Financial Risk Manager

• Indonesian President Susilo Bambang Yudhoyono hoped to help secure lucrative investment deals worth $15 billion on a trip to India this week. “The investment value is $15 billion, which includes cooperation in infrastructure, manufacturing, natural resources and services.

• Pakistan and Japan on Friday signed an agreement under which Japan would provide a soft loan of US $ 233 million for development projects in Pakistan. Under the arrangement, Japan will provide a soft loan of US $ 233 million of which $60 million and $173 million would be for budgetary support and the Khyber Pakhtunkhwa Rural Road Project respectively. This support is out of a total of $500 million pledged by Japan during the Pakistan Development Forum 2010.

• The World Bank has approved a $250 million loan and a $35 million grant for Pakistan to help vulnerable communities in areas rocked by conflict. The loan announced Thursday aims to bolster Pakistan’s recovery efforts in the Khyber Pakhtunkhwa (KP) province and Federally Administered Tribal Areas (Fata).

• Money market Interbank opened at 13.00/25 closed at 13.90 with a high of 13.90 and low of 13.00. Due to the liquidity crunch in the market the rate could not go down today due to which market had to stay near the upper limit of the discount rate although it did not touch the floor.

• The State Bank of Pakistan (SBP) continued injecting liquidity into the money market that, analysts believe, is faced with liquidity crunch due to the rupee blockade as non-performing loans (NPL) mount and excessive government borrowing from the scheduled banks takes a toll. The state bank, in its fifth reverse repo open market operation of the month in the Government of Pakistan Market Treasury Bills and Pakistan Investment Bonds, injected some Rs 8.0 billion into the banking system on Saturday. The Saturday’s auction was preceded by four others conducted by the central bank on the 6th, 15th, 17th and 21st of this month to inject a sum of over Rs 92.35 billion into the inter-bank market in the short span of 16 days. One major reason of this injection in the market is the non performing loan increase in the credit market which has cause a big liquidity crunch.

• The monthly average of remittances for the July-December 2010 period comes out to $881.90 million as compared to $755.04 million during the same corresponding period of the last fiscal year, registering an increase of 16.80 percent.

• The country’s trade deficit went up by over 18 per cent in the first half (July-December) of current fiscal year 2010-11 against the corresponding period of the last year, as it was recorded at $ 8.150 billion against $ 6.895 billion in the same period of 2009-10.

How governments borrow matters as well as how much.

WHEN financial turmoil threatened to engulf Ireland last month, the government took an unusual step: it scrapped bond auctions for the rest of the year. The move was possible because the country has enough cash to last until next May.

Over the past two years Ireland's National Treasury Management Agency (NTMA), which manages the state's debt, has maintained a cash cushion of €20 billion ($27.7 billion), equivalent to 12% of GDP. It did the bulk of its borrowing through long-term bond auctions, resulting in a relatively long average maturity for the national debt. The IMF reckons that next year Ireland must finance the rich world's largest budget deficit as a share of GDP. But it needs to refinance only a modest amount of maturing debt (see chart). In contrast, huge refinancing needs helped drive Greece into the arms of the fund and of its euro-zone peers in May.

Ireland's prudence in debt management has not come cheaply. It costs more to issue long-term than short-term debt. Anthony Linehan of the NTMA notes that a cash cushion entails increased interest charges and a higher debt-to-GDP ratio on the books of Eurostat, the European Union's statistics agency. But "it reassures the market to know Ireland is pre-funded."

The mechanics of how countries borrow receive far less attention than how much they borrow. Sovereign-debt managers in rich countries used to focus on borrowing as cheaply as possible. No longer. Many are now more preoccupied with ensuring uninterrupted access to funds. Some, for example, are reducing short-term borrowing and the associated "rollover risk". America relied heavily on shorter-term Treasury bills to finance a rocketing deficit in 2008. Since then, it has shifted most of its borrowing to long-term bonds. The share of the United States' debt maturing in the next 12 months has dropped from more than 45% in 2008 to barely 30%, an historic low.

