Pakistan Economy Hobbled by Underinvestment
Pakistan needs investment of 20% of GDP to achieve 5% economic growth, a capital-to-output ratio (COR) of four, according to Mohsin Mushtaq Chandna, economic minister at the Pakistan Embassy in Washington, DC.
Major Issues:
In a wide-ranging presentation to the Pakistan Club at the University of Chicago Booth School of Business, Mr. Chandna, an alumnus of the university, listed the following major issues facing Pakistani economy:
1. Pressure on capital account
2. Declining FDI
3. Declining tax to GDP ratio
4. Over reliance on monetary policy
5. Excessive domestic borrowing
6. Extremely volatile internal and external geo-political environment
7. Energy shortages
8. Increase in poverty and unemployment rates
Heavy Borrowing:
To make up for the shortfall in investments and tax revenues, the Pakistani government is forced to borrow heavily from commercial banks and international financial institutions such as the World Bank, the Asian Development Bank and the IMF, in addition to recent floating of $2 billion worth of bonds on international debt market. These debts add to the debt-to-GDP ratio and put further pressure on the cost of debt service.
Many of the problems highlighted by Mr. Chandna did not exist during President Musharraf's rule when foreign and domestic investments climbed to new highs and debt-to-gdp rartio declined.
Domestic savings rate was about 18% and foreign direct investment reached $5.2 billion, or 3.5% of Pakistan's GDP. These investments fueled economic growth from 2000-2008. In my view, the activist judges led by former chief justice Iftikhar Mohammad Chaudhry have contributed significantly to the sharp decline in FDI and domestic investments in the country.
Foreign Direct Investment (FDI):
World Bank's data shows that foreign direct investment (FDI) in Pakistan reached a peak of over $5 billion (3.6% of GDP) in 2007 and then fell sharply in the wake of Justice Chaudhry's reversal of the privatization of Pakistan Steel Mills. FDI has essentially dried up and the Pakistan Steel Mills Corporation has accumulated losses over Rs. 100 billion in spite of multiple bailouts at taxpayers expense. It is currently operating at just 3% of capacity and its monthly payroll adds up to Rs. 500 million, according to Dawn.
Canceled Privatization Deals:
Huge subsidies are being given at taxpayers' expense to Pakistan Steel Mills and several other state-owned enterprises which take resources away from more pressing needs for spending on education, health care and infrastructure. In fact, Pakistan Education Task Force Report 2011 reported that "under 1.5% of GDP [is] going to public schools that are on the front line of Pakistan's education emergency, or less than the subsidy for PIA, Pakistan Steel, and Pepco."
Speaking at a recent international judicial conference in Islamabad, Dr. Ishrat Hussain, current dean of the Institute of Business Administration and former governor of The State Bank of Pakistan, said there has not been a single privatization deal in Pakistan since the Supreme Court's 2006 decision voiding the steel mill transaction.
Dr Hussain said that despite fulfilling the legal requirements, the fear that the country’s courts may take suo motu notice of the transaction, and subsequently issue a stay order, deters businesses from investing in Pakistan, according to a report in The Express Tribune. “A large number of frivolous petitions are filed every year that have dire economic consequences. While the cost of such filings is insignificant the economy suffers enormously,” he added.
Crucial Projects Delayed:
Among other projects, Dr. Hussain particularly cited Reko Diq and LNG projects which could not proceed because of judicial activism of Pakistan Supreme Court judges.
The lack of progress on liquefied natural gas (LNG) deal has exacerbated Pakistan's energy crisis. It would have brought in 400 million cubic feet of gas per day to bridge the growing supply-demand gap now crippling Pakistan's economy.
The invalidation of Reko Diq license to Tethyan, joint venture of Canada's Barrick and Chile's Antofagasta, has turned away Pakistan's single largest foreign investment deal to date. The deposit in Balochistan was expected to produce about 200,000 tons of copper and 250,000 ounces of gold annually. Under the deal Baluchistan province would hold a 25 percent stake in the project, with Tethyan holding the remaining 75 percent.
Militants Released:
In addition to activist judges intervention in economic matters, there have also been many instance in which hundreds of known militants have been released by Pakistani courts. Those released have then committed acts of terror which have also scared away investors, both foreign and local.
Summary:
Mohsin Mushtaq Chandna's presentation of the data and facts is quite comprehensive. A combination of poor governance and activist judges have significantly contributed to the major issues highlighted in the presentation. I hope Prime Minister Nawaz Sharif's government is up to the tough challenges faced by Pakistan. Failure to confront these challenges would produced yet another lost decade like the decade of 1990s when Pakistan's economic growth was just 3-4%.
You can find a pdf version of Mr. Chandna's presentation on PakAlumni.com website:
http://www.pakalumni.com/forum/topics/assessment-of-the-state-of-pakistan-economy-in-may-2014
Major Issues:
In a wide-ranging presentation to the Pakistan Club at the University of Chicago Booth School of Business, Mr. Chandna, an alumnus of the university, listed the following major issues facing Pakistani economy:
1. Pressure on capital account
2. Declining FDI
3. Declining tax to GDP ratio
4. Over reliance on monetary policy
5. Excessive domestic borrowing
6. Extremely volatile internal and external geo-political environment
7. Energy shortages
8. Increase in poverty and unemployment rates
Heavy Borrowing:
To make up for the shortfall in investments and tax revenues, the Pakistani government is forced to borrow heavily from commercial banks and international financial institutions such as the World Bank, the Asian Development Bank and the IMF, in addition to recent floating of $2 billion worth of bonds on international debt market. These debts add to the debt-to-GDP ratio and put further pressure on the cost of debt service.
