BRICS Contingent Reserve Arrangement: Treaty for the Establishment

http://www.pbc.gov.cn/publish/english/955/2014/20140717154639176510565/20140717154639176510565_.html

TREATY FOR THE ESTABLISHMENT OF A BRICS CONTINGENT RESERVE ARRANGEMENT

Melbourne, June 21, 2014

This BRICS Contingent Reserve Arrangement ("CRA") is between the Federative Republic of Brazil (“Brazil”), the Russian Federation (“Russia”), the Republic of India (“India”), the People’s Republic of China (“China”) and the Republic of South Africa (“South Africa”) (henceforth referred to, individually, as “Party”, and collectively, as the "Parties").

WHEREAS, the Parties agree to establish a self-managed contingent reserve arrangement to forestall short-term balance of payments pressures, provide mutual support and further strengthen financial stability.

WHEREAS, the Parties agree that this contingent reserve arrangement shall contribute to strengthening the global financial safety net and complement existing international monetary and financial arrangements.

THEREFORE, this Treaty sets out the terms and conditions of such contingent reserve arrangement, as follows:

Article 1 - Objective

The CRA is a framework for the provision of support through liquidity and precautionary instruments in response to actual or potential short-term balance of payments pressures.

Article 2 - Size and Individual Commitments

a. The initial total committed resources of the CRA shall be one hundred billion dollars of the United States of America (USD 100 billion), with individual commitments as follows:

i. China – USD 41 billion

ii. Brazil – USD 18 billion

iii. Russia – USD 18 billion

iv. India – USD 18 billion

v. South Africa – USD 5 billion

b. The Parties shall be entitled to make a request to access committed resources at any time. Until such time as one of the Parties (the “Requesting Party”) makes such a request and that request is acceded to by the other Parties (the “Providing Parties”) and effected through a currency swap, each Party shall retain full ownership rights in and possession of the resources that it commits to the CRA. While commitments shall not involve outright transfers of funds, committed resources shall be made available for any eligible request.

Article 3 - Governance and Decision-Making

a. Governance of the CRA shall be constituted by a Council of CRA Governors (the “Governing Council”) and a Standing Committee.

b. The Governing Council shall comprise one Governor and one Alternate Governor appointed by each Party. Governors must be a Finance Minister, Central Bank Governor, or hold an equivalent post. The Governing Council shall take decisions by consensus and shall be responsible for high level and strategic decisions of the CRA. It is hereby authorized to:

i. Review and modify the size of the committed resources of the CRA as well as approve changes in the size of individual commitments;

ii. Approve the entry of new countries as Parties to the CRA;

iii. Review and modify the CRA’s instruments;

iv. Review and modify the framework for maturities, number of renewals, interest rates, spreads, and fees;

v. Review and modify the preconditions for drawings and renewals;

vi. Review and modify the provisions concerning default and sanctions;

vii. Review and modify the provisions concerning access limits and multipliers;

viii. Review and modify the percentage of access de-linked from IMF arrangements;

ix. Decide upon the creation of a permanent secretariat or the establishment of a dedicated surveillance unit;

x. Approve its own procedural rules;

xi. Review and modify the rules pertaining to the appointment and functions of the coordinator for the Governing Council and the Standing Committee;

xii. Review and modify voting power and decision rules of the Standing Committee;

xiii. Review and modify the authority and functions of the Standing Committee;

xiv. Approve the procedural rules concerning the functioning of the Standing Committee;

xv. Decide upon any other issues not specifically attributed to the Standing Committee.

c. The Standing Committee shall be responsible for the executive level and operational decisions of the CRA and shall comprise one Director and one Alternate Director appointed by each Party; these shall be appointed from central bank officials unless decided otherwise by the respective Party. It is hereby authorized to:

i. Prepare and submit to the Governing Council its own procedural rules;

ii. Approve requests for support through the liquidity or precautionary instruments;

iii. Approve requests for renewals of support through the liquidity or precautionary instruments;

iv. Approve operational procedures for the liquidity and precautionary instruments;

v. In exceptional circumstances, determine the waiver of conditions of approval, safeguards and required documents under this Treaty;

vi. Approve a Party’s encashment request;

vii. Decide whether to impose sanctions in case of a breach of this Treaty;

viii. Carry out other functions attributed to it by the Governing Council.

d. As a matter of principle, the Standing Committee shall strive for consensus on all matters. The decisions of the Standing Committee pertaining to items C.ii and C.iii shall be taken by simple majority of weighted voting of Providing Parties. The decisions pertaining to items C.v, C.vi and C.vii shall be taken by consensus of the Providing Parties. All other decisions of the Standing Committee shall be taken by consensus.

e. Whenever a decision is taken by weighted voting, the weight attributed to each Party’s vote shall be determined as follows: (i) 5 percent of total voting power shall be equally distributed among the Parties; and (ii) the remainder shall be distributed among the Parties according to the relative size of individual commitments.

Article 4 - Instruments

The CRA shall include the following instruments:

i. A liquidity instrument to provide support in response to short-term balance of payments pressures.

ii. A precautionary instrument committing to provide support in light of potential short-term balance of payments pressures.

Article 5 - Access Limits and Multipliers

a. The Parties shall be able to access resources subject to maximum access limits equal to a multiple of each Party’s individual commitment set forth as follows:

i. China shall have a multiplier of 0.5

ii. Brazil shall have a multiplier of 1

iii. Russia shall have a multiplier of 1

iv. India shall have a multiplier of 1

v. South Africa shall have a multiplier of 2

b. The total amount available under both the precautionary and the liquidity instruments shall not exceed the maximum access for each Party.

c. A portion (the “De-linked portion”), equal to 30 percent of the maximum access for each Party, shall be available subject only to the agreement of the Providing Parties, which shall be granted whenever the Requesting Party meets the conditions stipulated in Article 14 of this Treaty.

d. A portion (the “IMF-linked portion”), consisting of the remaining 70 percent of the maximum access, shall be available to the Requesting Party, subject to both:

i. The agreement of the Providing Parties, which shall be granted whenever the Requesting Party meets the conditions stipulated in Article 14, and;

ii. Evidence of the existence of an on-track arrangement between the IMF and the Requesting Party that involves a commitment of the IMF to provide financing to the Requesting Party based on conditionality, and the compliance of the Requesting Party with the terms and conditions of the arrangement.

e. Both instruments defined in Article 4 shall have IMF-linked and De-linked portions.

f. If a Requesting Party has an on-track arrangement with the IMF, it shall be able to access up to 100 percent of its maximum access limit, subject to the provisions under paragraph (d) above.

