profit.com.pk Monday, 30 January, 2012

Special Report: Architects of acurrency in crisis Page 02

HAmmAd mAlik

I T seems as if there will be noquick recovery in the investorconfidence that was shatteredpost 2008. Volumes had dried

up and a revamp had seemedimprobable under the prevalentcircumstances, but appreciatively,sense prevailed! Securities and exchangeCommission of Pakistan, showing compassion forthe investors, raised their concerns with thehighest authorities in a bid to reinstate the losthope of redirecting funds towards stock markets.although a reactive correction has beenwitnessed, it remains to be seen how long thisprevails. The measures taken are due to beeffective post-april and the current upsurge mightas well prove to be a masquerade, if anything.advocates of Bulls are strongly presenting a caseof an uptrend in the index, with predictions citingthe 14,000-points mark as the short-term target.Not to forget, we are still in Pakistan and a weekof healthy activity will not suffice for the businesslost in the preceding years.However, there are horizons which are still to bere-tested by the investors. I emphasis the term ‘re-

tested’ because this tactic wasused abundantly by investorspreviously, but has failed to gainattention as of late. For activityto increase, it is highlyimportant for players to test the‘futures’ market more frequentlyto benefit from the advantagesthat follow. although futurecontracts are not available for

every listed company, the list does entail all majorcomponents of the benchmark index. The currenteconomic scenario does not allow investors tooblige tons of cash at the bourse and thus thedried-up volumes in the ready market. Buyingshares in the ready market will require a fullpayment within two days of the transaction, afterwhich the delivery is called. Short selling, on theother hand, is not an option in the ready market!This is where trading in futures becomesbeneficial. even though the prices being offeredare at a premium, because of various factorsincluding mark-up and time value of money, theopportunities that are swathed above thepremium. Foremost, the cash-starved investorsonly have to deposit a margin against the entireamount of the contract undertaken; relieving

them of the burden of holding their most preciousasset is an era where liquid assets are consideredto be the most precious investment. With only a minimal percentage of the totalcontract value being held by the broker, theinvestor can unreservedly sell or buy contracts,which will be settled on the last Friday of everymonth. The last full week of the month will openspace for investors to settle their current contractsand take a new position for the subsequent month.The premium prices on offer can always be used toan advantage by the investor. If, for example, afterincluding the weekly commission of the broker andthe relevant taxation charges, there is still enoughgap in the value being offered in the ready marketand the futures contract, a quick-witted person willsell the scrip in the future and buy it in the regularmarket, guaranteeing a profit. However, bothpositions will need to be settled separately. This situation does not arise often, and is usuallyon offer when there are extreme or unforeseenmovements in the market. This situation can alsobe referred to as ‘arbitrage’, but the reason I didnot use this term was because of the inability toshort sell in the ready market. Plowing this tactic minimises the risk involvedbecause of the co-relatedness of both markets.

Usually, at the settlement date or close to it, pricesin both markets converge to a fair price, reflectingthat the movement in both is proportional. Thereare occasions, but rare enough, when futurescontracts are being offered on a discount.although making use of arbitrage will not bepossible here due to the current rules of theexchange, where selling without taking a positionin the ready market is forbidden, the investorshave the option of taking a long position with onlyblocking a minimum amount and then settling theposition as per the defined target, or the bestprice. The element of risk is minimised againbecause, rest assured, the offer price for a futurescontract cannot persistently stay below of what isbeing offered in the regular market. The need tofind new horizons, or unexplored areas, isimmense and with the US dollar trading above thers90 mark in the open market, there is alwaysroom for fresh funds to enter the market. TheIndex is trading at its low levels and the pricesbeing offered are attractive. With defined levels ofrisk, investors can always play it safe.

