KSBL Review Final 6613 PDF

KSBL
VOLUME 01, No. 1, 2013
An Indepth Look into
Pakistans Economy
Karachi School for Business & Leadership
A group of like-minded business leaders, with the objective of creating future leaders who can contribute to the rapid development of Pakistan into a successful and progressive state, established the Karachi School for Business & Leadership, in strategic collaboration with the University of Cambridge, Judge Business School. KSBL has been set up to create transformational leaders and entrepreneurs and provide them with cutting-edge knowledge and skills, developed around the core values of ethics, integrity, merit and social responsibility. KSBL is a graduate management school that currently o ers world-class MBA and Executive Education programmes, to the many talented young men and women, and corporate executives in the country as well as international students. We plan to start the Executive MBA in January 2014 and the Bachelors programme in fall 2014.
Message from the Editors

The Karachi School for Business and Leadership (KSBL) commenced operations in 2012, with a two-year, rigorous MBA programme. KSBL is the rst venture of the Karachi Education Initiative (KEI), a non-pro t foundation funded by several leading Pakistani rms and businesses. Located in central Karachi in its customised campus designed by the renowned US architects, William McDonough + Partners, KSBLs goal is to add a premium quality dimension to management education in Pakistan. KSBLs strong research emphasis and induction of a globally compatible faculty is a unique contribution to Karachis educational environment. Future plans include Executive MBA and four-year Undergraduate programmes, while a range of short-duration open enrollment and customised Executive Education courses have already had a vigourous introduction. We are pleased to present the rst issue of the KSBL Review. The aim of the KSBL Review is to provide a forum for discussion on a wide-range of topics focusing both on Pakistan and other nations and regions. The Review intends to provide a reader-friendly intellectual platform that brings together academics, policy makers, and business and executive practitioners. The Review is also aimed at the informed reader concerned about governance, business, economy and society. It hopes to analyse the most essential challenges we face at both strategic and micro levels. We trust this will become a forum for even complex research to be presented in. This issue of KSBL Review encompasses four articles on important aspects of the contemporary Pakistani economy. Dr Nadeem Javaids article highlights two very critical trends within the structural changes in the economy of Pakistan: the performance of the service sector and the demographic shift towards an aging population. Dr Imran Alis article analyzes the salient features of the new federal strategy, known as the Framework for Economic Growth (FEG), and its impact on private sector development, transformation of business and investment scenarios; as well as preparedness of the business sector to bene t from the strategy. Dr Asma Hyders article analyses the performance of key economic indicators, the use of which can improve not only economic analysis but also business decision-making. Finally, Dr Ali Khalil Maliks article provides a comprehensive analysis of nancial market trends and developments in the banking industry, assessing data that can become a vital tool for decision-making. Contributions from across all disciplines and elds of study from a wide-range of theoretical, practical, social and political perspectives are welcome for KSBL Review. The editors are looking forward to seeing the KSBL Review become a forum for cooperation, interaction and collaboration with colleagues across the country, in the region and globally.
EDITORS
Dr Imran Ali
Professor, KSBL
Dr Ali Khalil Malik

Associate Professor, KSBL
Dr Asma Hyder
Assistant Professor, KSBL
Dr Nadeem Javaid
Assistant Professor, KSBL
The Views and Opinions expressed in these articles, essays or in debates are only those of authors and not of KSBL. Manuscripts can be submitted through email on the following email address: asma.baloch@ksbl.org
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Exploring Structural Change in Pakistan
Dr Nadeem Javaid
GoPs New Economic Growth Framework and its Impact on Business

Dr Imran Ali
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16 Financial Markets:
Review Analysis & Dynamics
Dr Ali Khalil Malik
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Current Performance of Key Economic Indicators in Pakistan

Dr Asma Hyder
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Dr Nadeem Javaid
Assistant Professor, KSBL nadeem.javaid@ksbl.org Dr Muhammad Nadeem Javaid is an Assistant Professor of Business Economics at KSBL. He holds a PhD in Economics and an MS in Innovation and Industrial Dynamics from the University of Nice Sophia Antipolis, France. Dr Javaid has over thirteen years of experience in higher education and in the nancial industry. Prior to joining KSBL, he was teaching Economic Policy and Business Strategy to the MBA programme at the Suleman Dawood School of Business, Lahore University of Management Sciences (LUMS). He has also worked at SKEMA Business School (France), where he taught Organisation and Dynamics of Financial System, Financial Markets and Issues in Corporate Finance to its executive and postgraduate programmes in its Sophia and Paris campuses.
Average annual real GDP growth rates were 6.8% in the 1960s, 4.8% in the 1970s, 6.5% in the 1980s, 4.6% in the 1990s and 4.9% in 2010s. Pakistan's average economic growth rate, since independence, has been higher than the average growth rate of the world economy, unfortunately without an impressive improvement in social indicators. The structure of an economy is a function of the sum of all the di erent economic activities in the geo-political boundaries of that area. Long-term shift in the fundamental structure of an economy is referred to as structural change. In this article, I have underlined two very critical trends during the structural change in the economy of Pakistan i.e. prominence of the services sector and the demographic shift towards reverse aging population. These trends are not only a ecting society but also posing a sustainability challenge to the economy in the near future.
The rst section of this article examines these above stated trends, second and third section identi es their implications for society and the future course of action, respectively. Pakistans economy is the worlds 47th largest economy in terms of nominal GDP, 27th in terms of purchasing power parity and 6th in terms of population size. During the last six decades, the economy of Pakistan has undergone a massive change from an agrarian status to semi-industrialized, nonetheless highly skewed towards the services sector. Services sector adds resilience to Pakistans economy, since its annual growth rate is relatively less volatile as compared to the other three sectors of the economy. Agriculture sector displays the higher degree of volatility, being contingent to weather and natural disasters. Though being a major employer, causes social distress during the growth recessions. Pakistans economic development as measured by its GDP is primarily sustained by the service sector. As shown in Figure 1, the services sector has replaced the agriculture sector as the dominant sector of the economy. Today, contribution of the service sector towards the GDP is 54% as compared to 38% in 1960. While, contribution of the agriculture sector to GDP has declined from 46% to 21% during the same period. As far as the industrial (non-manufacturing sector) share of GDP is concerned, that has increased from 16% to 25% during the last fty-two years.
Sectoral Contribution to Gross Domestic

60 50 40 30 20 10 1960 1970 1980 1990 2000 2010
Agriculture, & of GDP Services, % of GDP Industry, % of GDP Manufacturing, % of GDP
Annual Economic Growth Rate ( % )
Income Per Capita Growth Rate (%)
- 12 - 10
Per Capita Income Growth Rate (1960-2012)

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GDP Annual Growth (%)
-8 -6 -4 -2 1960 1970 1980 1990 2000 -0 2010
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Sectoral Dynamics - Annual Growth Rates ( % )

20 16 10 5 0
Agriculture Services Industry Manaufacturing
driver of economic growth, is adding resilience to the economy. Demographic evolution is also a feature worth exploring while probing the structural change in an economy. Population growth rate and its age composition gives insights regarding the amount of the future productive human resources available as well as its dependency levels in the economy. As shown in Figure 6, Pakistan has experienced a signi cant rate of population growth during the 1980s and 90s. As a result, in terms of population size, Pakistan has moved from the 13th largest country in 1950 to the 6th largest country in 2011. Nevertheless, recent demographic indicators are re ecting improvement in life expectancy and fall in population growth rate.
1960
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-5
Whereas, the manufacturing sector, despite having many e orts at policy level, could not display remarkable improvements. Today its contribution to the GDP is around 18% as compared to 12% in1960. In terms of employment, agriculture still remains the major sector that is providing employment to 43% of the total labour force as compared to 65.3% in 1950. Today, the service sector absorbs 37% of the labour force as compared to 25% in 1950. Whereas, both manufacturing and non-manufacturing sectors are employing 20% of the total labour force as compared to 10% in 1950. During these ve decades, capacity of the agriculture sector to absorb the labour force has dropped signi cantly by 22%, which is then counterbalanced by the increased absorption capacity of the services and industrial sectors by 12% and 10% respectively. Figure 3 displays the sector wise annual growth rates. Growth in the services sector is relatively stable as compared to the other three sectors of the economy. Agriculture sector displays the higher degree of volatility, being reliant on weather and vulnerable to natural calamities. A noteworthy fact is that growth rates among services, manu-
facturing and industrial sectors are positively correlated whereas this relationship is missing between the agriculture and services sector. Agriculture sector, during the last fty-two years, has witnessed six growth recessions coinciding with steady performance by the services sector. This implies that social distress caused by agricultural growth recession is provisionally o set by the services sector. Consequently the services sector, being the main
Population Age Structure (% of total)
60 40 30 20 10 1960 1970 Age 0 -14 1980 1990 Age 15 - 64 2000 2010 65 - > 0
Annual Population Growth Rate ( %)

3.5
Population Growth (%)
50
3 2.5 2 1.5
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Annual Urban Population Growth Rate ( %)

4.5
Urban Population Growth (%)
Population density (people per sq.km of land area)

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4 3.5 3 2.5
Population Density
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Pakistans economic development as measured by its GDP is primarily sustained by the services sector.
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Following the same trends, 53% of the total population will be below the age of 30 years old, whereas the ratio of above 65 years old will rise to 5.8% by 2030. So the situation
calls for a very vibrant human capital formation strategy to ensure economic gains and social control.
However, all these indicators are on the bases of projections because no population census has been conducted since 1998. Pertaining to age composition of the population as shown in Figure 5, under-15 population is 34.8% (i.e. 62 million) of the current total population. Where 60.8% (i.e.108 million) are between the ages of 15-64 years and 4.3% (i.e. 6.8 million) are above the age of 65 years. According to the projections of the National institute of Population Studies, 53% of the population (i.e. 129 out of 242 million) will be below the age of 30 years in 2030 and ratio of above-65 years old will increase to 5.8% (i.e. 14 million out of 242 million). This implies that in the future Pakistan would have very young age structure with a sizeable dependent population. These structural transformations, though contributing to economic growth are accompanied by many unanticipated economic and social concerns. For example: massive urbanization due to service sector growth; rising levels of unemployment due to rising labour force participation rate all along mechanisation, automation, computerisation and digitisation of the economic activities; expansion of the parallel economy (undocumented economic activities) and rising level of poverty and crime rate.
Small-scale manufacturing and services sector never remained the focus of public policies but they kept on developing themselves as an informal sector. Resultantly, a large parallel economy has emerged which is providing employment opportunities to 78 percent of the non-agricultural labor force while contributing more than 30 percent to the GDP. Job opportunities in services sector & informal economy are causing the rural urban migration i.e. unplanned urbanization. Data indicates that 10.23 million people have migrated from rural to urban centers during the last four years. Data: Economic Survey 2011-12, MoF, Government of Pakistan.
Structure of Pakistans Services Sector (% of Value Creation 2011-12)

Data from Economic Survey Liiod, Pakistan
12.3%
10.8% Transport & Communication Wholesale & Retail Trade Finance & Insurance Ownership of Dwellings 17.4 Public Administration & Defence Other services
6.6%
2.7% 4.5%
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Services Sector Expansion; What are the Implications for Society?