Article 6 - Inter-central Bank Agreement

In order to carry out the transactions under the liquidity and precautionary instruments mentioned in Article 1, the Central Bank of Brazil, the Central Bank of the Russian Federation, the Reserve Bank of India, the People’s Bank of China and the South African Reserve Bank shall enter into an inter-central bank agreement setting out the required operational procedures and guidelines.

Article 7 - Currency Swaps

A Party may request support through one of the instruments specified in Article 4 according to the procedures established by the Standing Committee in accordance with Article 13 of this Treaty. Provision of USD to the Requesting Party shall be effected through currency swaps carried out between the Parties’ central banks on the basis of common operational procedures to be defined by the Standing Committee in accordance with Article 3.C.iv and the inter-central bank agreement, entered into pursuant to Article 6.

Article 8 - Definitions

The following terms shall have the respective meanings specified in this Article:

“Requesting Party Currency” shall mean the currency of the Party that requests to draw funds through a currency swap;

“Swap Transaction” shall mean a transaction between the Requesting Party’s central bank and a Providing Party’s central bank by which the Requesting Party’s central bank purchases US dollars (USD) from the Providing Party’s central bank in exchange for the Requesting Party Currency, and repurchases on a later date the Requesting Party Currency in exchange for USD;

“Drawing” shall mean the purchase, at the Value Date (defined below), of USD by the Requesting Party’s central bank;

“De-linked Drawing” shall mean a Drawing by the central bank of a Party that is not engaged in an IMF arrangement;

“IMF-linked Drawing” shall mean a Drawing by the central bank of a Party that is engaged in an IMF arrangement;

“Business Day” shall mean any day on which markets are open for business in all financial centers needed for the swap transactions to take place;

“Trade Date” of a Drawing or renewal of Drawing shall mean the date in which the spot market exchange rate for the Drawing or renewal of Drawing is established;

“Value Date” of a Drawing or renewal of Drawing shall mean the date the Requesting and Providing Parties’ central banks credit each other’s accounts. The Value Date shall be the second Business Day after the Trade Date;

“Maturity Date” of a Drawing or renewal of Drawing shall mean the date on which the Requesting Party’s central bank shall repurchase the Requesting Party Currency in exchange for USD. If any such Maturity Date should fall on a day which is not a Business Day, the Maturity Date shall be the next Business Day.

Article 9 - Coordination

a. The Party that chairs the BRICS shall act as coordinator for the Governing Council and for the Standing Committee.

b. The coordinator shall: (i) convene and chair meetings of the Governing Council and the Standing Committee; (ii) coordinate voting as needed; (iii) provide secretariat services during its term; and (iv) inform the Parties of the activation or renewal of liquidity or precautionary instruments.

c. Any Party requesting or receiving support through a liquidity or precautionary instrument – Article 4 – or opting out from participating as a Providing Party or asking for encashment of outstanding claims – Article 15(e) – shall not serve as coordinator. In this case, the next chair of the BRICS shall assume the role of coordinator.

Article 10 - Purchase and Repurchase under a Swap Transaction

a. The exchange rate that shall apply to each purchase and repurchase under a Swap Transaction shall be based on the prevailing exchange rate (hereinafter referred to as “the Swap Exchange Rate”) between the Requesting Party Currency and the USD in the Requesting Party’s spot market on the Trade Date.

b. The Requesting Party’s central bank shall sell the Requesting Party Currency to the Providing Parties’ central banks and purchase USD from them by means of a spot transaction, with a simultaneous agreement by the Requesting Party’s central bank to sell USD and to repurchase the Requesting Party Currency from the Providing Parties’ central banks on the maturity date. The same exchange rate (i.e., the rate of the spot leg) shall be applied to both the spot and the forward legs of the Swap Transaction.

c. On the Maturity Date, the Requesting Party’s central bank shall transfer the USD plus interest back to the Providing Parties’ central banks in exchange for the Requesting Party Currency. No interest shall be accrued on the Requesting Party Currency.

Article 11 - Interest Rate Determination

a. The interest rate to be paid by the Requesting Party on the USD purchased from the Providing Parties shall be an internationally accepted benchmark interest rate for the corresponding maturity of the swap transaction plus a spread. The spread shall increase periodically by a certain margin, up to a predetermined limit.

b. In the case of the precautionary instrument, the amount committed but not drawn shall be subject to a commitment fee, to be specified in the inter-central bank agreement.

Article 12 - Maturities

a. A De-linked Drawing under the liquidity instrument shall have a Maturity Date six months after the Value Date and may be renewed, in whole or in part, three times at most.

b. An IMF-linked Drawing under the liquidity instrument shall have a Maturity Date one year after the Value Date and may be renewed, in whole or in part, two times at most.

c. If the Requesting Party is not engaged in an IMF arrangement, access to the precautionary instrument shall have a tenure of six months and may be renewed, in whole or in part, three times at most.

d. If the Requesting Party is engaged in an IMF arrangement, access to the precautionary instrument shall have a tenure of one year and may be renewed, in whole or in part, two times at most.

e. The maturity of a De-linked Drawing under the precautionary instrument shall be of six months and that of an IMF-linked Drawing shall be of one year. The precautionary instrument, once drawn upon, shall not be renewed.

f. The Requesting Party may repurchase the Requesting Party Currency in exchange for USD at the Swap Exchange Rate before the Maturity Date. In this case, the accrued interest rate shall be calculated on the basis of the actual number of days elapsed from (and including) the Value Date to (but not including) the early repurchase date.

Article 13 - Procedures for Requesting or Renewing Support through the Liquidity or Precautionary Instruments

a. A Party that wishes to request support through the liquidity or precautionary instruments, or renewal of such support, shall notify the members of the Standing Committee of the type of instrument, the amount requested, and the envisaged starting date.

b. The Requesting Party shall provide evidence that it complies with the safeguards specified in Article 14 below.

c. Upon receiving the notification, the CRA coordinator shall convene a Standing Committee meeting to discuss and vote the Requesting Party’s request. The Standing Committee shall decide upon the request up to seven days after its submission.

d. Once a request for support through the liquidity instrument is approved, the Requesting Party’s central bank and the Providing Parties’ central banks shall activate Swap Transactions promptly, in a timeframe to be specified in the inter-central bank agreement.

e. Once a request for a Drawing under an approved precautionary instrument is made, the Requesting Party’s central bank and the Providing Parties’ central banks shall activate Swap Transactions promptly, in a timeframe to be specified in the inter-central bank agreement.

f. If the Requesting Party wishes to renew support through the liquidity instrument, it shall notify the members of the Standing Committee at least fourteen days before the Maturity Date.

g. If the Requesting Party wishes to renew support through the precautionary instrument, it shall notify the members of the Standing Committee at least seven days before the expiration of access under such instrument.

