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CPEC size to stay at $50 bn for now

Size of the China-Pakistan Economic Corridor (CPEC) will remain unchanged at $50 billion, for now, as both the countries have decided to consolidate the already approved projects amid a hope to also achieve the financial close of $1.7 billion transmission line project.

A meeting of the Joint Cooperation Committee (JCC) of the CPEC will take place on December 20 in Beijing, said the Ministry of Planning on Friday. Unlike Lahore-Matiari transmission line project that may reach the next level, the stalemate will continue on $8.2 billion mainline-I project of Pakistan Railways.

The Cabinet Committee on CPEC on Friday approved agenda for the 8th JCC meeting, the highest decision-making body of CPEC. The committee also approved composition of Pakistani delegation and fixed date of the meeting (December 20), according to a handout issued by the Planning Ministry.

Federal Minister for Planning and Development Khusro Bakhtiar chaired the meeting.

The committee reviewed progress on Pakistan-China industrial cooperation and called for a special focus on promotion of this sector. The cabinet body gave the nod to signing of industrial cooperation framework with China and to encourage Chinese investors to relocate their industries.

The committee instructed authorities to finalise a schedule for the groundbreaking of Rashakai Economic Zone at the earliest by removing all bottlenecks.

All provincial chief ministers have been invited to participate in the JCC that would enable them to market their own industrial zones as well as negotiate their projects particularly new initiatives in the socio-economic development sector, said the Planning Ministry.

CPEC – a pilot project of Belt and Road Initiative –had been launched four years ago with an initial size of the $46 billion. Over a period, the size grew to $50 billion, although the actual projects that have reached construction stage are $19 billion, according to Chinese estimates.

Now, both the countries have decided to consolidate the earlier approved projects first, as most of them are already falling behind the scheduled timelines, said the Planning Ministry officials. The completion period for the early harvest projects was December 2018.

The Planning Ministry officials said the agreement for financial close of the Lahore-Matiari project could be signed during the 8th JCC. The transmission line project is facing a three-year delay.

Pak’s overseas assets at risk after court verdict

Pakistan’s overseas assets are at risk of being taken over as a security to enforce the verdict of an international arbitration court in the Karkey rental power case, which may lead to serious financial complications for Pakistan.

Talking to sources pointed out that the International Centre for Settlement of Investment Disputes (ICSID) started proceedings on March 23, 2018 in the case filed by Turkish company Karkey. The court gave the ruling against Pakistan on August 22, 2018, asking it to pay $760 million in damages along with interest.

Following the verdict, Karkey went to the US, UK and Germany to get the court decision enforced against Pakistan. Now, Pakistan’s assets abroad are at major risk of being taken over as a security to implement the court’s ruling.

Earlier, Karkey had installed a 232-megawatt ship-mounted rental power plant during the tenure of Pakistan Peoples Party (PPP)-led government. It signed a rental services agreement in April 2009 under the Rental Power Policy 2008 for electricity production along with Lakhra Power Generation Company. Following the agreement, the Government of Pakistan also issued sovereign guarantees to meet payment obligations.

The Turkish company started commercial operations in April 2011 but in the meantime, the Supreme Court of Pakistan took suo motu notice of expensive rental power projects in 2012 and declared all the rental plant agreements illegal. The court also directed the National Accountability Bureau (NAB) to initiate probe into the matter which, during investigations, restricted the rental power plant carrying ship of Karkey from leaving Pakistan.

Karkey then filed arbitration claims against Pakistan in the ICSID under the Bilateral Investment Treaty (BIT). Karkey was among 12 rental power companies that were awarded electricity production contracts by the PPP government in 2009 to tackle acute power shortages.

According to NAB, the rental power ship was brought to Karachi Port in April 2011 to provide electricity to the national grid under the government’s rental power policy in order to overcome the energy crisis. However, NAB said, Karkey failed to generate 231MW, as required under the agreement, although $9 million worth of capacity charges were paid to the company in advance.

