market with developer efficiency in-novations,” said Cameron Purdy, vicepresident, Development, oracle.

“In addition, with oracle WebLogicServer 12 c, customers are better posi-tioned to adopt cloud computing andcan leverage their existing infrastruc-

ture to create private or public cloud ar-chitectures and then easily move backand forth between on and off premiseinfrastructure as their requirementschange.

oracle WebLogic Server and oracleExalogic Elastic Cloud provide an idealcloud application foundation with max-imum performance, scalability and reli-ability,” he added. As the center piece oforacle’s Cloud Application Foundation,and a core part of oracle Fusion Middle-ware product family, oracle WebLogicServer continues to deliver innovativenew capabilities for building, deployingand running Java Platform, EnterpriseEdition (Java EE) applications.

SECP allows Modarabacompanies to charge fee

ISLAMABAD

STAFF REpoRT

SECURITIES and ExchangeCommission of Pakistan (SECP) hasallowed modaraba management

companies to charge management fee out of thenet annual profit of the modaraba. Thedecision was made in consultation with non-banking financial institutions (NBFIs) andModaraba Association of Pakistan. In theprevious circular of 1995, the modarabacompanies were barred from chargingmanagement fee of operating profit of themodaraba unless, accumulated losses of themodaraba, if any, are wiped off. To bringcharging of management fee in line with theIslamic concept of modaraba, RegistrarModaraba SECP, has withdrawn the saidrestriction by issuing a new circular, whichclarifies that management fee could be chargedonly once on the profit of a modaraba.

Income-spending disparityfARAKH SHAHzAD

AS governments and companiesaround the world are searchingways to insulate themselves from

price shocks, Pakistan has the most vulner-able history of commodity price surge inthe region. Energy crisis has given a deadlyblow to the price stabilisation mechanismin a sense that first shot of price hikes is al-ways fired by the government on a monthby month basis. It might be surprising foranyone outside Pakistan that petrol andelectricity prices were increased about 10-12 times in the last one year but in Pakistanit is a business as usual.

EXPLOSION IN COMMODITY MARKET

The new explosion in commodityprices is likely to be fuelled by a mix of un-precedented inflation, rising electricitycosts, regularly surging petrol prices andgrowing housing and transportation cost.The rise in food prices always brings im-mense profits for agribusiness houses andspeculators but untold suffering for mil-lions of ordinary people.

Prices of traded food staples such aswheat, corn, rice, sugar and tea continuedto surge throughout the year. But the badnews is that the upward trend is deter-mined to shoot higher due to the prevailingmarket forces.

In 2008, riots broke out in at least adozen countries as food prices hit recordhigh. The Arab Spring that brought down

the Tunisian, Egyptian and Libyan regimeswere fundamentally triggered by economicand social unrest. The new surge in pricessignals to unleash more widespread socialunrest, as people around the world contendwith the impact of the ongoing recessionand governments’ austerity measures.

The latest research conducted byoxfam indicates that the worldwide surgein commodity prices has clearly drawn avisible divide among developing and devel-oped nations in levels of hunger. The pri-mary concern of more than half of allPakistanis when buying food is its costwhile 44 per cent say they can no longer af-ford the same items they consumed twoyears ago because prices have gone beyondtheir reach. Most people believe that pricesof oil, transportation, weather pattern orcatastrophic events and government poli-cies are major factors affecting food supply.

EFFECT ON DIETARY PATTERNS

It is also noted that the global rise infood prices has also changed dietary pat-terns of most people during the last twoyears. It points out that 18 per cent of Pak-istanis strongly agree that they no longereat some foods they did in the past. Around39 per cent somewhat agree, nine per centneither agree nor disagree, eight per centsomewhat disagree and 25 per centstrongly disagree. Research indicates thatthe cost of food is the major concern of 51per cent of Pakistanis surveyed while 28per cent are concerned about its availabil-

ity, 19 per cent question how healthy or nu-tritious the food is and 22 per cent ask howsafe food is to eat. Highlighting the mostimportant factor affecting the food supply,the research finds out that 26 per cent Pak-istanis blame government policies, 28 percent consider weather patterns and cata-strophic events while 23 per cent believethat oil prices and transportation chargesare major factor. It points out that nine percent Pakistanis claim that it is result of theactions of big corporations, three per centblame consumer demand and nine per centsay it is an outcome of high input cost offood producers, including cost of credit,equipment, fertiliser and seeds.

