HBL CEO Nauman K. Dar bows out

By Kazim Alam

KARACHI: Habib Bank Ltd (HBL) President and CEO Nauman K. Dar will retire on Dec 31, according to a stock exchange filing on Monday.

The bank did not specify any reason for Mr Dar’s exit. His term at the helm of the country’s largest bank was marred by a penalty of $225 million that the New York State Department of Financial Services (DFS) recently imposed on HBL for its non-compliance with risk management and anti-money laundering rules.

As a result, HBL suffered a net loss of Rs14.1 billion in July-September against a net profit of Rs9.8bn in the comparable quarter last year.

HBL is Pakistan’s biggest lender with net assets of nearly Rs175bn at the end of September.

Mr Dar took the top job in 2012, although his association with HBL began in 2003 when he joined Habib Allied International Bank UK as CEO. He previously worked at Citibank and Bank of America.

Mr Dar’s annual remuneration in 2016 was Rs81.3m, up 8.2 per cent from a year ago. This translates into a monthly remuneration of nearly Rs6.8m for 2016.

Chief Financial Officer Rayomond Kotwal will serve as interim CEO until the board makes a formal appointment.

Meanwhile, HBL appo­inted former central bank governor, Salim Raza, as director on the board. Before his stint at the helm of the State Bank of Pakistan, Mr Raza worked for Citibank in the Middle East, Africa and United Kingdom.

Separately, the board created a new position in the bank’s hierarchy and appo­inted Sagheer Mufti as chief operating officer with effect from Jan 8, 2018. “In his last assignment with Citigroup, Mr Mufti was Citibank’s global head for anti-money laundering operations,” the bank statement said.

Last month, HBL appo­inted another former central bank governor, Ashraf Mah­mood Wathra, as senior consultant on international strategy and operations.

The exit of Mr Dar and the appointment of at least three seasoned bankers with experience in international banking suggest that the bank is trying to address “control and compliance issues” that have hit its profitability.

Published in Dawn, October 24th, 2017


Abraaj buys stake in cinema operator

By Kazim Alam

KARACHI: Cinema operator Cinepax Ltd said on Wednesday it is going to develop 80 new screens across the country over the next four years using fresh investment from Abraaj Group, a UAE-based private equity firm.

Established in 2006, Cinepax currently operates 29 screens in 12 locations. Besides increasing the number of screens 3.75 times by 2021, the company also plans to use liquidity injection from Abraaj to “grow other entertainment-related ventures,” according to a press release.

A separate emailed statement from Abraaj confirmed that the private equity firm has acquired a minority stake in Cinepax. It refused to disclose the amount of investment in the Pakistani company.

The current ratio of cinema screens is only 0.5 per million population, the statement said.

Cinepax General Manager for Marketing Mohsin Yaseen also refused to divulge the investment amount or exact shareholding of Abraaj in the cinema operator.

Cinepax is going to set up cinemas in Sialkot, Multan and Sargodha besides expanding its footprint in major cities like Karachi, Lahore and Islamabad, Mr Yaseen said. “We plan to go into the video-on-demand segment,” he said while referring to a digital service that allows viewers to choose and watch entertainment programmes through an interactive TV system.

This will be the ninth transaction of Abraaj in Pakistan since 2004.

Published in Dawn, October 5th, 2017

Stocks down 5pc in turbulent week on panic-selling

By Kazim Alam

KARACHI: Politics took a heavy toll on the share market in the outgoing week as the KSE-100 index slid 4.9 per cent to close at 43,078 points.

Unending political uproar affected the average daily turnover, which shrank 3.4pc from the preceding week to 184 million shares.

The benchmark index has lost about 10pc value since the start of 2017. It’s down 19pc since reaching its peak of 52,876 points on May 24.

Foreign investors have been net sellers in recent months. But selling pressure from foreigners eased off a little in the outgoing week. Although their net sell amounted to $2 million, the figure was notably down from the preceding week when they sold equities worth $31.2m on a net basis.

In contrast, mutual funds emerged as the largest sellers in aggregate terms. Their net sell was $23.6m against the net buying of $6.5m a week ago. Interestingly, mutual funds were the only local players that sold stocks on a net basis because the rest of domestic investors – individuals, companies, banks, brokers and insurance companies – remained net buyers.