Article 14 - Conditions of Approval, Safeguards and Required Documents

a. When submitting a request for support through the liquidity or precautionary instrument, or renewal of such support, the Requesting Party shall sign and deliver a letter of acknowledgement committing to comply with all obligations and safeguards under this Treaty.

b. The Requesting Party shall also comply with the following conditions and safeguards:

(i) Submit all required documents and economic and financial data, as specified by the Standing Committee, and provide clarification to comments;

(ii) Ensure that its obligations under this Treaty at all times constitute direct, unsubordinated and unsecured obligations ranking at least pari passu in right of payment with all other present or future direct, unsubordinated and unsecured foreign currency-denominated external indebtedness of the Requesting Party;

(iii) Have no arrears with the other Parties or their public financial institutions;

(iv) Have no arrears with multilateral and regional financial institutions, including the New Development Bank (NDB);

(v) Be in compliance with surveillance and provision of information obligations to the IMF as defined, respectively, in Articles IV, Sections 1 and 3, and VIII, Section 5, of the Articles of Agreement of said institution.

Article 15 - Burden Sharing, Opt-out and Encashment Provisions

a. Providing Parties shall share the disbursement of drawings in proportion to their respective commitments to the CRA, subject to paragraphs (b) and (c) of this Article. In no event shall any Party be required to provide more resources than the amount that it has committed to provide in Article 2(a).

b. The approval of a request for support through the liquidity or precautionary instruments under this Treaty suspends, for as long as such support is in place, the Requesting Party’s commitment to participate as a Providing Party in any subsequent request for support through the liquidity or precautionary instruments.

c. When a request for support through the liquidity or precautionary instruments, or for renewal of such support is presented, a Party may opt-out from participating as a Providing Party, provided this is justified by its balance of payments and reserve position or by an event of force majeure, such as a war or natural disaster. The Party opting-out shall provide the necessary information to justify its decision. In this case, the other Providing Parties shall provide resources to allow opt-out in proportion to their commitments to the CRA, subject to paragraph (a) of this Article.

d. A Providing Party may request encashment of outstanding claims provided this is justified by its balance of payments and reserve position or by an event of force majeure, such as a war or natural disaster. The Providing Party applying for encashment shall provide the necessary information to justify its request. If the request is approved, the other Providing Parties shall provide resources to allow encashment in proportion to their commitments to the CRA, subject to paragraph (a) of this Article.

e. A Party that has opted-out or encashed from an outstanding currency swap or has opted out from an outstanding precautionary instrument shall not serve as a coordinator, as defined in Article 9, for the length of the transaction from which the party has opted-out or encashed.

Article 16 - Breaches of Obligations and Sanctions

a. Failure by a Requesting Party to fulfill payment obligations on the Maturity Date of a Drawing or a renewal of Drawing, unless corrected within 7 days, shall result in the following:

(i) all outstanding obligations of the Requesting Party to repay the Providing Parties under this Treaty shall be immediately due and payable;

(ii) the Requesting Party’s eligibility to further Drawings or renewals of Drawings under this Treaty shall be suspended;

(iii) any undrawn portion of a precautionary instrument of the Requesting Party shall be cancelled; and

(iv) any payments by the Requesting Party of its overdue obligations to the Providing Parties must be made on the same date and in proportion to the amounts due to each Party.

b. In case of an event of force majeure, the application of the measures above may be suspended.

c. In case of a persistent and/or unjustified delay in settling overdue payment obligations, a Requesting Party’s right to participate in any decisions under this Treaty may be suspended. After 30 days of unfulfilled payment obligations, the Providing Parties should consider whether this action is appropriate.

d. If, after the expiration of a reasonable period following the decision under paragraph (c), the Requesting Party persists in its failure to settle overdue payment obligations, the Governing Council may require the Requesting Party to withdraw from this Treaty.

e. The Requesting Party in breach of a payment obligation should agree to take measures that preserve the net present value of its obligations if the Providing Parties collectively decide to exercise this option.

f. In case the Providing Parties decide by consensus at the Governing Council level, the Requesting Party in breach of a payment obligation should agree to a novation of its obligations under this Treaty, including by issuing marketable debt securities that would not be subject to the Requesting Party’s jurisdiction. The Requesting Party should not unreasonably withhold consent to terms and conditions of such debt securities as shall be required by the Providing Parties.

g. The Requesting Party would be liable to a late fee in addition to the interest rate applied to the swap transaction to which payment is overdue. This late fee should increase periodically by a certain margin, up to a predetermined limit.

h. In case of a breach of any obligation under this Treaty, other than failure by a Requesting Party to fulfill payment obligations, the following sanctions may apply:

(i) all outstanding payment obligations under this Treaty shall be immediately due and payable;

(ii) eligibility to further Drawings or renewals of Drawings under this Treaty shall be suspended;

(iii) any undrawn portion of a precautionary instrument shall be cancelled;

(iv) the right to participate in any decisions under this Treaty may be suspended;

(v) after the expiration of a reasonable period following the decision under item (iv), the Governing Council may require the Party to withdraw from this Treaty.

i. The sanctions applied should be commensurate with the severity of the breach.

Article 17 - Language and Communications

a. The official language of the CRA shall be English. The English language versions of this Treaty and of any documentation under it shall be the official versions. All written and oral communication between the Parties shall be in English, unless the Parties otherwise agree in writing.

b. Any notice, request, document or other communication submitted under this Treaty shall be in writing, shall refer to this Treaty, and shall be deemed fully given or sent when delivered in accordance with the contact details that shall be provided separately by each Party.