HUNGER AROUND THE GLOBE

According to the FAo, 925 million peo-ple worldwide suffered from hunger in2010, an increase of about 150 million since1995-97. one third of children in the devel-oping world are malnourished. The land-scape is likely to be darkened even furtheras Institute of Fiscal Studies (IFS) forecasts600,000 more children will be pushed intopoverty by 2013, taking the total living in‘absolute’ poverty to 3.1m.

Although IFS report is focused onUnited Kingdom, yet it is an eye-opener tothe economies around the world in generaland weak economies like Pakistan in par-ticular. The think tank has warned that thenext two years will be ‘dominated by a largedecline’ in incomes. It revealed median in-comes are set to fall by 7 per cent after in-

flation has been taken into account – thesharpest drop in 35 years. The study said:‘The unprecedented collapse in living stan-dards is chiefly due to the high inflation andweak earnings growth over this period.’Robert Joyce, of the IFS, described it as the‘delayed effect’ of the recession. ‘Real earn-ings didn’t fall for a while after the economystarted contracting, partly because inflationwas very low’, he said. “But inflation hasrisen sharply and earnings have not doneso in response”, he concluded.

FALL IN LIVING STANDARDSNever before have household living

standards fallen over such a long period ac-cording to Paul Johnson, the IFS director.“We are running out of superlatives to de-scribe just how extraordinary some of thesechanges are,” he said. Most of the damageto living standards is being inflicted now.The typical family will be almost £2,500 ayear worse off by 2013. it is clear beyonddoubt that middle-income families are suf-fering an ‘unprecedented collapse’ in livingstandards as inflation and poor wages wipethousands off incomes.

In this global perspective, Pakistanneeds to have a comprehensive, proactiveand forward-looking mechanism to diffusethe poverty bomb being ticked by falling in-come and rising prices. If went off, it isfeared to sweep away the whole system inplace just like Tunis, Egypt and Libya. Themessage is loud and clear; if a society does-n’t help the many who are poor, it cannotsave the few who are rich.

Use of single-axistrucks cause Rs15bloss per annum

ISLAMABAD

GNI

PAKISTAN is losing about Rs15 billionper annum on the use of single-axistrucks, clearly indicating the loopholes

and ignorance towards developing acomprehensive transport policy. Although, thegovernment has been stressing on theimportance of developing a long-term transportpolicy, but on ground nothing has improvedand losses are increasing day by day. EconomicCoordination Committee had also constituted acommittee to review the issues pertaining totransport policy. Ministry of industries andproduction would be secretariat for thecommittee. The committee will comprise of,deputy chairman, planning commission asconvener, advisor to Prime Minister onpetroleum and natural resources, commercesecretaries, industries and production andcommunication divisions. on the other hand,despite ECC’s last decision to allow the importof used trucks, up to three years old, and busesand tractors up to five years old, thegovernment is unlikely to allow import of CNGcars and buses. The import of CNG cars andbuses could not be allowed due to shortage ofgas in the country, sources added. Ministry ofcommerce had suggested the government toapprove commercial import of buses withcapacity of 40 or more seats, up to three yearsold, may be allowed with the condition thatsuch buses should be certified by reputable pre-shipment inspection company to the effect thatthey have a road life of at least five years.

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CORPORATE CORNERInt’l Women’s Cluborganises general body meeting

lahore: International Women’s Club organised theirgeneral body meeting at Mall of Lahore which wassponsored by Greenvalley Supermarket InternationalWomen’s Club, Lahore. The event was sponsored byGreenvalley, a premium supermarket at Mall of Lahore.The event started with an address from Mrs Atika ZafarCheema, President of International Women’s Clubfollowed by a presentation on Greenvalley. All themembers visited Greenvalley store and enjoyed exclusivediscounts that were offered. pRESS RELEASE

UAE Consulate Generalholds National Day celebrations

karachi: UAE’s Consulate General in Karachi held thecelebrations to mark the 40th National Day of UAE withan exciting and entertaining evening at H.H. Sheikh ZayedBin Sultan Compound. Suhail Bin Matar Al-Ketbi (CouncilGeneral of UAE to Pakistan), Makhdoom MohammedAmin Fahim (Federal Minster for Commerce), Syed QaimAli Shah (Chief Minister of Sindh), Nisar Khuro SpeakerProvincial Assembly Sindh, Manzoor Ahmed Waseem(Home Minister of Sindh), and foreign diplomats fromother countries were present at the commencement of40th National Day anniversary of UAE with a cake cuttingceremony. pRESS RELEASE