Analysts attribute the surge in selling by mutual funds to the typical retail investor psyche. Small-ticket investors who invest through mutual funds base their investment decisions on the recent market performance. Resultantly, they end up sitting out a stock rally and are the last ones to exit the market after big investors have already booked profits.

Volume-wise, top contributors in the outgoing week were Azgard Nine, Bank of Punjab, Aisha Steel, TRG Pakistan and K-Electric.

According to Elixir Securities, the top gainer within the KSE-100 index was National Foods, which went up 10.3pc, followed by Crescent Jute 6.4pc, Soneri Bank 1.4pc, Dolmen City REIT 0.5pc and Pakistan International Container Terminal 0.4pc.

Pak Suzuki recorded a decline of 15.4pc, followed by The Searle Company 15pc, Ferozsons Laboratories 14.8pc, Feroze 1888 Mills 13.9pc and Engro Foods 13pc.

Sector-wise, banks went down 4pc while the drop in exploration and production was 3pc. Cement stocks fell 7pc on concerns about a price war among producers, according to Topline Securities. Fertiliser shares dropped 5pc because of weak demand and excess inventory levels.

AKD Securities expects the market will continue its bearish momentum given the ongoing political crisis involving the ruling party. However, analysts at Arif Habib Ltd believe the market will heave a sigh of relief as valuations become attractive and political noise takes a back seat. With a slowdown in foreign selling, confidence of investors should help the index rise again.

Companies that are going to hold board meetings next week to approve quarterly results include Kot Addu Power, Bestway Cement, Dawood Hercules, Faysal Bank, Bank Al Habib, Cherat Cement, Fatima Fertiliser, Oil and Gas Development Company, Natio­nal Bank and Indus Motor.

Published in Dawn, August 20th, 2017

Dalda plans Rs7bn share offer for public

By Kazim Alam

KARACHI: Dalda Foods Ltd and its parent company are going to raise more than Rs7 billion through the stock market by selling 25 per cent shares in the edible oil business, according to a recent regulatory filing.

The food entity will issue 30 million new shares at the minimum price of Rs85 apiece while its holding company, DFL Corporation, will sell 52.5m existing shares at the same price.

Dalda Foods wants to reduce its reliance on the import of edible oil by backward-integration. It will use the raised funds to expand the crushing capacity of its seed extraction plant from 300 tonnes per day to 500 tonnes.

The country’s edible oil industry is worth around Rs500bn and has been growing at an average annual rate of 7pc, according to industry estimates. About 4m tonnes of edible oil and fats are consumed in Pakistan annually. More than 60pc of it is used for home cooking while the rest is utilised by the industrial sector. Dalda Foods operates in both segments.

The company’s popular brands include Dalda, Tullo and tea whitener Cup Shup.

Deal structure

The Pakistan Stock Exchange (PSX) has placed the draft prospectus carrying the financial accounts of the company on its website to seek public comments until Aug 9.

The issue will take place later through book building in which high net worth individuals and institutions will bid for the stock to determine ‘strike price’ at or above the minimum price of Rs85 per share. They will be allotted 75pc of the issue while retail investors will be offered the remaining 25pc at the same price. Sales and profit of Dalda Foods have grown at an average rate of 12.8pc and 17.4pc, respectively, since 2010.

According to unconsolidated financial statements released to the public, the company recorded sales of Rs26.8bn for 2015-16, up 11.6pc annually. Its profit dipped 14.5pc to Rs1.6bn over the same period.

Assuming the strike price of Rs85 a share, the company offers investors the price-to-earnings multiple of 12.5. The ratio reflects investors’ willingness to pay Rs12.50 for every single rupee of profit earned by Dalda Foods. In contrast, eight peer-group companies listed on the stock exchange, including Engro Foods, Unilever Pakistan Foods and Nestle Pakistan, offer the average multiple of 31.2. This means Dalda Foods offers investors a discount of 60pc at the base price of Rs85 per share.

Speaking to Dawn, Insight Securities Executive Director for Research Zeeshan Afzal said the company offers ‘attractive’ valuation. “The company’s fair value could be around Rs150 per share after the public offering, assuming the price multiple of 24 for peer companies (excluding Engro Foods),” he said.