Article 18 - Representation and Warranties

Each of the Parties hereby warrants and represents that:

a. It has the full power and authority to enter into and perform its obligations under this Treaty and shall provide evidence of such authority if requested by any other Party;

b. This Treaty and the performance by it of its obligations under this Treaty do not contravene any law or other restriction binding upon it or any of its property, and there is no legal or regulatory hindrance which could affect the legality, validity or enforceability of this Treaty or of obligations hereunder or have a material adverse effect upon its ability to perform such obligations;

c. All transactions under this Treaty shall be exempt from any administrative or legal obstacles to their completion;

d. All payments by it under this Treaty shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of its country or any authority therein or thereof having power to tax. In the event that the withholding or deduction of such taxes, duties, assessments or governmental charges is required by law, it shall pay such additional amounts as may be necessary in order that the net amounts received by the other Parties after such withholding or deduction shall equal the amounts which would have been received under this Treaty in the absence of such withholding or deduction; and

e. It shall not assign, transfer, delegate, charge or otherwise deal in its obligations under this Treaty without prior written consent of the other Parties.

Article 19 - Legal Status of the CRA

The CRA does not possess independent international legal personality and cannot enter into agreements, sue or be sued.

Article 20 - Dispute Settlement

a. Any disputes relating to the interpretation of this Treaty shall be solved by consultations in the Governing Council.

b. If any dispute, controversy or claim relating to the performance, interpretation, construction, breach, termination or invalidity of any provision in this Treaty shall arise and not be resolved amicably by the Governing Council within a reasonable period, it shall be settled by arbitration in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (excluding Article 26 thereof) in effect on the date of this Treaty (the “UNCITRAL Arbitration Rules”). In case of resorting to arbitration, the language to be used in the proceedings shall be English and the number of arbitrators shall be three.

c. The Parties agree that in any such arbitration and in any legal proceedings for the recognition of an award rendered in an arbitration conducted pursuant to this Article, including any proceeding required for the purposes of converting an arbitral award into a judgment, they shall not raise any defense which they could not raise but for the fact that they are sovereign state entities.

Article 21 - Withdrawal from and Termination of the Treaty

a. A Party may withdraw from this Treaty by giving notice of such intention to the other Parties six months prior to the date of the envisaged withdrawal. However, withdrawal from the Treaty by any Party is not allowed for a period of five years from its entry into force.

b. During this six-month period, the Party that has given notice of such intention shall provide the other Parties with an opportunity to express views on its intention but does not have the right to request or the obligation to provide resources.

c. In the event that any obligation under this Treaty, including any obligation for the payment of money, remains outstanding at the time of termination of or withdrawal from this Treaty, all the terms and conditions of this Treaty (except for those entitling the Parties to any Drawing or renewal of a Drawing) shall continue to apply until such obligation has been fulfilled.

Article 22 - Acceptance, Depositary and Amendments

a. This Treaty shall be subject to acceptance, ratification or approval, according to the respective domestic procedures of the Parties.

b. The instruments of acceptance, ratification or approval shall be deposited with the Federative Republic of Brazil, which shall be the depositary of this Treaty.

c. The depositary shall promptly inform all Parties of: (i) the date of deposit of each instrument of acceptance, ratification or approval (ii) the date of the entry into force of this Treaty and of any amendments and changes thereto, and (iii) the date of receipt of a withdrawal notice.

d. If the Party that acts as depositary decides to withdraw from this Treaty, all the terms and conditions of Article 21 shall apply, with the exception that: (i) the depositary shall give notice of its intention to the other Parties; and (ii) as of the date of receipt of the depositary’s withdrawal notice, the role of depositary shall be assumed by one of the other Parties, as agreed upon by them.

e. This Treaty shall not be subject to unilateral reservations.

f. Any proposal to amend this Treaty shall be communicated to the Party that acts as coordinator for the Governing Council, which shall then bring the proposal before the Governing Council. If the proposed amendment is approved, the coordinator shall ask all Parties whether they accept the proposed amendment. If a Party, according to its domestic procedures, accepts the proposed amendment, it shall notify the depositary accordingly. The amendment shall become effective on the date of receipt of the last notification. Any decision of the Governing Council related to modifying Article 2 shall be considered an amendment.

Article 23 - Entry into Force

This Treaty shall enter into force 30 (thirty) days after the deposit of the fifth instrument of acceptance, according to each Party’s legal requirements.

Done in Fortaleza on the 15th of July of 2014, in five originals in English, one for each Party.

Monetising perks

Monetising perks     
Most of the time consumers give taxes, but this money is not forwarded to the government - 

See more at: http://magazine.thenews.com.pk/mag/moneymatter_detail.asp?id=8365&magId=10&catId=224#sthash.78oY673b.dpuf

The article was published in "Money Matters" on Monday 7 July 2014

Budget 2014-15 (July-June) again reminds us that revenues and expenditures by the government are critical in Pakistan. We talk so much on these issues that we ignore the real problem, i.e., growth. Although Prime Minister Nawaz Sharif has a wish to increase the share of education expenditure by 4.0 percent but financing it would be a bigger problem than we think. Deficit financing of 1.8 percent is one way to increase spending on education but if other expenditures remain the same, it will increase our debt, hence debt servicing and repayments.

I resist myself to say anything in favor of imposing any new tax because it will eventually be paid by the bourgeois class in the form of taxation or increase in prices (inflation tax). More importantly, we need to stop certain expenditures such as untargeted subsidies, #PerksPlotsProtocols and other bigger leakages in the economy.

Dr Nadeem-ul-Haque has been saying on different forums that we are not taxing #PerksPlotsProtocols. If we monetize them they will come under the tax net, unless government declares it no-taxed income. Neglected document of the Planning Commission “Framework for Economic Growth”, which was written in the presence of Dr Haque as deputy chairman says “all of the perks in Malaysia are monetized.” Everything is quantified in incentives which have been in practice for more than 10 years. Therefore, following the model of Malaysia by monetizing all the perks, we can increase the revenue collections.

In general it is believed that the Framework for Economic Growth (FEG) is difficult to implement. Some fears that it will take 30-40 years to implement these policies. With due respect, No. It’s a misconception. The FEG talks about different reforms which may take one minute to sign and few months of implementation effectively. Above all the government does not need huge budget (in billions) to implement these reforms.

Guestimates of spending on #PerksPlotsProtocol range between Rs.250-500 billion, which if monetized will generate sufficient revenues because it will become part of the civil servants’ income. Question is who will do it? Bureaucracy?

Another wicked policy is granting SROs which are popular among the business communities. SROs consume billions of rupees every year, which significantly affect our budget deficit. According to some estimates, last year we lost around Rs.500 billion due to several SROs issued by the government. Finance Minister Ishaq Dar appears keen to abolish several SROs which caused Rs.300 billion loss last year. Nevertheless, whether abolishing that SRO will contribute Rs. 300 Billion is a separate question.

