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Government Predicts Inflation to Fall to 9.5-10.5% in August with a Positive Economic Outlook

Aarooj Manzoor
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Government Predicts Inflation to Fall to 9.5-10.5% in August with a Positive Economic Outlook

Inflation Forecast and Economic Outlook August 2024

In a recent update, the government has projected a reduction in inflation to a range of 9.5-10.5% for August 2024. This forecast comes amidst positive trends in key economic indicators and efforts to stabilize the economy. The projection also suggests a further decline in inflation to 9-10% by September 2024, offering a cautiously optimistic outlook for the remainder of the year.

CPI Trends and Monthly Economic Outlook

According to the Monthly Economic Update & Outlook for August 2024, the Consumer Price Index (CPI) inflation was recorded at 11.1% year-on-year (YoY) in July 2024. This marks a decline from the previous month’s rate of 12.6% and a significant reduction from 28.3% in July 2023. On a month-on-month (MoM) basis, inflation increased by 2.1% in July 2024, compared to a 0.5% rise in June.

The report identifies key drivers behind the YoY CPI increase, including a substantial rise in the prices of perishable food items (29.2%), Housing, Water, Electricity, Gas, and Fuels (25.3%), along with other essential sectors like Health, Clothing, and Transport. Despite these challenges, the Sensitive Price Index (SPI) for the week ending on August 22, 2024, recorded a slight decrease of 0.10% compared to the previous week, indicating some relief for consumers.

LSM Sector and Economic Growth Prospects

The report also highlights a positive outlook for the Large Scale Manufacturing (LSM) sector, which is expected to maintain a growth trajectory in FY2025. This growth is anticipated to be driven by improved external demand, a stable exchange rate, decreasing inflation, and the easing of monetary policy.

These factors are critical in ensuring that the LSM sector continues to contribute to overall economic growth, supporting job creation, and increasing productivity in various industries.

Agricultural Outlook and Kharif 2024 Production

The agriculture sector’s performance, particularly during the Kharif 2024 season, is closely tied to weather conditions. The specific weather patterns for each crop will play a crucial role in determining yields. While recent and ongoing rainfall could benefit crops like rice, sugarcane, cotton, fodder, and vegetables, there is also a risk that excessive rain could damage farmland, negatively affecting production.

Monitoring these weather patterns will be essential for ensuring that agricultural outputs remain robust, supporting food security and contributing to economic stability.

External Sector and Trade Forecast

On the external front, the report indicates an upward trend in exports, imports, and workers’ remittances (WRs). For August 2024, exports are expected to range between $2.5-3.2 billion, imports between $4.5-5.0 billion, and remittances around $2.6-3.3 billion.

The stability of the external sector relies on several factors, including a stable exchange rate, revitalized domestic economic activities, better agricultural output, low domestic and global commodity prices, and improved foreign demand. These elements are crucial in sustaining the positive momentum in trade and remittances, which are vital components of the national economy.

PSX Closes in Green as KSE-100 Index Gains Amid Positive Market Sentiment

Khashif Sarfraz
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PSX Closes in Green as KSE-100 Index Gains Amid Positive Market Sentiment

Shares at the Pakistan Stock Exchange (PSX) traded positively on Friday, with the KSE-100 benchmark index climbing over 400 points in intraday trading before closing in the green. The index increased by 138.55 points, or 0.18%, to settle at 78,488.21 points, up from the previous close of 78,349.66.

Market Drivers and Performance

The initial surge in the market was attributed to expectations of rebalancing inflows by Morgan Stanley Capital International (MSCI), a key provider of global indices for passive investments. Mohammed Sohail, Chief Executive of Topline Securities, highlighted that this anticipation created a strong momentum at the market’s opening.

Additionally, traders were keenly awaiting the release of the Consumer Price Index (CPI) data, scheduled for Monday. The market expects August’s CPI to be around 10%, a decrease from July’s year-on-year rise of 11.1%.

Awais Ashraf, Director of Research at AKD Securities, noted that the bullish momentum was further “strengthened following Moody’s rating upgrade,” which saw Pakistan’s rating improved to Caa2 with a “positive” outlook. This upgrade reflected improving macroeconomic conditions and moderately better government liquidity and external positions.