The writer is head of strategy at first nationalequities. He can be reached athammadmalik@fnetrade.com

Syed ASAd HuSSAin

Hagler Bailly, a globalmanagement consultingfirm had warned Pakistanin 2006 that gas shortfall

to start in 2007 and it wouldcontinue to grow. If alternativesources were not sought in the nexttwo decades it could lead crippling ofthe economy. Here we are now. according to Pakistan energy YearBook 2010, the country producesnearly 4,000 MMCFD of natural gas.The largest consumers of gas arepower (29 per cent) and industrial(26 per cent), followed by domesticand fertiliser (17 per cent) andtransport (eight per cent). The bookpredicts that, gas demand isprojected to increase to 13.27 Bcfdagainst the supplies 2.17 Bcfd thus ashortfall to nearly 11 Bcfd isexpected by 2025.

It is suggested that until newreserves are discovered or Thar-coalreserves or Pak-Iran/Tajik gaspipeline projects get operational,existing if shrinking gas reserveshave to be used with care.government needs to prioritiesdistribution of gas as per the socio-economic needs of the country andall stakeholders must get convincedthat there is no other way out exceptcapitulating own rights. Media canplay an instrumental role and insteadof stoking fire they should tryeducate and convince allstakeholders. To me, come first the industrial andpower sectors because in order toreduce penury, unemployment andsocial unrest, industry should keepgrowing fast. Pakistan’s exports andthe overall economic growth andthereby jobs are largely dependentupon the industrial growth. and

verisimilar is; industry cannot run onintermittent power supply. Domesticor household sector comes next.Cooking and heating are perhaps thetwo major ends where gas isconsumed and unless there is noimmediate substitute available, thispriority cannot be further negotiated. The economic managers of the lastgovernment were imprudent andblatantly encouraged the use of CNgin the transport sector. They didn’tforesee the supply demanddisequilibrium that to come soon.Thus as a cheap and best substitutefuel of oil and diesel, consumption ofCNg in vehicles shoot upexponentially. In a recent survey ofgallup Pakistan, it is discovered thatmore than three fourth of car owners(77 per cent) in Pakistan claimed tohave used CNg fitted cars. Hence,the nation is now caught in a severeenergy crisis and there is no way outin the short run.It is also said that Pakistan is nowthe largest consumer of CNg(vehicles on CNg) and has the largestnumber of CNg (2941 in 2009)

refueling stations in the world.Ironically speaking, domestic gasconsumers pay around rs500 permonth (gas bill on avg.), whereas avehicle consumes rs500 per day ofCNg (on average). Imagine theamount of energy and the moneyburnt in the air can be saved if theuse of CNg is discouraged in theshort run. Hence, someone has to sacrifice tokeep the wheels of industry rollingand cooking stoves alive. Thetransport sector should shoulder theburden then. The flip side of it, thepoor commuters can becomeunhappy but there is a tradeoff whensetting the priorities because choicefor us is limited in the backdrop offast depleting gas reserves. equally, CNg crisis should not takeaway our eyes from looming powercrisis. Managing demand anddistribution of electricity is perhapsthe biggest challenge that thegovernment faces today. line lossesare perhaps one of the highest in theworld. WaPDa, KeSC, PePCO andother public sector enterprises are

riddled with corruption andincompetent staff which is backed bystrong union mafia. Whilst the nation has been asked topay electricity bills which are hittingthe roof now, the issue of freeelectricity to WaPDa employeescannot be ignored and must be dealtwith diplomatically. This disparitymust go at all cost. The growing list ofdefaulters should be cut to aminimum to reduce the circular debtburden. association of architects,Pakistan engineering Council andtown planners should help,encourage and introduce affordableconstruction technology which couldsave both construction cost and useof energy. We as a nation have totighten our belts if we are determinedto fight the crisis. government alonecannot fight the case.