One of the other issues which I have observed lately is the problem of collection or in other words problem of enforcement. Most of the times we as consumers give taxes, but this money is not forwarded to the government. The FBR does not have proper mechanism to track these transactions and collect the total amount of taxes which consumers pay by consuming various goods and services. I’ll try to clarify problem of collection by giving few examples.

One may disagree with my calculation based on the assumptions I have taken. Nevertheless this is a good area which needs to be explored intensively. While standing at a local and relatively smaller restaurant I asked about the daily sales of his best selling product. I multiply total sales with 17 percent sales tax which the restaurant is taking from the customers but it is not accounted anywhere because all the transactions are based on cash. Then I multiply it with 5 assuming that on average sale of four other products matches with the sale of the best selling product. Furthermore, I assume 2500 restaurants all over Pakistan which are similar to this restaurant. My calculation shows that GST which can be collected from these restaurants is Rs.110 Billion in six months. I still believe that it is an understated figure.

Let’s look at another example. Every city has bakeries. Some ask for sales tax while others don’t. Nevertheless, I went to a good bakery and asked the total daily sale of best selling item. Following the same procedure my calculations show that across Pakistan if we take 1500 similar bakeries, we are losing Rs.68 billion due to inefficiency and lack of proper infrastructure of revenue collection.

While looking at the above figures, I firmly believe that we do not need more taxes. We are already heavily burdened by taxes.  These were just examples of such non-collections. Bottom line is that collection should be made better instead of imposing new oppressive taxes.

Another interesting tax which was levied in the last few years is tax on cell phones usage. We pay sales tax, withholding tax when we load the prepaid card. Other than that we pay tax on each call, each package (such as friends and family numbers, 1000 SMS in a week for just Rs. 10 etc), special SMS and sharing balance with someone. While calculating the effective rate I was shocked to see that we pay almost half in taxes, implies that on Rs. 100 card we consume 50 and we pay 50 in taxes.

Another important issue is introduction of VAT, which is welfare enhancing. What is VAT? It is a tax on value-added of any product at each stage of production. In simpler words, if a product is sold at Rs.100 and it is further improved by processing it further then the VAT will be applied on the difference between the new price and old price (Rs.100). In this way the end customer need not to pay tax on the total amount but on the value addition. Consider the example of a restaurant which was discussed above. If price of certain product doubles after value addition then customer pays only half of the amount on taxes which he/she is paying currently. Thus VAT is welfare enhancing.

VAT has been discussed for the last two decades but it was never implemented due to lack of documentation and according to some lack of political will. Huzaima Bukhair and Ikram ul Haq wrote in one of their writings that VAT is not considerable to businessmen because of unscrupulous traders, dishonest tax advisers and corrupt tax officials. Therefore, we need to reform our tax administration.

In the end, I’ll copy the statement from the FEG that in Malaysia the whole cabinet and Prime Minister were pro reforms.  Thus, political will with the support of cabinet is the key to support reform initiatives.

- See more at: http://magazine.thenews.com.pk/mag/moneymatter_detail.asp?id=8365&magId=10&catId=224#sthash.78oY673b.dpuf

A budget for exporters but test for FBR

Published in the newspaper "The Nation" on 4 June 2014
http://www.nation.com.pk/E-Paper/Lahore/2014-06-04/page-2/detail-7

Mix and match budget was presented with a view that economy will move in the right direction with higher growth, lesser budget deficit, better investment opportunities, higher exports and better tax collection.

Budget is none other than an interesting exercise to make a plan for next year which includes all the expenditures and income of the government through various kinds of taxation. May days are busy days for ministry of finance since they were counting revenues from different sources of taxes to cover the expenditures government will do in the next fiscal year. After listening to a scary story from Dr Ashfaq Hasan Khan at the PIDE pre-budget seminar a few days ago on how we set revenue targets, I would refrain myself to say that the government has any intentions to propose tax reforms in the budget.

It is not a bad effort to present a budget of this kind when we are still facing energy issues, terrorism, lack of investment and high-budget deficit. Above all, everyone is looking for a relief package with subsidy on necessities, increase in salaries/pensions, lower inflation, employment opportunities etc.

While looking at the relief efforts, the budget witnesses increase in salaries of employees, ad-hoc relief allowance and pensions by ten percent. In addition, some other allowances are raised for employees in grade 1-16. Moreover, BISP allocation is increased to Rs. 118 billion and every household will get Rs 1,500 per month. Increase in minimum wages by 20 percent would be beneficial for the labour sector if it is implemented properly.

Sales tax on several commodities used in agriculture sector has either been reduced or abolished to bring down the cost of production as well as to provide relief to the farmers. Moreover, several initiatives have been taken to promote tunnel/greenhouse farming. Although tunnel farming needs special skills or training which Pakistan lacks, it may benefit many if mass training sessions are conducted to facilitate it.

Other than above facilitation, establishing a National Food Security Council is a good initiative to increase coordination across the provinces, which will help market reforms, value addition through productivity improvement and, above all, ensure stability in prices and guarantee stable incomes for farmers

Sales tax on retailers is a new initiative to increase tax revenues by linking tax rate with the amount of electricity bill they receive. A quick question would be whether it is going to increase pilferage of electricity to cut down their bills. Therefore, electricity theft needs to be controlled to implement such policy or we will face deeper problems.

Budget on health and higher education has been increased, but since the increase is not substantial, we cannot expect any major changes in both the social sectors. Both the sectors need substantial increase in their funds with serious structural reforms, which are absent in the budget speech.

The finance minister has announced several incentives for exporters, including reduction in the rate of exports, financing and different duty drawback rates to big exporters. Moreover, an entire section of the speech was dedicated to the exporters. Several sales tax initiatives were announced to lessen the problems of exporters. This would definitely facilitate the exporters but how they would respond is a serious question, since we are only looking at the supply side.

On the other hand, nothing was announced to facilitate domestic producer or domestic retailer except catching them with different ways to pay sales tax. No market strategy was announced by the FM to promote entrepreneurship in the economy although the PM scheme is there to provide loans at lower interest rates. The PM scheme with lesser absorption space in the economy/market may not solely benefit the entrepreneurs.