Many of the problems highlighted by Mr. Chandna did not exist during President Musharraf's rule when foreign and domestic investments climbed to new highs and debt-to-gdp rartio declined.
Pakistan Domestic Savings Rate Source: World Bank |
Domestic savings rate was about 18% and foreign direct investment reached $5.2 billion, or 3.5% of Pakistan's GDP. These investments fueled economic growth from 2000-2008. In my view, the activist judges led by former chief justice Iftikhar Mohammad Chaudhry have contributed significantly to the sharp decline in FDI and domestic investments in the country.
Gross Fixed Capital Formation in Pakistan. Source: ADB |
Foreign Direct Investment (FDI):
World Bank's data shows that foreign direct investment (FDI) in Pakistan reached a peak of over $5 billion (3.6% of GDP) in 2007 and then fell sharply in the wake of Justice Chaudhry's reversal of the privatization of Pakistan Steel Mills. FDI has essentially dried up and the Pakistan Steel Mills Corporation has accumulated losses over Rs. 100 billion in spite of multiple bailouts at taxpayers expense. It is currently operating at just 3% of capacity and its monthly payroll adds up to Rs. 500 million, according to Dawn.
FDI as % of GDP in Pakistan Source: World Bank |
Canceled Privatization Deals:
Huge subsidies are being given at taxpayers' expense to Pakistan Steel Mills and several other state-owned enterprises which take resources away from more pressing needs for spending on education, health care and infrastructure. In fact, Pakistan Education Task Force Report 2011 reported that "under 1.5% of GDP [is] going to public schools that are on the front line of Pakistan's education emergency, or less than the subsidy for PIA, Pakistan Steel, and Pepco."
Speaking at a recent international judicial conference in Islamabad, Dr. Ishrat Hussain, current dean of the Institute of Business Administration and former governor of The State Bank of Pakistan, said there has not been a single privatization deal in Pakistan since the Supreme Court's 2006 decision voiding the steel mill transaction.
Dr Hussain said that despite fulfilling the legal requirements, the fear that the country’s courts may take suo motu notice of the transaction, and subsequently issue a stay order, deters businesses from investing in Pakistan, according to a report in The Express Tribune. “A large number of frivolous petitions are filed every year that have dire economic consequences. While the cost of such filings is insignificant the economy suffers enormously,” he added.
Crucial Projects Delayed:
Among other projects, Dr. Hussain particularly cited Reko Diq and LNG projects which could not proceed because of judicial activism of Pakistan Supreme Court judges.
The lack of progress on liquefied natural gas (LNG) deal has exacerbated Pakistan's energy crisis. It would have brought in 400 million cubic feet of gas per day to bridge the growing supply-demand gap now crippling Pakistan's economy.
The invalidation of Reko Diq license to Tethyan, joint venture of Canada's Barrick and Chile's Antofagasta, has turned away Pakistan's single largest foreign investment deal to date. The deposit in Balochistan was expected to produce about 200,000 tons of copper and 250,000 ounces of gold annually. Under the deal Baluchistan province would hold a 25 percent stake in the project, with Tethyan holding the remaining 75 percent.
Militants Released:
In addition to activist judges intervention in economic matters, there have also been many instance in which hundreds of known militants have been released by Pakistani courts. Those released have then committed acts of terror which have also scared away investors, both foreign and local.
Summary:
Mohsin Mushtaq Chandna's presentation of the data and facts is quite comprehensive. A combination of poor governance and activist judges have significantly contributed to the major issues highlighted in the presentation. I hope Prime Minister Nawaz Sharif's government is up to the tough challenges faced by Pakistan. Failure to confront these challenges would produced yet another lost decade like the decade of 1990s when Pakistan's economic growth was just 3-4%.
You can find a pdf version of Mr. Chandna's presentation on PakAlumni.com website:
http://www.pakalumni.com/forum/topics/assessment-of-the-state-of-pakistan-economy-in-may-2014
Related Links:
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Pakistan expects to raise at least $2bn by March next year through the international sale of shares in Pakistani energy and banking companies, according to the man spearheading the privatisation drive.
Muhammad Zubair, chairman of the privatisation commission, signalled the country’s return to global equity markets following what the government says is the end of a political crisis marked by weeks of demonstrations in the capital, Islamabad.
“There was uncertainty that the prime minister will be forced to resign, the parliament will be packed up,” he said, referring to the protests led by Imran Khan, the cricketer-turned-politician, and Tahirul Qadri, a moderate Islamic leader. “By mid-September, it was clear that the prime minister was staying and the parliament will remain intact.”
Demonstrators remain camped outside the parliament, but other political parties, including some opponents of Prime Minister Nawaz Sharif, have backed the government’s right to run the country until its five-year mandate expires in 2018.
Mr Zubair will share his message of returning political stability on Thursday when he meets potential investors at the start of a roadshow beginning in London to sell a 7.5 per cent stake in Oil and Gas Development Co. Analysts say the offer through global depositary receipts should raise more than $800m.
This will be followed by the offer of government shares in the privately run Habib Bank, which analysts said could fetch up to $1.2bn in the first quarter of next year. HBL was privatised in 2003 when 51 per cent was sold to the Aga Khan Fund for Economic Development.
Mr Zubair said a successful outcome of the two deals would build investor confidence and help pave the way for privatising other public sector companies. He said at least nine electricity distribution companies and six generating companies would be privatised.
Pakistan International Airlines, the lossmaking state-owned carrier would also be offered for sale. In the past week, Pakistani officials have said the government was planning to split PIA into two, offering its international operations to a Middle Eastern airline while selling ageing aircraft and domestic routes to a local investor.