The author is an Islamabad basedfreelance contributor and Director

SZABIST, Islamabad campus. Viewsexpresses herein are personal. He

can be reached atasad.syedd@yahoo.com.au

Looming energy crisis

Testing thefutures marketWith the US dollar

trading above theRs90 mark in theopen market, thereis always room forfresh funds to enterthe market

PDF Profit_Layout 1 1/30/2012 12:29 AM Page 1

news02Monday, 30 January, 2012

PARiS

ReuteRs

TeN years ago Saturday, the eu-ropean Union celebrated thelaunch of the first euro coinsand notes with fireworks, par-

ties and solemn speeches. Today, severalmembers are on the edge of bankruptcy.First-world europe is reduced to askingthe IMF and China for help. The euro it-self is at risk of unraveling.

HOW COULD IT HAVE GONE WRONG?In a series of interviews with architects ofthe euro - a former president, a formerprime minister, two former finance minis-ters, a former central banker, a former eUcommissioner and a former eU affairsminister - common explanations emerged.The single currency would not havesparked the euro zone debt crisis, they ar-gued, if the pro-european dynamic that ledto its creation had continued into its firstdecade. But instead of launching an eco-nomic and political integration of europe,the low interest rates and easy money thatarrived with the euro led peripheral stateson a path of profligacy, widening the gapwith frugal, export-oriented economies ofthe north. Meanwhile, as rapid enlarge-ment made eU decision-making morecumbersome and as citizens’ enthusiasmfor europe waned, eU leaders hollowedout the authority of the european Com-mission, the union’s chief executive bodyand guardian of its treaties and of fiscalprobity. Most of all, some of the architectsnow admit that after the first few euphoricyears, it became clear the euro itself was aflawed concept, laying a single currencyover a group of countries that stuck to na-tional sovereignty over their economies.

The euro was a dare from the get-go.Former British Prime Minister MargaretThatcher famously spurned the currencyas unworkable and a threat to sovereignty;Sweden stayed out, too. euro boostersthemselves pushed ahead with the projectdespite sharing misgivings about its inher-ent political and economic flaws. “Onething was evident to me from the begin-ning,” said guy Verhofstadt, leader of theeuropean Parliament’s alliance of liber-als and Democrats, Belgian prime minis-ter from 1999 to 2008, and one ofeurope’s most federalist politicians. “astate can exist without a currency, but acurrency cannot exist without a state.”

FROM UNION TO DISUNIONOne of the driving forces of european in-tegration is former French PresidentValery giscard d’estaing. Now 85, he re-sides in a stately Parisian townhouse filledwith museum-quality 18th-century furni-ture. as president from 1974 to 1981, gis-card, with german Chancellor HelmutSchmidt, helped create the europeanMonetary System and the europeanCouncil summits of eU leaders. early lastdecade, he chaired the drafting of the eu-ropean Constitution that later became thelisbon Treaty, which governs eU institu-tions as they function today. For giscard,one of the key reasons for today’s euro zonedebt crisis is the eU enlargement of thepast decade, in particular in 2004, when 10countries - mostly former east Bloc na-tions - joined the european Union. “By thetime the euro was introduced, the groupwas no longer homogeneous,” giscard saidin an interview. The european Union nowcounts 27 members and is set to receive a28th - Croatia - in 2013. enlargement hasmade the european institutions hard togovern, he says, notably the executive eu-ropean Commission, which has a commis-sioner for every member country.

WALKS WITH A LIMPOn the other side of the French politicalspectrum is Michel Sapin, 59, who wasfinance minister in a Socialist govern-ment from 1992 to 1993 and dealt witheurope’s foreign exchange crisis of the

early nineties. He is likely to hold a sen-ior office if Socialist Francois Hollandebeats conservative incumbent NicolasSarkozy in the april-May presidentialelection.

