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Focus A Begging Bowl in Hand By Meekal A Ahmed T he Pakistan delegation to the

A Begging Bowl in Hand

By Meekal A Ahmed

T he Pakistan delegation to the spring meetings of the

IMF and the World Bank have ar- rived, begging bowl in hand — or “bowel” as one leading Pakistani English-language newspaper spelt it — conjuring up all sorts of in- teresting images and possibilities, looking dapper in their business suits as they emerge from the fleet of bullet-proof limousines hired by the Pakistan embassy in Washington DC. The spring meetings are generally a small affair with much fine din- ing and socialising, compared to the annual meetings in October. The delegations are typically small. However, Pakistan has, Allah be praised, sent a full contingent of worthies. And why not? Our prime minister, in a stirring show of genuine austerity, recently took only 50 people to watch a cricket match.

There is much speculation in the Pakistan press over what is likely to happen. To start with, the Pakistan delegation will meet with US officials. There they will explain to their incredulous audience that, because of our ‘ground realities’, we can’t do much on the eco- nomic policy front. Nevertheless, they will ask the US authorities to lean on the IMF to ‘go easy’ on us. What a deal! An easy-going IMF with no policy commitments on our part. Or at least none worth the paper it is written on and signed off on with great solemnity. As the American’s say, “It does not get any better than this!” What could be a worse manifestation of ‘moral hazard’? What could be a worse example of rewarding economic failure?

Of course, our delegation will have a little smugness and swagger about them with soaring exports on the back of rising global unit prices and mysteriously surging remittances which, taken to- gether, have resulted in a record level of gross foreign exchange reserves. Thus, Pakistan does not have an immediate ‘balance of payments need’. Furthermore, if some of the plans to issue con- vertible bonds in international capital markets bear fruit, there may be further room to continue with our feckless economic policies, starting with a ‘pro-poor-people-friendly-relief budget’ for 2011-12 which, shorn of its verbosity, and looking past the obfuscation, lies and spin, will, in reality, have nothing to do with the poor or the peo- ple.

An IMF mission is expected to visit this coming May. The Pakistani press portrays this visit as a terrific break-through. It is, they hint, the recognition by the US and the IMF (words used interchangea- bly in Pakistan) of our international standing and undiminished nui- sance value. Of course, they don’t put it that way. But the reality is that there is nothing untoward about a May visit. The IMF always turns up in May each year to assess our budget proposals. Both during and after their visit, the Pakistani media will insist that the IMF is preparing our budget for us. In the 17 years that I was asso- ciated with this IMF-Pakistan business, the IMF has never pre- pared the Pakistani budget. The IMF’s budget proposals and Paki- stan’s budget proposals are usually poles apart in terms of credibil-

ity, structure, financing and needed policy actions. It is true that there is some convergence as talks proceed — with the IMF doing much of the converging, which may go some way towards explain- ing the mess we are in. When I asked a mission chief some years ago about the widely-held Pakistani view that the IMF was prepar- ing our budget, he laughed and said, “I wish we were!”

Will there be another programme? The truth is I do not know. How- ever, even if there were no follow-on programmes, IMF rules re- quire that a member country with large exposure to the IMF has to submit to “post-programme monitoring” which includes, inter alia, six-monthly economic reviews. Of course under this ‘no- programme-no-financing scenario’, the IMF’s influence on Paki- stan, limited as it is, will be hugely diminished. They will have no ‘le- verage’ over the direction and content of our economic policies. The real question, however, is whether another programme will make a difference. In our long and chequered association with IMF-financed programmes, Pakistan has never completed a pro- gramme, save once. That was during the Musharaff regime when not only did Pakistan complete the programme; they declined the last tranche and sent the IMF packing back to Washington and their country club. How that programme was implemented, given our unblemished track record of programme failures, remains a mystery. Mr Shaukat Aziz was no economic magician but 9/11 was manna from heaven. But more to the point, Mr Aziz was sur- rounded by some notable, wily cookers. I suspect strongly, there- fore, that the data was cooked to show compliance with pro- gramme targets. My suspicions, expressed long ago, evoked an angry response from the former government’s economic spokes- person, who said my remarks were “political” in nature and there- fore lacked credibility. Moreover, he said disingenuously, our data had been “approved” by the best experts in the IMF, other multilat- eral organisations and, above all, the international rating agencies. Given the track record of especially the last-mentioned during the recent global financial crisis when they were assigning AAA+ rat- ings to worthless sub-prime mortgage-backed securities, one can only marvel at the naivety of such a view.

In conclusion, a follow-on programme, if implemented as shoddily as the last one, will only add another chapter to the depressing lit- any of failed programmes. Yet, Pakistan will muddle through as it has over the past 40 years, missing every target, seeking waivers for non-compliance and getting the targets reset to some distant date. No programme will yield the desired benefits if the timeline of adjustment is constantly pushed out. Reforms need to be imple- mented in a front-loaded manner for maximum impact. With elec- tions looming and election-related spending set to soar without hope of genuine tax and expenditure reforms to get the budget un- der control, Pakistan’s outlook will remain shrouded in uncertainty with the balance of risks tilted on the downside

The writer has served in the Planning Commission and with the IMF.