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Mr Zubair said the privatisation programme had the support of every mainstream political party. “We have met with 60 international equity funds. At least 90 per cent are convinced that political stability will remain in Pakistan . . . We now have to demonstrate we are back at work.”
Mr Sharif was elected prime minister for the third time in May 2013 and is seeking to revive confidence in an economy ravaged by corruption, poor management and attacks on official and civilian targets by Taliban Islamist extremists.
As the scion of a prominent business family in the populous Punjab province, Mr Sharif has advertised himself as a business-friendly leader eager to privatise lossmaking state groups.
But some analysts are sceptical about the likely extent of privatisation, warning that even a successful sale of OGDCL and HBL shares will not necessarily lead to the sale of struggling electricity groups.
“Getting credible foreign investors has historically proven difficult, especially when it comes to taking charge of public sector companies,” said Sakib Sherani, a former adviser to the finance ministry.
“These assets include those that are heavily overstaffed and have run in loss for a long time. The real test will come when these assets are put up for strategic sales along with transfer of management.”
Nor is political stability guaranteed, with Mr Khan and Mr Qadri repeating their demands for Mr Sharif to resign and trade unions likely to flex their muscles.
http://www.ft.com/intl/cms/s/0/029b3250-487a-11e4-ad19-00144feab7de.html
In addition to total disbursements amounting to $4.5 billion from the IMF since 2013, Pakistan has also raised at least $3.5 billion from the international bond market by floating Sukuks and Eurobonds.
In its many reports on the economy, the SBP has made it abundantly clear that it is not particularly fond of the government’s approach to shore up foreign exchange reserves on borrowed funds.
It should be noted that repayments to the Paris Club — following the debt rescheduling of December 2001 – are set to begin in 2016-17 whereas IMF repayments will start from 2017-18. It is against this backdrop that the SBP believes shifting financing away to non-debt creating inflows (i.e. foreign investments) is a must to strengthen the country’s debt servicing capacity in the future.
“A sustainable solution requires narrowing the FX gap with real earnings from exports and/or remittances, rationalisation of imports, and curbing smuggling,” the central bank advised the government in one of its recent reports.
In overall terms, since July 2013, non-debt creating foreign exchange inflows (such as foreign direct investment, remittances and exports) have increased by $2.2bn, while debt flows have increased by $4.1bn (in net terms).
While Pakistan’s overall external debt situation is not alarming at the moment, with the bulk of the debt stock long-term and concessional in nature, and with debt repayment indicators in a relatively comfortable zone, the trend established in the past few years does give cause for concern.
The concern is accentuated by the possible confluence of a number of unfavourable factors in the medium term. Within the next three years, repayments begin on maturing sovereign dollar-denominated bonds; to the Paris Club on rescheduled debt; and to the IMF for the amounts disbursed under the current programme. In addition, imports relating to new power plants and the projects under the China-Pakistan Economic Corridor will also kick in. On top of all this, Pakistan could be incurring as yet unspecified external liabilities on CPEC projects.
With exports misfiring, the government paying inadequate attention to this cause, and remittances plateauing, the unfolding scenario could be the ‘worst case’ rather than the hopeful ‘base case’ constructed by the government and IMF.
(A crude indicator of the PML-N government’s priorities is the number of hours the finance minister has spent travelling the world meeting foreign bond investors in the past two years versus the amount of time he has given to Pakistan’s exporters in listening to, and trying to address their concerns.)
Taking external as well as domestic debt together, Pakistan’s debt dynamic in overall terms is extremely unfavourable. Public debt has increased nearly three-fold since 2008, rising to almost Rs18 trillion by end-June 2015, growing at a compounded annual rate of over 16pc. In the last two years, Rs3.2tr has been added to the public debt, increasing the stock by 22pc. Making the debt dynamic non-benign is the fact that the bulk of the increase (Rs2.7tr) has come from high-cost, shorter-maturity domestic debt.
With economic growth stagnating, inflation-adjusted increase in government revenues only nominally positive, and uncertain prospects for exports, the outlook for public debt is not benign. Already, public debt-to-GDP ratio stands at over 65pc (excluding the quasi-fiscal deficit), well above its legal threshold under the Fiscal Responsibility and Debt Limitation (FRDL) Act of 60pc. Interest payments are inching up, budgeted to consume 52pc of total net federal revenue (after provincial transfers) in the current fiscal year.
An oft-overlooked aspect of Pakistan’s debt situation is the political economy. There is an inherent asymmetry between the ‘benefits’ derived from new debt undertaken, and the burden of its repayment. There are two facets worth considering. First, those segments who tend to ‘benefit’ from the debt contracted (the elite) are usually different from those who bear the incidence of the debt burden (the less affluent).
The elite benefit from the country’s overall borrowing because it insulates them from difficult choices by easing their budget constraint. The debt expands their available resource pool, and their control and influence of expenditure allocation allows them to increase the spending on their constituencies while shifting the ‘burden’ and consequences to less influential segments. The consequences can be in the form of expenditure cutbacks, lower spending on public services, lower investment and growth in the economy and/or higher inflation.
http://www.dawn.com/news/1213356
The SBP is expected to officially announce the foreign remittances statistics next week.
https://tribune.com.pk/story/1501689/money-matters-pakistan-gets-230m-loans-cushion-forex-reserves/
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Pakistan has received two short-term loans worth $230 million from international creditors, meant to keep the official foreign exchange reserves at a level sufficient to provide cover to three-month import bill.
According to officials, the country received an amount of $153 million from Citibank in August. Besides, Islamic Development Bank (IDB) gave a $77 million short-term loan in July for crude oil import.