To Sapin, the euro zone’s problemsstem from a fundamental design flaw inthe 1992 pact that created the europeanUnion and led to the euro, the MaastrichtTreaty. “The Maastricht Treaty was builton two pillars. The monetary pillar hasbeen an extraordinary success, because,say what you want, there is no monetarycrisis - the euro is strong,” he said. “Thesecond pillar was the economic govern-ment. We knew from the start we had tobuild a second pillar for economic,budget and fiscal matters, because coun-tries cannot share the same currency ifthey have divergent economic policies.”

european Investment Bank PresidentPhilip Maystadt, a veteran of eU monetaryintegration, could not agree more. He tookpart in the Maastricht Treaty negotiationsas Belgian finance minister from 1988 to1998. He recalls that germany at the timewas suspicious of unified economic gov-ernment, fearing it would impinge on theindependence of the future europeanCentral Bank. But protecting the bank’sindependence was not a good reason toabandon the concept of economic gover-nance, he said. “(Former european Com-mission President) Jacques Delors saidthe single currency walked with a limp - ithad one strong leg, the monetary part, andone weak leg, the economic governance,”he said. “Clearly, this ersatz economic gov-ernment was utterly insufficient.”

TURNING POINTeuropean leaders were aware of the short-comings of Maastricht. They spent twoyears negotiating the 1997 Stability andgrowth Pact, which threatens escalatingsanctions on states that fail to limit annualdeficits to three percent of gDP and out-standing debt to 60 percent of gDP. Butthe focus on these two indicators meantthat other measures of economic health,such as private debt, wage costs and thecurrent account balance, were ignored.

as a result, eU finance ministersoverlooked the build-up of tensions inthe Irish and Spanish economies. Theirpublic finances looked to be in excellentshape by Maastricht Treaty standards,until Ireland’s banking crisis and theSpanish real estate collapse. Those im-plosions forced authorities to turn pri-vate debt into public debt, wreckingtheir nations’ finances. Imperfect as itwas, the Stability Pact was the onemechanism that could have kept the sin-gle currency on the rails. But it was dis-carded the first time it was tested.

When the 2002-2003 economic cri-sis pushed French and german public fi-nance indicators beyond Maastrichtlimits, the two big eU nations cast itaside. exceptions were made, and in2005 the pact’s provisions were wa-tered

down further. “That was a real turningpoint. When the other finance ministerssaw what France and germany were get-ting away with, that’s when they said,‘ah, ok, we don’t have to respect the Sta-bility Pact’,” Maystadt said.

In the debt-fueled prosperity of thefirst half decade of this century, this didnot seem to matter. euro zone interestrates were low, growth was fast, stockmarkets went up. at the start of thedecade it looked like the lack of policycoordination would only cause memberstates’ economies to be a bit out of sync.

From around 2004 that changed. Itbecame obvious that two very differentmodels were cutting europe in two: ex-port-oriented manufacturing withstrong wage control in the north, anddebt-financed consumption in the south.

Books have been written about thistrend, but a picture says more than athousand words: the charts of net for-eign assets and current account balancesin north and south look like mirror im-ages. The combined net foreign assets ofgermany, the Netherlands, Belgium,austria and Finland grew more thanfour-fold to nearly two trillion euros bythe end of the decade, as their currentaccount surplus swelled to more than sixpercent of gDP, according to figuresfrom Thomson reuters Datastream andFrench investment bank Natixis.

But net foreign debt in France, Italy,Spain, greece, Portugal and Ireland grewto more than 1.5 trillion euros as thesouthern zone’s current account deficitwidened to around four percent. “Whenwe voted the Maastricht Treaty, it waswith the firm intention to continue on thepath of political integration. Then therewas a sort of sigh of relief when we sawthat, actually, the single currency couldwork without it,” said Sapin, the formerFrench finance minister. “It has taken usten years to understand that it could not.”

after a decade of defying commonsense and with their countries’ credit rat-ings crumbling, euro zone leaders are fi-nally admitting that Maastricht wasflawed. In a letter to european CouncilPresident Herman Van rompuy beforethe December 9 eU summit, French Pres-ident Nicolas Sarkozy and german Chan-cellor angela Merkel made a remarkableadmission: “The current crisis has uncov-ered the deficiencies in the construction of(european monetary union) mercilessly.”