Although Dr Pasha said a few days ago at the PIDE pre-budget seminar that withholding tax which was started in 1997 is becoming a monster and we need to either get rid of it or need to reform it. Several adjustable and advanced taxes were announced in the budget. These taxes are then readjusted in the income tax returns. Apparently, it is a good strategy to collect revenues from the non-taxpayers, but we still need to look at the practical difficulties of it.

I will call it a budget of exporters and test of FBR to collect taxes by doing different reforms. 

Abolishing SROs is a bold initiative but not all the SROs are abolished. There are few SROs which the committee has advised them to abolish. It may increase revenues to the government if no new SROs are issued to compensate the beneficiaries of old SROs. It may have been done in a different way as Dr Nadeem ul Haque says that powers to issue an SRO should be abolished and the parliament should decide if there is an urgency to import anything duty-free or at special tariff rates.

The budget was in favour of exporters. The government tried to give relief to the people, but amount of it is not substantial. Since different kinds of taxes are introduced in the budget to collect taxes from non-taxpayers and reduce several tax rates, which directly affects middle class persons, the government needs certain reforms and lots of efforts to meet the target of Rs 2,800 billion tax revenues. Moreover, decline in several tax rates, efforts to collect taxes from non-taxpayers and reduction in the overall subsidies may lead to single-digit inflation. I will not be surprised if it comes to 7-8 percent next year if some drastic measures are taken by the ministry of finance and State Bank of Pakistan.

(The writer is a research economist at Pakistan Institute of Development Economics)

More Taxes, No Please...!

Sent to Money Matters ...  

Revenues (income of government) and expenditures by the government are critical in Pakistan. We talk so much on these issues that we ignore the real problem, i.e., growth. In my last article I started with the PM’s announced policy of increase in the share of education expenditure by 4 percent. Further, I tried to point out various possible solutions to finance it.  Deficit financing of 1.8 percent is one way to increase spending on education but if other expenditures remain the same, it will increase our debt, hence debt servicing and repayments.

I resist myself to say anything in favor of imposing any new tax because it will eventually be paid by the bourgeois class in the form of taxation or increase in prices. More importantly, we need to stop certain expenditures such as untargeted subsidies, #PerksPlotsProtocols and other bigger leakages in the economy.

Dr Nadeem-ul-Haque has been saying on different forums that we are not taxing #PerksPlotsProtocols. If we monetize them it will be under tax net unless government declare it no-taxed income. Neglected document of the Planning Commission “Framework for Economic Growth”, which was written in the presence of Dr Nadeem-ul-Haque as deputy chairman says “All of the perks in Malaysia are monetized”. Everything is quantified in incentives which have been in practice for more than ten years. Therefore, following the model of Malaysia by monetizing all the perks we can increase the revenue collections.

In general it is believed that the Framework for Economic Growth (FEG) is difficult to implement. Some fears that it will take 30-40 years to implement these policies. With due respect, No. They are all wrong. The FEG talks about different reforms which may take one minute to sign and few months of implementation effectively.

Guestimates of spending on #PerksPlotsProtocol range between Rs. 250 billion to Rs. 500 billion, which if monetized will generate sufficient revenues because it will become part of civil servant’s income. Question is who will do it? Bureaucracy?

Another wicked policy is a policy of SROs which are the most popular among the business communities. It consumes billions of rupees every year, which significantly affect our budget deficit. According to some estimates last year we lost around Rs. 500 billion due to several SROs issued by the Government. Finance Minister using his DARNOMICS looks keen to abolish several SROs which caused Rs. 300 billion loss last year. Nevertheless, whether abolishing that SRO will contribute Rs. 300 Billion is a separate question.

One of the other issues which I have observed lately is the problem of collection or in other words problem of enforcement. Most of the times we as consumers give taxes but it is not forwarded to the government. Government or FBR does not have proper mechanism to track these transactions and collect the total amount of taxes which consumers pay by consuming various goods and services. I’ll try to clarify problem of collection by giving few examples.

One may disagree with my calculation based on the assumptions I have taken. Nevertheless this is a good area which needs to be explored intensively. While standing at a local and relatively smaller restaurant I asked about the daily sales of his best selling product. I multiply total sales with 17 percent sales tax which the restaurant is taking from the customers but it is not accounted anywhere because all the transactions are based on cash. Then I multiply it with 5 assuming that on average sale of four other products matches with the sale of the best selling product. Furthermore, I assume 2500 restaurants all over Pakistan which are similar to this restaurant. My calculation shows that GST which can be collected from these restaurants is Rs.110 Billion in six months. I still believe that it is an understated figure.

Let’s look at another example. Every city has bakeries. Some ask for sales tax while some do not. Nevertheless, I went to a good bakery and asked the total daily sale of best selling item. Following the same procedure my calculations show that across Pakistan if we take 1500 similar bakeries, we are losing Rs.68 billion due to inefficiency and lack of proper infrastructure of revenue collection.

While looking at the above figures, I firmly believe that we do not need more taxes to impose on us we are already heavily burdened by different kinds of taxes.  These were just examples of such non-collections. Bottom line is that collection should be made better instead of imposing more oppressive taxes on us.

Another interesting tax which was levied on us in the last few years is tax on cell phones usage. We pay sales tax, withholding tax when we load the prepaid card. Other than that we pay tax on each call, each package (such as friends and family numbers, 1000 SMS in a week for just Rs. 10 etc), special SMS and sharing balance with someone. While calculating the effective rate I was shocked to see that we pay almost half in taxes, implies that on Rs. 100 card we consume 50 and we pay 50 in taxes.

Since Budget is coming and I hope government can address some of these issues. Another important issue is introduction of VAT, which is welfare enhancing. What is VAT? It is a tax on value added of any product at each stage of production. In simpler words, if a product is sold at Rs. 100 and it is further improved by processing it further then the VAT will be applied on the difference between the new price and old price (Rs.100). In this way the end customer need not to pay tax on the total amount but on the value addition. Consider the example of a restaurant which was discussed above. If price of certain product doubles after value addition then customer pays only half of the amount on taxes which he/she is paying currently. Thus VAT is welfare enhancing.

VAT has been discussed for the last two decades but it was never implemented due to lack of documentation and according to some lack of political will. Huzaima Bukhair and Ikram ul Haq wrote in one of their writings that VAT is not considerable to businessmen because of unscrupulous traders, dishonest tax advisers and corrupt tax officials. Therefore we need to reform our tax administration.

In the end I’ll copy the statement from the FEG that in Malaysia the whole cabinet and Prime Minister were pro reforms.  Thus, political will with the support of cabinet is the key to support reform initiatives.

