Troubled Times

By Amir Zia
Money Matters
The News
August 29, 2011

Now the only certainty for the trading and business communities in Karachi is a lingering uncertainty and fear, which makes normal business and trading activities next to impossible

The month of Ramazan should have been the busiest shopping period of the year, but this season, most major markets, bazaars and shopping malls in Karachi wear a deserted look as violence, lawlessness and bloodletting reign supreme in this volatile city of an estimated 18 million people.

Criminal-cum-political mafias remain not just locked in bloody turf-wars – which so far have claimed more than 200 lives in the first 25 days of August – they now hold the entire city hostage. The "easy money" for bands of criminals comes mainly through the vast extortion racket as well as robberies and kidnappings for ransom. Our trading and business communities – which remain the prime target of these mafias – can evade taxes in this land of the pure, but they have to pay hefty amounts to their tormentors as "protection money" in order to survive and run businesses.

The sense of insecurity and lawlessness is taking its toll on businesses across the city.

“Compared with the previous years, our Eid sales this season remained down by almost 80 percent in the first 20 days of Ramazan,” said Siddique Memon, chairman of Karachi Traders Action Committee. “People are too afraid to come out for shopping, while we are afraid to keep our businesses open,” he said underlining the gravity of the situation.

Although there has been some semblance of normalcy with shoppers returning to bazaars after the Muttahida Qaumi Movement’s (MQM) “day of mourning” kept businesses shut on August 23, Memon said that the sales’ turnover in the last 10 days of Ramazan still remains at least 30 to 40 percent down compared with the past year.

On different occasions, ethnic and political violence have kept markets shut for four days in Karachi, which is unprecedented in Ramazan – the main sales season for both retail and wholesale outlets. In July, six working days were lost for the retail and wholesale businesses as well as for the service and manufacturing sectors. Then, there were days, when sporadic violence, threats by extortionists, political protests and fighting among different groups forced closures in different pockets of the city on a number of occasions.

Now the only certainty for the trading and business communities in Karachi is a lingering uncertainty and fear, which makes normal business and trading activities next to impossible.

The mood in the market is certainly grim. Many shopkeepers, who piled up stocks for the business season of Ramazan on 30 to 40 days credit, desperately wait for buyers.

“I don’t know how I will make payments to my creditors,” said the owner of a leading garment store at the posh Zamzama Boulevard, which is considered largely a safer area. “On the one hand, we are hit by the lack of business and on the other, we are a target for criminals,” he said requesting anonymity.

The main retail and wholesale markets semblance of normalcy – located in the old parts of the city – suffer the most because of their proximity to Lyari, which has been transformed into the hub of crime and violence in recent years.

The activists belonging to the controversial Peoples’ Amn Committee, which was officially disbanded with much fanfare by the Pakistan Peoples’ Party (PPP) government in March following pressure from the MQM, continues to operate – allegedly indulging in a range of criminal activities – from extortion to kidnappings for ransom.

There are militants belonging to the other parties also, including the Awami National Party (ANP) and the MQM, who operate in the city. However, police mainly blame the Aman Committee for the recent surge in crime and lawlessness.

Despite all the tall claims made by the government, police and other law enforcement agencies have remained reluctant to take on the criminals, who allegedly have patrons in the corridors of power, background interviews with senior police and industry officials say.

A shopkeeper, who identified himself only as Ahmar, said that he receives the so-called “donation receipts” from the Aman Committee at his shop located in the Timber Market. “Those who comply, make more such payments, while those who defy get death threats.”

Memon said that the government has failed to protect both shopkeepers and shoppers at around 300 markets spread across the city. “No route and place is safe now … one is afraid to travel from a bazaar to his or her own house,” he said. In the past, the government used to deploy around 2,500 policemen for security of these markets during Ramazan, but this year only 600 personnel have been deployed, he added. “We are forced to make our own security arrangements, which are costly.”

