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High Noon in Sindh

In dismissing the petition before the Supreme Court against Governor’s Rule in Sindh, Chief Justice Ajmal Mian articulated the wishes of the masses if not of all the intelligentsia in stating, “everybody wants peace in Karachi and the interest of the country and its citizens is of paramount importance instead of a particular individual or party”, unquote. During the course of the hearing, the Chief Justice repeatedly observed that the Supreme Court had already upheld the government’s move of proclaiming Emergency as a consequence of which the Federal Government could invoke any clause of provision of the Constitution under which the Emergency had been imposed.

For the past 10 years Karachi has gone steadily downhill in all senses of the word. Living under the shadow of the gun of different mafias with varying vested interest, one could excuse the MQM’s initial need for a militant wing. Gaining power by the ballot was impossible without having the cover of weapons to get to the ballot box. The gun soon became an addiction, an aphrodisiac as well as a means of enforcing one’s will for what is politely known as “Bhatta”, collecting “protection money”. On joining government, the first split within the Party was natural, the broad mass separating from the hard-core militants, most of the whom went and made the “Haqiqi” faction, nurtured and funded by the ISI, starting an internecine war that has outlasted two Benazir regimes and is well into the second Mian Nawaz Sharif regime. When Ms Benazir as PM, wanted the Army to come in under Article 147 of the Constitution and deal with her allies now-turned foes, the MQM, the lack of adequate powers led the then COAS, Gen Aslam Beg, to decline politely since he did not want the Army to be engaged in “chasing shadows”. During his first tenure Mian Nawaz Sharif also fell out with his MQM allies and “Operation Clean-Up” was launched in 1992 on a massive scale but again without the powers requested by the then COAS, Gen Asif Nawaz. While a lot of terrorists were caught, almost all walked free because prosecution witnesses were intimidated and the Courts lacked the will to convict them. Operation Clean-up, which promised much was left in confusion and frustration with Field Intelligence Teams (FITs) running amok and giving a bad name to the Army. Affected by paralysing strikes and complete shutdown of economic and social activity, the second Benazir regime handed matters over in 1995 to Gen Babar the then Federal Interior Minister.

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Reversing the Foreign Exchange Flow