In the developed world, the contribution of the services sector towards the GDP is around 75%. This share is 52% in India, 65% in Singapore and around 62% in Brazil and Russia. Services sector holds out the prospect of more stable growth compared to other sectors. Services rely more heavily on domestic demand and are less susceptible to global economic uctuations. Global patterns, regarding the process of economic growth and development, reveal that services sector contribution has increased as the economies have moved from agrarian to semi-industrial or industrial ranks. Paradoxically, in Pakistan commodity producing sectors (i.e. combination of manufacturing and agriculture) share has declined from 62% of the GDP in 1970 to 46.46% in 2012. It is predominantly because of fall in the share of agricultural sector, besides a stagnant manufacturing sector. The services sector is not only o -setting the decline of the other sectors but also providing momentum to economic growth in Pakistan. A review of the past six decades of Pakistans development priorities reveals that the public policies has kept focus on developing the large-scale manufacturing sector whereas small-scale and services sector kept developing in the informal sector. As a consequence, a large informal economy (i.e. as per conservative estimates 30-50 percent of the formal economy) has emerged which is providing employment opportunities to 78 percent of the non-agricultural labor force while contributing more than 30 percent to GDP. Surprisingly, this informal sector is one of the important drivers of economic growth that is infusing resilience to the national economy. Policy makers have always ignored its crucial role and seldom made any concerted e ort to bring this sector into formal economy. As a result, urbanisation is on rise; size of the urban population has increased from 57.32 million in 2008 to 67.55 million in 2012. This means that 10.23 million people have migrated from rural to urban centers in the quest of jobs or better education facilities for their children. This unplanned ow of people is not only exerting pressure on the available amenities in the city centers but also making the cities unmanageable. Moreover, unplanned urbanisation together with high income inequality is causing the surge in crime rates.
Demographic transition; is it a challenge or an opportunity?

Given the fact that two-thirds of Pakistans population is under the age of 30, this implies that an economy with an increasing young population and stagnant labour absorption capacity in the formal economy, needs comprehensive strategy not just for economic well-being but also for social control. It requires the uninterrupted GDP growth rate of 7% to create job opportunities to cater to the new participants of the labour force. Pakistan can reap the demographic dividend by investing heavily in human capital and eradicating the labour market imperfections. Educated and well-trained young labour force can turn the fate of the nation; as the comparative advantages of nations are shifting once again. Knowledge-intensive sectors are being considered to be the forthcoming propellers of economic growth. Therefore, investments in human capital can turn this challenge into an opportunity for Pakistan. The speed at which Pakistans age structures are changing is exceptional. In fact, aging is anticipated to occur more rapidly than development; as a result, population will grow old before it grows rich. Consequently, Pakistan would have large dependent population, which could be a huge burden on the economy. Therefore, the crucial concern is to set up the political and nancial institutions capable of managing public health care systems and pension programmes for aging society.
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MBA Programme
Quick discussion on a case presentation before the class Internship recruitment test in Progress
The KSBL MBA is a full-time 21month programme. There is one intake per year and the programme commences in August with a compulsory three-week Foundation Term.
Career Services and Placement

KSBL Career Services and Placement team helps its students achieve top career success from the MBA Programme. Our relationships and reputation within the business community will help assure that MBA students are exposed to an extensive range of placement opportunities for internships and at the time of graduation. Career Fairs and Employer Events will bring together highly sought after employers to meet and recruit KSBL graduates.
Curriculum
The MBA curriculum, designed in collaboration with Cambridge University's Judge Business School, prepares you to create and lead sustainable organisations in a complex and rapidly changing world. In addition to building a solid foundation in core business functions, the KSBL MBA substantively integrates ethics Admission component into all classes, helping to shape global ethical leaders. At KSBL, admission into the MBA programme is based solely on merit. KSBL believes in nurturing the talented youth of Pakistan. CEO Mentorship Pragramme We have adopted a NEED-BLIND admissions policy. Once In line with the mission to educate the next generation of admission is o ered, the Financial Aid o ce at KSBL then reviews "Transformational Leaders, KSBL initiated the CEO Mentorship the applicant's nancial status and structures a nancial assistance Programme (CMP) and has pioneered the concept of uniting the package suitable to the applicant's requirements. The assistance top leaders of the corporate sector with the young aspiring may consist of Scholarships, Interest-Free Loans, Qarz-e-Hasna, "leaders in making to foster knowledge sharing and development Work-Study Programme, amongst others. of critical thinking skills among its students.
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The FEGs proposed change and reforms
Structural transitions have clearly occurred in the Pakistani economy over the past six decades, with changing shares of the agricultural, manufacturing and service sectors in the countrys GDP. Pakistan has also followed a roughly decennial pattern of political regime change, which has at times re ected contrasting national economic strategies, such as the transition from private sector industrial growth in the 1960s to the nationalisation policies of the 1970s. Now, a prospective major shift could occur in the Pakistani states approach to economic growth, as re ected through recent Planning Commission initiatives. Will such an apparent shift create new business opportunities, and what impact would this have on investment and the business environment, given the existing low economic growth rate and depressed investment climate? The recent Framework for Economic Growth (FEG) developed by the Planning Commission envisages a paradigm shift in the role of government and the type and nature of state interventions in the economy.1 This paper will analyze the salient features of this new strategy, and in what ways it could positively impact private sector development and hopefully even transform business and investment scenarios. The FEG attempts to move away from the traditional approach of government interventions that have focused on projectbased and SRO-based measures, as well as targeted and untargeted subsidies, which are designed to bene t certain selective groups. The new approach relies on moving the government and its various departments away from operations and towards a more regulatory and monitoring role, thereby creating more space for the private sector in activities unduly dominated by public sector operations. The heavy revenue losses from public sector enterprises, especially over the past ve years, are also an incentive to change the governments role in the economy. The new strategy relies on four pillars or focal sectors to achieve this transition in the states positioning for reform. These pillars are: Improved Governance, Youth and Community A airs, Creative Cities and Vibrant Markets. All four have important implications for an extended role of the private sector. The hope is that
Dr Imran Ali
Professor, KSBL imran.ali@ksbl.org
Dr Imran Ali, Professor of Business Policy at KSBL, has an Honours Degree from Sussex and PhD from Australian National University. He has held teaching, research and visiting positions at the Universities of New South Wales, Melbourne, LUMS, ANU, London, Harvard, Sydney and Oxford. He has a large number of international publications on Pakistan and Punjab, including The Punjab under Imperialism, 1885-1947 (Princeton/Oxford University Presses), and co-edited Pakistan: Contours of State and Society (OUP). He has consulted with several national/international organisations, and sat on various public/private sector boards/committees including the Pakistan Railways Board.
re-orienting government priorities towards energising these sectors, and freeing them from existing constraints, will in turn lead to more dynamic and modernised institutions and a faster rate of economic growth. While this strategy in itself contains a useful prescription for more rapid changes, implementation remains a major hurdle. Like so many reform measures and institutional innovations proposed in the past, it appears even in this initial phase that the bureaucratic and political establishments have failed to signal a major buy-in into this strategy. While some measures, such as restructuring of some public sector organisations have been proposed, tangible results are still forthcoming. There are major business-related features of the FEG, and the business community has much to gain from this new strategy. By encouraging competitive and inclusive markets, and helping to promote productivity, connectivity and innovation, the FEG could stimulate more rapid growth. What remains problematical is the capacity of the business community to mobilise support for dramatically altering the governments operational paradigms, given the states own lag in follow-up and implementation. Clearly, this opportunity should not be wasted, though collective business pro-activism, and even awareness by business leaders of this proposed paradigm shift, remains questionable.
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The slowdown in growth is inter-related with the contemporary challenges that Pakistan faces. These are mainly problems with macroeconomic stabilisation and scal policy, demographic pressures, resilient in ation, economic distortions through arbitrary subsidies and protection, impact of earthquakes and oods, continuing low intensity con ict, a large and loss-making public sector that adversely a ects market development, low and declining productivity, energy de cits, reduced domestic and foreign investment, and the seemingly endemic state shortfall in justice, security, accountability and social sector delivery. 2 In order to achieve more rapid hardware growth, the proposed FEG strategy moves the focus to software development, such as economic governance, public service institutions, incentives, h u m a n resources, entrepreneurship and innovation. The urban economy, in particular, needs to be rejuvenated, by reforming restrictive zoning laws, inadequate market development and ine cient public sector management. Reforming these and other impediments to increased competitiveness of markets would lead to higher growth rates: an estimated seven percent per annum is needed just to absorb the emerging extreme youth bulge. Growth will also be spurred through increased productivity: labour productivity growth has been lower than in neighbouring countries
contract enforcement with weak property rights. Consequently, rms remain predominantly small in size, and are unable to bene t from economies of scope and scale or the premium human resources that would make them internationally competitive. The FEG focuses on the need to strengthen competition and entrepreneurship, through a number of measures. These include restructuring and divesting control of public sector enterprises, limiting government borrowing, strengthening agribusiness value chains, computerising property records, and speedier contract enforcement. The FEG seeks strengthening of private sector enterprise, through rewarding innovation, abolishing business bottlenecks, promoting research and development, reforming the labour market and reducing state activity in the goods and factor markets. Moreover, improved human resource through better healthcare, more meaningful education and greater connectivity can increase labour productivity, in which Pakistan lags even behind its neighbours. The FEG also advocates improved governance, with the government exiting from operations and maintaining a regulatory and policy role, while market forces should determine the ownership and nancing of assets, as well as production and management. Public sector enterprises need critical surgery by removing subsidies and monopolies and ending ine ciencies in resource The FEG seeks strengthenmobilisation. At the core, ing of private sector enterthe civil serprise, through rewarding vice needs to be fundameninnovation, abolishing busitally reorganness bottlenecks, promotised, with proper space ing research and developfor profesment, reforming the labour sionals and market and reducing state specialists, since the activity in the goods and traditional factor markets. generalist bureaucracy, with its heavy rent-seeking and ine ciencies, is now an obstacle to faster growth. Thus, minimising the governments operational scope, along with restructuring and speedy reforms, is highlighted.
The urban economy, in particular, needs to be rejuvenated, by reforming restrictive zoning laws, inadequate market development and ine cient public sector management.
Thus, the FEG identi es the fundamental constraints to economic growth as the lack of competitive markets and missing government reforms. The former is compounded by barriers to entry and exit, regulated and monopolised markets, and lack of entrepreneurship caused by rentseeking which in turn depresses risk-taking and entrepreneurship. Lack of government reforms creates poor returns on public investment and higher macroeconomic risks, compounded by regulatory uncertainty and poor
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Further emphasis is placed on openness in trade, since no economy achieved international competitiveness by remaining insular and inward looking. Pakistans degree of openness has indeed decreased in the past ve years, with renewed protection after initial trade liberalisation. In particular, trading with India and China requires a major upturn. A return to unilateral trade liberalisation, with general reduction in tari s and abolition of the embedded and distortive system of regulatory duties (SROs), will further spur growth. 4 A prominent feature of the FEG is the call for vibrant and competitive markets: not only to move away from import substitution but also to terminate the incentives and subsidies given to rent-seeking lobbyists. Government regulations create imbalances as they are not professionally organised and are skewed in favour of speci c interests. Market development is further impeded by outmoded urban management and zoning practices, inadequate transport and storage facilities in the rural economy, and neglect of domestic commerce. Reforms are needed at macro-, meso- and rm-levels in order to move out of the current morass a ecting the agricultural, manufacturing and trading sectors.5 The FEG also places major emphasis on creative cities, acknowledging that modern economies have prospered through urban centres, and unless these are buoyant and expanding then a rural stimulus alone cannot deliver development. Modern cities now have multiple types of zones, which are more functional than the retention of the dual residential and commercial categories that continue to constrain Pakistani cities. Punitive imposts on commercialisation, and a host of heavy-handed government regulations, have further depressed urban development, creating investment disincentives for higher density land
usage. While the urban population is growing rapidly, the software for urban management has become obsolete. 6 Cities need to move to a new mode of governance, which would be more investment friendly. New laws and regulations would end restrictive zoning and building regulations, encourage high-rise and mixed use development, and rectify anomalies in urban land policies. This would
yet another failed attempt at reform if the new strategy remains unimplemented. Energising these changes will require political courage and public service willingness and capability. It is the lack of these that explains much of the continuing, and indeed deepening, backwardness of Pakistan. However, there is a third element, the business community itself, which could initiate a robust campaign for changes that will radically expand its domain. However,
address the demand for commercial, warehousing and a ordable housing needs. The rationalisation of land and rental markets, with simpler registration systems and clearly identi able property rights, along with e cient urban local governments, could help to rapidly increase business investment and enterprise. While the FEG is an admirable e ort to reinvigorate business and the national economy, it will only remain
despite the assertion in the FEG that stakeholders have been consulted in its formulation, it appears that business is quite unaware of these developments. Nor have business leaders shown much interest or taken an initiative in addressing this issue: many might anyway be hostile to these proposals since they call for the dilution of vested interests. It would be a pity if yet another opportunity to return Pakistan to viable economic performance is wasted.
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The Causes of Embedded Backwardness and Resistance to Change