But the time of the listing may not be opportune, he added. The benchmark index has shed about 11pc value since hitting its peak on May 24 partly because of political turmoil. Moreover, recent public listings, such as Roshan Packages, Ittefaq Steel and the PSX, failed to generate immediate capital gains for investors, Mr Afzal said.

Published in Dawn, August 4th, 2017

Business that’s not for money

For-profit entities exist to make profit.

But some businesses exist for another reason: to bring prestige to a conglomerate.

Here’re a few lines that the head of the news division in HBO series The Newsroom says to a sister-brother duo that is attempting a hostile takeover of ACN, a news network that’s trying to do journalism the way it should be done.

“CNN represents a small fraction of Time Warner’s revenue. NBC Nightly News a small fraction of Comcast. And ACN an even smaller fraction of Atlantis. But they are the face and voice of their parent corporations.”

Running a newspaper is different from selling burgers, toothpaste, soaps and detergents.

Selling consumer goods can make you rich. But it gets you no prestige, no influence, no pull in society.

Prestige, influence and pull are intangible assets that don’t show on the balance sheet.

I just wish somebody showed this beautiful clip to the publishers of major Pakistani newspapers and news channels.

Is Pakistan running out of physical space?

By Kazim Alam

A storm of self-congratulatory tweets brought to our attention a pleasant surprise a couple of months back: Pakistan is set to become the 16th largest economy by 2050, according to a report by PricewaterhouseCoopers (PwC), one of the world’s biggest consulting firms.

Using values from past data to derive future estimates is called extrapolation. Extrapolation lies at the centre of economic planning. But it can also be misleading for a simple reason. It involves the risk of overemphasising some variables while ignoring others.

Now what’s wrong with the PwC estimate about Pakistan’s economic size in 2050? It gives us a false satisfaction that we’re destined to be a major global economic player 30-odd years down the road. What the report completely ignores is the heavy toll that simultaneous growth in the country’s population will take on the economy and living standards.

In an article for Dawn, noted public intellectual Pervez Hoodbhoy says that Pakistan’s population is growing exponentially. This means that instead of growing at an arithmetic rate (1, 2, 3, 4, 5, 6, 7…), the rise in population is at a geometric rate (1, 2, 4, 8, 16, 32, 64…).

“In 1947 [Pakistan] had 27 million people and now has over 200m. This gives a doubling time of roughly 25 years. Now assume for a moment that the ultras have their way and the doubling time stays unchanged. Then 25 years later there will be 400m Pakistani CNIC holders. Wait for another 100 years and that number will comfortably exceed the world’s current population of 7.2 billion.”

Just like PwC, Hoodbhoy is also extrapolating data. But Hoodbhoy’s extrapolation has the potential to toss aside the extrapolation of PwC by rendering its whole feel-good exercise meaningless. What good will becoming the 16th largest economy bring to Pakistanis if they literally run out of physical space in the coming decades?

“Short of nuclear war or a miracle, nothing can now prevent Pakistan from reaching 400m people in 35-40 years. Hence the demand for living space will vastly accelerate. Even now, green areas are vanishing as villages become towns, and one city spills over into the next. Karachi and Hyderabad are approaching their eventual merger, just as Islamabad and Rawalpindi have become practically one city, and Islamabad is furiously racing towards Taxila.”

What standard of living will the citizens of the 16th largest economy will have in 2050 if “there will only be half as much fresh water as today, the air will become yet filthier, pollutants will poison the land and sea, and road traffic will become nearly impossible”?

If the situation is indeed as dire as Hoodbhoy suggests, then why is no one making a fuss about the oncoming Armageddon? Having talked to a number of people about the issue, I have reached the following conclusion:

  1. People don’t believe the dark forecast because they are optimistic that human ingenuity will overcome all big problems – like it always has.
  2. People believe every child is born with his rizq already promised by God.
  3. The human race has existed for millennia and the physical space has demonstrably not run out so far. Thus, the whole argument seems like a red herring to many people.

Some of the people familiar with western political ideas also referred to Thomas Malthus, the 19th century philosopher who painted a pessimistic picture of the future for the human race by pointing out that food production in Europe rose at an arithmetic rate while population grew at a geometric rate. Of course, few of Malthus’s predictions proved right: technological advancements have so far ensured sufficient food for everyone (in theory, at least).