The lawlessness in many localities of Karachi appears akin to that of troubled semi-autonomous mountainous region in the country’s north, where the Taliban and Al-Qaeda militants are challenging the state's writ.

Senior police officials admit that there are several localities in Karachi which remain “no-go areas” for the law enforcement agencies. These localities are considered safe havens for the crime mafias, terrorists, drug peddlers and weapon dealers.

Although the challenges of extortion and crime are not new for the megapolis, there has been a sharp surge in these incidents following the 2008 general elections, which brought the PPP-led government to power.

No wonder that businesses and economic activities have taken a severe hit as people remain afraid to make fresh investments and open new businesses. Those who can afford to, are shifting businesses and families abroad or to other parts of the country.

Kaiser Bengali, a leading economist and a former advisor to the PPP Sindh provincial government, said that the impact of lawlessness does not remain confined to the retail and wholesale businesses, but hits the entire economic spectrum.

“When there is a law and order problem or a shutter down, even import-export gets affected,” he said. “Our exporters lose business because of unreliability of their supplies. The overall tax revenue collection is also affected because of production losses and closure of services industry.”

Dr. Ashfaque Hasan Khan, another leading economist, who served as an advisor to the finance ministry, said that daily wage-earners, including labourers, small shopkeepers and traders, suffer the most because of the forced closures and turmoil in the city.

“The impact of all the work hours lost in a day due to strikes and violence, along with the losses to the services industry, manufacturing, and trade can easily be up to 15 billion rupees or more,” he said.

No wonder that the investment climate remains negative in the city where 748 people were killed in ethnic, political and religious violence in 2010 and 242 in 2009, according to Human Rights Commission of Pakistan. This year, the number of killings has already crossed the 1,200-mark by the end of August, which includes more than 450 targeted murders, media reports say.

Dr. Khan said that Karachi, the main industrial and commercial hub of Pakistan, provides almost 68 percent of the total revenues to the national exchequer. “This means that the government loses more than three billion rupees only under this head, if a working day is lost in Karachi, which creates a snowball effect.

All the major political parties – including the ones in the ruling coalition – have so far failed to come up with a roadmap to restore peace and the rule of law in this beleaguered city besides making short-sighted and mostly inflammatory statements. For many people of the city, these parties have become part of the problem rather than offering a solution. The scepticism of the people appears justified because in most cases, criminals operate under the flag of this or that political party.

No wonder, there has been a growing crescendo at various levels that the army should be called in to deal with the situation. This reflects the growing frustration among ordinary citizens toward this democratic dispensation, which has failed to resolve contradictions and meet challenges despite repeated claims and promises.

The army may bring short-term relief, but the real challenge of making civilian institutions work, deliver and establish the rule of the law appears neither on the agenda nor is part of the mainstream discourse.

The Karachi situation can be manageable provided there is political will and direction – which unfortunately appears missing both in the ranks of the government and its, past and present allies.

As Karachi moves from one bloody cycle of violence to another after temporary truces, there hardly appears any ray of hope for the people of this city where the business of crime is easier and offers better yields than that of legitimate commercial ventures.

Obey or Depart

By Amir Zia
Newsline
August 2011

Kardar's departure underlines the discord between professionals and their political bosses who have failed to provide an economic vision for the country or stick to the reform programme that is vital for putting the country's ailing economy back on track.

When Shahid Kardar took over as the 16th Governor of the State Bank of Pakistan(SBP) on September 9, 2010, few in the country’s financial and economic world believed that he would be able to complete his three-year term in office. Many thought that Kardar was too upright and straightforward to play ball for long with the Pakistan Peoples’ Party (PPP) government, which boasts a dismal record when it comes to the task of managing or mismanaging the country’s economy.