Wherever it proposes change and transition, the FEG also indicates the signi cant, if not formidable, obstacles to reform in Pakistan. However, it fails to analyse in any depth why these resistances are so deeply embedded, and why they continue to recur and return with continued vigour. This is partly because such explanations are outside the ambit of the FEG document, which is forward looking and focused on building the case for reform in the near to medium term future. In the areas of suggested interventions, whether governance, human resource upgrade, urban restructuring and market renewal, the pre-eminence of the way we do things and the weak stimulus towards how to do things better or best, is creating the lags and relapses that keep Pakistan backward. In understanding the forces that succeed in retaining the status quo, a much wider analysis of historical, socio-economic and politicoinstitutional factors is required. We need to analyse why market forces have remained weak or been rolled back in Pakistan, with detrimental impacts on its development. Critical developments even in the period before Partition are relevant, as there were signi cant continuities into the Pakistan period. Incumbent social scientists have generally failed to analyse these forces in the understanding of Pakistans political economy and evolving business and social dynamics, which is probably a function of their inadequate research into the nature of the countrys institutional development. On the political side, the contrast with India in the nationalist movement was a telling signal of the di culties experienced after 1947. By the mid 1930s the Indian National Congress, the spearhead of Indian nationalism, was already a mature political party reaching from village to provincial to the all-India apex level. In the 1936 elections, consequent to the Government of India Act of 1935, the Congress delivered a body blow to British rule by defeating the pro-British landlord-based parties in every Hindu majority province. The Congress represented a broad alliance of upper peasantry, urban professional classes and workers, small and medium enterprise, as well as the big businesses that provided nancial contributions. 7 By contrast, the Muslim League was hardly organised, comprising the same Muslim landlord interests that the British supported. The exception was the vital Punjab province, where the League stood excluded from this role, since its communal stance could threaten the inter-religious coalition brought together by the British in the Unionist Party. Consequently, and only a decade before Partition, the League held only 1 out of 120 Muslim seats in the Punjab Assembly.8 democratic continuity in India and authoritarian over-reach in Pakistan. While the former was far from perfect, it did avoid the almost extreme concentration of power and resources in Pakistan, leading to the rise of a class of rent-seekers that successfully resist governance reforms. The nature of economic change in the future Pakistan area also laid the foundations for authoritarianism and resource diversion. The backbone of the Indus basin economy was the canal irrigation network in Punjab and Sindh, developed mostly under British rule. The agricultural colonisation and land settlement process, required to bring hitherto arid wastes under cultivation, also created signi cant intermediary interests that exercised major power and rent-seeking roles in the post1947 political economy. The greatest amount of land grants went to the upper, landholding agricultural castes, while the rural masses (consigned to the category of menial lower or service castes) were excluded from land occupancy.9 Unlike its own peasantry during the industrial revolution, it was British strategy to preserve this upper peasant element from the abrasive impact of market forces. The remarkable Punjab Land Alienation Act of 1901 restricted land sales from agricultural to non-agricultural castes, a political but anti-market measure not unrelated to the fact that the former provided both military recruits and land revenue, for the security and scal sustenance of the colonial state.
We need to analyse why market forces have remained weak or been rolled back in Pakistan, with detrimental impacts on its development.
The contrasting trajectory of post1947 political developments led to
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Three further segments, all potentially hostile to the articulation of the market, were greatly strengthened through agricultural colonisation. 10 First, the larger landowners received signi cant land grants, and have since remained entrenched; and unlike their Indian counterparts quite undisturbed by land reforms. Their continued eminence in political a airs has helped to retain deinstitutionalised and de facto power nodes averse to sustained reform strategies. Second, the military obtained extensive canal irrigated land, either for grants to soldiers or in animal breeding schemes. Such rewards remained unmatched elsewhere in the British Indian empire. This militarisation of the rural economy served as a prelude to post-1947 authoritarian power capture, disproportionate resource diversions, and continued obeisance to global imperialism.11 Third, in this hydraulic society, with innumerable land transfer transactions and centralised irrigation management, the civil bureaucracy exercised more arbitrary authority than anywhere else in South Asia. Public functionaries in Pakistan have not only indulged in rampant rentseeking, but also e ectively resisted timely reforms and thereby contributed to the retention of obsolete and dysfunctional structures and processes. The paradigm of growth without development, and indeed of economic growth actually embedding social rigidities, has been explored by me in several research publications. One class remains unaccounted for: the business groups that emerged with extensive agrarian growth. With the rise of market towns, agri-trade and agro-processing, the Indus basin did witness the rise of a commercial and professional class, hopefully paving the way for socio-economic modernisation. Apprehensive that this segment would destabilise the hold of its rural intermediaries, the
colonial state tried to minimise its appropriation of agricultural land. Since business groups were predominantly non-Muslim, exploitation by business increasingly assumed a communal characterization. With the economic depression of the 1930s and consequent agrarian disruption and indebtedness, the British generated the narrative of the usurious Bania moneylender as the source of crisis.12 Eventually, the religious cleansing of 1947 drove out almost the entire business community from the Indus basin, thus losing
Regional disparities added to wealth maldistribution to enhance skepticism over the functional inequality approach.
a premium resource built over the previous half century. This emergent business vacuum tilted the Pakistani political economy further towards elements hostile to market forces and structural transformation. While political history might claim redeeming aspects in the formation of Pakistan, from the economic development perspective this had serious downsides. Indeed, if industrial revolution is the hallmark of the modern age, then the Pakistan area su ered a counter-revolution in eliminating its entrepreneurial resources. The business vacuum began to be lled through trading groups in Karachi and upcountry in-migrating from India. Trading pro ts, especially from the Korean War, were invested in industrial projects, with textiles emerging as the major sector. More accelerated industrialisation in the 1960s did lead to wealth concentration and the emergence of a few
dozen big business groups, which caused resentment especially with stagnating real wages. Unlike India, business in Pakistan lacked political anchorage, having failed to nancially contribute to political organisations and democratic governance. The rapid emergence of industrial oligopolies was seen to be induced by a range of concessions, such as protected markets, subsidised nance, tax holidays, raw material pricing anomalies, and opportunistic public sector divestitures. Regional disparities added to wealth maldistribution to enhance skepticism over the functional inequality approach. Nevertheless, business groups had also started diversifying beyond the textile base, and Pakistan was seen as a model of late industrialisation.13 That the country was unable to maintain this strategy, and indeed su ered a radical reversal in the 1970s, was testament to the entrenchment of anti-capitalistic elements. The strategic alliance that accomplished this further counter-revolution was mobilized in the 1970 elections, with medium enterprise galled by the rent-seeking of big business, urban intelligentsia riling against military dictatorship, in Punjab small landholders that had been squeezed by the green revolution whose bene ts had passed to middle and large farmers, tenants expropriated by farm mechanisation, and in Sindh large landlords resenting the sudden rise of industrial magnates.14 TThe nationalisation programme of the 1970s represented a major rollback of market forces and a debilitation of private large-scale industrial and nancial assets. The expropriated production units were placed under 12 sector corporations, which after Zia-ul-Haqs coup came under the direct control of civil and military o cials, thereby greatly extending the economic domain of public functionaries.
May 2013 13
Further, the 1970s nationalisation had gone beyond the exclusion of large-scale business to the almost bizarre takeover of the intermediate agro-processing sector, such as oil and our mills; though these were soon privatised by Zia. Moreover, the state took over the commanding heights of agri-trade, with stateowned trading corporations in rice, cotton, wheat and other commodities. Like 1947, and in order to placate the agrarian elite and upper peasantry, the private sector was emasculated from the forward linkages of the agrarian supply chain.15 After the trauma of nationalisation, the private sector was reluctant to invest in Pakistan for over a decade. When investment did return after 1985, capital ows went once again to low value added textile segments.
Investment itself became a rentseeking exercise, with the entry of maverick entrepreneurs exploiting the nationalised nancial sector, and the consequent rapid accumulation of non-performing loans. The private sector remained weak, lacking the nancial and organisational capabilities to invest in higher technology industries. Pakistan lost the opportunities thrown up by the global economy in consumer electronics, the emergent computer industry, information technology and software development. Export levels stagnated and remained tied to the commoditised end of the cotton and leather trades. 16 Since 1990, the privatisation programme has been induced through conditionalities from high foreign debt levels rather than internal dynamics. This has rolled
back the state from ownership of production units and commercial banks, though public sector enterprises still pervade infrastructure, energy, transport and heavy industry. The military continues to consume a signi cant part of the national budget, while excessive state borrowing not only crowds out the private sector, but delivers bulk nancial resources to political and public functionaries.17 It appears that the strategic intent of the colonial state, in a ording succour to pre-modern formations and keeping business at bay, is being replicated by the sovereign state more than a half century after independence.
01 02 03 04 05 06 07 08 09
See Framework for Economic Growth Pakistan (Islamabad, Planning Commission, Government of Pakistan, May 2011). For a review see Imran Ali,Pakistan: Political Economy, and Post-2000 Developments, in R. Jetly (ed), Pakistan in Regional and Global Politics (London and Delhi, Routledge, 2009). Far an analysis, see Imran Ali, The Sinews of Governance: Bureaucracy, Narrative and Power under Colonialism and Independence, Pakistan Development Review (Islamabad), Vol. 45, No. 4II (Winter 2006). See Imran Ali, Pakistan, in Regionalism and Trade: South Asian Perspectives, (Singapore, Institute of South Asian Studies, National University of Singapore, 2007). See Imran Ali (with A. Malik), The Political Economy of Industrial Development in Pakistan: A Long-Term Perspective, The Lahore Journal of Economics, Vol. 14 (September 2009), pp. 29-50. See Imran Ali, Two Tales of a City: Lahore and the Ends of Empire, in N.U. Haque and D. Nayab (eds), Cities Engines of Growth (Islamabad, Pakistan Institute of Development Economics, 2007). There is now a large body of academic research on Indian nationalism. For a useful analysis of nationalist politics in the Hindu-majority provinces, see D.A. Low (ed), The Congress and the Raj (New York, Columbia University Press, 1977). For voids in Muslim nationalism and pre-Partition Punjab political developments, see Imran Ali, Relations between the Muslim League and the Punjab National Unionist Party, 1935-47, South Asia (Journal of the South Asian Studies Association of Australia and New Zealand), No. 6, 1976. See also Imran Ali, The Punjab and the Retardation of Nationalism, in D.A. Low (ed.), The Political Inheritance of Pakistan (London, Macmillan, 1991). For a comprehensive analysis of the agricultural colonization process, see Imran Ali, The Punjab under Imperialism, 1885-1947
(Princeton, Princeton University Press, 1988; reprinted by Oxford University Presses, Delhi and Karachi).
10 11 12 13 14 15 16 17
See Imran Ali, Malign Growth? Agricultural Colonization and the Roots of Backwardness in the Punjab, Past and Present (Oxford), No. 114, February 1987. Tan Tai Yong, The Garrison State: The Military, government and Society in Colonial Punjab, 1849-1947 (Delhi, Oxford University Press, 2005). See Imran Ali, Business, Stakeholders and Strategic Responses in Pakistan (Armidale, University of New England Asia Centre Paper No. 8, 2005). See Imran Ali, Business, Stakeholders and Strategic Responses in Pakistan (Armidale, University of New England Asia Centre Paper No. 8, 2005). Imran Ali, Historical Impacts on Political Economy in Pakistan, Asian Journal of Management Cases, Vol. 1, No. 2 (2004). Imran Ali, Elites and their Role in Pakistans Development, in J.C. Breman, R.S. Srivastava and M. v d Linden (eds), Festschrift for G. K. Lieten (Amsterdam, 2011). For analysis of the underlying factors behind this malaise, see Imran Ali, Understanding Pakistan The Impact of Global, Regional, National and Local Interactions, and Past and Present: The Making of the State in Pakistan, in Imran Ali, S. Mumtaz and J.L. Racine (eds), Pakistan: the Contours of State and Society (Karachi, Oxford University Press, 2002). For social and economic impacts of these processes, see Imran Ali, The Historical Lineages of Poverty and Exclusion in Pakistan, South Asia, Vol. 25, No.2, August 2002. See also Imran Ali, Persistent Inequality and the Challenges to Legitimacy and Peace Building in Pakistan, in A. Hussain and M. Dubey (eds), Democracy, Sustainable Development and Peace: New Perspectives on South Asia (Delhi, Oxford University Press, 2013).
14 KSBL Review
Executive Education
A group discussion during KSBL executive education programme on creating high performance teams
Dr Kamal Munir, Professor Cambridge Judge Business School, conducting a programme on "Strategising for Competitive Advantage" at KSBL
KSBL launched Executive Education programmes in strategic collaboration with Judge Business School (JBS), Cambridge University, in 2010. Since then, KSBL has conducted 17 programmes which have been very well received by Corporate Pakistan and have established KSBL as an upcoming premium provider for Executive Education in the country.
KSBL - Executive Education Advantage