The IDB’s short-term facility is meant for import of crude oil from Saudi Arabia and the lender directly makes payments to the oil supplier on behalf of an oil importer. It partially helped lower pressure on the country’s forex reserves.
From April to May this year, Pakistan had signed three separate short-term loan agreements with the IDB valuing $700 million. Of this amount, Pakistan has already imported crude oil equivalent to $340 million.
For the current fiscal year, the government has estimated receiving $1.55 billion short-term loan from the IDB against the oil import facility.
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During the week ending August 31, 2017, the SBP’s reserves increased by $338 million to $14.681 billion due to official inflows, the central bank had reported on Thursday.
For almost one month, Pakistan was touching the three-month import cover border line as its reserves remained at around $14.3 billion.
In order to avoid downgrading in its credit ratings and keep the tap of budget financing open from the World Bank, Pakistan has to maintain its official foreign currency reserves above the three-month import cover level.
The finance ministry is currently making arrangements for floating about $1 billion worth of Sukuk Bonds by middle of November and a better credit rating will help lower the cost of borrowing. It had also raised $1 billion last year at 5.5% interest rate – the lowest rate on the Islamic bond that it ever paid.
The government was reviewing different options to keep the reserves above the level of three-month import bill. The options included incentives for expatriates to invest in Pakistani dollar-denominated bonds, more restrictions on imports and steps that will encourage exporters to bring back export proceeds.
Finance Minister Ishaq Dar on Friday held a meeting with his Chinese counterpart Xiao Jie and discussed issues of mutual interests – including ways and means to further enhance bilateral economic relations.
During FY2016-17, Pakistan had borrowed a record $10.1 billion external loans that included a record-breaking $4.4 billion short-term financing.
Out of this, $2.3 billion came from Chinese financial institutions. The government took $1.7 billion from the China Development Bank, $300 million from the Industrial and Commercial Bank of China, and $300 million from the Bank of China.
It also obtained $445 million from the Noor Bank of the UAE, $650 million from a consortium of the Suisse Bank, the UBL and the ABL, $275 million from Citi and $700 million from the Standard Chartered Bank, London.
This was the first time in Pakistan’s history that any government has taken over $10 billion as fresh foreign loans in a single year.
Pakistan Tahreek-e-Insaf Chairman Imran Khan on Thursday called Finance Minister Ishaq Dar Pakistan’s economic hitman while criticising his economic policies.
In July, Pakistan obtained a total of $254.9 million loans, including $77 million from IDB. It received $75 million from the World Bank for project financing.
China also gave $71.5 million worth of loans for carrying out various Beijing-funded schemes. The Asian Development Bank provided $28.8 million worth of loans.
The $254.9 million loans were 3.2% of the total annual budgetary estimates of $8 billion for FY2017-18.
THE EXPRESS TRIBUNE > OPINION
Economy: real and monetary
By Dr Pervez TahirPublished: March 16, 2018
https://tribune.com.pk/story/1661121/6-economy-real-monetary/
A debate is raging that the economy is in dire straits and the continuation of present policies is a recipe for complete disaster. Any economy has two sides, the real and the monetary-financial. The disaster story relates to the latter. The classical economists used to think that money is merely a veil and what matters is the real economy of goods and services.
It was, however, Lord Keynes who discovered that the Great Depression of the 1930s was caused by insufficient demand for the existing industrial capacity. Boosting demand by printing currency would revive the economy. He was concerned with the short run in which money does matter. Classical economists were talking of the long run over which the industrial capacity is created. Long-term growth is what matters in developing economies like Pakistan. Investment is the strategic variable along with a proper choice of technique to employ the growing labour force. The chosen technique can be labour-saving, labour-intensive, or labour-absorbing. The last-mentioned was prescribed by the celebrated Cambridge economist Joan Robinson in the case of China. (Incidentally, besides being a woman, her love for China cost her the Nobel prize.)
In Pakistan, the cohabitation of political transitions and economic crisis is a familiar sight. The story line begins with the external sector and the government sector in terms of financial and monetary indicators. For the February 2008 elections, the transition fiscal year was 2007-08. Total debt was 63.2% of GDP and the external debt and liabilities were 30.7% of GDP. The SBP’s liquid reserves were 8.8 billion dollars, covering imports of 17 weeks. Short-term external debt was 8.2% of reserves. Inflation, current account deficit and fiscal deficit at 12%, 8.5% and 7.6% had all crossed danger zones. GDP growth of around five per cent was the lowest in five years. The economy was clearly on the downhill, touching the bottom at 0.36 in 2008-09. The transition fiscal year for elections in May 2013 was 2012-13. Total debt was 69.5% of GDP and the external debt and liabilities were 26.3% of GDP. The SBP’s liquid reserves were 6.1 billion dollars, covering 14.3 weeks’ imports. Short-term external debt was 4.4 % of reserves. The rate of inflation, current account deficit and the fiscal deficit were 7.4%, 1.1 % and 8.2%, respectively. GDP growth was low at 3.7%, but the economy was on the upturn. For the 2018 elections, 2017-18 is the transition fiscal year. The source of information for the year is the latest press release of the IMF, an organisation concerned mainly with the monetary and financial side of the economy. It expects fiscal deficit at 5.5 per cent, current account deficit at 4.8 per cent and GDP growth at 5.8 per cent. As a result, ‘risks to Pakistan’s medium-term capacity to repay the fund have increased’. Remember Ishaq Dar’s refrain that he had to go to the IMF to repay the debt contracted by the previous government. Free of political compulsions, the caretaker government had prepared the ground for it. The deal was to pay back without reform. The signs of slowly increasing growth were ignored.