There were of course the sceptics who felt that the assignment was too big for Kardar given the fact that, barring a brief stint as the Punjab finance minister during the early years of former president Pervez Musharraf’s rule, he had little experience of leading a big organisation like the central bank. The chartered accountant from Lahore was better recognised for offering freelance consultancy services to multilateral and bilateral donors, including the World Bank and the Asian Development Bank, and non-governmental oganisations, rather than for working within the discipline of any institution.

These apprehensions proved right on July 18 when, after days of speculation, the government accepted Kardar’s resignation. The news did not come as a surprise either to his admirers or his critics because they had already sensed a growing estrangement between the SBP governor and the centre on key policy issues, including maintaining the independence and autonomy of the central bank.

The government’s heavy bank borrowing, its desire for a softer monetary policy stance and President Asif Ali Zardari’s insistence on making changes in the lending rules for private investors and businesspeople became those critical issues on which Kardar failed to see eye-to-eye with his political bosses.

But the spin wizards at the finance ministry have been feeding stories to the media that Kardar compromised his position by frequently visiting the finance ministry and giving concessions to the government on a number of controversial issues, including allowing Sindh Bank to open dozens of branches. “He went out of his way to appease the finance minister and even helped write his important speeches,” says a senior ministry official on condition of anonymity. “His conduct was unbecoming of a central bank governor. He was getting too close to the ministry and the finance minister – he was even writing his speeches.”

PPP insiders insist that Kardar was not cut out for the high-profile job. “He had a big attitude problem. He could never understand the vision of President Asif Ali Zardari and translate it into action,” remarks a senior PPP leader from Karachi, who is close to the presidency. She went on to say that “On a number of occasions, he disappointed the leadership. Once when the President asked him to work on the structure of the rupee swap with the Turkish currency, he brushed the idea aside… President Zardari discussed the same idea with his Turkish counterpart Abdullah Gul during a visit. Gul immediately called the Turkish central bank governor, who worked out the details within no time.”

“This was just one issue… there were a number of other such instances when Kardar failed to play a proactive role. He was more of an NGO-type and a wrong choice for this job from day one,” she concludes.

But Kardar’s inability to meet the expectations of the government, especially President Zardari’s, is seen by many as his strong point. He annoyed the President and the finance ministry on a number of occasions and openly criticised the government for its heavy borrowing from the central bank in the SBP’s quarterly reports – which has an inflationary impact – and lack of fiscal discipline.

The government’s domestic debt has jumped by 67% to 5.462 trillion rupees since the PPP government assumed power in early 2008. According to the SBP figures, the country’s total debt and liabilities now stand at a whopping 68.3% of the gross domestic product (GDP).

Kardar had also given the government a tough time on several other fronts: from the issue of allocation of funds for the Benazir Income Support Fund to his refusal to endorse the exaggerated figures of revenue collection for the fiscal year 2010-11 (July-June) at Rs 1,590 billion against the actual collection of Rs 1,540 billion. The incorrect revenue collection figures for the last fiscal year have snowballed into a big issue and have become a source of yet another embarrassment for the country as international lending agencies are now raising questions about all the data presented by the government.

Sources close to the government reveal that President Zardari personally asked Kardar to quit in a meeting following his refusal to toe the government line. One of the key points of disagreement between them was over the issue of relaxing the rules for loan disbursement, they say.

Thus, in just over a year, Kardar has become the second SBP governor to make a premature exit and the third top policymaker to leave in less than 18 months. His predecessor, Syed Salim Raza also tendered his resignation before the expiry of his term in June 2010, while the former finance minister Shaukat Tarin parted ways with the government in February 2010 on the pretext of rejoining his troubled Silkbank. But privately, Tarin, a former Citibank official, says that he anticipated the government’s unwillingness to carry out the necessary reforms that prompted him to make his exit.

The SBP governor’s resignation is seen as a bad omen for the country’s struggling economy, which remains caught in the oppressive cycle of high inflation and low growth. The investment climate is already looking bad as the net foreign investments have plunged by almost 70% in the last fiscal year compared with the fiscal year 2008, when this government assumed power.