The plant produced only 30-55MW and that too at a cost of Rs41 per unit, which was very expensive and a serious breach of contract. This led to a 50% increase in refund claims by the government from $80 million to $120 million.

OPEC, Russia accept to slash oil output

Organization of the Petroleum Exporting Countries (OPEC) and its Russia-led allies agreed on Friday to slash oil production by more than market expectations despite pressure from US President Donald Trump to reduce the price of crude.

The producer club will curb output by 0.8 million barrels per day from January while non-OPEC allies contribute an additional 0.4 million bpd of cuts, Iraqi Oil Minister Thamer Ghadhban said after OPEC concluded two days of talks in Vienna.

Oil prices jumped about 5% to more than $63 a barrel by 1500 GMT as the combined cut of 1.2 million bpd was larger than the minimum 1 million bpd that the market had expected. Saudi Arabia, de facto leader of the OPEC, has faced demands from Trump to help the global economy by refraining from cutting supplies.

An output reduction also would provide support to Iran by increasing the price of oil amid attempts by Washington to squeeze the economy of OPEC’s third-largest producer.

“We will never address geopolitical issues at OPEC,” UAE Energy Minister Suhail bin Mohammed al-Mazroui told a news conference.

Russian Energy Minister Alexander Novak praised the ability of his Saudi counterpart Khalid al-Falih “to find a solution in the most difficult situation”, indicating Russia was on board.

Sensitive price indicator decreases 0.55pc

The Sensitive Price Indicator (SPI) for the week ended December 7, 2018 registered a decrease of 0.55% for the combined income group, going down from 239.25 points in the prior week to 237.94 in the week under review.

However, the SPI for the combined income group rose 5.8% compared to the corresponding week of previous year. The SPI for the lowest income group dropped 0.39% compared to the previous week. The index for the group stood at 219.39 points against 220.26 in the previous week, according to provisional figures released by the Pakistan Bureau of Statistics.

During the week, average prices of 15 items rose in a selected basket of goods, prices of 15 items fell and rates of remaining 23 goods recorded no change.

Moreover, on a monthly basis, the pace of inflation slowed down to 6.5% in November 2018, which may prompt many to raise eyebrows over the State Bank of Pakistan’s (SBP) decision to increase the discount rate to double digits.

 

Monetary policy to stay stable in short run

As central bank seeks to adopt a flexible exchange rate policy from January 2019, the government finally acted on Friday to soothe unnerved markets and signalled that it would not bring further fluctuation in the exchange rate and monetary policy in the short term.

The announcement came following a meeting of the Monetary and Fiscal Policies Coordination Board, which met on Friday for the second time this week. Finance Minister Asad Umar chaired the meeting where State Bank of Pakistan Governor Tariq Bajwa and Minister for Planning Makhdoom Khurso Bakhtiar were also present.

“In principle, the (exchange rate) parity should be at its competitive-enhancing level,” stated the finance ministry in a well-drafted statement. “Accordingly, following the latest adjustments, it is now more reflective of economy’s medium-term needs and market conditions.”

“The board also anticipates that short-term conditions on the exchange rate front are likely to normalise,” stated the finance ministry.

Regarding recent changes to the monetary policy, the board was of the view that “the stance is appropriate at current levels given the projections for inflation in FY19 and FY20.”

The real interest rate is significantly positive, will help manage aggregate demand and reduce the output gap closer to sustainable levels.

The statement suggests that the government has not accepted the International Monetary Fund’s (IMF) demand for steep currency depreciation and hike in interest rate to over 12%. However, the government is walking in the direction suggested by the IMF but it has not accepted the pace of adjustment.

The IMF wants a complete free float of the exchange rate and interest rate far higher than 10%. It now seems that the IMF programme may not be finalised in the short term, which will lead to increased reliance on friendly countries.

The meeting was informed that the oil credit facility from Saudi Arabia would come into effect next month, which would ease pressure on the exchange rate, a senior government official told.

The finance ministry’s statement said the availability of deferred oil payment facility and the recent decline in international crude oil prices were expected to help reduce the pressure in Pakistan’s foreign exchange market in the near term. Moreover, bilateral flows would close the financing gap in the current fiscal year.