Highly qualified faculty for designing relevant learning experiences aligned to achieve client organisation's goals and objectives Programmes with participant-centered methodologies to allow participants to learn and discover solutions under the able facilitation of the faculty Blend of relevance and rigour, international best practices and local perspectives while focusing on individual, functional and organisational growth and development Acknowledgment of learning from the KSBL programme through the KSBL Cambridge Certi cate
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Developing partnerships with organisations, working with them to meet their current and future business goals, using the vehicle of learning and development for their executives.
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With its highly quali ed permanent faculty, visiting foreign faculty from Cambridge and other renowned business schools, KSBL Executive Education is o ering world-class, innovative and relevant Open-Enrolment and Customised programmes and services for the corporate, family business, public and social sectors in Pakistan and in the region. The programme portfolio is developed based upon KSBL faculty expertise and feedback / suggestions from KSBL Executive Education Alumni and from the market in general.
Financial Markets: Review, Analysis & Dynamics Dr Ali Khalil Malik

Asset Allocation: Stocks, Gold & Oil
Financial markets have displayed enormous volatility over the past few years. Investors have experienced mixed returns from nancial instruments and commodities. Commodities (especially gold & oil) were considered to be attractive investment opportunities; this perception however seems to be changing rapidly. The spectacular growth of gold seems to be disappearing and the upward trend in the price of oil appears vulnerable to global economic uncertainty. Instruments such as Futures still attract a large amount of in ows and, for many commodities and nancial products, provide investors the ease (and exibility) of taking positions in those products rather than physically holding them (or, in case of an index, the cost and time required to replicate an index). Yet Futures are perceived to be more volatile (riskier) than traditional nancial markets because of excessive speculation in Futures. The volume in Futures markets has surged in recent years but excessive speculation remains a concern for the risk-averse investor. The Karachi Stock Exchange (KSE) is perceived to be a riskier market with erratic market movements, displaying little or no concern for the economic fundamentals. The market at one point in time can display extreme momentum in the upside direction, and at other times can display sharp downside swings. This potential for sustained upside movements has attracted many domestic investors to the markets but the more cautious and foreign investors tend to be less optimistic with respect to the performance of the market.
Associate Professor, KSBL ali.malik@ksbl.org
Dr Ali K. Malik is an Associate Professor of Finance at KSBL. He graduated with a PhD in Finance from Manchester Business School (Manchester, UK). He also has a Masters in Finance from The University of Manchester and Bachelors in Economics from University of London. Dr Malik has six years of teaching experience at universities in Pakistan and UK. Prior to joining KSBL, Dr Malik was a faculty member at the Lahore University of Management Sciences (LUMS). His research and teaching interests focus on nancial economics, nancial engineering and nancial risk management.
A look at the graphs of daily returns (volatility plots) for selected ve nancial markets reveals: KSE, on average, tends to be relatively less volatile compared to other markets, e.g. another emerging countrys stock exchange Mumbai Stock Exchange displays more pronounced volatility (and hence risk) compared to Karachi Stock Exchange over the past two years time period. Gold, which was (and still is) considered to be a safe haven for investors, displays signi cantly more volatility compared to the selected stock markets. Whether this extra risk of gold is compensated with extra returns is another issue. The extremely volatile behavior of gold could be due to speculation originating in the corresponding Futures market for the precious metal. In terms of market dynamics, or more speci cally, the spillovers between foreign and local markets, we compute the cross-correlations between KSE 100 and S&P 500 indexes and between KSE 100 and SENSEX 30 indexes at various leads and lags over the past six months. As is evident from the graphs, the correlations between KSE and other markets are of very small magnitude. Except for a correlation of approximately 0.1 with S&P at lag 1 and a correlation of approximately -0.13 with SENSEX at lag 0, all others are close to zero (except for some non-zero correlations at random intervals). Given the cross-correlations, KSE appears to be largely immune to the foreign market spillovers and hence, volatility speci c to KSE appears to be originating from within the market only. Therefore empirical evidence is not supportive of the hypothesis that global equity market spillovers signi cantly a ect the Karachi Stock Exchange.
.04
KSE Returns
-.04
-.02
.02
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obs
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Daily Return Plots for the Selected Financial Markets

.04
SAN Returns
SAP Returns
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.04
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obs
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obs
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.05
GOLD Returns
0 100 200 300 400 500
Oil Returns
-.05
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obs
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obs
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Cross-Correlations of KSE with S&P and SENSEX