COMMISSION DEFANGEDThe letter does not mention how Sarkozyand Merkel, and their predecessorsJacques Chirac and gerhard Schroder,gradually undermined the foundations ofeconomic governance that earlier gener-ations of eU leaders built.

One of the oldest debates in the eu-ropean Union is over who should driveeU affairs: the supranational body thatis the european Commission or by

the heads of state or government of itsmember nations, represented in the eu-ropean Council. First created as an in-formal discussion forum in 1974, theCouncil formally became an eU institu-tion in 2009 as part of the lisbon Treatyreforms. During the long reign ofJacques Delors - three successive terms,from 1985 to 1994 - the Commissionplayed a leading role. With the backingof socialist French President FrancoisMitterrand, under whom he had been afinance minister, Delors drove a strongfederal agenda, often clashing with eu-rosceptic eU leaders, most famouslywith Margaret Thatcher.

The Delors Commission created thesingle market, shepherded the Maas-tricht Treaty and set the continent ontrack for the single currency. None of hissuccessors would have that kind of influ-ence again. “after Delors’ departure, theeU leaders did not want such an activeCommission president again. Theywanted someone who would not botherthem,” said Yves-Thibault de Silguy,who was commissioner for economic,monetary and financial affairs in the1995-99 Jacques Santer commission.

Santer, then prime minister of luxem-bourg, was chosen after the UK had vetoedthe candidacy of Belgian Prime MinisterJean-luc Dehaene, saying he representedan outdated tradition of centralism and“big government”. “What happened was aprogressive loss of confidence in the verything that had made europe successful: thecommunity method,” de Silguy said.Under this method, an independent euro-pean Commission makes proposals to theCouncil and the european Parliament, andimplements them once they are approved.But in the past decade, governmentsclipped the Commission’s wings year afteryear, in favor of an “intergovernmental”approach whereby governments make de-cisions for the Commission to execute,often in ad-hoc summits that rubber-stamp decisions prepared in an even closercircle of French and german leaders.

Intergovernmental decision-makingitself is a source of delay and dilution, asit requires unanimity, giving each mem-ber state a blocking veto. De Silguy saidthe intergovernmental approach ex-plains a lot of today’s problems and isparticularly inappropriate for economicmatters. “europe needs fluid and ho-mogenous markets, with a policeman tomake sure the rules are obeyed, and thatpoliceman is the european Commission.The entire european construct is basedon that premise,” he said. In October2001, a group of elder statesmen led byDelors and including former germanchancellors Helmut Kohl and HelmutSchmidt raised the alarm, criticizingtheir successors’ growing tendency to by-pass the Commission and micro-manageeU affairs. To no avail.

giscard sums it up like this: “The Com-mission murmurs in Brussels and nobody

listens.” after

Maastricht, pro-european feeling fell off acliff, with the number of people consideringtheir countries’ eU membership a goodthing falling to an all-time low of 46 percentin the spring of 1997. The launch of the euroas an accounting currency in 1999 and thearrival of the euro notes and coins in 2002restored good feeling for a few years. But therejection of the european Constitution inFrench and Dutch referendums in 2005showed the tide had turned again. Pro-eu-ropean feeling slid from 59 percent in aContinent-wide poll in autumn 2004 to 50percent in autumn 2005 and to 47 percentin spring 2011. It will likely hit a new all-timelow in the next wave of measurement, ac-cording to an official involved with the poll.

BRIDGE OF DISCORDWith a flawed single currency, an emas-culated eU Commission, and an increas-ingly eurosceptic public, the euro zonewould have hit a bump sooner or later.

But there was one euro side-effectthat magnified all the other problems.

Besides being a medium of ex-change, an accounting unit and a storeof value, a currency is also a feedbackmechanism for economic policy. If acountry’s policies are lax, and spendingand wages are out of control, then itscurrency weakens and its interest ratesrise, forcing the government to correctcourse with a devaluation or austerityprograms. With one currency for manystates, devaluation is no longer an op-tion. The introduction of the eurobrought a stable exchange rate, low in-terest rates and a flow of money tosouthern european countries that fordecades had used devaluation as theirmain policy adjustment factor.