LSE holds workshopon ‘Anger Management’

lahore: Lahore School of Economics (LSE) hosted itsfirst ever “Anger Management” workshop, organised by thenewly born Lahore School Social Awareness Society (LS-SAS). The guest speaker for the event was Mr omar Babar, aUSA native, Emory University graduate, who is currentlyworking as an asst Professor at FAST. The workshop wasattended by a number of students and teachers andhighlighted different types of anger, such as “Positive Rage”or courage linking to one’s prestige, “Negative Rage” or theego factor linking to external threats, along with causes andeffective coping strategies for anger; citing real life issues andexamples from everyday life. "The Lahore School SocialAwareness Society is a great opportunity for students to cometogether, share their visionary ideas, resolve major problemsof our era to bring about progressive social change," saidHiba Asad, President and founder of LS-SAS. pRESS RELEASE

There are no quick fixes to the crisis; the EUshould have greater powers to stopnational budgets if they risk breaching thebudget rules and to punish offenders

German Chancellor, Angela Merkel

LAHoRE: Senator, prof Khurshid Ahmad and Rector UMT, DrHasan Sohaib Myrad award gold medals and degrees tosuccessful graduates. PRESS RELEASE

oIL consuming na-tions, hedge fundsand big oil refineriesare quietly preparingfor a Doomsday sce-

nario: An attack on Iran that wouldhalt oil supplies from oPEC's second-largest producer.

Most political analysts and oiltraders say the probability of militaryaction is low, but they caution the risksof such an event have risen as the Westand Israel grow increasingly alarmedby signs that Tehran is building nu-clear weapons.

That has Chinese refiners drawingup new contingency plans, hedge fundstaking out options on $170 crude, andenergy experts scrambling to deter-mine how a disruption in Iran's oilsupply -- however remote the possibil-ity -- would impact world markets.

With production of about 3.5 mil-lion barrels per day, Iran supplies 2.5per cent of the world's oil. "I think themarket has paid too little attention tothe possibility of an attack on Iran. It'sstill an unlikely event, but more likelythan oil traders have been expecting,"says Bob McNally, once a White Houseenergy advisor and now head of con-sultancy Rapidan Group.

Rising tensions were clear thisweek as Iranian protesters stormedtwo British diplomatic missions inTehran in response to sanctions,smashing windows and burning theBritish flag. The attacks prompted con-demnation from London, Washingtonand the United Nations. Iran warnedof "instability in global security." Whiletraders in Europe prepare for a possi-ble EU boycott of imports from Iran,mounting evidence elsewhere points tolong-odds preparation for an evenmore severe outcome. In Beijing, theforeign ministry has asked at least onemajor Iranian crude oil importer to re-view its contingency planning in caseIranian shipments stop.

In India, refiners are leafingthrough an unpublished report pro-duced in March to look at fall-back op-tions in the event of a majordisruption. And the International En-ergy Agency, the club of industrializednations founded after the Arab oil em-bargo that coordinated the release ofemergency oil stocks during Libya'scivil war, last week circulated to mem-ber countries an updated four-pagefactsheet detailing Iran's oil industryand trade. The document, not madepublic but obtained by Reuters, liststhe vital statistics of Iran's oil sector,including destinations by country.Two-thirds of its exports are shipped toChina, India, Japan and South Korea;a fifth goes to the European Union.

Hedge funds, particularly thosewith a global macro-economic bias,have taken note, and are buying deepout-of-the-money call options thatcould pay off big if prices surge, seniormarket sources at two major bankssaid. open interest in $130 and $150December 2012 options for U.S. crudeoil on the New York Mercantile Ex-change (NYMEX) rose by over 20 percent last week. Interest in the $170 callmore than doubled to over 11,000 lots,or 11 million barrels. Still more tradedover-the-counter, sources say. Mc-Nally says that oil prices could surge ashigh as $175 a barrel if the Strait ofHormuz -- conduit for a fifth of theworld's oil supply, including all ofIran's exports -- is shut in.