Impact of Moody’s Rating Upgrade and Economic Indicators

The market’s rally began on Thursday after Moody’s upgraded Pakistan’s credit rating, which had been a significant driver of positive sentiment. The rating agency cited “improving macroeconomic conditions and moderately better government liquidity and external positions” as reasons for its decision. This upgrade alleviated some concerns about Pakistan’s economic stability, helping to boost investor confidence.

Abdul Azeem, Head of Research at Al Habib Capital Markets, stated that Friday began with a “positive sentiment,” fueled by increased foreign exchange reserves reported by the State Bank of Pakistan (SBP) and stronger-than-expected corporate earnings. He also pointed out that stocks like EFERT, FFC, MTL, NBP, and COLG contributed a cumulative 290.6 points to the index.

Most Actively Traded Stocks and Market Volumes

HASCOL emerged as the most actively traded stock of the day, with a volume of 63.11 million shares. The total trading volume for the day was 680.81 million shares, and the total traded value stood at Rs21.19 billion.

The market’s bullish trajectory was also amplified by the Economic Coordination Committee’s (ECC) recent approval of an incentive scheme to boost foreign remittances, which eased concerns over external financing pressures. This package, aimed at enhancing remittances through official channels, further contributed to the positive market sentiment.

Looking Ahead: Key Indicators to Watch

Investors are closely watching the upcoming release of the CPI data, which will provide insights into inflation trends and potential adjustments in monetary policy. Market participants are also keeping an eye on further developments regarding foreign exchange reserves, corporate earnings, and global economic conditions that may influence the PSX in the coming days.

Pakistan Awards $2 Billion Road Contract to China

Khashif Sarfraz
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Pakistan Awards $2 Billion Road Contract to China

Pakistan has relaxed its bidding rules to directly award a $2 billion contract to China for constructing a critical section of the Karakoram Highway, enhancing its strategic road connectivity with China. At the same time, the government approved a Rs78 billion incentive package for banks and exchange companies to boost foreign remittances.

Direct Award of Road Contract to China

The Economic Coordination Committee (ECC) of the cabinet, led by Finance Minister Muhammad Aurangzeb, approved invoking a special rule to bypass the requirement for international competitive bidding. This decision allows Chinese firms to be directly awarded the contract for constructing the Thakot-Raikot section of the Karakoram Highway, a crucial link under the China-Pakistan Economic Corridor (CPEC).

The Ministry of Communications, after extensive deliberations, received ECC approval to proceed with the project under the Framework Agreement signed between China and Pakistan in June. The agreement, finalized during Prime Minister Shehbaz Sharif’s visit to Beijing, includes a $2 billion loan from China to finance the project.

Significance of the Thakot-Raikot Section

The Thakot-Raikot section, spanning 241 km, is vital for maintaining uninterrupted land connectivity between China and Pakistan. This road portion will be submerged due to the construction of various dams, including the Diamer-Basha, Dasu, Azad Pattan, and Thakot dams. The project will involve Chinese companies in engineering, procurement, construction, and supervision tasks, utilizing Chinese equipment.

According to the Public Procurement Regulatory Authority (PPRA) law, contracts are usually awarded through competitive bidding. However, under Rule 5, the ECC justified its decision, citing conflict with an international agreement, allowing the special provisions to prevail.

Incentive Package to Boost Foreign Remittances

To ease pressure on its foreign exchange reserves, the ECC approved a Rs78 billion incentive package aimed at encouraging foreign remittances. The package includes revisions to the Reimbursement of Telegraphic Transfer (TT) Charges scheme and the Incentive Scheme for Exchange Companies.

The new package allocates Rs68 billion to commercial banks and Rs10 billion to exchange companies. Remittances rose by 10.7% to $30.3 billion last fiscal year, thanks in part to the Remittances Initiative Scheme by the Finance Ministry. The ECC also approved increasing the incentives for exchange companies, with a focus on incremental growth in home remittances.