But an outright rejection of Hoodbhoy’s argument by calling him a 21st-century Malthusian isn’t very intelligent. The Malthusian view of the world was turned upside down by the agricultural and industrial revolutions.

Plus, famine, disease and wars ensured a regular trimming of the world populations for hundreds of years.

But the latest data from around the world shows that child mortality is at a record low, the number of war-related deaths has rapidly come down from its average of half a century ago, diseases that would kill millions of children every year are disappearing and the world population is – by and large – healthier, more prosperous and living longer than its historical average.

As for technological advancement, I remain a staunch believer in human ingenuity. But should we bet the future of human race on our intuition alone? Optimism cannot undo hard facts. Pakistan already has two million people entering the job market every year. This means we need at least 7% GDP growth rate per annum – a far cry from the current growth rate of hardly 5%. Consider this in view of the prevailing housing shortage, water scarcity and streets teeming with undernourished and out-of-school children, you’ll realise Pakistan is a ticking bomb.

Next time you read a PwC report talking about the size of Pakistan’s economy 30 years down the road, take it with a sack of salt.

SBP just devalued the rupee by 3.1%. Will it lead to higher exports?

By Kazim Alam

The State Bank of Pakistan just allowed the rupee to devalue against the dollar by 3.1 per cent to Rs108.095. That’s the biggest plunge in the rupee’s value in nine years, according to Bloomberg News.

Here’s a piece I wrote a couple of months back on the topic of devaluation. Your feedback is welcome.


WATCHERS OF THE exchange rate are divided in two distinct camps.

The first camp consists, in large part, of simpletons who believe a strong currency is good for Pakistan. For them, a strong rupee is a hallmark of a strong economy. Consequently, they believe their own ability to buy more dollars using fewer rupees is the best barometer of national economic strength.

The other camp believes that depreciating the rupee bodes well for the economy because it helps grow the country’s exports. This camp knows a thing or two about economics, as its recipe to increase exports is well-founded in modern economic theory. After all, nearly all economic turnarounds in the recent decades were shaped by export-oriented policies of once-struggling economies.

It is in this context that I found a recent op-ed in The Express Tribune quite interesting. “Misinterpretations regarding exchange rates” by Dr Sajid Amin Javed, a research fellow at the Sustainable Development Policy Institute, neatly lays out the pros and cons of depreciating a national currency.

The article presents both sides of the picture, but the underlying assumption is clear: depreciation increases exports. Of course, the writer duly brings up (negative) side effects of depreciating the currency to increase exports. But he remains unambiguous about the inverse relationship between depreciation and exports throughout the article.

“Depreciation may sound unwanted in the short run, but it benefits the country in the long run. It increases exports, decreases imports and thus reduces trade deficit,” Javed says.

I have two objections to his overall argument. The first objection is logical. The second one is logical as well as moral.

1) Growth in exports is not an automatic outcome of currency devaluation

2) Currency devaluation rigs the system in your favour. It’s a bad business practice and immoral

Let me describe each of the two arguments below.

1) Currency devaluation is not a magic wand that delivers actual growth in exports

a) The value of the local currency against the dollar is not the sole determinant of the level of exports. If that was the case, Zimbabwe and Venezuela would be the largest exporters worldwide. It’s plainly obvious, yet noteworthy that a host of factors contribute to a country’s export competitiveness. It is painful to see how commentators hand out a quick fix to the low-export problem in the shape of a weaker rupee.

Look at the latest Ease of Doing Business Index released by the World Bank that ranks Pakistan 144th out of 189 economies of the world. Pakistan’s exports would remain paltry even if a dollar was worth Rs1,000 as long as it continued to hold its current 172nd position on the indicator of trading across the border. Yes, you read it right. Pakistan is among the bottom 20 of the 189 economies of the world when it comes to trading across the border. I don’t know how depreciating the rupee can help grow exports in such a business environment.

b) The rupee has been losing its value against the dollar since forever. Its relative ‘strength’ against the greenback dates back to the arrival of Ishaq Dar at the Ministry of Finance and coincides with the build-up of foreign exchange reserves from $3.2 billion to $24.5 billion.