Cross-Correlations
.2 .1 .1 .2
Cross-Correlations
SAP kse
-.1
-.2
-.2
-.1
SAP kse
10
20 leadlag
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40
10
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40
To further evaluate the performance of KSE, we compute the e cient frontier (optimal risk portfolios) from an investor perceptive. In terms of portfolio allocation, we consider portfolios of ve assets, KSE 100, S&P
500, Gold, Oil and Sensex 30, i.e., an investor having the option to invest in these ve assets. Given their risk and return characteristics we want to evaluate how well these assets would t into his/her optimal portfolio.
The upper half of the minimumvariance frontier, known as e cient frontier, of these assets is given above for the past two years daily returns.
May 2013 17
Financial Markets : Review Analysis & Dynamics
The minimum-variance frontier plots the optimal risk-return combinations i.e. it shows the maximum return you can get for a given level of risk (normally) measured by standard deviation or the lowest risk you have to bear for a given targeted return. As you move rightwards along the frontier, the risk and return both increases. The optimal point (portfolio) on this frontier depends on the level of risk-inversion of an investor i.e., how much risk one is willing to take. We use this frontier to illustrate the preference of assets among the assets discussed above. For all the portfolios along the e cient frontier there is a substantial weight on the KSE 100 index; in fact of all the assets KSE has, the largest weight in all the portfolios along the frontier. The minimum weight on KSE is 35% and it rises gradually to 100% as you move towards high risk/return portfolios along the frontier. The other two assets behind KSE, in terms of weights in the portfolios are Gold and S&P 500 respectively. The same information can also be presented in terms of other measures of risk like Value-at-Risk (VaR). VaR as opposed to standard deviation measures the tail-risk. The term tail-risk refers to the extreme parts of a probability distribution function. More speci cally, VaR measures the loss level, with a speci ed probability, which will not be exceeded over a given number of trading days. We use conditional VaR (C-VaR) as opposed to
0.19 0.18 0.16
VaR to re-evaluate the importance of KSE in this portfolio allocation problem.1 Even when evaluating the portfolios within this dimension of risk (C-VaR) and return, our earlier analysis stays intact. The weight on KSE still varies between 36%-100% along the e cient frontier. To minimize the e ect of time-dependency on the e cient frontier, we perform this exercise again using last one-year daily returns data only, as portfolio allocation (like other nancial relationships) is time dependent. KSE however, still retains its importance in terms of its weight in the portfolios along the e cient frontier. The weights on S&P and SENSEX however increase relative to gold (compared to our analysis above). However, again as we move towards the riskier positions along the frontier, weight on KSE gradually increases to 100%. Based on the analysis so far, KSE, despite all the negative perceptions o ers attractive opportunities for the investors, (risk-averse and risk-takers) compared to other assets, which attract signi cant amount of investment globally. Our analysis shows that due to its non-correlated-ness with other markets, KSE appears to be an ideal market to improve the risk-return combinations (i.e. shifting the e cient frontier outwards) available to the investor. If we take into account the impact of
exchange rate movements (since the Pak Rupee has depreciated signi cantly against the U.S. Dollar over the past couple of years), then the attractiveness of KSE is diluted somewhat. Using the annualised dollar returns on KSE for the past 6 months and repeating the same exercise, we nd that the weight on KSE in the portfolios along the frontier is now restricted to 25-50% for most of the portfolios (even as you move towards the north-west direction). It still, however, comes second only to SENSEX, in terms of its weight in the portfolios along the frontier. These are then followed by S&P and gold respectively. The same is also true when using C-VaR as the measure of risk. The fundamentals may not be very strong for Pakistan, but the stock market o ers attractive risk-return opportunities for the investors.2 The depreciating rupee does take some gloss o the strong KSE performance in the recent years but it still o ers great diversi cation opportunities for the investors worldwide. However its disconnection with the macro-fundamentals might just be what is keeping the more risk-averse investors away from the market. A depreciating exchange rate also poses strong questions for the foreign investors. We plot the daily exchange rate (Rupee-Dollar) percent changes over the last few months below. The uncertainty and volatile movements in the exchange rate are clearly evident from the graph. 3
Mean - Variance - Efficient Frontier
Our analysis shows that due to its non-correlated-ness with other markets KSE appears to be an ideal market to improve the risk-return combinations available to the investor.
1.4 1.5 1.6 1.7 1.8 1.9 Risk (Standard Deviation) 2 2.1 2.2 2.3
Expected Return
0.15 0.14 0.13 0.12 0.11 0.1 0.09 1.3
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Daily Exchange Rate Movements

4 -4 0 -2
Exhange Rate
50
100 obs
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A strong performance in the past does not guarantee a similar performance in the future. A rational investor would consider all the available information before deciding on the future course of action. Had
KSE already reached its peak, the upcoming elections in Pakistan and the related uncertainty, and the weakened fundamentals all pose intriguing questions for potential KSE investors. In fact after looking at a
couple of indicators (Stochastic Oscillator and Chaikin Volatility) below, one gets a feeling of a possible reversion in the KSE 100 index. 4
Stochastic Oscillator
150 100
50
0
1 16 31 46 61 76 91 106 121 136 151 166 181 196 211 226 241 256 271 286 301 316 331 346 361 376 391 406 421 436 451 466 481
Chaikin Volatility
200 100
-100
1 16 31 46 61 76 91 106 121 136 151 166 181 196 211 226 241 256 271 286 301 316 331 346 361 376 391 406 421 436 451 466
May 2013 19
Investment Dynamics
In todays uncertain environment and economies struggling with their fundamentals, lower-risk income investments may not provide high enough yield and could actually incur losses if interest rates rise in a recovering economy. The key to generating higher income isnt to avoid the safe investments or overdo the riskiest, but is about combining many of them into a portfolio that pursues your desired returns while diversifying risks. It is therefore bene cial to look for income across a broader range of asset classes from around the world. For example, it is common for a countrys stock market dividend yield to exceed its long-term government bond yield. The story is similar in real estate investments; yields are currently higher than government denominated debt in many countries. And because international markets are driven by di erent economies, they can bring another level of diversi cation to your income portfolio. Adding alternative assets to a diversi ed portfolio can also help investors dampen volatility and potentially increase returns over the long term. Diversi cation works because not all asset classes move together. In general, asset classes such as real estate, commodities, tend not to move in lockstep with traditional asset classes (i.e. they have low correlations to stocks and bonds). Their lack of correlation is what makes them good diversi ers. Alternative assets (real-estate, commodities, etc.) have the potential to improve portfolio diversi cation because of their generally low correlations with stocks and bonds. A well-diversi ed portfolio with non-correlated alternative strategies (assets) may achieve higher returns with less volatility. Some investments are positively correlated to each other, meaning they tend to react similarly to market or economic trends. Non-correlated securities on the other hand make excellent diversi cation tools by allowing investors to pursue increased returns from assets that respond di erently to changing conditions. This may expand return potential while helping to protect against downside risk, because gains in one investment may o set losses in another. This appears to be case in our portfolio allocation the problem above as well (KSE having very little correlation with other nancial assets). Market neutral strategies have (had) little or no correlation to stocks and bonds, meaning they generally have moved independently of traditional asset classes often found in investors portfolios. Adding these alternative assets may help investors reduce downside risk without sacri cing upside return potential. Diversi cation can help improve returns and reduce volatility; individual asset class returns can vary signi cantly, especially in the short term. Since asset classes dont move in lockstep, being appropriately diversi ed across a broader opportunity set can help reduce volatility and increase long-term returns. For example, a hypothetical diversi ed portfolio would have returned 86% over the past 10 years, while the S&P 500 returned only 33% over the same period. Because asset allocation is a key driver of returns, it is important to rebalance regularly to adjust for
Diversify & Look for Alternative Investments