This caused speculative bubbles inreal estate and banking, pushed up wagesto uncompetitive levels, and led to abuild-up of debt that in 2010 began tocollapse. One of the few founding fathersto have clearly articulated the euro’s flawswas Otmar Issing, the german formereuropean Central Bank chief economistand board member. In a 1996 paper, hewarned that inherent in the currency wasthe potential for requiring transfers ofcash from wealthier states to poorer ones.That could spark political tensions, hewarned. “There is no example in historyof a lasting monetary union that was notlinked to a state entity,” Issing wrote.

Fifteen years later he recalls that thewarning signals appeared very early inthe euro’s life - divergences in laborcosts among euro members, the viola-tion of the budget-deficit cap. “What Ididn’t foresee was the dimension of thecrisis,” he told reuters. another thingfew forecast was the degree of discordthe euro-zone crisis would engender: theeU flag being burnt in athens, greekstreet theatre portraying german lead-ers as Nazis, and a French socialistpolitician comparing angela Merkel toOtto von Bismarck, who unified ger-many by waging war on France.

In this climate, europe’s far-right par-ties have flourished, and few more thanFrance’s Front National, led by Marine lePen. She is running for president in the2012 election on a pledge to take France outof the euro. With an acute sense of history,le Pen organized a little ceremony at theriver Seine. On September 6 this year, lePen and activists of her party threw fake500 euro notes off the Pont de la Concorde,which connects Place de la Concorde, siteof the guillotine used for public executionsduring the French revolution, to theFrench parliament. “I will put an immedi-ate end to all bail-outs of countries thathave fallen victim to the euro,” said le Penin front of a wall of cameras. “It is time forFrance to rediscover its national interest.”In the months ahead, as today’s leadershammer out a new treaty for deeper inte-gration, they will have the voices of theirpredecessors ringing in their ears.

“The call for a more federal europe hasnever been stronger than today, not out ofconviction, but out of necessity,” said Ver-hofstadt, the former Belgian prime minis-ter. “I hope we make the jump. If we dither,we’ll end up in the ravine.”

Architects of a currency in crisisSPECIAL REPORT

PDF Profit_Layout 1 1/30/2012 12:29 AM Page 2

IN late October, I started noticing a tug-of-war going on in the stock market. It showsup on the charts by forming a symmetricaltriangle turned sideways on the chart. Tri-angles typically have five major pushes to

each side of the triangle before breaking out. Sometime ago, it was nearing the completion of the fifthpass, so I told my valued clients that a stock mar-ket breakout was likely coming within the comingweek or two maximum.

Well, sure enough just a few short days later, thestock market broke out ofthe triangle pattern on thedaily chart of the S&P 500and started headingsouth. This was a huge tipfor currency traders. Yousee, when stock marketbreakouts happen likethat, it illustrates cur-rency traders which cur-rencies will likely benefitand which ones will likelysuffer from the breakout.In the industry, we call itthe “risk on” or “risk off”trade. When stocksbreakout southward therisk-off trade is in play

and when stocks breakout northward on the chart,the risk-on trade is in play. Now as investors, youjust need to know who’s in the risk-on and risk-offcamps. The risk-on currencies are the ones that tendto track stocks and commodities closely and oftencarry higher interest rates.

So some of the risk-on currencies are the aus-tralian dollar, New Zealand dollar, Canadian dol-

lar and even sometimes the euro and the pound.emerging market currencies like the Mexicanpeso, South african rand, etc. are also risk-on cur-rencies since they are influenced by commoditiesand have higher interest rates.