Depreciating the rupee has not helped Pakistan grow exports. Just look at the chart below prepared by American economists Atif Mian and Amir Sufi that compares export per capita of Pakistan and India since the early 1980s. You don’t even have to pull up the data on the rupee’s depreciation all these years in case you’re in your 30s: our parents always preferred keeping savings in either gold or dollars to hedge against the devaluation of the rupee. But did that devaluation result in the rise of our exports? The following graph is yelling ‘no’ to me.

c) The Tribune article notes that rising exports generate income and employment opportunities. Yes, sure. But producing goods and services for the domestic consumption also increases incomes and creates jobs. After all, the economy as measured by gross domestic product (GDP) consists of four things: consumption, government expenditure, investments and net exports. Net exports that currently hover around $22 billion constitute only about 8% of Pakistan’s GDP.

Pakistan’s economy is consumption-oriented with a high marginal propensity to consume i.e. personal spending goes up in conjunction with the rise in income. According to official government statistics, the private consumption expenditure in nominal terms was over 80% of GDP in 2015-16.

Rising exports will increase the income of the people engaged in producing exportable goods. Similarly, people producing goods for domestic consumption will benefit more if the government adopts the policy of strengthening the purchasing power of the local consumer – a direct outcome of a stable exchange rate. It’s up to policymakers to assess how to ensure the maximum economic benefit for the maximum number of people.

2) Currency devaluation is immoral

The devaluation in currency means changing its value in the international marketplace to make the system work in your favour. It does two things. One, it erodes the purchasing power of your fellow citizens (that’s a no-brainer).

Two, it rigs the system temporarily in your favour. It’s the rigging of a very basic kind if you think about it. It gives you the false pretence of winning for a short term while you cause a long-term damage to the system by signalling to your competitor that it’s OK to change rules in the middle of the game.

It’s like tinkering with the meter of the cab you’re driving. You drive 900 metres but the system tells you that the cab travelled one kilometre. It’s like bowling from a distance of 21 yards instead of 22 yards in order to make your yorker faster.

Remember, the exchange rate is just a number. It means nothing on its own. In essence, the exchange rate tells you how much one currency is worth against another. Rigging its value at whim erodes the trust people have in it. Imagine if every country appointed overzealous bureaucrats to make exchange rates favourable to their trade balance. There’ll be havoc as international trade will collapse.

The exchange rate should ideally be stable and reflective of economic fundamentals, not the whims of national treasury managers.

Widening the roads won’t end traffic jams

By Kazim Alam

Are you tired of being stuck in a gridlock every evening? Do you expect traffic jams will disappear once the Sindh government widens all major roads in Karachi?

Let me break it to you: jams are here to stay – at least until we adopt a proper public transport system.

Here’re a couple of statistics that demonstrate the uselessness of road expansion projects in Karachi.

Outstanding auto loans in Jan-Mar amounted to Rs137.4 billion, up 35 per cent year-on-year. Meanwhile, the number of cars sold in the same three months went up 13pc on an annual basis.

Banks are helping people buy more cars. These cars are choking our roads. Widening the roads won’t fix the traffic mess. That’s because increasing the width of thoroughfares will accommodate more cars for a while, and then won’t.

Automakers roll out cars day in day out as banks happily extend car financing at low interest rates. “Nowhere in the world did flyovers and underpasses ever solve traffic problems,” economist Kaiser Bengali once told me in an interview.

The solution lies in managing the car ownership rate while building a public transport system that’s reliable, affordable, expansive and environment-friendly.

Sindh’s reliance on a single tax grows

By Kazim Alam

KARACHI: Presenting the Sindh budget for 2010–11, then finance minister Murad Ali Shah had termed the newfound right of the province to collect sales tax on services a “momentous achievement” for the ruling party that “won this with serious and persistent efforts”.

In the seven budget speeches that followed, Mr Shah would repeatedly laud the up-to-par performance of the Sindh Revenue Board (SRB), the body set up exclusively to collect sales tax on services in 2010.

Indeed, the SRB has outperformed other tax-collecting agencies in the province by a wide margin. Its collection target increased from Rs25 billion for 2011–12 to Rs100bn for 2017–18. This translates into an average annual growth rate of 26 per cent over the six-year period.