large market uctuations and the resulting portfolio imbalances. A longer-term investment horizon can further improve returns and reduce
Because asset allocation is a key driver of returns, it is important to rebalance regularly to adjust for large market uctuations and the resulting portfolio imbalances.
risk. The longer the time horizon, the lesser will be the variability in potential outcomes. Diversi cation, along with a longer-term perspective, can therefore improve a portfolios risk/return characteristics.5 Dividend Paying Stocks Dividend paying stocks o er attractive investment opportunities. Dividends occur when a company shares its pro ts with stockholders. As a complement to traditional income investments, dividend payers may o er added sources of yield along with other possible bene ts. Dividend-paying stocks have historically delivered higher long-term returns than other income vehicles. Dividend payers tend to be large, nancially strong companies with more mature businesses that are less susceptible to economic cycles. Dividend income therefore has the potential to cushion falling stock prices and reduce the volatility
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of returns. They help boost gains in up periods and reduce losses during downturns. Companies with high dividend yields and low payout ratios have historically delivered the best returns. And because such companies pay out a relatively small portion of their earnings, theyre often able to continue issuing dividends in tough times, and increase them in good times. Dividends are an important source of income and have accounted for a sizeable share of historical stock market total returns. Dividend yields on emerging market stocks are often higher than those in the developed countries. As the global economy and capital markets become increasingly integrated, emerging markets should play a larger role as a driver of growth. Over the next four years, the IMF expects that more than 70% of global growth will come from emerging markets. Therefore dividend-paying stocks in these emerging markets o er attractive opportunities for the investors. A Look into the World of Futures Financial instruments play a vital role in ful lling multiple objectives of investors. Investors use these instruments for hedging, investment, risk management and speculation. One such instrument which has grown substantially in volume over the recent years is the Futures contract.
the exibility of investing in various commodities without actually physically buying those commodities and hence incurring the transportation or storage costs for those commodities. Similarly, Futures provides the exibility of investing in commodities which cannot be physically stored or publicly traded. They also provide the exibility to invest in stock indexes (a diversi ed portfolio with no non-systematic risk and a Beta of 1 on-market risk) in a cost e ective manner; saving the time and cost of replicating the market index in exactly the same proportions. Futures these days are available on a wide range of assets and are normally traded in secondary markets. The contracts normally specify the commodity to be delivered, and, when and where to be delivered (in case of a delivery) and the size of the contract. Futures provide the exibility of enjoying the same gains/losses on a commodity (i.e. physical purchase of commodity) without the need of actually physically buying the commodity. Futures also help in managing the timing of cash ows, e.g. to purchase one ounce of gold through Futures, one would be required to deposit only a margin (a fraction of the actual price of one ounce of gold) rather than the full amount, with the broker. As the Futures price changes on a daily basis (till maturity), the pro t and loss (what you would also experience on the physical purchase of gold) is re ected in your margin.6 The closing price at which the settlement takes place is usually known as the settlement price. This settlement will continue to take place till the maturity of the contract, or till the closure of your positions in the Futures contract. As the maturity of Futures contract approaches, the Futures price will normally converge to the
spot price and hence your cumulative pro t and loss from Futures or physical purchases would be the same. Futures also give you the exibility to close your positions (closing out a Futures position involves entering into an o setting trade) before the maturity of the contract. Most Futures contracts are closed before maturity (in this case, no delivery takes place, depending on a long or short position). Futures are also extensively used for hedging (especially the price risk in commodities). They can be used to hedge against market risk, interest rate risk, exchange rate risk and price risk. Futures can also be used for cross-hedging i.e. for hedging assets for which no secondary market exists.
As the maturity of Futures contract approaches, the Futures price will normally converge to the spot price and hence your cumulative pro t and loss from Futures or physical purchase would be the same.
As mentioned, Futures are available on a wide range of products, such as foreign currency, interest rates (Eurodollar Futures), commodities, indexes, utilities, weather, etc. In Pakistan, Futures are available to trade on the Pakistan Mercantile Exchange. Futures for only some selected commodities are available for trading (gold, etc.) at the moment. But we hope that as the awareness for Futures grows and more people enter the market, a larger selection of Futures contracts will be available in Pakistan in the future.
Dividends are an important source of income and have accounted for a sizeable share of historical stock market total returns.
A Futures contract is a novel and cost e ective option for investing (and hedging against market risk) in a multitude of assets. Futures provides
May 2013 21
Crude Oil Dynamics The Pakistani economy is greatly dependent on the price of oil. A rising Dollar coupled with rising oil prices leaves the Pakistani economy extremely vulnerable to these changes (especially to oil prices). Although prices remain below their 2008 peaks, recent tension in the Middle East has the potential to push oil prices higher. Because Pakistan imports the majority of oil that it consumes, rising oil prices create a drag on economic growth. Volatile supply drives prices further high. As the tension continues to rise in the Middle East, the possibility that oil and gasoline prices will move higher, has increased. Given that the Middle East produces a signi cant amount of the worlds oil, any threat to production in that region typically causes oil prices to go up. Rising oil prices can therefore hinder economic growth, particularly in the case of Pakistan, which is an importer of oil. Because this oil is imported, the money spent on it does not contribute to Pakistans Gross Domestic Product (GDP) and, as a result, can be considered a drag on economic growth. Rising oil prices quickly make the price of petrol increase (because of the pricing mechanism adopted by the Government of Pakistan), making it more expensive for consumers to drive to their o ces and for businesses to deliver goods. Rising oil prices create larger percentage swings in petrol prices and, therefore, in the budgets of consumers and businesses. Higher oil prices reduce the amount of money consumers have to spend elsewhere, and this hinders economic growth. Higher oil prices hamper the ability of consumers to spend money on things that would directly contribute to GDP growth. The long-term solution will be to continue pursuing alternative sources of energy (coal, etc.). This will make Pakistan less reliant on foreign
oil and help insulate against potential supply shocks. Oil prices have displayed great variability in recent years. Only a few years ago they were hovering around the record $150 per barrel barrier, only to be followed by an even more dramatic price collapse, with prices following to $30 per barrel. Economists have tried to understand the reasons behind this recent price surge and collapse in the price of oil and also the reasons behind the highly volatile nature of oil and its movements. A common perception is that this volatile nature of oil is due to the increased participation of investors/speculators in the Futures markets (increased nancialisation of Futures markets).7 It is a well-known fact that Futures prices for crude oil and the corresponding spot price move in tandem with each other. And the common argument is that it is the speculation (and volatility) in Futures markets, which drives the spot price for crude oil rather than the economic fundamentals. This argument is even shared by some of the oil companies CEOs. Futures, for this reason, normally comes under the spotlight when the irrational exuberance in nancial markets is to be blamed for struggling economic fundamentals. And oil prices are of even greater interest since most of the economic recessions are preceded by rising oil prices. The economic evidence however is contrary to the general perception of speculation/volatility in the Futures market driving the price of oil. Recent empirical evidence shows that even though trading in Futures (increased nancialisation of the Futures markets) is an important factor, it is, however, not the most important factor determining the price of oil. The key factor turns out to be the economic fundamentals. Economic fundamentals are the main driver of the crude oil prices. The most recent surge in the
price of oil and the subsequent collapse was mainly because of the increased global demand in the price of oil followed by reduced demand for oil due to a global recession. Even though Futures prices do have a role to play in the price of oil but this recent episode of oil price surge and collapse was mainly determined by the economic fundamentals.
As tension continues to rise in the Middle East, the possibility that oil and gasoline prices will move higher has increased.
The kind of volumes observed in the Futures oil market cannot justi ably predict the future direction of oil prices, as those volumes have no resemblance to the actual demand and supply volumes. Therefore even though Futures is to some extent responsible for the volatile nature of oil prices, it is certainly not the sole or the most important determinant of oil prices.8
It is not suggested to fully hedge against the complete value of oil imports, but an optimal hedge ratio can surely be worked out and may shield Pakistans economy from potential oil shocks in the future.
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Futures (and options) do, on the other hand, provide a useful tool for hedging against the rising oil prices. Given the recent experience of oil price surges and the fact that
Pakistan is an oil importer with an economy strongly dependent on the price of oil, it makes sense for the country to hedge against this oil price risk. It is not suggested to fully
hedge against the complete value of oil imports, but an optimal hedge ratio can surely be worked out and may shield Pakistans economy from potential oil shocks in the future.
Sector Analysis (Banking Industry in Pakistan)

Basel Regulations, Pakistani Banks & Implications for the Economy As Banks in many countries around the globe continue the journey towards the implementation of Basel III regulations, Pakistani Banks lag far behind their foreign counterparts in implementation of the Basel regulations. Even Basel II was not fully implemented in Pakistan and now the move towards Basel III would be a very drastic one for the banking industry in Pakistan (even the process for implementing Basel II regulations was derailed during the global nancial crisis in Pakistan). Basel III was developed largely to avoid a repeat of the recent global nancial crisis and to curb the dangerous innovations of the banking industry.9 While the nancial meltdown a ected many banks throughout the world, many of the Pakistani banks remained immune to the crisis. Pakistani Banks continue to make record pro ts, at least banks with local and middle-eastern ownerships.10 The kind of issues which Basel Regulations (and esp. Basel III regulations) addresses e.g. nancial instruments and liquidity issues may not be very relevant for the Pakistani banking industry, as the volume of derivative transactions in Pakistan is nowhere near the level in developed countries and credit derivatives dont even exist in the country. Yet the exit of some foreign banks from the industry, heavy government borrowing from the banks, slowdown of the economic growth within the country, political uncertainty, corruption, weak governance may put a question mark on the sustained performance of the Pakistani banks in the near future. Basel Regulations is a set of regulatory framework designed to increase the sustainability and e ectiveness of the banking sector.
May 2013 23
The regulations can however hamper the growth of the banking sector and hence the economy. The idea here is (given the space constraint) not to evaluate the Basel regulations but rather highlight some of the key Basel Regulations for market, credit and liquidity risk (Basel II & III) and their implications for the local banks (if implemented) and the economy at large. Some of the terms used are regulations speci c and the readers are referred to the Bank of International settlements website for their clari cation.
new requirements aimed at increasing the contingency capital available (i.e. the various capital and liquidity ratios and the corresponding de nition of Tier 1 capital) will not signi cantly a ect the banking industry in Pakistan.11 Risk weighted Assets are not expected to increase signi cantly as a result of these Basel III (and Basel II) regulations. Credit equivalent amount for the o -balance sheet items is also not expected to signi cantly increase the capital charge for the Pakistani banks.
Pakistani Banks continue to make record pro ts, at least banks with local and middleeastern ownerships.
Since derivatives ( nancial or credit) are not intensively used in Pakistan, swaps (cross-currency swaps & other FX products) being the most utilized derivatives in Pakistan, many of the
Credit equivalent amount for the o balance sheet items is also not expected to signi cantly increase the capital charge for the Pakistani banks.
The common perception (based on statements by State Bank of Pakistan (SBP)) is, that Pakistani banks will not have many problems in satisfying the new capital requirements in Basel III.12 This perception appears to be true because of the stringent state bank regulations here and also because of statistics of breakdown of banks assets into di erent categories (cash, investments, loans & advances etc.). A look into the breakdown of banks assets into di erent categories reveals that majority of banks (esp. the large banks), have a signi cant proportion of assets in the form of cash & bank and investments categories. Therefore satisfying the new capital requirements for the large banks at least should not be a major issue.13 Basel III if and when implemented in Pakistan is therefore not expected to hamper economic growth within the country and within the banking industry. Pakistani banks (or at least the large banks) already satisfying the new capital requirements however pose another question on the role of banking sector in Pakistans economic growth. Holding more capital than is required, should it be considered an achievement for the State Bank of Pakistan (SBP) or is it something to be worried about. Even if one accepts the argument that vigilant checks and control of State Bank of Pakistan (SBP) kept Pakistani banks immune to the global nancial crisis spillovers14 (despite the fact that mortgages and the related credit derivatives are virtually non-existent here), except for the credit card crisis, should we continue to stick to the status quo? Pakistani economy is not doing well; exchange rate is depreciating against most of the currencies, GDP growth rate is one of the lowest of all the countries in the region, macro fundamentals are showing no sign an economic boom in the near future and with political uncertainty increasing, should banks continue to hold on to the passive policy of simply lending to the government and holding extra capital for no reason.
24 KSBL Review
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No one is arguing against a cautious approach but given the size of banking sector (compared to other sectors in Pakistan), one expects the banks to play a more central role in driving the economy. SBP should obviously keep check on the activities of banks but banks should be encouraged to take on a more active role in terms of loans/advances etc. to the corporates and consumers. Helping and encouraging them to move onto the model based approach for market risk and similarly on to the internal ratings based approach (IRB) for credit risk will help them realize the bene ts of diversi cation (credit-default correla-
tions and nancial instruments correlations). This would help them in developing expertise (knowledge and skills-based) and take a more futuristic approach towards the estimation of market-risk based VaR (Value-at-Risk) or probability of default estimations for the credit-risk based VaR. In the end this is expected to free up the un-necessarily tied up capital and get injected into the economy. To keep vigilance one can always keep control by brining in some of the more stringent regulations of Basel like, estimation of stressed VaR, capital for CVA risk; arising from changing credit spreads calculations (to account for counter-
party credit risk) and other liquidity measures.15 In short the suggestion here is not to get rid of the control and regulatory mechanisms but being more rational and knowledgeable can actually help both economy and the banking sector. If the government borrowing and non-performing loans of the banking sector are kept under control and banks are encouraged to adopt better risk management practices, there is no reason why banking sector cannot make a signi cant contribution in the economic growth of the country.
01 02 03 04 05 06 07 08 09
C-VaR measures the expected loss given that the loss is greater than the VaR level. This may appear surprising but the same is true for the U.S. as well. The U.S. stock market also generated strong returns for the investors despite the uncertainty surrounding the U.S. economy. These are percentage changes in exchange rate, even a change of 1 or 2 % on a daily basis creates huge uncertainty in the foreign exchange market and hence for investors globally. These indicators are for subjective decision making only. As a matter of fact one should always consider the fundamentals (company and country related) before making long-term investment decisions. Further one can always use beta to assess the company or country speci c risk and can use strategies such as diversi cation, market-neutral portfolios, long-short hedged strategies etc. to minimize the downside risk. These numbers are borrowed from JP Morgans Insightful Series. Futures contracts are available of various maturities. Since only a margin account is required for trading in Futures markets. This analysis is based on the more detailed research paper, Ali K. Malik, Volatility Spillovers in the Crude Oil Markets, Working Paper, Karachi School for Business and Leadership. Basel III regulations do face resistance even from banks in the developed countries. Critics argue that regulations can potentially slow down economic growth and can even lead to more dangerous innovations by banking experts so as to nd a way around the regulations.
10 11 12 13 14 15
The recent increase in non-performing loans for some banks can however a ect their pro tability in the future. The use of swaps etc. is limited only to a few nancial institutions because of the strict State Bank Regulations. Again issues like securitization and re-securitization in Basel III may not be very relevant for the banks here. And the banks should be able to meet new capital and liquidity ratios speci ed in Basel III like; capital conversation bu er, countercyclical bu er, leverage ratio, liquidity risk ratio, etc.). This breakdown of bank assets into di erent categories and the corresponding numbers are based on the KPMG Taseer Hadi & Co., Banking Survey 2010. The large banks in Pakistan have a more than 50% share of customer deposits; see the referenced document for more details. Other than American or European owned banks, but they were mainly a ected due to their operations in U.S. and Europe. One can even experiment with non-normal distributions, to keep a tighter control.
May 2013 25
Internationally Renowned Resident Faculty
Dr lmran Ali, Professor, Business Policy, KSBL Dr Shaukat A. Brah, Professor of Operations Management Dean, KSBL
Dr Shaukat A. Brah PhD, University of Houston, USA Dr Jawaid A. Ghani PhD, Wharton School, University of Pennsylvania, USA Dr Zeeshan Ahmad PhD, Mississippi State University, USA Dr Nadeem Javaid PhD, University of Nice Sophia Antipolis, France
Dr Imran Ali PhD, Australian National University, Australia Dr Farzad Ra Khan PhD, McGill University, Canada Dr Asma Hyder Baloch PhD, NUST & Sussex University, UK Post Doctorate, University of Pennsylvania, USA Dr Muhammad Athar Siddiqui PhD, University of Strathclyde, UK
Dr Faheem-ul-Islam PhD, University of Cambridge, UK Dr Rizwan Amin Sheikh PhD, SKEMA Business School, France Mr Dawood Ghaznavi MBA, Yale University, USA M.S. Engineering, Moscow Institute, USSR Dr Ali Khalil Malik PhD, Manchester Business School, UK
www. ksbl.org