‘CREDIBLE’ INFORMATION

This month's speculation of an at-tack on Iran is the most intense since2007, when reports showing that Iranhad not halted uranium enrichmentwork fuelled speculation that PresidentGeorge W. Bush could launch somekind of action during his last year in of-fice. Those fears helped fuel a 36 percent rise in oil prices in the second halfof the year. The latest anxiety was setoff by the International Atomic EnergyAgency's November 8 report citing"credible" information that Iran hadworked on designing an atomic bomb.A new round of sanctions followed, in-cluding the possibility that Europecould follow the United States in ban-ning imports. That alone would roilmarkets, but ultimately would likelyjust drive discounted crude sales toother consumers like China.

A more alarming -- if more remote-- possibility would be an attack by Is-rael, which has grown increasinglyalarmed by the possibility of a nuclear-armed Iran. Israeli Defense MinisterEhud Barak said on November 19 thatit was a matter of months, not years,before it would be too late to stopTehran. In that context, every tremorhas been unnerving for markets. Someexperts say an explosion at an Iranianmilitary base earlier in the month wasthe work of Mossad, Israel's intelli-gence agency. An unusually large ten-der by Israel's main electricity supplierto buy distillate fuel raised eyebrows,although it was blamed on a shortageof natural gas imports.

REFINERS BRACE

No country has more reason to beconcerned than China, which nowgets one-tenth of its crude imports

from Iran. Shipments have risen athird this year to 547,000 barrels perday as other countries includingJapan reduce their dependence.Sinopec, Asia's top refiner, is theworld's largest Iranian crude buyer.

The Foreign Ministry and the Na-tional Development and Reform Com-mission, which effectively oversees theoil sector, have asked companies thatimport the crude to prepare contin-gency plans for a major disruption insupply, a source with a state-ownedcompany told Reuters. The precau-tionary measure preceded the latestgeopolitical angst and is broadly in linewith Beijing's growing concern over itsdependence on imported energy. Ear-lier this year it issued a notice for firmsto prepare for disruptions fromYemen. But the focus has sharpenedrecently, the source said. "The plan isnot particularly for the tension thistime, but it seems the government ispaying exceptionally great attention toit this time," said the source on condi-tion of anonymity. In India, which gets12 per cent of its imports from Iran, re-finers had a potential preview of com-ing events when the country's centralbank scrapped a clearing house systemlast December, forcing refiners toscramble to arrange other means ofpayment in order to keep crude ship-ments flowing. That incident -- in ad-dition to the Arab Spring uprising andthe Japanese earthquake -- promptedthe government to document a briefbut broad strategy for handling majordisruptions. The document, which hasnot been reported in detail, says thatIndia could sustain fuel supplies to themarket in the event of an import stop-page for about 30 days thanks to do-mestic storage, and would turn tounconventional and heavier importedcrude as a fall-back.

It also urged the country's state-owned refiners to work on developingdomestic storage facilities for majoroPEC suppliers, consider hiring super-tankers to use as floating storage andto sign term deals to price crude on adelivered basis, a copy of the documentseen by Reuters shows. The govern-ment has not tasked refiners with ad-ditional preparations this month,industry sources say. And in any event,there's not much they could do.

"If they cut supplies we will be leftwith no option than to buy from thespot market or from other MiddleEast suppliers," said a senior officialwith state-run MRPL, Iran's top Indiaclient. To be sure, there's only somuch any refiner can do. The gap leftby Iran will trigger a frenzy of buyingon the spot market for substitute bar-rels, likely leading the IEA to release

emergency reserves, as it did follow-ing the civil war in Libya, or othercountries like Saudi Arabia to stepinto the breach. "We probably need todo this ASAP but are putting ourheads in the sand so far," said one oiltrader in Europe.

For refiners like Italy's Eni andHellenic Petroleum, the most pressingissue is not necessarily an unexpectedoutage but an import boycott imposedby their government. France has wonlimited support for such an embargo,but faces resistance from some nationsthat fear it could inflict more economicdamage.

CHEAP PUNTS

Unlike in 2007, there's not yetmuch evidence that a significantgeopolitical risk premium is being fac-tored into prices.

European benchmark Brent crudeoil has rallied 4 per cent in the past twodays, partly due to accelerating discus-sion of a Europen boycott as well asTuesday's unrest in Tehran, duringwhich protesters stormed two Britishdiplomatic compounds.