A sovereign-debt manager's greatest fear is a failed auction, in which bids fall short of the debt on offer. The actual cash shortfall is usually not that important: the borrower can simply raise the additional money at a later date. But a failed auction can look like a damaging vote of no confidence. In March 2009 an auction of British gilts failed. Though it proved an anomaly, it still rattled stockmarkets and generated unflattering headlines.

Sovereigns usually prefer auctions because they result in lower borrowing costs. Paying fees to a syndicate of banks to market a deal directly to investors is politically unpopular, too. But Britain's auctions have become so large that they entail far more risk for primary dealers, the banks that purchase government securities at auction and then sell them on. That is particularly true for long-term bonds, whose prices are more volatile. Because that increases the risk of failure, last year Britain started supplementing its debt auctions with syndicated deals.

Dealers themselves face more pressure to support the market. Earlier this year America's Federal Reserve notified primary dealers that they would have to bid in auctions for a share of issuance that was in proportion to their size and number. Treasury officials say the guidance formalised existing expectations. But Dino Kos, a former head of markets at the Federal Reserve Bank of New York (and now a strategist for Portales Partners, a broker), says the new requirement almost guarantees that an auction will not fail.

Sovereign borrowers are also trying to expand their base of investors. Banks, for example, have habitually treated their governments' debt as risk-free. This has led to potentially dangerous concentrations of sovereign debt. The IMF notes in its latest "Global Financial Stability Report" that some 24% of Japanese banks' assets consist of government bonds. Moreover, Japan borrows inordinately through short-term debt. If banks suddenly lost confidence in government debt, the result could be both a systemic banking crisis and a funding crisis for the Japanese government.

Finance ministers and debt managers are spending more time on the road, in particular courting sovereign-wealth funds in Asia and the Middle East. Sweden's debt manager is exploring the American private-placement market. Inflation-indexed bonds are experiencing a surge in popularity, both from investors worried about inflation and from borrowers who think they attract a different type of buyer. South Korea and Australia have reactivated inflation-indexed bond programmes in the past year, and America will almost double its annual issuance from $58 billion in 2009 to over $100 billion in 2011.

Ultimately, of course, the most careful debt management cannot stop a country's solvency coming into question if its deficits keep rising. But as Ireland is finding, a bit of wiggle-room can be invaluable.

Source: The Economist , A service of YellowBrix, Inc.

In a 'market' economy, the highest status belongs to those who have acquired the most. In a Gift Economy, the highest status belongs to those who have given the most. But important is that the gift must always move. This idea was recently popularized by the terrific little movie called Pay it Forward. Every gift is its own reward, but that reward is multiplied, without limit, when the gift, or any gift, is passed along to others. A story is a gift. Blogs are gifts. Ideas and insights and teaching and counsel are gifts. Conversations are gifts, Hugh MacLeod.

The concept of a giving and receiving gifts is as old as society itself. It has always been there in one form or the other. People in all civilizations have been has the pleasure of exchanging gifts in order to establish social relationships and strengthen existing ones or rulers would give away large amounts of goods to their followers (still do in some monarchies) or rich people give away things of value for the collective benefit of the public. Only the forms have kept changing over time.

When people give to one another, freely and without conditions, sharing their blessings with others and bearing each other's burdens, the giving multiplies and we receive far more than what was given. Even when there is no immediate prospect of return, Allah Almighty keeps accounts of all the giving, and in the end blessing will return to the giver, multiplied manifold. All religions advocate that humans should participate and give (back) some of what Allah the exalted has bestowed upon them, in what ever way possible. Have you heard the famous proverb, "Give till it hurts."

Another reason perpetuating giving is that human beings have an instinctive drive to vie for social status; it is wired in by our evolutionary history. For the major part of the history that ran before the invention of agriculture, our ancestors lived in small nomadic hunting-gathering communities. High status individuals, those who were more assertive and could persuade others to follow them, got the best of every thing, and provided more for the followers.