Details of the Incentive Package

The ECC approved a flat reimbursement rate of the Saudi Arabian Riyal (SAR), which is divided into fixed and variable components. Banks will now receive a fixed incentive of SAR 20 for eligible transactions of $100 or more. Additional incentives are provided based on growth performance, with total benefits ranging from SAR 28 to SAR 35 per $100 transaction.

Similarly, benefits for exchange companies have been increased, with the fixed benefit for every $100 surrender rising from Rs1 to Rs2. Variable incentives are also included, offering further benefits based on the amount of foreign exchange mobilized and incremental growth.

Further Foreign Financing Measures

In addition to the contract award and incentives package, the ECC has taken other steps to strengthen Pakistan’s external financing position. The government has banned pension payments in foreign currency to retired pensioners residing abroad, effective for those recruited after January 1959. This measure aims to reduce foreign exchange outflows.

Moreover, the ECC approved relaxing competitive bidding conditions for hiring foreign consultants for the Chakdara-Timergara road project, funded by a $49 million loan from the Export-Import Bank of South Korea. The decision was made to comply with the conditions set by the lender.

Conclusion

These decisions reflect Pakistan’s strategic focus on bolstering economic ties with China while addressing its external financial constraints. The direct award of the Karakoram Highway contract underlines the importance of the CPEC initiative in the nation’s infrastructure development, while the new incentives aim to attract higher remittances and stabilize foreign exchange reserves.

ECC Approves Revisions in Home Remittances Incentive Schemes to Boost Pakistan’s Foreign Exchange Reserves

Aarooj Manzoor
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ECC Approves Revisions in Home Remittances Incentive Schemes to Boost Pakistan’s Foreign Exchange Reserves

Overview of ECC Meeting

On August 30, 2024, the Economic Coordination Committee (ECC) of the Cabinet, chaired by Federal Minister for Finance & Revenue Senator Muhammad Aurangzeb, convened to discuss critical economic policies and projects. The meeting focused on revising home remittances incentive schemes and making decisions regarding major infrastructure projects under the China-Pakistan Economic Corridor (CPEC).

Revisions to Remittances Incentive Schemes

Reimbursement of Telegraphic Transfer (TT) Charges Scheme

The ECC approved a revision to the Reimbursement of Telegraphic Transfer (TT) Charges Scheme. Previously, the flat reimbursement rate for eligible transactions was SAR 30. Under the new scheme, this amount will be divided into two components:

  • Fixed Component: SAR 20 per eligible transaction for amounts of USD 100 and above.
  • Variable Component: SAR 8-15, linked to incremental growth in remittances. Banks will receive additional rewards based on their performance in increasing remittance inflows. For incremental growth up to 10% or USD 100 million, banks will receive SAR 8 per transaction. For growth exceeding this threshold, the additional reimbursement will be SAR 7 per transaction. This structure aims to incentivize higher remittance volumes and reduce overall TT charges for the government.

Incentive Scheme for Exchange Companies (ECS)

The incentive scheme for Exchange Companies (ECS) has also been revised. The base rate for the fixed component will increase from Rs. 1 to Rs. 2 per USD surrendered to SBP-designated banks. The variable component, linked to incremental growth in remittances, will be as follows:

  • Up to 5% or USD 25 million growth: Rs. 3 per USD.
  • Exceeding 5% or USD 25 million growth: Rs. 4 per USD.

Payments will be contingent on surrendering foreign exchange to designated banks, and performance will be evaluated monthly. This revision is expected to motivate ECSs to boost remittance mobilization and cover increased operational costs due to PKR depreciation.

Developments in CPEC Projects

Realignment of KKH (Thakot-Raikot)

The ECC reviewed a summary from the Ministry of Communications regarding the Framework Agreement between China and Pakistan on the realignment of the Karakoram Highway (KKH) Thakot-Raikot section under CPEC. The Committee authorized the Ministry and the National Highway Authority to proceed with procurement in accordance with Public Procurement Rules, 2004.

Chakdara-Timergara Road Project

Another significant agenda item was the Chakdara-Timergara Road Project (N-45). The ECC permitted the Ministry of Communications and National Highway Authority to invoke Rule-5 of Public Procurement Rules-2004 for the procurement of consultancy services required for the project.