Meeting Expenditures

Published in Money Matters on 19 May, 2014

The government’s basic motive behind tax collection is the provision of certain facilities, such as national defence, public parks, roads, etc, but it is not necessary that it benefits every individual.

Another important motive of tax collection is redistribution of resources among the society. For example, government spends taxpayer money by providing free education and/or free health and/or better roads, and/or libraries, etc. Therefore, the ultimate objective of tax collection is to re-spend on the people living in the society.

Tax as well as expenditures, if equal, we can achieve a balanced budget, which according to common perception is the best policy. But is it? At micro or individual level is it possible to spend more than the income. For a salaried person the answer is “no”. Think again, can we spend more than our income? My answer is “yes”. One might ask how. The answer is by borrowing. So, the next question would be, how do we pay back and from where does the money come from. The answer lies in the mode of spending. If there is no pay back on our spending in future then we are in trouble. On the other hand if our income increases in future then we are maximising our utility.

Same is true for the overall economy. Capital expenditures payback, but current expenditures do not. Deficit financing through different modes of borrowing would be beneficial if it contributes to the future income. However, not all the current expenditures are bad because most of the current expenditures compliment capital expenditures, such as maintenance, cost of schools, hospitals, libraries, salary of teachers, doctors, nurses, and administration, etc.

Let’s go back to the original problem of having low tax revenues that lead to higher budget deficit, since government needs to spend more on various sectors. For now, the government is looking forward to increase education expenditures to four percent by 2018; as promised in the elections by the Pakistan Muslim League-Nawaz (PML-N). Currently we are spending only 2.2 percent of GDP. Our total tax revenues are 8.7 percent of GDP. This implies that we are spending 25 percent of our total tax revenues on education. 

For the sake of information, 25 percent of total tax revenues or 2.2 percent of GDP is Rs600 billion, which the government spent on education last year. In terms of per capita it is Rs3,243 considering the total population equals 185 million. Interesting would be to see the breakdown of the money spent each year on education and more interesting would be to see the effectiveness of that money.

The announced four percent requires another Rs500 billion if it’s spent today. This implies that it will become Rs 1,100 billion, which accounts for 44 percent of the total revenues. The question arises whether the promised four percent is possible when a higher share of budget is going to the national defence and debt servicing, since our total tax revenue as a percentage of GDP has been continuously declining for the last several years.

 If the ratio remained at 8.7 percent , then we are going to spend little less than half of the total tax collection. Is it possible? The answer would be why not? We can just increase our expenditures by 1.8 percent and achieve the target of four percent of GDP.

Budget 2013-14 allocates Rs3,985 billion expenditure for both current and development expenditures. Total FBR tax revenues estimate of the current fiscal year are Rs2,475 billion. Therefore to add Rs500 billion we need to borrow more. However, the payback for the extra Rs500 billion will depend on the mode of spending and effectiveness of spending. If increase in education budget leads to increased productivity in future, then we can spend more by borrowing more.

One way is to raise tax revenues. How? Putting more taxes; I believe there are enough taxes on the entire nation. Another famous way is to increase tax base; we have overall low average incomes and most of the people are not in the tax bracket. Moreover, increasing sales tax would penalise the average taxpayer.

Total current expenditure is around 80 percent of the total expenditures. Therefore, reducing current expenditures especially untargeted subsidies would help in creating more fiscal space. More importantly, we spend too much on the #PerksProtocolPlots which was coined by Dr Nadeem-ul-Haque few months ago and he has been continuously saying it on social media. Abolishing #PerksProtocolPlots will have multiple benefits; it will reduce the insignificant expenditures and more importantly it gives incentive to those who avoid paying taxes.

Consequently, by abolishing spending on #PerksProtocolPlots we are saving good amount of money to spend on education and other social and productive sectors. It will also help in achieving the actual goals of collecting tax revenues.

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Dar’s Exchange Rate Equilibrium

Article was published in "Money Matters" on March 24, 2014

tweets @malikemal

March has made history in the literature of exchange rates in Pakistan. I am calling it a historic event since no one expected this to happen with meager foreign exchange reserves, low foreign direct investment, negative trade as well as current account balance and lower GDP growth. While analyzing the data researchers will consider it an outlier.

Writers are trying to explain the behaviour of the exchange rate in numerous ways. Every explanation mentions the $1.5 billion grant or ‘gift’ from two friendly countries. The Coalition Support Fund payments, privatisation, IMF loans and MoUs signed are other major factors which, according to different authors, are the main contributors to the exchange rate appreciation. I tried to relate the appreciation of rupee by seven percent within less than seven working days with the above mentioned fundamentals but failed to relate any variable or combination of these factors, which could explain the meteoric appreciation of the rupee. On the other hand, we also know that our trade balance is negative and the current account has reached $2 billion in eight months, putting pressure on the exchange rate.

In my last article I tried to explain how different variables can affect the exchange rate and what would be the impact of forced exchange rate appreciation. If it is a temporary appreciation, exporters will bear a potential loss for a short period and importers will enjoy paying lower prices for a short period. Further, it is also expected that a temporary appreciation in the exchange rate will eventually result in massive depreciation in the coming weeks. It was also expected that moneychangers (dealers of foreign currency in the open market), assisted by the government creating chaos in the market, will eventually benefit moneychangers when the currency depreciates in the next few weeks. Nevertheless, this does not seem to be the case.

Before I explain further let’s look at the graph below and try to analyse it. It is taken from the central bank’s website which provides “Exchange Rates for Mark to Market Revaluation by Authorized Dealers in Foreign Exchange”. The value of the exchange rate is below Rs98/$ on March 20 2014 and according to the forecast it is slightly increasing above Rs100/$ in the next six months. What does it tell us?

It tells us to take the finance minister seriously. When he said that he would bring down the exchange rate to Rs98/$, no one bought it including me and several other writers/researchers /authors. Moreover, they argued, the exchange rate is artificially controlled by intervention in the market and thus it would not depreciate in a few weeks to Rs.106/$ or Rs.109/$.

Million-dollar question:  How did the value of the exchange rate come down so swiftly in less than seven working days? The answer to me is very simple. They just pulled it down. How?