The drive for status expresses itself in different ways, depending largely on the degree of scarcity of goods. "Defining success by what one gives rather than what one has" is neither a new practice nor an overly idealistic view. It is rooted deep in history and human nature, and is more basic than wealth or money. Remember, in hunting societies of the past, the hunter's status was not determined by how much he killed or how much of that he consumed, but rather by what he brought back for others. Lewis Hyde in his book 'The Erotic Life of Property,' writes, "In a gift economy, status is accorded to those who vie and give the most to others."

This phenomena gives rise to a discipline called Gift Economy. As per the definition, "Gift economy is an economic system in which participants give away things of value to the shared benefit of the community." In the present era, the scientific research, intellectual and creative work and the Internet are practical forms of gift economy. A scientist produces research papers and gives them away to other scientists, through research journals and conferences. The other scientists freely refer to the earlier scientists' research findings. The more citations the scientist has, the more standing and respect he has. All of the scientists benefit from an accumulation in the body of knowledge anywhere in the world. Although research is being increasingly commercialised these days, giving away of findings still remains the most efficient method of solving common problems within a particular scientific discipline.

Similarly, intellectuals, philosophers, creative writers and artists spread their work across the world. Despite the obscurity of the modern version of the gift economy, every one benefits from the original work and the creators earn credence in return.

Coming onto the Internet, the open source software is best example of a gift economy in this cyber age; with information being one of a major resource. Programmers make their software as well as source code available to the end users and programming community and anyone can use it as well as modify and or improve the code. Individual programmers gain prestige and respect, and the community as a whole benefits from better software. The open source has been one important factor for the Internet to grow over about three decades. Now what millions of Internet users are doing? They are giving each other information and that is the nature of transaction on the Internet. The Internet is moving towards more than a new kind of marketplace and a new medium for exchanging money. The medium may lead to a radical change in the nature of money itself one day. Many researchers and economists have already predicted that money as we know today is due for a sweeping change. Concepts like alternative currencies and local money are being researched and propagated. Though some of these efforts predate the Internet, but modern Internet aficionados see the Internet as a vehicle for accelerating the changes that earlier have only been predicted as a fancy idea.

Gift economies co-exist with command economies, market economies and barter economies. Given the practices, next may be the move toward sustainable business and to make the business itself a gift to society. The first step toward a sustainable sense of success is taking pride in the value of contributions to others rather than taking pride in the value of personal possessions. This means striving for quality in the use of whatever power we have rather than working to get more power over others as an end in itself. In this view, economic profit and affluence may help us to contribute, but they do not themselves amount to be business success.

While the exchange economy may have been appropriate for the industrial and post industrial age, the gift economy is coming back as we proceed through the information age.

G20 meetings are closed to the public and the press. The organization, so unstructured it has no secretariat, is often hard-pressed to get its members to agree on anything. The group of world leaders, moreover, is now holding only its third meeting.

But now Britain’s Prime Minister Gordon Brown tells Reuters that the G20, meeting in Pittsburgh starting Thursday night, will become institutionalized as “the world’s main economic governing council.” “The G20 will take a bigger role in economic cooperation than the G8 has in the past,” said Mr. Brown.

If the next two days do indeed bring that to pass, the result would be a greater voice in the world economy for rapidly developing nations, such as Group of 20 members India and Brazil, economists say. It might also mean that the G8, the group of major industrialized countries that is accustomed to deciding important economic issues, is on its way to becoming the Ford Edsel of international organizations.

In addition, the apparent plan, the details of which have not been made public, would almost certainly raise eyebrows – and probably more – from those who are suspicious of international governing bodies. (Remember the Tri-lateral Commission?)

“There are a lot of folks in various countries that take as a serious issue self-governance,” says Chester Spatt, a professor at the Tepper School of Business at Carnegie Mellon University here. “They have concerns about ceding too much authority.”