Karachi Wholesale Grocers Announce Market Closure

Khashif Sarfraz
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Karachi Wholesale Grocers Announce Market Closure

Karachi Wholesale Grocers Announce Market Closure in Tax Protest

The Karachi Wholesale Grocers Association has announced a complete shutdown of Pakistan’s largest wholesale market on Saturday, August 31, to protest the government’s withholding tax policies. This decision followed an emergency meeting at Jodia Bazaar, where traders, importers, and exporters expressed their dissatisfaction with the tax measures. Consequently, the association’s move highlights the escalating tensions between the trading community and the government over these policies.

Impact of the Strike on the Supply Chain

The market closure is expected to have a significant impact on the supply chain. Since it coincides with the weekly holiday on Sunday, the strike will disrupt the distribution of goods nationwide for two days. This disruption could lead to shortages and delays in the availability of essential commodities.

Rauf Ibrahim, a representative of the Karachi Wholesale Grocers Association, confirmed that all markets affiliated with the wholesale grocers will join the strike. Furthermore, he stated that this action directly responds to the withholding tax, which traders have long criticized as burdensome and damaging to their businesses.

Traders’ Frustration with Tax Policies

Traders argue that the withholding tax imposes an unfair burden, reducing their profit margins and complicating their financial operations. Many in the business community view it as a barrier to trade and economic growth. Consequently, the association’s move highlights the escalating tensions between the trading community and the government over these policies. The decision to strike marks a significant escalation in their ongoing resistance to the tax measures.

Upcoming Press Conference and Future Strategy

The traders have announced a press conference at Jodia Bazaar on Saturday at 11:30 AM, where they plan to outline their future strategy in the fight against the tax policies. Consequently, they highly anticipate the outcome of this conference, as it may determine the next steps in their campaign to pressure the government to reconsider its stance on the withholding tax.

Conclusion

The planned market closure by the Karachi Wholesale Grocers Association highlights the growing tension between the government and the trading community over tax policies. Meanwhile, as the strike approaches, all eyes will be on the press conference at Jodia Bazaar, which could signal a new phase in the traders’ campaign against the withholding tax.

Telegram CEO Pavel Durov Faces Investigation in France

Khashif Sarfraz
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Telegram CEO Pavel Durov Faces Investigation in France

French authorities have formally placed Telegram CEO Pavel Durov under investigation, suspecting his involvement in criminal activities carried out on the messaging platform. The investigation, initiated by a French judge, includes allegations of complicity in facilitating illicit transactions, dissemination of child sexual abuse materials, drug trafficking, money laundering, and failure to cooperate with judicial authorities.

The investigation has sparked widespread debate about the balance between freedom of speech and legal enforcement and how much responsibility tech companies like Telegram bear for the content shared on their platforms.

Legal Developments and Allegations

French police detained Durov for four days following his arrest at an airport near Paris last Saturday. They later released him on bail after he paid 5 million euros (approximately $5.6 million) and agreed to conditions requiring him to report to the police twice a week and remain in France. The arrest raises questions about the boundaries of platform liability and how accountable tech companies should be for the content their users share.

French media reported that Durov’s lawyer, David-Olivier Kaminski, dismissed the allegations as “totally absurd,” emphasizing that authorities cannot hold the head of a social network responsible for crimes committed on the platform. “Telegram fully abides with European rules on digital,” Kaminski stated, defending the company’s adherence to regulations.

Implications of the Investigation

Under French law, being placed under formal investigation does not imply guilt or necessarily lead to a trial. However, it indicates that judges believe there is sufficient evidence to continue the probe. These investigations can last for years before they are either sent to trial or shelved.

The arrest has ignited discussions over the responsibilities of social media platforms in monitoring and moderating user content. Telegram, which boasts nearly a billion users worldwide, has often been at the center of such debates due to its strong stance on privacy and encryption.

