Pakistan rupee to plunge further

It's been a bad week for Pakistan's already weak equity market. Not only was it confirmed that investors in the benchmark KSE-100 index will soon be subject to a Capital Gains Tax, but the Finance Minister resigned shortly after. To date no replacement has been announced. Expectedly, the market plunged.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aEFZY.RCINfE

Capital Gains Tax; Pakistan set to remove exemption

Pakistan's Dawn newsapaper reports that a capital gains tax on stock trading from July 1 2010 will be imposed at a rate of 10pc for holdings of less than 6 months and at 7.5pc for holdings of 6 - 12 months. Stock markets have been exempt from CGT since 1974 but growing pressure on the fiscal deficit (approx. 5.2% of GDP in the current year) and IMF recommendations compelled the Pakistan government to reconsider this as a budgetary measure for FY11 which commences on 01 July 2010. This is likely to have a perceptibly negative impact on Pakistani stock markets. Volumes in the benchmark KSE-100 index have dipped substantially since 2008, in the wake of trading restrictions as local regulators responded (badly) to the onset of the global financial crisis at the time.

http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/the-newspaper/front-page/13+capital-gains-tax-on-stock-trading-from-july-1-320-za-02

India: Record Low ‘Buys’ on Rate Outlook

Looks like inflation is becoming even more problematic:

http://www.businessweek.com/news/2010-01-25/india-hit-by-record-low-buys-on-rate-outlook-update1-.html

Chinese Prepare to Launch USD250mn Dubai Fund

Another angle on the Chinese growth story? Much needed assistance for Dubai;

http://www.ft.com/cms/s/0/54f3658e-0952-11df-ba88-00144feabdc0.html

Pakistan: 24% Power Tariff Hike for 2010

The Government of Pakistan has promised the International Monetary Fund, ADB and the World Bank that power tariffs will be raised by 24 per cent in three phases during the current financial year, which concludes on 30 June 2010. The government already raised the tariff by about six per cent hike last October and 12 per cent at the beginning of this year. A further six per cent increase in the base tariff from April 2010 has also been announced.

As a result, consumers estimate that the cumulative increase in the average electricity bills is estimated to amount to more than 50 per cent in the for January. The tariffs have been raised as part of the phasing out of the massive energy subsidies under the $11.3bn standby deal with the IMF; and have been the basis for growing discontent with the government's decision in 2008 to seek multilateral assistance. It is interesting to note however, that costlier electricity is only in part the outcome of IMF conditionalities.

Pakistan's Dawn newspaper reports:

"...consumers are also being charged excessively due to a government decision to pass on the rise in international oil prices to them. In the bills these charges appear under the head of “fuel adjustment charges”.

On top of that, the consumers are paying the government almost 22 per cent tax in accordance with the power they consume. This is something that the government has tried to conceal from the public for fear of the political fallout."

The government's decision to maintain taxes on electricity usage is unsurprising given Pakistan's weak fiscal position, as data for the first half of the financial year indicates that total tax collection for the initial five months of the current financial year has been approximately 3% below the targeted amount.

Raising electricity tariffs could help the government meet its budgetary targets, provided that power theft, which has plagued electric supply companies for decades, does not grow as a result of higher rates.

Another issue that the government will have to contend with as a result of rising electricity costs is inflation. Last month's Consumer Price Inflation number of 10.3% indicated that inflationary pressures had decreased relative to previous years; the 2008-09 average was 23.5%. Increases in electricity tariffs could undo measures taken by Pakistan's central bank to limit liquidity, as well as steps taken by the government to address food supply issues.

World Bank Says Recovery Underway

The World Bank believes that the Chinese growth story is key to boosting global growth trends, particularly in East Asian economies, as industrial growth in the country will drive global investment emanating from China.

"...world industrial produc tion was falling at a 27 percent annualized pace, but by the beginning of April/May, production began recovering (figure 1.5), initially led by ac celerating growth in China following the imple mentation of the $575 billion (over five quarters) fiscal stimulus package. Increased import demand from China quickly spread to other countries, with industrial production registering positive growth in emerging countries (excluding China) by March 2009 and high-income countries by May 2009."