Indeed, at a Thursday press briefing, Treasury Secretary Timothy Geithner said he doubted any state would give up its sovereignty for a consensus. But he added, “I think it’s important that we get people to agree all of us are performing together.”

It’s good for nations to talk, says Mr. Spatt. But “usually when one says an institution is really important, the institution has demonstrated importance,” he says, inferring that’s not yet the case for the G20.

With President Obama and the first lady now in Pittsburgh, attention shifts from New York and the United Nations to the work of the Group of 20. The G20 finance ministers first met in 1999 and try to get together annually. They will gather again in November. The member nations account for about 90 percent of the world’s production.

But more than a few economists question whether this body, with just three meetings under its belt, is up to the task of directing the world economy.

“It’s an ad hoc group,” says Simon Johnson, a former economist at the International Monetary Fund (IMF) and now a senior fellow at the Peterson Institute for International Economics in Washington. “They had a good meeting in April, but I don’t think they have demonstrated they are the world’s economic council.”

Last November, as the financial crisis began to ripple through the world, the G20 leaders pledged cooperation to try to stimulate their economies. In April, they pledged financial aid to poor nations. This time, their agenda includes whether member nations should continue with fiscal stimulus, whether to introduce regulation of bankers’ compensation, and perhaps whether and how to balance world economic growth.

Some economists express discomfort about the notion of giving the G20 a lot of influence. One is Stuart Hoffman of PNC Financial in Pittsburgh, who calls the G20 “an important forum, not a governing body.”

But, on a positive note, he says, the G20 format gives smaller nations “more of a voice.”

Even if the leaders include in their final communiqué a reference to the G20 as a governing council, some economists doubt the group’s decision will have any teeth.

“The rich nations control the major institutions, such as the IMF and World Bank,” says Mark Weisbrodt, an economist with the Center for Economic and Policy Research in Washington. “The G20 will still be just a place to talk.”

The talk may yield a press release that sounds as if the G20 accomplished something, says Mr. Johnson. “The leaders just want to escape without a pounding from the press,” he says. “They are just hoping for good press coverage the next couple of days.”

Johnson expects the group will term the meetings a success. However, as Spatt notes, the members have some fundamental disagreements. “The way they will be taken seriously is by action,” he concludes. {#}

Sales of previously owned U.S. homes rose in April, a report showed on Wednesday, providing new evidence the housing market is stabilizing and backing views that the recession is nearing an end.

The National Association of Realtors said sales climbed 2.9 percent to an annual rate of 4.68 million as the traditional spring home-buying season swung into gear. The positive picture, however, was dimmed by a separate report showing applications for home loans fell to their lowest level since early March last week as mortgage costs rose.

Worries about the government's ability to fund costly measures to rescue the economy drove longer-dated government bond yields higher on Wednesday, with the spread between the 2-year and 10-year Treasury notes widening to a record 2.75 percentage points. The rise in bond yields threatens to push up borrowing costs for consumers and businesses, and U.S. stocks sold off on concerns the economy could suffer. Major indexes ended more than 1 percent lower. Economists, however, were heartened by the home sales data and said borrowing costs had not moved up enough to imperil the housing market's chances of recovery.

"I don't think it's a threat as long as mortgage rates stay low and so far they have," said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts.

In general, the data was seen as a fresh hint that the steep 17-month U.S. economic downturn, triggered by the collapse of the housing market, was easing and could well end by the third quarter, as a survey published by the National Association of Business Economists predicted. The pace of job losses slowed last month, claims for unemployment aid have come off their peaks, and consumer confidence has risen from recent rock-bottom levels.

"The national economy is showing some initial signs of stability," U.S. Treasury Secretary Timothy Geithner said in Boston as he announced $1.5 billion in federal tax credits for community development projects. "This is just the beginning, however. We have a long way to go."