But it is also down 4 per cent sincethe IAEA's November 8 report. Ana-lysts say that it's impossible to extractany Iran-specific pricing from a host ofother recently supportive factors, in-cluding new hope to end Europe's debtcrisis, strong global distillate demandand upbeat U.S. consumer data.

"I don't think there's very muchevidence (of an Iran premium)," saysEd Morse, global head of commoditiesresearch at Citigroup and a formerState Department energy policy ad-viser. And he does not see an attack aslikely: "I think it's a low probabilityevent. Maybe higher than a year ago,but still low."

But that is not stopping some fromlooking ahead. oil prices would likelyspike to at least $140 a barrel if Israelattacked Iran, according to the mostbenign of four scenarios put forwardthis week by Greg Sharenow, a portfo-lio manager at bond house PIMCo anda former Goldman Sachs oil trader.

He refused to predict a limit forprices under the most extreme"Doomsday" scenario in which disrup-tions spread beyond Iran and theStraits of Hormuz is blocked.

With that in mind, hedge funds arebuying cheap options in a punt on anextreme outage. For about $1,500 percontract, a buyer can get the right todeliver a December 2012 futures con-tract at $150 a barrel; even if prices donot rise that high, the value of the op-tions contract could increase tenfold.

The spark of demand for upsideprice protection this month is an abruptreversal from most of this year, when thebias was toward puts that would hedgethe risk of economic calamity. "The kindof put skew we were seeing in the lastthree to six months was remarkable withpeople preparing for disaster - the Planetof the Apes trade, another massive mar-ket crash," says Chris Thorpe, executivedirector of global energy derivatives atINTL FC Stone. "only in the last threeor four weeks has there been increasedcall buying." options remain relativelycostly compared to earlier in the year,with implied volatility -- a measure ofoption cost -- of 43 per cent above thisyear's average of just below 35 per cent,the CBoE oil volatility index shows.But nonetheless it's clear that for somefunds the potential upside of violencein Iran means that interest is increas-ing. Says Thorpe: "It's at the back ofpeople's minds." REUTERS

Funds and refiners ponderoil Armageddon, war on Iran

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Necessary measures will be taken to furtherdevelop the Russian economy, to increasewages and pensions, to reform education andhealth care, to fight corruption and, finally, toprotect our country against external threats

weekly review

Political and economic strains causeKSE-100 Index to lose 276 points WoW

g KSE gains 13 points onWhite House’sreconciliatory statement

g 109 advance, 105 decline,79 remain unchanged oftotal 293 scrips traded

g KSE 30 index gains 19.38 points

g Panic selling ensues at KSEover investors concern

g 69 advance, 158 decline, 86remain unchanged of total313 scrips traded

g KSE 30 index also registerslosses

g KSE gains 26 points amidrenewed Pak-US tensions

g 125 advance, 86 decline, 93remain unchanged of total 304scrips traded

g Jahangir Siddique Company,volume leader of the day

g KSE gains 24 points backedby oil sector

g 111 advance, 108 decline, 94remain unchanged of total313 scrips traded

g Investors shrug offongoing diplomatictensions in Pak-US ties

g KSE tumbles as Pak-US ties crumbleg 64 advance, 156 decline, 100

remain unchanged of total 320scrips traded

g KSE-30 index loses 225.05 points

LAHoRe

AAHYAN MUMTAZ

PoLITICAL strains came to the forefront again as the KSE-100index lost 101 points (-0.83 per cent WoW). Devoid of investoractivity, volumes continued to be low since trading resumedafter Eid holidays, with average daily volume coming at 41.5

million shares (-6.0 per cent WoW). The lackluster environment wasduly reflected in scarce portfolio investment flowing into or out of theexchange. of these, foreigners and mutual funds were most cautious,selling shares worth $ 1.3 million and $2.3 million respectively. Thepolitical situation has seen gradual deterioration since the start ofNovember. With reshuffling in the political hierarchies and resignationsof important political personal taking fold, investment climate remaineddry as investors preferred to remain watchful. Moreover, technical level

talks with the IMF – circling aroundindependent external sector

assessments – concludedwith Pakistani officials

revising theirinternational

tradeprojections

downwards.Althoughthis is notexpectedto have amaterialeffect onmacros,

the datareleased on

foreigninvestment in

the country was dismal; FDI

stood at $340.2million, down 27.7 per

cent YoY.