Political Context and Reactions

French President Emmanuel Macron, known for his frequent use of Telegram, has stated that Durov’s arrest was “in no way a political decision.” He clarified that judicial authorities, independent of government influence, initiated the investigation. A source close to Macron revealed that Durov met the President in 2018 during discussions with tech entrepreneurs and later received French citizenship in 2021 through a rare procedure reserved for high-profile individuals.

Kaminski did not respond to requests for comment from Reuters, but his statements reflect growing concerns over how legal systems address the complexities of online content management and the scope of platform liability.

Broader Impact on Tech Companies

The investigation into Durov comes at a time when governments worldwide are increasingly scrutinizing tech companies over the content hosted on their platforms. This case may set a significant precedent, affecting how tech giants operate within various legal frameworks and how much they must invest in content moderation to avoid legal consequences.

As the investigation progresses, it will be crucial to observe how French authorities handle the case and whether it results in new regulations or legal interpretations that could reshape the landscape for social media companies operating in Europe and beyond.

Conclusion
The legal scrutiny faced by Pavel Durov brings into sharp focus the broader debate about freedom of expression, digital privacy, and the responsibilities of social media companies. With the investigation underway, questions remain about the balance between platform neutrality and accountability, and how these issues will influence the future of digital communication.

Antarctic Conference Highlights Alarming Climate Changes and Global Implications

Khashif Sarfraz
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Antarctic Conference Highlights Alarming Climate Changes and Global Implications

Antarctic Conference Highlights Alarming Climate Changes and Global Implications

Nearly 1,500 academics, researchers, and scientists specializing in Antarctic studies gathered in southern Chile this week for the 11th Scientific Committee on Antarctic Research conference. The event served as a platform to share the latest research findings from the vast white continent, with discussions covering a wide range of scientific fields—from geology and biology to glaciology and even the arts.

Unprecedented Changes in Antarctica

A major theme that emerged from the conference was the rapid and unexpected changes occurring in Antarctica. Extreme weather events are no longer hypothetical; they are becoming real-time accounts from researchers stationed on the continent. Reports of heavy rainfall, intense heatwaves, and sudden Foehn (strong dry winds) events have led to mass melting, giant glacier break-offs, and hazardous weather conditions, all of which carry global implications.

With weather station and satellite data only dating back about 40 years, scientists are questioning whether these events signify that Antarctica has reached a tipping point—a critical threshold where the loss of sea ice from the West Antarctic ice sheet accelerates and becomes irreversible.

Uncertain Future: A Temporary Dip or a Downward Plunge?

“There’s uncertainty about whether the current observations indicate a temporary dip or a downward plunge of sea ice,” said Liz Keller, a paleoclimate specialist from Victoria University of Wellington in New Zealand. Keller led a session on predicting and detecting tipping points in Antarctica, noting that the current rate of change is unprecedented.

While scientists debate whether we’ve reached a “point of no return,” Keller emphasized that the rapid rise in CO2 levels over the past century is unlike anything seen in thousands of years. “You might see the same rise in CO2 over thousands of years, and now it’s happened in 100 years,” she added.

Potential Global Consequences

According to NASA estimates, the Antarctic ice sheet holds enough ice to raise the global mean sea level by up to 58 meters. This has severe implications, given that about a third of the world’s population lives below 100 vertical meters of sea level.

Mike Weber, a paleooceanographer from the University of Bonn in Germany, noted that sediment records dating back 21,000 years show similar periods of accelerated ice melt. However, the current situation appears to be more extreme and rapid, raising concerns about future sea level rise and global climate impacts.

A Call for Urgent Action

The findings presented at the conference highlight the urgent need for a deeper understanding of Antarctica’s rapidly changing environment. As researchers continue to monitor these changes, there is a growing call for global action to mitigate the potential catastrophic impacts on sea levels and climate systems.

While new technologies, like heat battery energy storage, offer promising avenues for expanding renewable energy markets, the rapid changes in Antarctica underscore the urgency of addressing climate change on a global scale.