Growing extremist violence has crippled the economy in northwest Pakistan, made tens of thousands of people unemployed and exacerbated the poverty that breeds fundamentalism, business leaders say.

North West Frontier Province (NWFP), which borders Afghanistan and Pakistan’s capital Islamabad, is rich in agriculture, minerals, stunning mountain scenery once popular with tourists and multiple local industries.

But the 21st century has brought decline owing to extremist violence in the adjacent federally administered tribal areas (Fata) and the NWFP district of Swat, where the Taliban launched an uprising two years ago.

‘Around three-quarters of our industries have closed since the war in Afghanistan started but most have closed in the last two to three years,’ Sharafat Mubarak, president of the local chamber of commerce and industry, told AFP.

Before the September 11, 2001 attacks on the United States which precipitated the invasion of Afghanistan and ensuing Taliban insurgency, 2,254 industries were functional in NWFP, of which just 594 operate today, he said.

Read at Dawn

The International Monetary Fund (IMF) has expressed its shock and concern over no respite in the inflation in Pakistan.Inflation increased by 1.4 per cent in April, just as much in March and one per cent in February percent owing to which the target of single digit inflation which was expected in June is also not likely to be achieved by July.

“Owing to this very reason, IMF has asked Pakistani authorities not to reduce the discount rate in the next monetary policy statement secluded to be announced in July next year,” the official said.

In the Dubai meeting, the IMF officials were curious to know as to why the inflation in the rest of world is on decline, but in case of Pakistan there exists no visible respite on this account.

“On face of it, the credit supply to private sector is at the lowest ebb which is why the economic activities in the country in negative zone,” the official said.

During the February review by the Ministry of Finance, the government expected to bring down the inflation to less then 10 percent in the month of June, but now under the new scenario, the inflation will hardly ease to 13.5 percent.

In fact IMF knowing very well that wheat price is also inflationary but Fund people did not say anything to government when it increased support price of wheat by 60 percent.

The official said that the rise in inflation is basically due to food and fuel inflation as government has increased the wheat, rice prices and did not reduce the POL prices.

Because of this very factor food inflation is on the rise. The bad governance has also 90 percent contributions to the existing inflation and 10 percent responsibility lies with private sector. If the government comes up with some effective administrative measures the inflation can be brought down, the official said.

The official referred to the palm oil prices, which were reduced to $ 400 per ton from $ 1200 per ton, but the prices of edible oil and ghee tumbled in Pakistan only Rs 12 per kg while it should have reduced by Rs 42 per kg. Now the international price of palm oil has slightly increased the prices of edible oil and ghee increased by Rs 2-3 per kg.

The IMF also asked Pakistan to build in the budget for 2009-10, some of the amount from Tokyo pledges amounting to $5.28 billion and in case of any shortfall or delay from of the said amount out of pledges, then Fund will provide the loan against the said shortfall. And in case Pakistan gets the required amount from Tokyo pledges after some delay, then Pakistan will pay back the same loan to Fund with minor interest rate.

The said additional facility is to be of a kind of cushion money that will be strictly conditional to shortfall of Tokyo money.

To a question, he disclosed that Pakistan was reluctant to build in some of the amount out of pledges in budget saying the Tokyo pledges’ materialization in stipulated time is uncertain.

The IMF also advised the economic managers to use the fiscal space of about Rs160 billion to Rs180 billion, that has been created by relaxing in the fiscal deficit target by 1.2 percent to 4.6 percent from 3.4 percent, for social sector development expenditures.

This time the Fund was not in favour of any cut in development budget, rather stressed for slash in current expenditures to achieve the target of 4.6 percent budget deficit target foxed for next fiscal year.

Pakistan Sugar Mills Association requested Trading Corporation of Pakistan not to waste valuable foreign exchange on extremely expensive imported surgar because sugar from the domestic market have following benefits;

Given this economic recession, I asked people from different segments of our multi-classed society to account for their monthly income and spending. All the accounts were very revealing. This is the story that moved every one.