The week started on anegative note for bankingcompanies.According to datareleased by SBP,non-performingloans rose by PKR38bln in 3Q2011 –a jump of 6.6 percent QoQ. Thiscame at a timewhen the pace ofNPL accretion wasthought to beslowing down andwas accordinglytaken as a strictdownside byinvestors, asaccordinglyreflected in thebanking sectorreporting negative3.1 per cent WoWperformance.However, this risein NPLs was notproportionatethrough all, aspublic sectorbanks saw thehighest deterioration in asset quality. A beneficiary however, wasBAFL, who has reported improving asset quality and upon closeinspection was the only bank to have recorded a decline inprovisioning for the 3Q2011. In other sectors, FFC saw aconsiderable decline as investors raised concerns over reversingurea prices now that gas has been restored.

STOCK SPECIFIC ACTIVITYIn the coming week, what willbe interesting to see is theperformance of fertil-izer stocks given thatthey have dominatedthe volumes in the in-cumbent week. This iswith particular refer-ence to how investorsperceive possible ureaprice drops in thewake of resumed gassupply. In this regard,there is a slight possi-bility of ENGRo ben-efiting at the expenseof FFC and FATIMA.Another highlightsector is cement andtextiles which are ex-pected to be sensitiveto external tradenews. This all isthough assuming aless volatile politicalscenario as the pastweek has been any-thing other than that.Unless calmness onthe front is achieved,investors are likely tostay low, resulting indepressed volumesand scarce trading activity during sessions. Again the trend of for-eign investors would be essential in this regard, although a reversalin selling sentiments remain unlikely. Support, if any, would be em-anating from local investors on the basis of company activity.

FORWARD LOOKING EXPECTATIONS

Russian President, Dmitry Medvedev

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CoMMoDITY prices ralliedthis week as the US dollarweakened against the euro inreaction to global efforts to

tackle an escalating eurozone debtcrisis, analysts said. The US dollar wonback some ground on Friday as tradersbooked profits ahead of next week’s EUsummit and after official data showedthe US unemployment rate dropped to8.6 percent last month, its lowest levelsince March 2009.Raw material prices, like equities, werebuoyed this week after the centralbanks of the US, the eurozone, Britain,Japan, Canada and Switzerland cut thecost of providing US dollars to banks,giving more liquidity to financialmarkets.Commodity prices also won supportafter China unexpectedly cut its ratio ofobligatory bank reserves, in itsstrongest move yet to ease restrictionson lending.“In the current environment, externalmarkets, attitudes towards risk andviews on the global economy are likelyto stay in the driver’s seat” as far ascommodities are concerned, BarclaysCapital analysts said in a note toclients.“This week has seen progresssurrounding the eurozone debt crisisahead of the ... EU summit next week,”they wrote.oIL: Prices rose as the euro ralliedagainst the US dollar. A weakergreenback makes US dollar-denominated commodities like oilcheaper for buyers holding strongercurrencies, lifting demand and pricesof raw materials.Crude futures also rose this week oninternational tensions over major oilexporter Iran. The EU, piling pressureon Iran after an attack on the Britishembassy, beefed up sanctions onThursday over Tehran’s nuclearprogram and threatened to hit its oiland finances next.By late Friday on London’sIntercontinental Exchange, BrentNorth Sea crude for delivery nextmonth rose to $108.92 a barrel from$106.11 a week earlier.on the New York Mercantile Exchange,West Texas Intermediate (WTI) or lightsweet crude for next month jumped to$100.26 a barrel from $96.06.PRECIoUS METALS: Gold, seen as asafe haven in times of economicuncertainty, led the precious metalscomplex higher.By late Friday on the London BullionMarket, gold advanced to $1,747 an ounce from $1,688.50 theprevious week.Silver jumped to $33.15 an ounce from$31.24.on the London Platinum andPalladium Market, platinum rose to$1,559 an ounce from $1,529.Palladium rallied to $653 an ouncefrom $572.BASE METALS: Industrial metalsprices mainly rallied, with coppergaining 8 percent. By late Friday on theLondon Metal Exchange, copper fordelivery in three months rose to $7,883a tonne from $7,276 the previous week.Three-month aluminum rose to $2,145a tonne from $2,004.Three-month lead increased to $2,120a tonne from $1,994.Three-month tin declined to $19,800 atonne from $20,600.