Citizens to Regain Access to Forgotten Funds After 10 Years of Inactivity

Khashif Sarfraz
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Citizens to Regain Access to Forgotten Funds After 10 Years of Inactivity

In a recent meeting of the Senate Standing Committee on Finance, it was revealed that Pakistani citizens have forgotten about Rs97 billion lying dormant in their bank accounts. This significant sum is spread across 10.4 million temporarily closed accounts in various banks throughout the country.

Dormant Accounts and Forgotten Funds

The meeting, chaired by Senator Saleem Mandviwala, highlighted that these accounts have remained inactive for a decade. Officials from the State Bank of Pakistan informed the committee about the existence of these funds, pointing out that many account holders appear to have forgotten about the money in their accounts.

Currently, if an account remains inactive for 10 years, and after three notices are sent to the account holder without a response, the funds are transferred to the State Bank of Pakistan. However, it was proposed during the briefing that the existing 10-year period for considering such accounts as permanently closed be extended to 15 years.

The Need for Flexibility

Despite a decade of dormancy, millions of account holders still approach banks to reactivate their accounts. This trend underscores the need for a more flexible approach to account reactivation, allowing citizens the opportunity to reclaim their forgotten funds.

The committee approved the State Bank’s proposal to reactivate temporarily closed accounts. This decision is expected to provide relief to many account holders who may not have been aware of the dormant status of their accounts.

Implications for Economic Activity

Reactivating these accounts could potentially boost economic activity by allowing citizens access to their funds, which have remained unclaimed for years. This move also reflects a more lenient approach by the authorities, aiming to enhance financial inclusion and awareness among citizens.

The State Bank’s proposal to extend the dormancy period to 15 years will allow more time for account holders to reactivate their accounts and ensure that they do not lose access to their savings.

FBR’s Tax Registration Drive Faces Low Compliance from Traders Under Tajir Dost Scheme

Khashif Sarfraz
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FBR’s Tax Registration Drive Faces Low Compliance from Traders Under Tajir Dost Scheme

FBR’s Tax Registration Drive: Progress and Challenges

The Federal Board of Revenue (FBR) has been conducting a tax registration drive for nearly five months across 42 cities, successfully bringing thousands of traders onto the tax roll. However, under the Tajir Dost Scheme (TDS), the average income tax collected from an individual trader remains low at just Rs2,432 per month.

Tax Contributions from the Retail and Wholesale Sectors

Despite the retail and wholesale sectors contributing 20% to the country’s gross domestic product (GDP), their tax contribution is only 4%. The government has been working for years to effectively bring these sectors into the tax net.

Out of an estimated 3.5 million retailers, only 300,000 are actively filing tax returns. The TDS aims to incorporate the remaining 3.2 million retailers into the formal tax system.

Since the launch of the scheme on April 1, over 64,000 traders have been registered by the tax authorities. The first phase of the scheme covered six cities: Karachi, Lahore, Islamabad, Peshawar, Quetta, and Rawalpindi. In July, the scope of the registration was expanded to 36 additional cities.

Low Compliance and Registration Numbers

On Wednesday, official sources reported that the FBR collected a total of Rs503,363 in income tax from 207 traders across 42 cities. This low compliance rate indicates that although many traders have registered under the TDS, they remain reluctant to pay income tax.

Among the registered traders, 56,081 were from the initial six cities, while only 7,919 were from the newly added 36 cities. This disparity suggests that the registration drive has been less effective in the newer cities.

A city-wise breakdown of registered traders shows that Lahore had the highest number of registrations at 25,138, followed by Rawalpindi (9,562), Karachi (7,971), Islamabad (5,651), Peshawar (4,779), and Quetta (2,980).

Notifications Issued to Implement the Scheme

To implement the scheme, the government issued SRO 457 of 2024 on March 31, outlining special procedures for the Tajir Dost Scheme. Another notification, SRO 1064 of 2024, was issued on July 22, specifying the area-wise monthly advance tax for traders.

Under the scheme, tax rates are set for shopkeepers at a fixed rate, ranging from Rs100 to Rs60,000 per month, depending on the fair market value of their stores and sales. The objective is to bring traders and wholesalers into the formal tax structure, as required by the International Monetary Fund (IMF).