Dr Asma Hyder
Assistant Professor, KSBL asma.baloch@ksbl.org Dr Asma Hyder Baloch is an Assistant Professor of Labour Economics at Karachi School for Business and Leadership. She did her PhD from NUST and Sussex University, UK under a split PhD program in 2007. She is a recipient of the Fulbright J. William Award for International Understanding and did her Post Doctorate from University of Pennsylvania, USA in 2010. She is also a research a liate at the Institute for Research on Labor and Employment, University of California Los Angeles.
Macroeconomic variables indicate the health of an economy. These variables also help in taking policy decisions for improving the state of the economy. If we look factually at Pakistans economy, it is clear that the economic system is facing serious challenges. This essay presents an analysis of the recent performance of macroeconomic variables i.e. in ation, foreign trade, interest rates and foreign exchange rates. The real GDP growth rate was 3.7 percent during the Fiscal Year 2012 against the target of 4.7 percent. This outcome is not surprising given the energy shortages, security concerns and challenging political environment during the last year; these problems restricted the expansion of businesses and private sector investment and adversely a ected production and growth. The recent performance and analysis of some indicators are given below.
The in ation based on WPI, year-on-year basis, increased to 7.6 percent on average during September, October and November. WPI in ation, year-on-year basis, increased to 7.7 percent in November 2012 when compared to 7.5 percent a month earlier. During November 2011, WPI in ation was recorded at 12.0%. Thus it is clear that in ation has registered a considerable decline over the year. The top ten commodities which varied from the previous year i.e. November 2011, include Footwear (69.11% increase), Wheat Flour (56.25% increase), Bricks, Blocks & Tiles (40.77% increase), Dairy Products (36.10% increase), Woven Fabrics (24.73% decrease), Cotton Yarn (20.80% decrease), Timber (17.18% decrease) and Fertilizers (13.39% decrease). Recently there has been an upsurge in the prices of our. The prices of Wheat during the last month were highest in Sindh and Balochistan and lowest in Lahore. The Wheat crop was also a ected by a water shortage, particularly in Sindh, during this season. According to the State Bank of Pakistan, the total production of 23.5 million tonnes in 2012, compared with 25.2 million tonnes realized in the previous year. Not only was the area under Wheat cultivation lower this year, but crop yields also declined because of lower fertiliser use and water shortages. The prices of Basmati Rice are highest in Islamabad and lowest in Karachi. Large price variations are observed in Fresh Milk prices across the cities. A snapshot of prices in di erent cities for a few selected commodities is given in Figure 1.
In ation
The countrys sustained high in ation during FY 2012 re ects the Governments heavy borrowing from the State Bank of Pakistan to nance large budgetary spending and excessive de cits. More recently, the in ation increased by 8.8, 7.7 and 6.9 percent in September, October and November 2012 respectively, on a year-on-year basis. Similarly the Wholesale Price Index (WPI) and Sensitive Price Index (SPI)1 also show an increasing trend on a year-on-year basis. However the overall increase remains high for CPI as compared to WPI and SPI. The top few commodities whose prices varied during Nov. 2011 to Nov. 2012 include Pulse Gram (44.30%), Besan (42.57%), Eggs (24.70%), Honey (23.60%) and Beans (20.81%), on the other hand, decrease in prices has been observed in Tomatoes (41.86%), Onions (36.74%), Sugar (18.65%) and Gas (40.09). On average, Wheat prices were highest in Karachi and lowest in Quetta, whereas, the price of Rice has been observed highest in Islamabad and lowest in Bannu during the same period.
The surge in in ation due to food prices seems unmanageable in Pakistans economy.
May 2013 27
Food carries a signi cant proportion in all three categories of in ation and in uences the movement in these indices. Increase in food prices accelerated in ationary pressures. The surge in in ation due to food prices seems unmanageable in Pakistans economy. Higher prices were observed in the early quarters of 2011, this surge was mainly due to oods and damage to standing crops along with a global increase in commodities and fuel prices also pushed up the prices domestically. During 2012, the CPI remained high during the mid-quarter of 2012 and after that there were slight decreasing trends. It is important to mention here that recently there was a slight decrease in food items and an increase in the weight of a few other commodities like Health, Rent, Transport and Communication were added into the basket. A very sharp decrease in WPI during the early quarters of 2012 was mainly because of a decrease in a few of the food items that are included in the WPI basket, for example onions, potatoes and the prices of a few other vegetables remain notoriously volatile. Core in ation is a measure of in ation that excludes the highly volatile commodities from the basket like Food and Energy. Core in ation is also considered as a long-term indicator of in ation. There was a slight increase in the mid-quarter of the year 2012, however the non-food index decreased after the second quarter of 2012.
Average Monthly Prices of Selected Commodities in a Few Cities, February 2013

Average Monthly Prices of Wheat/10KG, February 2013
100
200
300
400
Islamabad
Karachi
Lahore
Peshawar
Quetta
Figure 2: In ation Snapshot Year-on-Year Basis

In ation on Year-on-Year Basis
20
60 80
Average Monthly Prices of Milk/1KG
15
10
j 01
ul
20
11 0 c 1o
t2
01
1 0 an 1j
20
12 0 p 1a
r2
01
2
date2
j 01
ul
20
12 0 c 1o
t2
01
2 0 an 1j
20
13
20
40
Islamabad
Karachi
Lahore
Peshawar
Quetta
CPI Non_Food WPI
Food Core SPI
Average Monthly Prices of Kerosene Oil/1 Ltr
Generally, in ation is likely to be higher in the ongoing quarter if non-food and non-energy in ation maintain their current level. Secondly, any supply shock can add to overall in ation. Moreover, the forthcoming elections are expected to reinforce the persistence of in ationary expectations. Finally, the increase in Government borrowing from the Central Bank (i.e., the printing of currency notes) may further stoke in ationary expectations. International oil prices, monetary policy and the rupee exchange rate (discussed in the next section) are other factors that will determine the future trend of in ation.
50
100
150
Islamabad
Karachi
Lahore
Peshawar
Quetta
28 KSBL Review
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Average Monthly Prices of Selected Commodities in a Few Cities, February 2013

Average Monthly Prices of Basmati Rice/1 KG
Box1: Election and Expected In ation

In ation is expected to rise during and even after the election period. With the additional in ow of forthcoming election funds deemed as having in ationary impact given existing level of liquidity, local output growth measured as the gross domestic product. Usually the ruling party keeps the regulated prices arti cially low before elections, and just after the election of the Government, they cut all the subsides and prices of selected commodities that had been deliberately kept low up to the end of the election. Such a price rise has a sudden upward impact on in ationary pressures. On the other hand, during the election year, increases in budget de cit accommodated by borrowing from the Banking Sector result in monetary expansion and in ationary pressure on the economy. Thus after this years election, an upward trend in in ation is expected.
20
40
60
80
Islamabad
Karachi
Lahore
Peshawar
Quetta
Average Monthly Prices of Sugar/1KG
Interest Rate
The discount rate is the interest rate that the State Bank of Pakistan charges from commercial banks when they borrow money from its discount window to meet short-term liquidity needs. Though the discount rate is not directly linked to the interest rates that banks charge their borrowers, it is very closely correlated with the Karachi Interbank O er Rate (KIBOR), which is used in most lending contracts as a benchmark interest rate. Since June, 2012 the Central Bank has been lowering the discount rate. The argument in favor of resumption of monetary easing is that given that in ation is slightly lower and economic growth is not picking up it is necessary to encourage the private sector to borrow, invest and induce the banks to step up e orts to improve their intermediary role.
20
40
60
80
Islamabad
Karachi
Lahore
Peshawar
Quetta
Average Monthly Prices of LPG CYLINDER, 11KG
500
1,000
1,500
2,000
Islamabad
Karachi
Lahore
Peshawar
Quetta
May 2013 29
Interest Rate (Year 2012)

The Governments objective to encourage investment through di erent methods couldnt be achieved properly. However, some expansion has been observed in the private sector, which resulted in the increased demand of public services. Thus despite strong growth in tax collection, the pressures on the scal account continued, and security concerns and energy shortages remained an immense barrier in private and foreign investment.
13 12 11 10 9 8 7 6 June August October December Interest Rate-2012
Foreign Trade Statistics