Commodityprices rally asUS dollar slidesagainst euro

I always believe thatcompetition makes themarket grow and it leads toimproved levels of serviceSohaib Sheikh, Head of Marketing Wateen Telecom

Banking on Basel – The case ofInternal Rating Based approach

nAWAzISH MIRzA

THE mortgage crisis of 2008demonstrated the vulnerabilityof financial intermediaries to-wards extreme events emanat-

ing mainly from fragile risk managementpractices. Technically, financial interme-diation is a pseudo derivative transac-tion, and banks take both long (loans)and short (deposits) position simultane-ously. Therefore, the inherent risks inbanking firms are extreme warranting aprudent risk assessment and manage-ment. The basic ingredient of risk man-agement for commercial banks – capitaladequacy ratio – is based on a regulatorydriven standardised approach for calcu-lation of capital adequacy. The standard-ised approach was proposed by BaselCommittee on Banking Supervision as aninterim arrangement and banks were ex-pected to develop their own risk assess-ment systems. However, almost sevenyears after the second Basel Accord,banks in Pakistan are still relying on therisk weights provided by the central bankto assess and mitigate their overall risk.This standardised approach is seriouslyflawed with multiple caveats that shouldbe of concern to commercial banks.

Primarily, the risk weights assignedunder standardised approach for corpo-rate sector are classified into rated (byapproved rating agencies) and unratedexposures with different risk weightsfor investment (low) and speculative(high) grade entities. This must be in-teresting to note that none of the de-fault in the last decade was detected exante by either of the two rating agenciesin Pakistan (despite their claims thatratings are forward looking). Adding in-sult to injury is that some of the de-faulted entities were enjoyinginvestment grade status by these agen-cies, couple of weeks before declaringdefault and were ex post subsequentlydowngraded to default. This raises

questions on prudence of risk mitigat-ing practices that are based on such ex-pert opinions. Therefore, if banksdevelop internal rating based models,they will be in better position to ex anteassess the likelihood of default and pro-vide adequate capital cushion.

Similarly, for unrated corporate ex-posures, banks should allocate 100%risk weight for capital adequacy pur-pose. In Pakistan less than hundred in-dustrial (excluding instrument ratings)firms have entity ratings as per the web-site of two local rating agencies. Thatwould imply a 100 per cent capitalcharge by commercial banks for most oftheir corporate clients. This could bealarming as banks with credit portfoliosskewed towards bad borrowers will beallocating less capital than required, ex-posing them to high default risk. Thiscould also leads to Moral Hazard as cap-ital charge for all unrated exposures issame, and banks might seek high riskborrowers to earn premium for aug-menting their interest rate spread byhiding the risk under the rug. on the

contrary, banks with premium qualityunrated borrowers would managing anon-existing risk putting constraints ontheir capital. An internal rating basemodel can address these issues by clas-sifying unrated borrowers according totheir repayment capacity and conse-quently assessing appropriate capitalfor the relevant risks.

Lastly, standardised approach pro-vides no benefits for diversification inportfolios which is a conventional toolfor risk management. At present, banksare required to allocate risk weights toindividual exposures regardless of thesituation of their overall portfolio. Again,this might lead to the situation wherebanks will increase concentration of theirportfolios to yield higher spreads, as theyfind no economic benefit from diversifi-cation. It is also important to note thatdiversification is not only diversifyingone particular risk (intra diversification)but also applies to diversify the possibleinteraction of various risks (intra diver-sification) as market risk could triggercredit risk and credit risk could ulti-

mately lead to market risk. None of thesetypes of diversification are considered instandardised approach and banks withhigh concentration and low concentra-tion will be on a similar pitch to allocatecapital against contingent risks. The di-versification impact is incorporated inInternal Rating Based (IRB) approach byassuming correlation of exposures withinthe portfolio for credit risk and under ad-vanced management approach for oper-ational risk, while in market risk, allvalue at risk models (under IRB) accountfor diversification.