Kardar’s departure underlines the discord between senior policymakers and professionals and their political bosses who have failed to provide an economic vision for the country or stick to the reform programme that is vital for putting the country’s ailing economy back on the track.

The SBP governor has had to perform a high-wire balancing act when trying to control inflation and achieve price stability in an environment in which the government lacks fiscal discipline and transparency, and is resorting to large-scale borrowings. Analysts say that given the lack of direction and political instability of this government, Kardar’s resignation should not come as a surprise.

The International Monetary Fund (IMF) has also criticised the government for its failure to implement the promised economic reform programme and has held back the sixth tranche of an $11 billion loan programme since August 2010. The government’s reluctance to broaden the tax net by imposing a reformed general sales tax (RGST) and taxing agricultural income remains the major bone of contention with the IMF.

Kardar had been publicly advocating the broadening of the tax base, a gradual elimination of untargeted subsidies (especially in the energy sector), reforming and privatising the loss-making public-sector enterprises and improving debt management.

His untimely departure will further erode Pakistan’s image among international donors and lending agencies and shake the confidence of both foreign and local investors.

The autonomy and independence of the central bank, one of the few respected and professionally run institutions of Pakistan, remain critical if the government wants to salvage the country’s economy. Whether the 17th central bank governor will be able to ensure autonomy or dance to the tune of his political masters, remains a moot point. Given the state of Pakistani politics and massive vested interests, the situation is not exactly promising.

Smugglers' Cup Of Tea

By Amir Zia
The News
August 1, 2011

Nearly half of the 200,000 tons of tea annually consumed in Pakistan comes through smuggling, which hurts lawful businesses and deprives the national exchequer of billions of rupees in taxes.