However, it also warns of the higher risk of asset bubbles and overheating in Asian economies.

"The acute phase of the financial crisis has passed and a global economic recovery is under way. Moreover, the recovery is fragile and expected to slow in the second half of 2010 as the growth impact of fiscal and monetary measures wane and the current inventory cycle runs its course. Indeed, industrial production growth is already slowing (albeit from very high rates). As a result, employment growth will remain weak and unemployment is expected to remain high for many years. The overall strength of the recovery and its du rability will depend on the extent to which household- and business-sector demand strengthens over the next few quarters. While the baseline scenario projects that global growth will firm to 2.7 percent in 2010 and 3.2 percent in 2011 after a 2.2 percent de cline in 2009, neither a double-dip scenario, where growth slows appreciably in 2011, or a strengthening recovery can be ruled out."

"...the economic rebound that is currently under way is likely to continue for several months, supporting relatively rapid growth. However, a great deal of uncertainty clouds the outlook for the second half of 2010 and beyond. The waning growth impact of the fiscal stimulus, a progressive end to the inventory cycle, uncertainty about the extent to which private sector confidence will step in and sustain the recovery, and the possibility of a second round of bank failures either in developed or developing countries are among the factors that could contribute to a more pronounced slowdown of growth in the second half of 2010 and into 2011-potentially yielding a double-dip growth recession.

On the upside, if private sector confidence does return, there is a risk that the huge tra ditional and nontraditional monetary stimu lus that has been put into place will begin to gain traction, potentially reflating some of the bubbles that have only recently burst. Indeed, some (Roubini 2009) are already arguing that very loose monetary policy in high-income countries has produced a carry-trade oppor­tunity that is underpinning in an unsustain able manner the resurgence of capital flows to developing countries that may ultimately regenerate the kind of global imbalances that precipitated the crisis in the first place."

Sri Lanka: IMF upgrades status

According to the Central Bank of Sri Lanka (CBSL), the International Monetary Fund (IMF) has graduated Sri Lanka to a country with a Middle Income Emerging Market status removing the country from the list of Poverty Reduction and Growth Trust (PRGT) eligible countries.

"This upgrade would facilitate Sri Lanka to project itself strongly in international financial and capital markets," the bank said in a statement.

"A country graduates from PRGT only if it, (i) has enjoyed income per capita well above the International Development Association (IDA) threshold for a number of years, (ii) has the capacity for durable and substantial access to international financial markets, and (iii) does not face serious short-term vulnerabilities," it said.

The Executive Board of the IMF has taken into account the following specific factors in considering of Sri Lanka’s graduation process.

i. The strong economic performance in recent years that has substantially lifted Sri Lanka’s per capita Gross Domestic Product (GDP) to US dollars 2,014 by 2008, well above the prevailing IDA threshold, and its per capita Gross National Income (GNI) has not been on a declining trend for the last five years. The strong growth performance has signalled substantial resilience to shocks, including shocks to oil prices, and to the expiration of the Multi-Fibre Agreement.

ii. The availability of an IMF Stand-by Arrangement facility as approved in July 2009 to cushion the impact of the global crisis.

Further, the economic developments under the programme have been stronger than expected, with GDP growth expected to return to almost pre-crisis levels in 2010, while exports have been showing signs of recovery.

iii. The country’s public external debt being projected to decline gradually over the medium term. Although debt dynamics remain sensitive to currency depreciation and export shocks, the timely implementation of fiscal consolidation, as envisaged in the Stand-by Arrangement programme, will be crucial to ensure that the public debt remains on a sustainable path.

iv. The country’s ability to access international capital markets in the past years and its ability to meet the market access criterion. Oversubscription of the recently issued five-year sovereign bond reflected the progress made under the Fund-supported program, and signalled good prospects for continued access to international capital markets.