Adapting internal rating based ap-proach is beneficial both for commercialbanks and the central bank. Commercialbanks could have more accurate esti-mate of their exposures and can hedgeonly the relevant risk. This will mitigatethe excess risk of bad borrowers and willfree up capital against good borrowers,which can be used in other ventures. Ifthe inherent risks are mitigated the eco-nomic cost of supervision for the centralbank would be less and this would lowerfrictions in the financial system. SBP in-troduced a road map in 2005 to adoptinternal rating based approach by Janu-ary 2010 but unfortunately later they al-lowed flexibility for transition to internalmodels. Given, the risk managementbenefits from IRB, Commercial Banksshould consider developing their inter-nal assessment methodologies and SBPshould follow up on adapting Basel II inits essence because otherwise we haveseen that “one size fits all” approach isonly good tp manage risk in a GaussianWorld but could not sustain even asmallest black swan.

The author holds a PhD inQuantitative Finance from Paris

Dauphine. He is Associate Professor ofFinance at Lahore School of Economics

and provides consultancy on riskmanagement through Synergistic

Financial Advisors.

Ifound no particular reason to treatthe joint central bank initiative as adeparture from the usual euronarrative – somebody placed

somewhere high talking up the marketevery now and then to engineer short,targeted gains in the single currency. Ifanything, doubts about the Dec8&9summits pressured the euro down againon Friday, as time to back words withactions drew near. Seen closely, thesurprise market rally of last weekbetrayed more investor desperation thanconfidence in the troika’s ability todeliver as efforts to save the euroeffectively run into overtime.My crystal ball agrees more with MorganStanley than BNP Paribas, that ratherthan some manner of sanity returning tothe euro argument, the recent rallyprovides a fresh position to renew shorts.According to Bloomberg, futures traders

have increased bets the euro will fallagainst the dollar, with net-short wagersrising the most since June ’10. So, even asthe last five trading days marked theeuro’s first weekly gain since oct 28, I seelittle to believe nearterm strength in theEuropean currency.Its failure to breakabove the 1.3560resistance confirmedmy hunch that thetalk-up wouldsubside as forcefullyas it materialised.Remain committedto the 1.30 drop. Itshall come.It is actually quitesimple to rationalise.one, whether madedirectly, channeledthrough IMF ormade as a Christmaspresent by SantaClaus, Europe’sfinancial firepower issimply insufficient toneuter sovereign debtbombs. Two,fashioning the ECBinto an endless lender of last resort willmandate running printing pressesovertime, un-bottling inflationexpectations and driving Germany even

farther from the rest. Three, this week’sinterest rate conclave will only deepen thecleavage as the expected 25bp cut will feedBundesbank paranoia of inflation. There isalready rising unrest in Germany as rising

prices threaten toundermine the middleclass’ savings,infuriating the biggestvote bank. Four,countries (like Italy,Portugal, Greece)expecting Germany,and the internationalcommunity, to step upfunding will notregister meaningfulgrowth as harshausterity compromisesproductivity andeventually growth,requiring unendingexogenous support.Five, the road to fiscalunion will concentrateunprecedentedpolitical decisionmaking in Germany,contrary to the originalfounding intent of theunion. No sir, there is

no way the euro can survive this crisisunscathed. Best case scenario? Deep,protracted recession. More likely?Unravelling of the single currency. Near

term scenario? Drop to 1.30!Interestingly, Europe’s drama is nolonger restricted to the currency market,its fear-and-greed pendulum swingingvisibly into the oil market as well. If ithadn’t been for geopoliticaluncertainties bidding up crude, oil toowould have swung endlessly up anddown as emergence and redressal ofcontagion fears in Europe impactedoverall aggregate demand. But so longas Israel threatens attacking Iran,Tehran vows blocking the Straits ofHormuz, Saudis sweat over the shiauprising in the eastern provinces, Libyastruggles with regaining Qaddafi eraproduction levels and the Arab springsprouts Islamist governments, oil willremain elevated. Ditto for oil andcommodity currencies.Be prudent, posture for shorts againstcommodity currencies. Stay away frommainstream market currents till this weekputs the risk environment in perspective.The euro summits and interest ratedecisions are the last roll-of-dice by eurozealots. And even if they throw in thekitchen sink, they simply would not haveenough funds to forestall imminent fallingsovereign dominos. Wait till the marketprices it in. Till then, trading euro-dollaris like catching falling knives.

Comments & queries:jafry.shahab@pakistantoday.com.pk

Like catching falling knives

the euro summits andinterest rate decisions are the

last roll-of-dice by eurozealots. And even if they

throw in the kitchen sink,they simply would not have

enough funds to forestallimminent falling

sovereign dominos

shahab Jafry

currency market focuS

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