Challenges Ahead

Despite these efforts, the government’s attempts have not yet yielded the desired results. On Wednesday, a nationwide shutter-down protest was observed, and traders are expected to announce their next strategy in the coming days.

The FBR continues to face challenges in encouraging higher compliance rates among traders and effectively expanding the tax base to achieve sustainable economic growth.

Government to Overhaul Bilateral Development Financial Institutions Amid Allegations of Nepotism

Khashif Sarfraz
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Government to Overhaul Bilateral Development Financial Institutions Amid Allegations of Nepotism
The Pakistani government has decided to overhaul bilateral development financial institutions that have become hotspots for nepotism, following the appointment of favored bureaucrats to their boards. These board members reportedly receive up to $5,000 (Rs1.4 million) per meeting in fees.

Focus Shift from Primary Role to Government Debt Investments

Instead of adhering to their primary role of providing loans to the industry and promoting foreign investment, these financial institutions have been heavily investing in government debt, utilizing loans from the State Bank of Pakistan (SBP). Many of these boards are staffed with individuals who lack the necessary expertise, often ignoring violations of the Articles of Association.

Finance Minister Muhammad Aurangzeb has announced a plan to restructure these companies and their boards. He will begin receiving briefings on their operations, which were established in partnership with countries such as China, Saudi Arabia, Iran, Oman, Libya, Kuwait, and Brunei.

The management teams from the Saudi-Pak Industrial and Agricultural Investment Company and the Pak-Brunei Investment Company are scheduled to present their investment mandates today. They will provide explanations for their preference for investing in government debt rather than lending to industries.

Heavy Investments in Government Debt

Official statistics reveal that, as of December last year, these companies had invested Rs1.9 trillion in government debt, following nearly Rs2 trillion in borrowing from the central bank. In 2021, their investment in government debt was only Rs338 billion. However, in 2022, the SBP permitted these institutions to participate in Open Market Operations, undermining the International Monetary Fund’s (IMF) objective of halting direct lending to the federal government by the SBP.

Seven financial institutions were established with equity investments from regional countries, including the Pak-Kuwait Investment Company, Pak-China Investment Company, Pak-Brunei Investment Company, Pak-Oman Investment Company, Pak-Libya Investment Company, Pak-Iran Investment Company, and the Saudi-Pak Industrial Agricultural Investment Company.

These development financial institutions are designed to implement the government’s foreign development policies and promote industrial growth. However, according to the SBP, nearly all recent investments from these companies have been directed towards government securities, growing by 72.4% to Rs1.9 trillion last year. In contrast, loans to the private sector showed a stagnant growth rate of just 0.1% in 2023.

Concerns Over Governance and Nepotism

The SBP’s Financial Stability Review highlighted that the expansion in the asset base of these companies was primarily driven by investments, financed through borrowing. Their aggressive participation in Open Market Operations enabled these substantial investments.

A finance ministry official acknowledged that the government had largely ignored the financial affairs of these institutions, using their boards to accommodate favored politicians and bureaucrats.

These companies reportedly pay board members between $3,500 and $5,000 per meeting, equivalent to nearly Rs1 million to Rs1.4 million. Their websites indicate that retired bureaucrats continue to hold positions on these boards, enjoying the perks despite having left the finance ministry.

Federal Cabinet’s Efforts to Address the Issue

Additional secretaries at the finance ministry have divided the boards of these development financial institutions among themselves, regardless of their qualifications. To curb this trend, the federal cabinet decided in June that bureaucrats could not retain more than Rs1 million per annum in board fees. Any excess must be surrendered to the national treasury. However, this rule does not apply to retired bureaucrats, who continue to receive substantial board fees.

Several board positions remain vacant, and the Ministry of Finance has faced criticism for its poor track record in filling these roles. Additionally, the ministry has been slow to act against a senior executive of the Export-Import Bank, who allegedly tampered with records.

A senior official commented that the strong connections among bureaucrats have led to nepotism in the appointment of board members, allowing former bureaucrats to retain these positions even after retirement.

On Wednesday, the Senate Standing Committee on Finance directed the finance ministry to submit details of the vacant positions and the names of directors at these development financial institutions.

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