or almost last three decades, the repatriation of money earned by our blue and white-collar workers in foreign lands, known as home remittances, has been a major factor in narrowing the critical gap in our foreign exchange requirements. Through legitimate banking channels we have averaged US$ 2 to 2.5 billion. Whereas the figure through “Hawala” or “Hundi” is much higher, the foreign exchange remains outside the channels, in fact adds to inflation. On May 28, the ill-conceived action of the Mian Nawaz Sharif government of freezing foreign currency accounts (FCAs) put almost a dead stop to remittances through the acknowledged routes and a reverse flow developed, so much so that banks in UAE, particularly Dubai, were alarmed at the surplus cash suddenly coming in bucketfulls from Pakistan. It is conservatively estimated that in the weeks following May 28, at about the time we needed a positive net inflow, as much as US$ 3-4 billion could have flowed out of Pakistan.
In 1975, before Indian PM Indira Gandhi imposed the emergency as much as 70-80% of foreign exchange remittances was made through “Hawala”, at that point of time only 30% of Pakistani home remittances was through “Hawala”. Indira Gandhi put most of the illegal money changers engaged in “Hawala” in jail, and froze their accounts. Thousands of people lost the money they had sent through the “Hawala” route. Since the net spread is only about 8-15%, the returns for this route was taken to be very risky and the net result is that “Hawala” to India is almost non-existent. On the other hand before May 28, 60-70% of workers remittances were through “Hawala” to Pakistan, now the ratio has gone up to almost 95%. On the other hand, for countries like Bangladesh and Sri Lanka, which had almost 100% net inflow through “Hawala”, the ratio is 80% through official channels for Bangladesh and almost 100% for Sri Lanka, i.e. “Hawala” is non-existent. Similarly Philippines has developed a modus operandi that has replaced the previous extremely bad system by investing in new technology.
To give an example of how much the “Hawala” system has taken over, if one makes an enquiry about how the Ambassador to UAE down to the lowest peon in the Embassy have sent part of their pay to Pakistan. Not only do they use the unofficial route themselves, they have full details and knowledge of who the main players in the “Hawala” game are, where their accounts are and who operates the accounts on a day-to-day basis. Enquiries have revealed that the Chief Managers of some nationalised as well as privatised Pakistani banks with lots of branches in Lahore and Peshawar have full knowledge of these accounts in their domain and how they are being operated. To a slightly lesser extent this is also happening in Karachi. In this age of computerisation, massive inflows of funds in and out of accounts in any Branch of any bank are available at the press of a button on the desk of currency managers every morning. As such for anyone to deny that full knowledge of the “Hawala” or “Hundi” runners is available is telling a blatant lie.
The main reasons for freezing all the foreign currency accounts on May 28 were (1) there was no money left in the FCAs, the successive governments, mainly Ms Benazir’s, having spent almost all the US$ 11 billion invested there (2) to avoid declaring bankruptcy, the only way to stop foreign exchange being withdrawn was to freeze the accounts. Having taken such a draconian step that destroyed forever the credibility of not only any succeeding government but that of Pakistan as a sovereign state, the Mian Nawaz Sharif government in a mind-boggling exercise allowed the foreign money changers to operate. In essence while keeping the official FCAs locked up, the government tacitly allowed foreign exchange to be repatriated illegally. Why in God’s name do we need foreign exchange money-changers when there are scheduled bank branches by the hundreds available? Money changers are not required for inward remittances, only outward flows. The movement of money illegally out of the country is bad enough in normal circumstances, in the present economic environment it is a dire threat to national security. Knowing this dangerous aspect some people very influential in the government and close to the seat of power are actively engaged in conniving that Pakistan be drained completely of foreign exchange. At best this could be because of lack of knowledge, at worst collusion to sabotage the economic stability of the nation. Not only are funds flowing freely out of Pakistan, it is in turn encouraging a large “Hawala” market run by these unscrupulous scoundrels to operate without any check. That artificially keeps the difference between the official and “Hundi” rate high, as such today at Rs. 10 per US Dollar, at times as much as Rs 18 to the US Dollar.
If the government is really serious in reversing the foreign exchange flow, Pakistan has to take some concrete steps, viz (1) to restore sovereign credibility and the confidence of those who repatriate money to Pakistan, the FCAs must be de-freezed immediately while requesting FCA depositors not to withdraw more than 10% for the time being in the national interest as well as allowing the FCAs as collateral for loans as was being done previously (2) those who withdraw foreign exchange anyway, to be paid at the “Hawala” rate of the day as available in the money market (3) future remittances to be given Pakistan Rupees at the going “Hawala” rate (4) any bank branch manager and his superior keeping accounts illegally of any money changer/”Hawala” person to also be jailed, special foreign exchange courts be set up in this regard as normal courts will be unable to cope (5) economic intelligence to be beefed up so as to know the new Hawala players and their modus operandi (6) all foreign money changers to be banned and their accounts frozen (7) anyone not complying to be jailed under the emergency as a threat to national security (8) the Philippines system to be studied and investment made in technology, electronic means to be established by the Banks as a Consortium so that money is transferred i.e. debit/credit to the accounts is made simultaneously electronically and money is available to the recipient within minutes if he wants to withdraw any amount and (9) arrangements be made for delivery of money to individual in their houses, if and when necessary.
According to a Swiss Bank survey as much as US$ 100 billion belonging to Pakistanis is on deposit in individual accounts whereas US sources place the figure as high as US$ 75 billion. That is more than double the national foreign exchange debt, why can’t we encourage our people by a mixture of carrot and stick to invest/deposit foreign exchange in Pakistan? If the government of Mian Nawaz Sharif has the will, there will always be a way out of the foreign exchange quagmire.

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Glimmer or Mirage?

While the pall of dark economic gloom continues to hover over us, some short-term indicators have started to twinkle. We continue to face a horrendous economic situation, deepened by a chronic shortfall in revenues. The magic revised figure of Rs 305 billion is still almost Rs 100 billion away in the last quarter, there is the glimmer of hope that the worst may have bottomed out and we may finally be on the road to the elusive economic recovery.