An old lady named Suban, in her late 70s may be, she did not know her age, lives alone with no male member to look her after. Having lived all her life in the remote village in district Chitral, her total possession is three goats she had. She takes them out for grazing every day and also performs other domestic chores single-handed. She is healthy, active and happy with life. I once asked her about how she manages her expanses (read budget)? On lot of coaxing she said, "I will be happier if my goat delivers three lambs this time." Surprised, I asked her to explain. She said, "I will sell the lambs and put a new roof on my home and will sell all the milk to live comfortably!" Her budget is simpler but life certainly is tough.

The most important factors for the current development were laid in the early nineteenth century. The "rejection of thinking" and "acting as a community" -- meant for the technology -- resulted in enormous increase in the industrial production because the division of work led to higher productivity and new professions. It appeared, on the face of it, as a way to increase the standard of living and quality of life. Best example that can be cited is Taylorism as introduced in Ford automobile factories and other production units in the early industrial age.

Analysis of the society by political and economic thinkers led to development theories, which could not foresee the effects of these policies as evidenced today. The cardinal error by these theorists was the euro-centristic model -- nobody took what was happening in other cultures into consideration.

In Smith's economic system, the free market functioned globally, as long as global meant regional and maximum on a national level. In Marx's political system the democracy functioned internationally, as long as the power base was centrally located. Similar concept is also found in ancient Greek city state models on a local basis. In all the cases, there appears to be consensus on one point that multiple behavioral models (Artenvielfalt) are not acceptable in these theories. But this is precisely the decisive error.

It is in this context that the present development situation can be analyzed. Today, the market factors are democratically functioning in society, which determines the general welfare of the people. Paradoxically, the market – in the traditional sense -- neither takes into consideration the environment nor the traditional cultures that are present in rural areas. Production of goods leads to a certain uniformity because of cost reduction methods. Every effort must be undertaken, so that the production does not fall short of targets under any circumstances. The multi-national concerns attempt by adding more products to their production programs to offer a variety of models: since all parties participating in the market work in similar way, but the demand in the market is relatively fixed and not able to be increased arbitrarily, it is clear where the wastage of resources is taking place.

The winner is the one, who has the largest potential of human resources as long as these can be controlled politically. The intentions and the wishes of so-called democratic countries are understandable, if they exert all possible pressure on others to accept their form of governance. If this effort does not succeed, their system – let us call it western system -- would collapse together with all parties involved in it.

There are incredible factors, which remain unconsidered by the members of the urban culture, they being the innovators and carriers of the enormous misunderstandings and the cardinal errors. These cultures have developed over a long period of time in inter-action with the climate and the environment. Each culture has its own set of rights and should be the subject of research to shed light on this enormous richness. Of course much of the matter has been lost due to the way of thinking and the actions undertaken up till now, but exactly this is the task before us; to track down these materials.

Misuse of environment and resources are hardly a subject of discussion in economic appraisals. Similarly, the richness of traditional cultures, which still exist at least in part in the rural areas, which are typically described as "under-developed" is not mentioned in these appraisals. There is no code or value allocated to them. The damages become visible only when the values are already destroyed. The extent of destroyed traditional cultures is quite evident in the number of museums, i.e. as soon as the traditional cultures began to be considered as moneymaking measures for the institutions, they received recognition as a valid market factor, but in effect became still unstable.

As the international flow of money is not directed towards local industry and national states, there is a trend towards uniformity through optimization and standardization. This uniformity can be concealed through various designs and requires increased consumption of goods. In order to increase the consumption, the consumers (all consumers of the world united!!) require financial means, which are actually not available to the majority of population.

A special sort of market is created at the place where traditional cultures are promoted. Members of the community have a chance to participate, if they consider it a possibility to maintain their basic requirements, i.e. a form of satisfaction of most basic material needs must remain intact.