The risk-off currencies are the defensive cur-rencies like the U.S. dollar, Swiss franc and yen.The dollar is really taking the lead right now as the“defensive currency of choice” because the centralbanks of Switzerland and Japan have made theother ones essentially bad defensive choices be-cause of these central banks intervening in theircurrencies to weaken them.

So if you have an opinion on where stocks areheading, whether up or down…then you also havean opinion of whether the risk-on trade will be inplay or if the risk-off trade will be in play. andknowing that, you’ll be able to know which curren-cies have an edge and which ones don’t. Then youcan play them against each other.

For instance, if the risk-off trade favors thedollar and hurts the aussie dollar and NewZealand dollars then you can sell-shortaUD/USD or NZD/USD and benefit from bothdynamics going on there.

So keep an eye on what stocks [and even com-modities] are doing and you’ll have a great take onwhat is going on in the currency market eventhough you may not have as much experience inthe currency market. This is a great way to takeyour stock market experience and translate it intowhat that means in the currency market.

as investors , you will find that transactingyour trades in the currency market (rather thanthe stock market) can carry some distinct advan-tages such as: no commissions, just the spread topay…less slippage, quicker fills on your orders,24-hour a day trading, etc. Happy investing in thecurrency market Disclaimer: This is just a re-search piece and not an investment advice. all fi-nancial transactions carry a rISK.

The writer is a financial market economistand commodity expert with 12 years of financial

market experience. He graduated fromUniversity of Chicago, Booth School of Business,USA & IBA Karachi. He can be reached at. Blogs

at www.economistshan.blogspot.com

IT’S interesting that the mostsenior government functionariesshould visibly posture towards acreating a ‘new middle class’ aselections draw near. and while

the waseela-e-haq program that thepresident inaugurated relates to oneprovince for the time being, the focuson providing self-employment oppor-tunities to unemployed persons be-tween ages 19 and 35 is arguably thebest medicine for Pakistan’s sufferingmiddle class in present times, andshould be extended to other provincessooner rather than later.

granted, safeguarding the future isimperative. But often in times of immi-nent collapse relevant authorities tiltmore towards creating environmentsthat avoid repeat downtrends, whiledoing little to avert immediate bust. Sowhile protecting the developmentbudget, making education policy morerealistic and spending more on voca-

tional training are all essential to keepPakistan from joining sub-Saharan na-tions in terms of economic profile, theydo little to address the crisis buildingtoday – the insufficiently skilled mil-lions adding to the unemployment bur-den with each passing year.

Bolstering the middle class is alsoessential to protect democratic institu-tions. By its very nature, democracyneeds a vibrant middle class, one that ismost responsive to perspective policytoggling. Simply put, the more peoplethe self-employment program touches,and improves, the more votes for the in-cumbent administration from an other-wise disinterested chunk of theelectorate. The initiative will not onlyease the strain on employment, it willalso stimulate essential consumerspending, and engineer the subsequentmultiplier in the economy. It is a semi-isolated gain at best presently, but wehave just gone from bad to better.

New middle class

When stocks breakoutsouthward the risk-offtrade is in playand when stocksbreakout northwardon the chart, therisk-on trade is in play

Why money is

flowing into dollar

Shan Saeed

E D I T O R I A L

A closed economy?

SelF-PrOClaIMeD econo-mists many a times lead oneto experience a fatal cringingand a heightened need toclaw. The latest argument en-

countered by the writer on what policymakers should and shouldn’t do proposedclosing down the economy! The dissentingwould agree that no matter how rhetorical,‘blanket’ and ‘unheard of’ this argumentseems, it is still intriguing. With chants ofmore and freer trade coming from all cor-ners of the globe, the prospect of gliding

back and finding sustainable alternativessounds alien. Introspection would objectotherwise. The theoretical backing fortrade and comparative advantage is con-sumer centered. If more and cheaper canbe imported from abroad, one should putdomestic resources to other productiveventures. applying this to the Pakistani orthe emerging market scenario; withoutsignificant investments being made intechnology or simply put ‘catching up’, thevery theory of comparative advantage hasled the economy to greater dependence onforeign inflows and agriculture for sur-vival. Mixed with the country’s state di-rected corruption, very little remains interms of tangible hope to allay apprehen-sions of implosion.