For the common man there is no issue more sensitive than food, followed by water and electricity. Last year, due to faulty projections the last elected regime defaulted on adequate imports of wheat stocks on time, with the Caretaker regime maintaining the status quo of inertia, there were “atta” riots as wheat stocks plummeted. Some PML stalwarts in Sindh took advantage of the situation to turn “atta” into gold. Wheat in tons went across the border, primarily into Afghanistan but also into other adjacent regions. This time around, the government was taking no chances and fully 4 million tons of wheat has been imported to add to the surplus stock held because of last year’s excessive import. Add to this a bumper crop this year and we are fairly wallowing in wheat. This bumper crop has been due to policy initiatives in agriculture, where the agri-credit was raised from Rs 12.5 billion to Rs 30 billion, allowing farmers a 1:2 ratio of DAP to area instead of 1:4 ratio they previously used. With support price raised, this has resulted in 12-13% increased production with 4% increased average, a 2 million ton increase. To this add the success of the Canola crop in reducing our edible oil imports by an additional US$ 300 million last year and almost US$ 150 million this year. With a world-wide slump in textiles, our domestic cotton off-take has been reduced and we have an importable surplus, enough at least to keep feeding our traditional markets. Even though our textile made-ups have gone down considerably, it has been somewhat made up by a sizable spurt in the manufacturing sector, up by almost 16%, almost 60% of it policy-related. The most significant manna has come from heaven as oil prices have crashed the world over, saving the foreign exchange earmarked for this purpose. If “el Nino” holds back in Sindh where the wheat harvest has already started and any rains would play havoc, things may well look up considerably.

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Ms Benazir’s American Odyssey

There is no doubt that Ms Benazir’s US visit from which she returns today after completing a 10-day journey, has been a media triumph for her personally. The Prime Minister happens to be one of the more charismatic leaders of the world, having more name recognition and goodwill than any other leader of Pakistan, past and present. This has been extremely well exploited to the advantage of her person and in extension this country. If she stands as the Asia candidate for the UN Secretary General’s job, God help those who stand against her candidacy. All this has resulted in a not-so subtle pressure on her US hosts to recognize that Pakistan has a case for favoured treatment in contrast to the doghouse-status we have been consigned to. Even making others recognize a reality is some achievement.

Nothing is more becoming to Ms Benazir Bhutto than aggression and defiance, that has always been her finest moment. She has used it within the parameters of diplomatic nuances to good benefit for the country with both the US Establishment and Congress. She had the President of the US very visibly on the defensive in accepting that a fair standard was not maintained in the business of our paid-for arms and equipment (in the pipeline) that had been virtually confiscated. In a manner of speaking, she ticked off her hosts in the Thatcher-style, calling a spade a spade, maintaining viz. (1) new equipment or our money back (2) trade not aid and (3) no deal on nuclear non-proliferation unless tied with commensurate treatment to India. For good measure she brought Kashmir into international focus making India truly squirm with discomfort. Since Americans like nothing better than an underdog and are hyper-sensitive about fair-play, things went down well in Peoria, Illinois. With a better understanding of our vital necessities and reminded about our cold war role culminating in the turning of Afghanistan into Soviet Union’s Vietnam, it is to be expected that US will search some way to assuage our feelings of hurt and abandonment, one hopes by some material help rather than symbolic rhetoric only.

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The Present Scenario

The year 1991 saw a great boom in the stock market in Pakistan. This was a natural result of the far-reaching reforms made by the present government in opening the shackles from the economy. Among other measures, as the restrictions governing movement of foreign exchange regulations diminished, there has been a net inflow of foreign exchange into Pakistan, mostly from Pakistanis living abroad. With growing confidence in the seriousness of GoP to go further down the road to economic emancipation, money that had been domestically hoarded has also come back into the market. With bucketfuls of money being pumped into the acquisition of shares, the stock market became extremely bullish. This has been further accentuated by the wide ranging reforms in the financial market, resulting in the opening up of many financial institutions, among them Modarabas, leasing companies, private banks, etc. Every new offering in the stock market obtains a premium for a unit share, now anybody who has some money salted away (and has the time and inclination) and applies for shares in new public ventures, manages to clear a profit of between 150-200% on his/her original capital if the application is successful in the computerized drawing of lots. In a manner, it is legalized gambling.

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