Finance Minister Ishaq Dar believed and repeatedly said that our exchange rate is depreciating due to speculations and it is not a true equilibrium value of exchange rate. He supposed that Rs.98/$ is the true equilibrium value of the exchange rate. But one may ask that if he wanted to set it at his desired level then he may have announced it. Why did it take 7 days to come to Rs.98/$. The answer is simple once again. It looks more professional this way.

However, one needs to take two agents into confidence before doing this kind of exercise, i.e., SBP and authorised big moneychangers. Were they informed? Did they get the guidelines from the finance on how to pull the exchange rate down? Did the government bailout big moneychangers to overcome their loss?

The bottom line of the story is that Rs98/$ is the new equilibrium exchange rate. Irrespective of whether it is an overvalued exchange rate and exporters will face losses, every exporter will need to set their prices considering the new exchange rate. The exchange rate will probably move around the par value of Rs.98/$ and depreciate little in the next few weeks. SBP will control it by using by direct forex interventions. We can call the current drop the regime shift in the history of exchange rates in Pakistan.

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DAR’s Exchange Rate Policy

Article was published in the "Money Matters" March 17, 2014.        tweets @malikemal

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While teaching an international finance course to my students at the PIDE, several questions surfaced regarding the gap between the theory we teach and the current scenario of exchange rate of the rupee that has appreciated against the greenback from Rs108.64 on December 3, 2013 to Rs97.88 on 12 March 2014. On the one hand, prominent economists have rubbished the recent appreciation and termed it an overvalued exchange rate, while on the other hand our finance minister, who is currently obsessed with reducing the exchange rate, believes the rupee’s appreciation indicates the revival of public and investor confidence in the economy and the local currency.

Two basic theories which explain movements in the exchange rate in the short to medium run are uncovered interest parity (UIP) and purchasing power parity (PPP). Uncovered interest parity says that movements in the exchange rates are due to the difference between interest rates offered in the home and foreign country. Exchange rate adjusts according to the interest rate differential during the maturity period of bonds.

The purchasing power parity theory says that the exchange rate is the ratio of domestic price and foreign prices. If prices in the home country are more than foreign country then the exchange rate depreciates and vice versa if foreign prices are more than domestic prices. Thus, it clearly states that changes in exchange rate between the two countries is directly proportional to the inflation differential between the two countries.

Daily fluctuations in the exchange rate depends on various factors which are mostly related to the “news”. Some people call it speculation but not every news story is speculative, sometimes it is based “anxiety” and “expectations”. I am using the word “anxiety” because, in general, forex investors have a myopic view and they do not want to take any kind of risk. We can call them over obsessed risk averters.

These news stories or reports are nonetheless related to the availability of forex reserves in the market. For instance, expectations of excess supply appreciate the exchange rate and expectations of excess demand depreciate the exchange rate. These expectations are sometimes correct and sometimes create havoc in the market. The current appreciation in the exchange rate from Rs. 104/$ to Rs. 98/$ is a special case of speculation which is explained by several authors during the last few days but every argument relates it with higher remittances, lower trade balance, better reserves management but it is beyond that. The latest report in the market is that Pakistan received $1.5 billion from the two friendly countries for a special purpose. The news may be true but I don’t buy the argument that $1.5 billion has resulted in the appreciation of rupee by 7.2 percent in 12 days.

Oil imports bill account for one-third of the total imports bill. The government is now using FE-25 facility to finance imports for a 40-day period. This ensures lesser depletion in forex reserves held by the SBP temporarily. More importantly, it gives imports a cover and puts less pressure on the exchange rate due to large inflow of forex reserves held by the SBP. It helps the government manage forex reserves more efficiently.

Although the above stated arguments are important in the exchange rate management but I failed to associate the current appreciation during the last ten days with the actual happenings discussed by the authors in various newspapers. The only logical thing which can be associated with it is political gimmick. But how?

It is surprising to see government officials over joyous about the current appreciation. It is no surprise either that the government has taken credit for the rupee’s rise or conveniently termed it an achievement of the government. Several repercussions are expected due to the appreciation in the nominal exchange rate. On the positive side, the inflation rate will decline due to a decline in the import bill in rupees. Subsequently, the government may also reduce the price of oil – a move that will help industrialists purchase cheaper raw material, intermediate goods and capital for their production. Moreover, imported consumer items will be available at lower cost. But here we are forgetting that prices are sticky downwards. Other than oil prices, which are controlled by the government, prices of other commodities may not decline. Nevertheless, they are not going to increase as well.

Theories of exchange rate determination discussed earlier clearly state that in the presence of inflation differential, which is positive for Pakistan, the exchange rate needs to depreciate. Nonetheless, prices do not affect the exchange rate instantly but with a lag of six months to three years in some cases due to several factors – central bank intervention being the most important among them. Similar behavior was observed in the last decade when the exchange rate was artificially controlled. Some authors call it a stable exchange rate but they ignore that the real effective exchange rate is overvalued, which really matters in terms of policy formulation and competitiveness.

And while the IMF has approved our EFF loan, several prominent economists, including ones in the IMF have been arguing that our exchange rate is overvalued and needs to depreciate thus we should not intervene in the market and try to “stabilise it”. Stabilising the nominal exchange rate implies that we are changing the value of the real exchange rate from its equilibrium.

The current appreciation will increase the import bill (in dollars) because imports are now cheaper and exports will decline (in dollars) because exports are now expensive. Selling one dollar worth of exports in the international market was giving Rs105 at the start of this month but now they will get Rs98 for the same thing. Thus our exporters are bearing potential loss of Rs7. Is it good for the economy? Not at all.  Moreover, if the trade balance gap widens then it will directly affect the current account balance.

Further, one must ask whether the Pakistani currency is appreciating only against dollar or it is appreciating against other currencies as well. The answer is yes, it has appreciated against the Euro by 5.3 percent from March 3, 2014 to March 12, 2014. Similarly, it has appreciated 7 percent against the Chinese Yuan and 8 percent against UK Sterling in the same period.

While communicating with several economists and students of economics, I realised that everyone is expecting the rupee’s revaluation to be short-term, most expecting it to go back to Rs106 or Rs109 against the dollar. Nevertheless, no one knows the time frame, which is the most important thing. Since Finance Minister, Ishaq Dar is expecting $16 billion forex reserves by the end of this year, the government gets a cover by financing imports through banks, Further, the finance minister has asked the US to reimburse Pakistan for the remaining CSF payments, ensuring better forex reserves management while controlling the current account balance. The exchange rate may not depreciate much by the end of the year but this does not imply that our competitiveness is improving or our economy is thriving.

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