Why then should the country trade, ifno good is to come out of it? In the last fiveyears (since FY05), the cumulative out-flows on the balance of payments fronthave amounted to $1.2 billion (rs107 bil-lion). Specific to trade, the cumulative cur-

rent account deficit has amounted to $42billion (rs3.7 trillion). Identifying com-modity classifications in the export/importlist, textiles and oil emerge as the mostprominent products. In the last threeyears, the former has comprised 51-2 percent of the total export receipts while oilamounted to 32-4 per cent of the importbill. In simple magnitude terms, the econ-omy has coincidentally imported/exportedoil/textiles worth $11 billion on average inthe last three years. However, upon closeinspection of the import commodity bill(and much to the dismay of the messiah),one finds that most goods (besides oil)have an inelastic demand, and so circu-larly, to sustain the foreign reserve out-flow, the export side is pressed to buttress.Thus for reasons beyond neocolonialism,the economy cannot be closed down!

Nevertheless, given that the economyhas been able to sustain net foreign currencyoutflow or deficit in the last five years andsince independence, it clearly does not lack

the ability to garnersome millions of dollarsto invest back home. Ifpower and energy (andthe oil bill) is what dragsthe economy down, thenmaybe ministers andother important whats-theirnames should reallystop making shiny com-ments about 175 billion tonnes of coal re-serves and actively direct whatever resourcesthe economy has, to utilise this resource andsave or redirect the $11 billion being spenton oil instead of plugging in just rs900 mil-lion or $1 billion for extraction of gas. If thisvast resource is put to use, about 2000-2500(conservative estimate) years can be spentwithout wondering which direction arabcrude prices will take. and for once, inflationmight as well take a step down!

In all, Pakistan has sort of missed thebandwagon in terms of identifying its majorsources of income. With India on the soft-

ware, hardware and in-dustrial front, China an-other league and evenBangladesh bankingheavily on the readymade garments segmentand with a steady growthrate higher than Pak-istan’s, the time to iden-tify and prosper on

behalf of a niche has probably departed. andthus, to save whatever is left and running,inputs have to be restored. Once again, ifthe country is flushed with abundance, therulers might as well stop themselves or bestopped from creating delays and ineffi-ciencies. One remembers Marx’s definitionof capital as what regenerates itself. Surelysitting on liquidity and investing in land willnot create more of either of the two.

The writer is an economic analyst andfreelance 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

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M o n d a y, 3 0 J a n u a r y, 2 0 1 2

Pakistan hassort of missed thebandwagon in terms ofidentifying its majorsources of income

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MAHEEN SYEDSub-Editor

Missing the old Profit

I have noticed that the number of pages havebeen reduced in your publication, and Iactually miss the earlier pages, when therewere so many interesting articles andfeatures to read than merely the news items.In my humble opinion, the views are whatreaders want to read and that was whatProfit used to bring on a daily basis. I hopeyou revert back to the old format, because Idon’t think Profit had a match in the marketin terms of interest and popularity as far asbusiness publications are concerned. Thecenter spreads especially were trulyremarkable, and spread information in anaesthetic and really enjoyable manner.

nOOR ZAHRA SHeR

LAHORe

Textile exports

This is with regards to the news article,“Textile exports down by 19.2 per centYoY”. It is a shame that textile – once anopulent sector for Pakistan – is nowtaking a nosedive into obscurity. Notonly has our produce diminished, thishas also led to a slump in exports andhence this is something that is reallyaggravating the economy. We need toboost our agriculture and create anenvironment of investment in Pakistan.The farmers must also be givenincentives and proper opportunities tomake sure that the output is at a levelthat is the need of the hour.

nAmRAH Syed

LAHORe

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