Are we heading for a repeat of the script? The deputy head of the IMF has already made it clear that the possible grey-listing by the FATF does not disqualify a member to access its lending. The upturn in the real economy continues. CPEC investment will boost it further. The country has the ability to grow out of the present financial strife. Reform must be undertaken, but without repeating the mistake of the anti-growth IMF support.
https://www.bloomberg.com/news/articles/2019-10-25/pakistan-s-tycoons-seek-to-take-over-disputed-barrick-mine
Reko Diq is one of the largest underdeveloped copper and gold deposits in the world, capable of producing each year 200,000 tons of copper and 250,000 ounces of gold.
Pakistan’s top business tycoons have offered to take over a disputed copper and gold deposit that was once explored by Barrick Gold Corp. and Antofagasta Plc, according to people familiar with the matter.
Officials at the provincial Balochistan government are said to have met with a consortium of four business groups including tycoons Arif Habib and Muhammad Ali Tabba who are willing to invest about $1 billion of their own cash in the project, the people said, asking not to be named because the discussions are private. The consortium is willing to go through a bidding process to take over the project, the people said. Pakistan’s provincial government spokesman didn’t respond to requests for comment.
An international tribunal run by the World Bank in July ordered Pakistan to pay $5.8 billion in damages to Barrick Gold and Antofagasta after the country denied them a license to develop the Reko Diq mine in 2011. Collecting the funds though may be a challenge, given Pakistan’s fragile economic state. The damages almost match the International Monetary Fund’s $6 billion bailout for Pakistan earlier this year to help the South Asian nation avert an economic crisis.
The provincial chief minister has expressed a preference for Pakistani companies to take over the mine, the Dawn newspaper reported earlier this month. The business groups that showed interest in the mining project are: Yunus Brothers Group that owns Lucky Cement Ltd., Arif Habib Group, Fatima Group and the owners of Liberty Power Tech Ltd., the people said. The four are being led by Shamsuddin Shaikh, who spearheaded a group of companies to mine coal from Pakistan’s Thar desert for the first time.
Reko Diq is one of the largest undeveloped copper and gold deposits in the world, capable of producing 200,000 tons of copper and 250,000 ounces of gold a year for more than half a century, according to a feasibility study before the dispute. The capital investment at the time would have exceeded $3 billion.
Pakistan is seeking the reversal of a $5.8 billion penalty imposed by an international tribunal for denying a mining lease to an Australian company, saying that paying the fine would hinder its handling of the coronavirus pandemic.
The Reko Diq district in southwestern Pakistan’s Baluchistan province is famed for its mineral wealth, including gold and copper. Prime Minister Imran Khan’s government considers it a strategic national asset, though instead of yielding a bonanza the Reko Diq mining project may cost the country dearly.
The World Bank’s International Center for Settlement of Investment Disputes is considering Pakistan's appeal against enforcing the penalty over its cancellation of the Reko Diq mining lease for Tethyan Copper Corp., a 50-50 joint venture of Barrick Gold Corp. of Australia and Antofagasto PLC of Chile.
In the meantime, the Baluchistan government has set up its own company to develop the mine: As prices for commodities surge, with gold recently at more than $2,000 an ounce, turning fiasco to fortune is all the more appealing.
Pakistan and Tethyan both have signaled a willingness to discuss alternative solutions, such as a settlement, but the status of any talks on a deal is unclear. Officials on the Pakistan side said they have not been in direct contact and no specific settlement has been proposed.
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By then, Tethyan had invested $220 million in Reko Diq. The Australian mining company sought help from the World Bank arbitration tribunal in 2012, and it ruled against Pakistan in 2017, rejecting an earlier decision against Tethyan by the Pakistan Supreme Court.
The miner originally sought $8.5 billion. The tribunal opted to use a formula for calculating damages for the cancelled lease based on the assumed profits Tethyan might have earned from the mine over 56 years, said an official at the Justice Ministry who spoke on condition he not be named because he was not authorized to speak to media about the case.
The resulting fine, of nearly $6 billion including the damages award and interest, is equal to about 2% of Pakistan’s GDP and is on a par with a recently agreed upon bailout package for Pakistan from the International Monetary Fund.
Economist Jeffrey Sachs described it as a “mugging” of Pakistan. Other experts also have questioned the reasoning behind huge award, which is more than double the size of the largest similar arbitration award, in the case between Dow Chemical and Kuwait Petrochemical Corp.
Documents explaining the award suggest one intention was to penalize Pakistan for having violated its investment treaty with Australia.
Balance-of-Payments Constrained?
Policies and Implications
for Development and Growth
Jesus Felipe, J. S. L. McCombie, and Kaukab Naqvi
No. 160 | May 2009
https://www.adb.org/sites/default/files/publication/28250/economics-wp160.pdf
This paper examines the extent to which Pakistan’s growth has been, or is
likely to be, limited or constrained by its balance-of-payments (BOP). The
paper begins by briefly considering the BOP-constrained growth model in
the context of demand and supply-oriented approaches to economic growth.
Evidence presented suggests that Pakistan’s maximum growth rate consistent
with equilibrium on the basic balance is approximately 5% per annum. This is
below the long-term target rate of a growth of gross domestic product of 7–8%
per annum. This BOP-constrained growth approach provides some important
policy prescriptions for Pakistan’s development policy. Real exchange rate
depreciations will not lead to an improvement of the current account. Pakistan
must lift constraints that impede higher growth of exports. In particular, it must
shift its export structure to products with a higher income elasticity of demand
and sophistication.