“These positive developments will build foreign exchange reserves in coming months,” the ministry said.

The central bank let the rupee weaken by Rs5 or 3.7% in the past one week and the rupee-dollar parity stood at 138.89 on Friday. This brought the total adjustment to Rs35 or 33.7% since January this year.

The central bank also increased the interest rate by 1.5 percentage point to 10% last Friday. Since January, the total increase in the interest rate has been 4.25%, which is quite substantial.

“The board was of the opinion that present developments in the exchange rate were mainly explained by the market demand-supply gap of dollar liquidity on one hand and more underlying structural impediments on the other,” the statement said.

Sources said the SBP proposed that flexible exchange rate should be adopted from January 2019 onwards. The new proposal is better than the current managed exchange rate regime but falls short of the IMF’s demand for a free float.

The board was apprised that the current account was visibly responding to the measures taken since January 2018. In first four months of the current financial year, non-oil imports dropped 4% compared to a growth of 25% over the same period last year, the finance ministry pointed out.

Government setting up digital platform for traders

Pakistan has kick-started the process of establishing an integrated digital platform named the National Single Window (NSW) to facilitate traders in filing import and export documents at one place instead of 42 places and reduce the consignment clearance time at ports to hours from days at present.

“The new system will cut annual import and export cost by $800 million if we manage to improve the cross-border trading system by 3%,” Federal Board of Revenue’s (FBR) NSW Programme Director Imran Mohmand said while talking to a group of journalists at a meeting organised by the FBR, Pakistan Customs and the World Bank.

“The benefit of cost reduction will go to the private sector; the system is targeted to be made operational by February 2022,” he said.

He pointed out that Pakistan’s ranking had improved 29 notches to 142nd place out of 190 economies in the area of trading across borders, adding they were working on the system for the past 14 months.

According to Mohmand, the system has helped South Korea to save $3 billion annually while its documentation and customs cost has gone down to $70 per 20-foot container.

It has helped Singapore to save $1 billion annually and improve its ranking to number 2 in trading across borders. Similarly, Costa Rica has reduced the time for documentary compliance from 27 hours to 2 hours and its exports have increased 22.4%.

He elaborated that the information and communications technology (ICT)-based platform would connect 42 regulatory authorities, ministries and other departments like the Pakistan Telecommunication Authority (PTA), Ministry of Commerce, Oil and Gas Regulatory Authority (Ogra), Pakistan Customs, port authorities, customs agents and transporters.

The traders will file import and export documents at the single platform for one time only and not again and again. The 42 agencies, including banks, insurance, port and customs authorities will process the documents on one platform.

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“We will digitalise all the 42 agencies one by one to make the National Single Window project operational,” he said, adding it was aimed at digitalising 75% of documentation by 2021-22.

At present, Pakistan clears an import consignment in an average of 11 days at a cost of $726. On the contrary, Korea clears one consignment in just seven hours at a cost of $342.

Similarly, Pakistan clears an export consignment in an average of five and a half days at a cost of $474. As opposed to this, Korea clears the consignment in just 14 hours with $196 cost.

“Pakistan’s current government is very much supportive of establishing the system but a great political will is still required to make the NSW operational,” Mohmand said.

Singaporean consultancy firm CrimsonLogic has estimated the project cost at $163 million. “We will make the project operational at a very low cost of around $50-60 million,” another official associated with the NSW said.

FBR Member Customs Operations Jawad Agha said they had developed a new version of the indigenously developed paperless customs’ management system called WeBOC (Web-Based One Customs).

The new version offers e-payment solutions, speed up clearance of import and export consignments at ports and help improve customs officials’ behaviour among other features. The new system would be in place in next five to six months.

In 2017-18, out of the total revenue of Rs3.842 trillion collected by the FBR, We BOC received Rs1.636 trillion or 42.6% of the overall revenue at the import stage in the shape of customs duty, federal excise duty, income tax and sales tax.

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