Pakistan with a Begging Bowl

By Ikrammullah

T here is no difference of opinion about Pakistan’s failing economy. Indeed, it is the mother of all crises facing the

country, including inflation, energy and gas loadshedding, law- lessness, etc.

We are neck-deep in debt and losses. Perhaps, the govern- ment is even depending on foreign aid to pay the salaries of government officials next month, let alone development and growth in any sector. Unfortunately, it seems as if the political leadership has compromised on the nation’s sovereignty.

But in this most difficult time, Chi- nese Premier Wen Jiabao’s visit

to Islamabad truly falls in line with

the old adage, “a friend in need, is

a friend indeed.” Pakistan and

China, reportedly, have signed

“35 agreements and memoran- dums of understanding (MoUs),

worth $35 billion, on cooperation

in economy, energy, banking, se-

curity and technology.” More than that the Chinese Premier has as- sured that “Beijing would never give up” on Pakistan. Certainly, this is a cool breeze for the peo- ple of Pakistan just when they were gasping for fresh air. But it is not enough to cure the myriad ills facing the Islamic state. Pakistan

has to stand up on its own feet to attain a place of honour in the comity of nations. There will be no need for our leaders to carry

a begging bowl, if we, as a nation, resolve to keep digging

straight down until we discover the still virgin and unexplored resources, and eventually emerge as one of the richest nations on earth.

Against this backdrop, Pakistan has the distinction of possess- ing world’s largest copper and gold reserves, which are hidden

in Balochistan and Waziristan; South Africa and Australia being

the other two countries with the former having 400 tonnes and the latter 260 tonnes per year yield of gold. As against this cur- rent international gold deposit situation, Pakistan has an esti- mated capacity of producing 450 tonnes per year for the next 25 to 30 years, only if the projects are undertaken seriously through indigenous control.

The gold-copper deposit in Reko Diq is four times larger than its neighbouring Saindak deposit in Balochistan. Reportedly, ac- cording to Dr Samar Mubarakmand, a renowned nuclear scien- tist and member of the Planning Commission of Pakistan, only a part of it is worth $270 billion. While talking to the media, he

said: “You can keep mining gold and it will never end, resulting

in a complete turn over of Pakistan’s economy…”

For the record, the first contract for mining gold, copper and other minerals in Balochistan was given by Prime Minister Shaukat Aziz to an Australian firm BHP Billiton at a meagre price of $3.3 billion with 75 percent shares to the mining com- pany, while Pakistan only had the remaining 25 percent. Sub-

sequently, both parties sold their shares after due profits. Billi- ton sold its shares, in 2006, to two different firms – Antofagasta (Chilean) and Barrick Gold (Ca-

nadian) – with 3.5 percent share each, while Balochistan’s shares were sold for $200 million, how- ever, there are many facts that re- main unknown.

Moreover, Pakistan’s first major project in the mining sector was initiated by a Chinese firm at Saindak. For the execution of this project, a new department named Resources Development Corpo- ration was established in Paki- stan, in 1974, with the technical and financial assistance of the Metallurgical Construction Cor- poration (MCC) of China. But it is unfortunate that even after exten- sive planning, the project ended

without much success solely due to the incompetence, mis- management and corruption of government functionaries. Now

a new opportunity has emerged with Dr Mubarakmand’s ap-

pointment as Chairman of the Board of Directors of the Reko Diq project. But he has not yet taken over because of Balochis- tan government’s delay in issuing the notification. However, he

said that if he is asked to undertake the project, he would ac- cept the challenge without any hesitation, since he already had

a team of trained manpower with complete expertise in extract-

ing and refining all types of minerals, including copper, gold and other minerals in the mining sector.

So, if the PPP-led government is sincere in throwing away the begging bowl and to boost the nation’s economy, it is the nec- essary that decisions about exploring our mineral wealth be ac- corded top priority in the best interests of Pakistan. That would also help resolve the current crisis in Balochistan. At the same time, it is hoped that the Supreme Court would look into the matter of issuing licences to foreign companies and decide in the interest of Pakistan

The writer is the President of the Pakistan National Forum.

Pakistan’s first major project in the mining sector was initiated by a

Chinese firm at Saindak. For the execution of this project, a new department named Resources

Development Corporation was established in Pakistan, in 1974, with the technical and financial assistance of the Metallurgical Construction Corporation (MCC) of China.


Pakistan: Living without Foreign Assistance

By Shahid Javed Burki

C an Pakistan live without foreign assistance? This ques- tion has begun to be debated after a statement by Mian

Shahbaz Sharif on May 12 when he said his province, the most populous and prosperous in the country, will make a serious at- tempt to forego foreign assistance with conditionalities.

The aim is admirable but the real question is whether it is achievable within a reasonable period of time. The only way to reflect on this issue is to take emotions out of it and build a case for or against aid by looking at the numbers.

We should begin this investigation by deciding on what should be the country’s rate of economic growth and that of its several provinces. Pakistan is doing poorly compared to its South Asian neighbours. Bangladesh — once the much poorer part of this country which was doing much less well compared to its west- ern wing— has seen its economy grow at around six per cent a year in recent times. This is almost three times the current rate of economic growth in Pakistan.