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Pakistan’s output growth rate since the 1960s has averaged 5.3% per annum, and
2.5% in terms of productivity growth. While these figures are respectable by world
standards, they are not so impressive compared with those of the East Asian economies
when they were at a similar stage of development in the late 1960s. In the 1950s and
1960s Pakistan started transforming from a poor agricultural economy into a rapidly
industrializing one; yet it never subsequently achieved growth rates similar to those of
the Asian tigers or, more recently, the People’s Republic of China (PRC). The country’s
Poverty Reduction Strategy (April 2007) has targeted a growth rate of gross domestic
product (GDP) of 7–7.5% per annum for the next decade. The question that naturally
arises is whether this is feasible or whether it is a hopelessly overoptimistic target. If
the former, what are the necessary policy measures that should be taken to ensure this
outcome? If the latter, what impedes higher growth?
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In particular, there are concerns about the changing composition of output and the rise
of substantial deficits on the current and fiscal accounts. In 2001–2003, export growth
made a significant contribution to GDP growth. But in 2004–2007, when the growth rate
was higher, consumption, investment, and government expenditure were the largest
contributors. From the supply side, the service sector was the largest contributor to GDP
growth (Felipe and Lim 2008). Exports plus net factor income from abroad has fallen as
a percentage of GDP while the rapid growth has sucked in imports. This is reminiscent of
the early periods of high growth in the 1980s and 1990s when there were also significant
deficits in the current account. In fiscal year 2007–2008, the current account deficit
rose to 8.4% of GDP. This has led to a serious BOP crisis. As a consequence, rating
agencies Standard and Poor’s and Moody’s downgraded Pakistan. This will have serious
consequences for overseas borrowing.2
https://www.globalvillagespace.com/breakthrough-pakistan-to-get-50-share-in-reko-diq/
Sources claim that Pakistan and TCC will most likely sign the deal in February. If finalized, the deal will avert the threat of imposition of a $10 billion dollar fine on Pakistan.
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Sources revealed to The Express Tribune that the project’s development would result in an investment of approximately $10 billion in Balochistan, including $1 billion which would be invested in social uplift projects such as roads, schools, hospitals, and the creation of technical training institute for mining. The investment is also said to result in the creation of over 8,000 jobs.
“This project shall make Balochistan the largest recipient of foreign direct investment in Pakistan and the Reko Diq project shall be one of the largest copper and gold mining projects in the world”, sources added.
50 per cent of the new project’s shares will be owned by Barrick Gold, while the remaining shares shall be owned by Pakistan, divided equally between the federal government and the provincial government of Balochistan.
The federal government’s shares of 25% shall be divided equally amongst three state-owned entities (SOE), namely Oil & Gas Development Corporation Limited (OGDCL), Pakistan Petroleum Limited (PPL), and Government Holdings Pakistan Limited (GHPL).
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The reconstituted project will be held 50% by Barrick and 50% by Pakistan stakeholders, comprising a 10% free-carried, non-contributing share held by the government of Balochistan, an additional 15% held by a special purpose company owned by the government of Balochistan and 25% owned by other federal state-owned enterprises. A separate agreement provides for Barrick’s partner Antofagasta PLC to be replaced in the project by the Pakistani parties.
https://www.barrick.com/English/news/news-details/2022/barrick-pakistan-and-balochistan-agree-in-principle-to-restart-reko-diq-project/default.aspx
Barrick will be the operator of the project which will be granted a mining lease, exploration licence, surface rights and a mineral agreement stabilizing the fiscal regime applicable to the project for a specified period. The process to finalize and approve definitive agreements, including the stabilization of the fiscal regime pursuant to the mineral agreement, will be fully transparent and involve the federal and provincial governments, as well as the Supreme Court of Pakistan. If the definitive agreements are executed and the conditions to closing are satisfied, the project will be reconstituted including the resolution of the damages originally awarded by the International Centre for the Settlement of Investment Disputes and disputed in the International Chamber of Commerce.
@arabnewspk
#OPINION: Over the last three years, #Pakistan’s savings rate has improved from a low of 5.4 percent to 19.9 percent since 2020-- all helped by a robust growth in remittances and a deepening financial system, writes
@javedhassan
https://www.arabnews.pk/node/2049801
Riaz Haq
@haqsmusings
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57m
Nearly 4X increase in #Pakistan’s #savings rate in past 3 years is very welcome news for the country’s #economic growth! Savings are extremely important for increased #investment to spur #gdp growth in any country, including Pakistan.
https://twitter.com/haqsmusings/status/1507052389856993308?s=20&t=wWRuDGR6yXBru9bI3xY7Aw
Over the last two decades, Pakistan has not only experienced a chronically low gross domestic savings rate but has also seen the savings rate decline until recently. According to data from the World Bank, the gross domestic saving rates fell from 16.4 percent in 2000 to just 5.4 percent in 2019. Pakistan’s savings rate compares unfavorably with East Asian countries and South Asian peers. Bangladesh and India have seen their savings rates increase over the same period, which in 2019 stood at 25 percent and 28.2 percent respectively.
Several studies show the relationship between the savings rate and economic growth, especially in developing countries. Economist Robert Solow first argued that larger savings result in higher investments and increased production (Quarterly Journal of Economics, 1956). Other economists such as McKinnon (Money and capital in economic development, 1973) and Shaw (Financial deepening in economic development, 1973) further emphasized the causative relationship between savings and economic development. Empirical evidence shows that as income increases with higher economic growth, it tends to also boost capital accumulation. Such favorable conditions help create a virtuous cycle of further investment and accelerating economic growth.