Foreign Trade statistics are an important indicator in judging the economic performance of a country. These statistics provide a very clear indication of growth of domestic production capacity/overall performance of an economy. According to provisional gures compiled by the Pakistan Bureau of Statistics2, exports from Pakistan during December, 2012 amounted to Rs. 191.41 million, showing an increase of 5.2% over November, 2012 and 15.5% over December, 2011. On the other hand imports into Pakistan during December, 2012 amounted to Rs. 356.9 million. This represents an increase of 3.1% over November, 2012 but a decrease of 6.2% over December, 2011. The main commodities exported during December, 2012 were cotton cloth, cotton yarn, knitwear, rice, ready-made garments, bed wear, jewelry, towels, cement and made-up articles (excl. towels & bed wear). The major commodities imported during December, 2012 were petroleum products, petroleum crude, palm oil, power generating machinery, plastic materials, iron & steel, medicinal products, electrical machinery & apparatus, raw cotton and mobile phones. The gures for export and import of each of the commodities referred to above are given in table 1.
Current Value of Imports, Export and Balance of Trade Nov-Dec-2012

Series
Exports Imports Balance of Trade
December 2012
Rs 191,408 356,899 -165,491 $ 1,969 3,672 -1703
November 12
Rs 181,961 346,229 164,268 $ 1,896 3,607 -1,711
% change in Dec12 over Nov 12

Rs 5.19 3.08 0.74 $ 3.85 1.80 -0.47
Notes: 1) Rs. in million, and US dollars in million. 2) Rupee Value converted into US Dollar on average monthly exchange rate provided by S.B.P. 3) November, 2012 (1$=RS. 95.992598), December, 2012(1$ = Rs. 97.187015) A large percentage of exports are from the textile group, almost 69 percent of overall exports. Within the textile group the more signi cant textile categories include cotton yarn, cotton clothes, knitwear, bed wear and readymade garments. Among the commodities imported, the petroleum group comprises 38%. Within the petroleum group the petroleum products are 60% and petroleum crude comprises 40%. Within the food group the highest import bill is for palm oil (160,052 million dollars), and for pulses and tea we paid 19,231 and 35,015 million dollars respectively in December 2012. The percentage composition of major commodity groups of exports and imports are given in the following pie diagrams.
30 KSBL Review
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Exports of Selected Commodity Groups Dec, 2012

2%
Imports of Selected Commodity Groups in Dec 2012

7%
17%
2% 9%
29% 7% 15%
Food Machinery Transport Petroleum

5%
Textile
69%
38%
The major export destinations include USA (cotton clothes, surgical goods, carpets & rugs), UAE (Jewelry, petroleum products, silk & synthetic tec.), Afghanistan (cement, wheat our, fruits and rice) and China (cotton yarn, rice and raw cotton) among other countries. For imports, the ve major trading partners include UAE, China, Saudi Arabia, European Union and Kuwait. A cross-country analysis of textile exports (based on quantum) presented by State Bank of Pakistan suggests that Pakistans apparel exports have performed better in the EU market compared to its competitors.
Box 1. Historical Perspective of Trade Openness in Pakistan

After partition, Pakistan adopted an import-substitution industrialisation policy, as did many other developing countries in that era. Exports plus imports were only 16.1% of production in 1951. During the 1960s and 1970s, the country continued with import protection policies, but the Government took some measures to encourage exports. During these decades, the country had large balance of payment de cits not only due to ine ciencies encouraged by protectionist policies, but also because of the oil price shock in the 1970s. The implementation of a Structural Adjustment and Stabilisation Program was a step toward trade liberalisation and deregulation of the economy during the 1980s and 1990s. Later, till the end of last decade, the e orts continued to liberalise trade and reduce the complexity and variations in trade procedures.
May 2013 31
Exchange Rate
The exchange rate for Pak Rupee is based on the market-based oating exchange rate system, under which the exchange rate is determined by the supply and demand position in the foreign exchange market. A snapshot of the exchange rate of Pak Rupee with few selected currencies is given below.
Exchange Rate 2013 (Pak Rupee per Currency Unit)
mean of Exchange rate
100
200
300
400
Australian Dollar
Bahraini Dinar
Canadian Dollar
Chinese Yuan
Euro
Kuwaiti Dinar
Omani Rial
Saudi Arabian Rial
Singaporian Dollar
U.S. Dollar
UAE Dirham
UK Pound Sterling
The US Dollar depreciated 6.7 percent from March, 2012 to Jan, 2013 against the Pound Sterling. One of the signi cant reasons for depreciation in the US Dollar is due to global economic developments. However, the US Dollar appreciated against many other currencies in the region, and Pakistan is among those countries. For example, the Indian Rupee (INR), Japanese Yen (JPY), Indonesian Rupiah (IDR), and Chinese Yuan Renminbi (CNY) depreciated in value against US Dollar during the rst two quarters of 2012. High repayments to International Monetary Fund (IMF) are adding to the depreciation of the Pak Rupee. Like the US Dollar, almost similar upward trends can be observed for UAE Dirham and UK Pound Sterling during this period.
Exchange Rate trends: Pak Rupee against US Dollar, UAE Dirham and UK Pound Sterling
26.5 155 2012m7 Time_period 140 UK Pound Sterling 145 150 96 36 160 98
92
90
2012m1
2012m4
2012m7 Time_period
24.5
25
UAE Dirham 25.5
U.S. Dollar 94
2013m1
2012m1
2012m4
2013m1
2012m1
2012m4
2012m7 Time_period
2013m1
01 02
Rs. in million, and US dollars in million. Rupee Value converted into US Dollar on average monthly exchange rate provided by S.B.P.
32 KSBL Review
KSBL Seminar Series on Global & Pakistani Perspectives

INTRAPRENEURSHIP, ENTREPRENEURSHIP AND INNOVATION RESHAPING THE BUSINESS LANDSCAPE December 13, 2012
Professor Christoph Loch conducting a seminar for Senior Business Executives
Dr Nadeem Javaid giving a Research Presentation
CEO Panel Discussion on Entrepreneurial Approaches to Implementing Innovation in Pakistan
Comparison Between Strategic Oversight of Innovative Initiatives by Senior Corporate Management and Venture Capitalists - Key-Note Address by Dr Christoph H. Loch, Director (Dean) Judge Business School, Cambridge University How do Nations Innovate? Technological Change and The Wealth of Nations - Research Presentation by Dr Nadeem Javaid, Assistant Professor, Business Economics, KSBL Panel Discussion on Entrepreneurial Approaches to Implementing Innovation in Pakistan Moderator: Mr Dawood Ghaznavi, Faculty, KSBL. Panelists: Mr Inam ur Rehman, CEO, Dawood Lawrencepur Ltd.; Mr Shahid Hussain, CEO & Director Service Sales Corporation (Pvt) Ltd.; Mr Ghazanfar Azzam, CEO, Waseela Micro nance Bank
LEADERSHIP April 9, 2013
Dr Milan Pagon conducting a seminar on Impact of Neuroscience on Leadership
CEO Panel Discussion: Pakistani Perspectives on Leadership
Impact of Neuroscience on Leadership - Key-Note Address by Dr Milan Pagon, Professor of Management, Zayed University, UAE Leadership Role in Driving Organisational Excellence - Presentation by Mr Saad Amanullah Khan, CEO, Gillette Pakistan Panel Discussion: Pakistani Perspectives on Leadership Moderator: Dr lmran Ali, Professor Business Policy, KSBL. Panelists: Mr Asif Jooma, CEO, ICI Pakistan; Mr Zafar Sobani, CEO, Hub Power Company; Mr Saad Amanullah Khan, CEO, Gillette Pakistan
KARACHI SCHOOL FOR BUSINESS & LEADERSHIP

National Stadium Road, Opp. Liaquat National Hospital, Karachi 74800, Pakistan. UAN: (92 21) 111 11 KSBL (5725) | PABX: (92 21) 34855382 | Website: www.ksbl.org
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KSBL

VOLUME 01, No. 1, 2013

An Indepth Look into

Karachi School for Business & Leadership

Message from the Editors

Dr Ali Khalil Malik

GoPs New Economic Growth Framework and its Impact on Business

Current Performance of Key Economic Indicators in Pakistan

Exploring Structural Change in Pakistan

Sectoral Contribution to Gross Domestic

Annual Economic Growth Rate ( % )

Income Per Capita Growth Rate (%)

Per Capita Income Growth Rate (1960-2012)

GDP Annual Growth (%)

-8 -6 -4 -2 1960 1970 1980 1990 2000 -0 2010

Sectoral Dynamics - Annual Growth Rates ( % )

Annual Population Growth Rate ( %)

Annual Urban Population Growth Rate ( %)

Population density (people per sq.km of land area)

Exploring Structural Change in Pakistan

Structure of Pakistans Services Sector (% of Value Creation 2011-12)

Services Sector Expansion; What are the Implications for Society?

Demographic transition; is it a challenge or an opportunity?

Career Services and Placement

GoPs New Economic Growth Framework and its Impact on Business

Professor, KSBL imran.ali@ksbl.org

GoPs New Economic Growth Framework and its Impact on Business

GoPs New Economic Growth Framework and its Impact on Business

The Causes of Embedded Backwardness and Resistance to Change

GoPs New Economic Growth Framework and its Impact on Business

KSBL - Executive Education Advantage

Open-Enrolment and Customised Programmes

Financial Markets: Review, Analysis & Dynamics Dr Ali Khalil Malik

Associate Professor, KSBL ali.malik@ksbl.org

Daily Return Plots for the Selected Financial Markets

Cross-Correlations of KSE with S&P and SENSEX

Financial Markets : Review Analysis & Dynamics

Mean - Variance - Efficient Frontier

0.15 0.14 0.13 0.12 0.11 0.1 0.09 1.3

Daily Exchange Rate Movements

Financial Markets : Review Analysis & Dynamics

Diversify & Look for Alternative Investments

Financial Markets : Review Analysis & Dynamics

Sector Analysis (Banking Industry in Pakistan)

Financial Markets : Review Analysis & Dynamics

Internationally Renowned Resident Faculty

Current Performance of Key Economic Indicators in Pakistan

Current Performance of Key Economic Indicators in Pakistan

Average Monthly Prices of Selected Commodities in a Few Cities, February 2013

Figure 2: In ation Snapshot Year-on-Year Basis

Average Monthly Prices of Milk/1KG

CPI Non_Food WPI

Food Core SPI

Average Monthly Prices of Kerosene Oil/1 Ltr

Average Monthly Prices of Selected Commodities in a Few Cities, February 2013

Box1: Election and Expected In ation

Average Monthly Prices of Sugar/1KG

Average Monthly Prices of LPG CYLINDER, 11KG

Current Performance of Key Economic Indicators in Pakistan

Interest Rate (Year 2012)

13 12 11 10 9 8 7 6 June August October December Interest Rate-2012

Foreign Trade Statistics

Current Value of Imports, Export and Balance of Trade Nov-Dec-2012