It is now no longer news that Pakistan remains a paradise for tea smugglers. As our government has accepted, compromised and learnt to live with countless other vices, different shades of incompetence and corruption and even mafias and terrorist groups, it also seems at peace with not so innocent tea smugglers. No wonder nearly half of the 200,000 tons of tea annually consumed in Pakistan comes through smuggling, which is hurting lawful businesses and depriving the national exchequer of billions of rupees in taxes. “There is a huge market for smuggled tea, which gives about a 25 to 28 percent profit margin to smugglers,” said a top executive of a multinational company, which sells popular brands of tea. “The officially imported tea is costlier because of the customs duty, levied on the value of the commodity, and a 16 percent sales tax,” he said requesting not to be named in line with his company policy. The smuggled tea, the bulk of which comes through Afghanistan due to the misuse of the transit trade facility given to this landlocked country by Islamabad, is available across the country, including in all the major cities and generates hefty profits for its dealers, who do not have to pay any government levies or taxes.
Local tea industry officials say that Afghanistan with a population of barely 29 million, imports more than 100,000 tons of black tea, though its “national popular drink” remains green tea.
In comparison, Pakistan -- a country of around 180 million people -- where black tea remains an addiction, imported 127,000 tons of tea in fiscal 2010/11 (July-June) compared with 95,000 tons in 2009/10, according to tea industry officials.
Hamid Saeed Khwaja, cochairman of the Pakistan Tea Association, said that more than 30 percent rise in the official tea imports last year was due to the fact that now only the government-owned National Logistics Cell and Pakistan Railways carry the transit trade goods for Afghanistan. “This has raised the cost of operations for tea smugglers, creating some more space for the officially imported tea,” he said.
The government’s move to assign the state-run logistics services for Afghan transit trade came following the Supreme Court's suo moto notice of the abuse of this facility. Background interviews showed that smugglers deal only in high quality tea, costing $2.5 or above per kg, which bring them good margins. They do not go for tea costing $1.5 or less per kg, which is mostly imported under the official trade.
Tea industry officials said that although the Federal Board of Revenue (FBR) and law enforcement agencies have been trying to curb tea smuggling, the task remains easier said than done due to the 2,250-kilometre long porous Pakistan-Afghan border. But most of the smuggling is done through the official trade points and their nearby unofficial mountainous routes.
The multinational company official said that attempts to check smuggling in the past are unlikely to succeed now because smugglers pay huge bribes to officials deputed along the frontier. “Apart from transit trade, smugglers also use the Iranian port at Bandar Abbas to move smuggled goods, including tea,” he said. Zafar Mahmood, Secretary Commerce, said that Afghanistan-Pakistan Transit Trade Agreement, 2010 addresses Pakistani concerns, but its enforcement remains the responsibility of the FBR and law enforcement agencies.
The FBR, known more for missing its targets than achieving them, finds itself struggling along with the other law enforcement agencies when it comes to handling affairs at the Durand line which maintains a special status since the days of the British Raj. The war on terrorism, the huge financial stakes of Pakhtun tribes living on both sides of the frontier as well as political and administrative sensitivities now make their task even more difficult. However, the tea industry officials say that they have a cheaper and better option to beat smugglers. Khwaja said that the government collects around 38.5 percent duties and taxes on officially imported tea that amounted to Rs9.0 billion in the last financial year. “We say that slash taxes and duties by 50 percent, including the sales tax. This will erase the profit margins for smugglers and discourage smuggling.
The government will not see its revenue drop because the official size of tea imports will double in line with Pakistan’s tea consumption pattern,” he said. “It will also help reduce tea prices for consumers by at least 50 rupees a kilogram, which will be a win-win situation for everyone.” The executive of the multinational, however, argued that the best way to revise levies on tea remains to raise import duty and exempt it from sales tax, which would reduce total levies to a point that leaves little or no incentive for tax evasion and smuggling. “It is estimated that smugglers incur Rs30,000 per ton by way of facilitation costs. Government levies of around Rs40,000 per ton should substantially remove the incentive to evade. The Customs Members of FBR would of course welcome higher import duty.” He, however, said that the Sales Tax member would reject the proposal of reduction in sales tax, citing reasons including the need for the documentation of the economy despite the fact that a high general sales tax rate encourages smuggling of tea. “Someone needs to bring them out of their silos, to see that aggregate government revenue remains neutral,” he added. Industry officials say that the FBR remains reluctant to act because it underestimates the tea consumption figures. Tea companies claim higher consumption and smuggled tonnages, basing it on their knowledge of consumer trends and bid volumes for Pakistan and Afghanistan in tea auctions in Kenya, they said. “According to the FBR, the quantity of smuggled tea stands at around 40,000 tons, while tea companies estimate it at around 110,000 tons. Even if 40,000 tons is the correct figure, urgent corrective action is called for,” the executive said. Industry officials say that there remains a general apathy towards the formal sector for which lip service is paid, but little is done to remove impediments. “In some extreme cases, the big companies and multinationals are seen as suspicious and profit-greedy and by implication there is sympathy for the ‘poor, small’ smuggler and the corner shop that deals in smuggled items,” said the multinational executive. “After all, there are markets like Shah Alam and Akbari Mandi in Lahore, Raja Bazar in Rawalpindi and Jodia Bazar in Karachi which openly deal in smuggled and counterfeit products, yet are tolerated. Some attribute smuggling to cultural and social reasons, suggesting and by implication accepting that we are a nation of cheaters.” It should be not just for the tea industry, but the government needs to encourage organised businesses by establishing the rule of law and providing a business-friendly environment. This will help attract the badly needed investment, which will boost growth and create employment. "The best way to promote new investment is to promote success of existing businesses. New investors are unlikely to enter sectors that are plagued by smuggling and foreign investors are put off when they hear of whole sectors in which smuggling and evasion go unchecked for long periods,” the executive said adding that existing operators, exasperated by apathy and declining business would be most likely to quit. “The informal sector will grow. So will the havala business, as that is how payment for smuggled tea is made.”