However, it is not always easy to identify the determinants of a society’s savings propensity. The collective spending behavior of households and public and private entities is subject to several interdependent social and economic factors. Literature suggests that a major factor of savings rates is the level of financial deepening in a society, that is, inter alia, the percentage of the population holding bank accounts, the development of financial markets and the diversity in financial instruments available.
Other factors influencing the savings propensity include culture, religion, and demographic factors such as the labour force participation rate and dependency ratio. Pakistan’s high fertility rate and burgeoning dependent youth population does not encourage household savings. The interplay of disparate factors is not always obvious, and yet often converge to affect the direction of the national savings rate. There is a consensus that people with high levels of income have a greater propensity to save and vice versa. However, for this to be sustainable, the growth should be through productivity gains and not consumption driven that is fuelled by external borrowings. If higher incomes do not result in investments in productive capacity, then the long-term savings rate is unlikely to improve and may even decline.
That has been the case with Pakistan where the economy expanded despite relatively low and declining domestic savings rates between 2000 and 2019. Such a growth model was unsustainable because the savings-investment gap was filled by foreign funding, primarily in the form of borrowings. More perversely, the economic growth was largely consumption-driven and masked the structural issue of low savings rate. It has led the country closer than ever to a foreign debt trap where the bulk of new external funding is not deployed in productive capacity but rather to service old foreign debts.
“Reko Diq is one of the bigger copper-gold undeveloped projects in the world,” said Mark Bristow, chief executive of Barrick, which aims to start mining in 2028 subject to an ongoing feasibility study. “It’s a very big deal. Any copper mine right now is a big deal.”
The project highlights how the copper shortfall is pushing miners into ever trickier markets in search of supply. Pakistan’s repeated political and economic crises have scared away all but the most determined foreign investors, and local authorities had blocked an earlier attempt involving Barrick to mine Reko Diq.
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Bristow argues that the project, in which Barrick has a 50 per cent stake alongside the Pakistan and Balochistan governments, will bring much-needed development to the region.
“Mining, when it goes into emerging markets, is obsessed with getting its money back,” he said. “We’ve learned that you start paying benefits and dividends early on.”
As countries transition to clean energy sources, copper — whose conductive properties make it crucial to transporting electricity — is only expected to become more important to the global economy.
But with supply from incumbent mines in countries such as Chile and Peru stalling, an estimated $118bn of investment by 2030 is needed to plug a supply gap that will by next decade be equivalent to 35 Reko Diq-sized projects, according to analysts at CRU Group.
Th a record of operating in riskier markets such as Mali and the Democratic Republic of Congo.
While Reko Diq adds “a lot of uncertainty” for Barrick investors, “Barrick is no stranger to frontier jurisdictions”, said Canaccord Genuity analyst Carey MacRury.
Another factor that could help steer the Reko Diq project is the presence of a new investor. Saudi Arabia’s Public Investment Fund and state mining company Ma’aden have expressed interest in a stake. Analysts said the involvement of one of Pakistan’s most important allies would help shield the project from future political U-turns.
If successful, the mine could turn the company into one of the world’s largest copper producers. Diversifying its portfolio into copper is particularly important for gold miners such as Barrick to stay relevant with investors focused on environmental, social and governance issues, since the company’s core product plays no role in the energy transition.
Reko Diq sits along the largely untapped south Asian leg of a rock formation from Europe to south-east Asia that is believed to hold rich copper deposits. Analysts believe there is the potential for more mines.
Ahsan Iqbal, who recently stepped down as Pakistan’s planning minister and worked on the project, argued that Reko Diq would “put Balochistan on the mining map of the world”.
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Reko Diq “is 50 miles from Afghanistan and 40 miles from Iran”, one person involved with the project said. “So it will be a target.”
For support, Barrick has turned to Pakistan’s powerful army, which helps control the country’s politics and helped negotiate last year’s deal to revive the project, according to a person involved.
Pakistan’s army chief also this month attended a local mining conference alongside Bristow. “The military are a steadying hand,” Bristow said. “They are absolutely essential on the security side.”
Yet rights groups have repeatedly accused the army of abuses in Balochistan, including extrajudicial executions, allegations it denies.
Bristow has welcomed the potential Saudi interest in Reko Diq and dismissed hand-wringing over whether he can see through the project.
“When you look at the world, it is more complex than when I started,” he said. “Gone are the days that you can control a mining company from a multistorey, cushy building in the developed world.”
https://www.arabnews.com/node/2377731/pakistan
ISLAMABAD: Barrick Gold Corp. CEO Mark Bristow has said there is newfound “interest” from multinational mining firms to develop the $7 billion Reko Diq gold and copper mine in southwestern Pakistan, Bloomberg reported on Thursday.
Barrick Gold owns a 50 percent stake in Pakistan’s Reko Diq mine, with the remaining 50 percent owned by the governments of Pakistan and the province of Balochistan. Barrick considers the mine one of the world’s largest underdeveloped copper-gold areas.
“They have an interest,” Bristow said in an interview to Bloomberg, declining to name the mining companies interested in Reko Diq or what he meant by “interest.”
“Of course, they’re a lot more conservative than I am, but as we open up these areas, whatever way you look at copper, there’s not enough of it.”
Last month Barrick said it was open to bringing in Saudi Arabia’s wealth fund as one of its partners in the Reko Diq project but has dismissed reports it was in talks with fellow Canadian miner First Quantum Minerals on a possible acquisition.
Barrick won’t be diluting its equity in the project but “will not mind” if Saudi Arabia’s Public Investment Fund (PIF) wants to buy out the equity of the Pakistan government, Bristow had said in a Reuters interview.