Meanwhile, provincial revenues from other taxes increased only 10.4pc annually over the same period.

In simple words, the Sindh government is getting increasingly dependent on sales tax on services, which is an indirect tax. Almost 54pc of total provincial tax receipts are expected to originate as sales tax on services next year.

Speaking to Dawn, Sindh’s former caretaker finance minister Shabbar Zaidi said the government’s growing reliance on a single indirect tax is not a healthy practice. He said its rate should instead be brought down by half to 7.5pc.

He added that this tax should be imposed only on those services that are availed by well-heeled people. “Sales tax on services should have a minimal impact on the lives of ordinary folk,” he said.

Currently, the tax applies to a broad range of services, such as advertising, customs agents, franchise service providers, restaurants, property developers, insurance providers, shipping agents and telecommunication service providers.

Ali Salman, managing director of Islamabad-based economic policy think tank PRIME Institute, said the Sindh government’s growing reliance on sales tax on services creates two problems. One, the duplication of sales tax collection because companies that operate nationally have to pay it to more than one provincial government.

And two, it prevents the government from taking bold tax measures, such as enhancing the collection of direct taxes like agricultural income tax.

The share of direct taxes in total tax receipts of Sindh is less than 7pc for the next fiscal year. The estimated share of the tax on agricultural income in total tax collection is just 0.5pc.

“Pakistan remains one of the very few countries where the government’s reliance on indirect taxes surpasses (its reliance on) direct taxes by a big margin,” Mr Salman said, adding that such indirect taxes increase inflation and hurt low-income households disproportionately.

Published in Dawn, June 7th, 2017

Italian businesses are waking up to Pakistan’s potential: envoy

By Kazim Alam

KARACHI: Statistics released by the national data-collecting agency paint an unflattering picture of exports, which came down 9 per cent annually between 2013-14 and 2015-16.

In particular, textile exports that constitute about three-fifths of the total registered negative growth in July-March despite preferential market access to the European Union, largest foreign consumer of Pakistani goods.

But every cloud has a silver lining. Recent data from the Pakistan Bureau of Statistics (PBS) shows a trend that may well be the forerunner of a reversal in Pakistan’s export fortunes.

Imports of textile machinery jumped 21pc year-on-year to $401.1 million in July-March. Imports of electricity-generating machinery surged 76pc over the same period. Added megawatts of electricity to run the newly imported textile machinery is the herald of future export proceeds, according to Stefano Pontecorvo, Italy’s ambassador to Pakistan.

Speaking to Dawn on the sidelines of Igatex Pakistan 2017, an international exhibition of textile machinery and technology held in April, Mr Pontecorvo said more than 70 Italian textile companies came to Karachi for the trade fair. Italy had the largest presence in the exhibition in which 550 companies from 35 countries took part.

“The Italian government and businesses are waking up to the huge potential that Pakistan has,” he said, adding that Pakistan has become the sixth largest buyer of Italian textile machinery.

“In three years, I expect the Pakistan-Italy trade volume to go up to six times of what it is today. I am bullish on Pakistan,” the ambassador said.

Pakistan’s imports from Italy were $444 million in 2015, down 5.4pc from 2014, according to the latest International Trade Centre (ITC) statistics. Pakistan’s exports to the European nation declined 19.4pc to $618.2m over the same period.

Noting that trade flows take time to change, Mr Pontecorvo said Pakistan has a solid entrepreneurial base, strong industry and sound banking system to fuel the expected economic expansion.

Internal restraints like energy shortages and uncertainty in the international market are major reasons for the decline in Pakistan’s exports, the ambassador said. But lower exports from Pakistan have also resulted in higher domestic consumption, he added. “Industrial capacity is limited. So you end up exporting less if you consume more. No wonder Pakistan’s domestic market (for textiles) is growing bigger and bigger,” he said.

Foreign direct investment (FDI) from Italy amounted to $41.7m in July-March, which made it the sixth largest foreign investor in Pakistan. Its investments are concentrated in textiles, surgical instruments, pharmaceuticals and plastics.

He said the rise in FDI from Italy is partly because Italians of Pakistani origin are taking interest in the country. “It’s a sign of confidence.”

Published in Dawn, May 2nd, 2017