“There is a strong relationship between Saudi and Pakistan and since we control the project we have the first right of refusal,” the CEO added, saying Barrick would support PIF coming into the mine through Pakistan’s 25 percent equity stake.
In an out of court agreement last year, Barrick Gold ended a long-running dispute with Pakistan, and agreed to restart development on the mine. Under the deal, the company withdrew its case in an international arbitration court, which had slapped a penalty of $11 billion on Pakistan for suspending the contracts of the company and its partners in 2011.
The company’s license to mine the untapped deposits was canceled after the Supreme Court ruled illegal the award granted to it and its partner, Chile’s Antofagasta. Antofagasta had agreed to exit the project, saying its growth strategy was focused on production of copper and by-products in the Americas.
Pakistan’s mineral-rich province of Balochistan is home to separatist militants who have engaged in insurgency against the government for decades, demanding a greater share of the region’s resources.
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Pakistan's PM invites Rio Tinto to explore investment opportunities - MINING.COM
https://www.mining.com/web/pakistans-pm-invites-rio-tinto-to-explore-investment-opportunities/
Pakistan’s Prime Minister extended an invitation to Rio Tinto’s CEO to visit the country to explore investment opportunities further in a meeting in New York on Thursday.
The CEO of Rio Tinto Group said his team would liaise with the concerned authorities to explore investment opportunities in Pakistan’s mineral and mining sector, according to a post by the PM’s office on X, formerly known as Twitter.
https://finance.yahoo.com/news/gold-billionaire-sawiris-eyes-stake-041314342.html
(Bloomberg) -- Egyptian billionaire Naguib Sawiris, who has forged a fortune in telecom and gold, is eyeing an investment in Barrick Gold Corp.’s $7 billion Reko Diq copper-gold project as he looks to expand his business in Pakistan.
Reko Diq, in the Balochistan region that borders Afghanistan and Iran, is one the world’s largest undeveloped copper and gold deposits, capable of producing 200,000 tons of copper and 250,000 ounces of gold a year for more than half a century. The project is jointly owned by Barrick and Pakistan.
Asked whether he was interested in investing, Sawiris, a major investor in gold miners including Endeavour Mining Plc through his La Mancha Resources Inc., said “yes.”
“I have an advantage compared to other investors. I know the country, I have friends here,” Sawiris said in an interview in Islamabad. “We want to be on the Pakistani side, because I have been here for 25 years.”
He did not elaborate on the potential scale of the investment, but added there were few other options, in part due to the lack of geological data: “We tried here to look but unfortunately there is only this one big project.”
Last month, Barrick Chief Executive Officer Mark Bristow said he was seeing newfound “interest” in Reko Diq from multinational mining firms that have to date been hesitant to venture into tricky regions of the world. The mine has also attracted interest from Saudi Arabia, whose presence could serve to stabilize the project in a contentious part of the world.
Pakistan’s state-owned energy exploration companies, which have a stake in the project, said last month they were looking into “potential engagement” with sovereign foreign investors, without giving details.
Sawiris’ Ora Developers is separately working on a luxury housing project, Eighteen, and he earlier set up one of Pakistan’s first mobile phone companies, Mobilink, now owned by Veon Ltd., and the nation’s largest cellular firm by subscriber numbers.
Pakistan’s lengthy, difficult official procedures, an unstable currency and capital restrictions are hurdles for investment, but Sawiris said he remained optimistic.
“If there is concrete in my way, I’ll drill through it and I’ll go,” he said. “I have never let anybody in my life hold me back from what I wanted to achieve.”
https://www.mining.com/video-reko-diq-project-like-the-early-days-in-chile-barrick-ceo-bristow-says-part-3/
As Barrick Gold (TSX: ABX; NYSE: GOLD) expands its copper exposure, CEO Mark Bristow says he’s “super excited” about the company’s Reko Diq copper-gold development in Pakistan.
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“This is like the early days in Chile, the Escondida discoveries and so on,” he said at the Gold Forum Americas in Colorado Springs, referring to Pakistan’s untapped discovery potential.
Bristow said supply constraints for gold and copper and the strong demand are pushing prices higher, while both suffer from weak development pipelines. The company is expanding its Lumwana copper mine in Zambia and Reko Diq in Pakistan, both of which will add to its copper output while driving local economic development.
“Copper has no substitutes,” Bristow said. “It is as strategic as gold is precious, and we’re bringing new copper projects online just as the supply squeeze hits.”
Bristow also addressed the suspension of operations at Barrick’s Porgera gold mine in Papua New Guinea last month due to local clan violence. He reinforced the company’s commitment to making a positive social and environmental impact, especially in emerging markets.
Watch the final part of Bristow’s three-part interview with The Northern Miner’s western editor, Henry Lazenby.
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Mining is a vital part of Chile's economy, and the country is a global leader in the industry:
Copper
Chile is the world's top producer of copper, accounting for 24% of the global supply in 2022. The country's copper production is concentrated in the north, particularly in the Antofagasta region, where the world's largest copper mine, Escondida, is located.
Lithium
Chile is the world's second largest producer of lithium, with about 30% of the global supply. Chile is part of the "Lithium Triangle" in South America, along with Argentina and Bolivia, which together contain the world's largest lithium reserves.
Mining exports
In 2021, Chile's mining exports were worth approximately $57 billion, which was more than 60% of the country's total exports.
Mining jobs
Mining generates hundreds of thousands of direct jobs in Chile.
Mining services
Chile exports mining services to more than 39 markets, with the main destinations being the U.S., Peru, and Mexico.
Chile's mining sector is also known for its technological advancements and commitment to sustainability. The country is working to promote sustainable mining by fostering collaboration between mining companies, communities, and suppliers.