Several serious Bangladeshi economists believe that they can see their country sustain a rate of growth of more than seven per cent per annum for many years.

The Indian annual growth rate has averaged 8.5 per cent over the last six years. Its ambition is to achieve double digit growth rates in two to three years and sustain them for decades. This seems feasible looking at the current trends. The rates of sav- ings and investment are high enough to make a 10 per cent rate of increase in GDP feasible. If India achieves that rate it would have become one of Asia’s miracle economies.

Some of the empirical work done at the World Bank has shown that for a country such as Pakistan not to have an increase in the incidence of poverty, gross domestic product must grow at

a rate twice the rate of increase in the work force.

Although Pakistan’s population growth rate is said to have de-

clined to less than a two per cent a year — we will only have firm numbers once the on-going census has been carried out and its results tabulated — the rate of increase in the workforce contin- ues to be three per cent per year. The reason why this is so much larger than the rate of increase in population is because

of what demographers call “demographic inertia”. It takes times

before fertility declines begin to translate into declines in the rate of increase in the workforce.

For Pakistan not to see any further increase in the already large incidence of poverty, the GDP must increase by at least six per cent annually. For a decline in the incidence of poverty, the rate of increase in the GDP must be more than six per cent a year — say seven or eight per cent. This is one reason why the Plan- ning Commission, in setting its sights for the future, would like to see the economy expand by at least seven per cent a year. Is this feasible?

Pakistan does not have an efficient economy. There are many reasons for this. The technological base of the economy is poor; the work force is poorly trained and not well educated; supporting physical infrastructure (for instance availability of uninterrupted supply of electricity and gas) is below the level required by a growing economy; the state, mostly unwittingly, has placed many hurdles that entrepreneurs must cross; and rampant corruption increases the cost of business transactions.

Pakistan does not have an efficient economy. There are many reasons for this. The technological base of the economy is poor; the work force is poorly trained and not well educated; supporting physical infrastructure (for instance availability of uninterrupted supply of electricity and gas) is below the level re- quired by a growing economy; the state, mostly unwittingly, has placed many hurdles that entrepreneurs must cross; and ram- pant corruption increases the cost of business transactions.

My guess is that in Pakistan’s case the incremental capital ratio is of the order of four. This means that the country must invest at least four per cent of the gross domestic product to produce one per cent increase in domestic output. For the economy to grow at between 7- 8 per cent a year, it must invest between 28 and 32 per cent of the GDP. This is more nearly twice the cur- rent rate. This could happen — other countries do it, India has

surpassed this level in recent years — but it will need a great deal of effort.

According to Pakistan Economic Survey, 2009-10, the average rate of investment in the five year period between 2004 and 2008 was 18.9 per cent. It was higher in the earlier years but de- clined in recent times. About three quarters of the investment was financed by domestic savings, the remaining one-quarter was provided for by foreign savings which includes external as- sistance. Without foreign aid, even the low level of effort being made currently to generate growth would become difficult. To raise it to the levels needed would be virtually impossible with- out sizeable foreign capital flows, including foreign assistance.

If we look at external accounts, the most interesting and unex- pected development in recent years is the sharp rise in the level of remittances. In March this year, the flow of capital from this source increased to $1 billion. If this volume is sustained, an amount of $12 billion would be received this financial year.

It is not clear why the remittances are increasing when there is so much uncertainty concerning Pakistan’s economic fu- ture.

There must also be a negative impact on the earnings of the members of the diaspora as a result of the economic slowdown in countries where these people are located. Given this, one would expect a decline in the level of remittances rather than an increase.

However, this is not to suggest that the policymakers should not seek to become self-sufficient and aim to generate domestic re- sources needed for financing development. But this can only happen if both the people and the ruling establishment are pre- pared to reduce the level of current consumption in favour of

larger amount of savings. The citizenry must also be prepared to pay a larger share of its income to the government as tax.

At this time the people don’t seem to be prepared to that and the government lacks the political will to collect a larger share of na- tional income as tax.

What is clear is that to climb out of the current economic slump and to put the economy on a trajectory of growth on which the neighbouring countries are moving, the rate of investment need to be significantly raised. The additional resources needed for that to happen will have to come from the outside. Even with a concerted effort by the government and display of political will that the present set of rulers seem to lack, the transition to a higher growth path will have to be financed from abroad.

The talk of dispensing with external capital flow will remain just that — talk by politicians — unless they can come up with a credi- ble plan for increasing domestic savings and tax-to-GDP ratio.

This brings me back to the statement by the Chief Minister of Punjab. If he and his government are serious about reducing — if not altogether eliminating their province’s dependence on ex- ternal capital flows that come in the form of assistance — they should take advantage of the enormous opportunities that have opened up as result of the adoption of the 18th amendment to the constitution.

The amended constitution has not only transferred new func- tions to the provinces, it has also given them the authority to mobilise resources from within their borders. Up until now, the provinces have relied on federal transfers for more than 90 per cent of their expenditures. This proportion needs to decline. Only if that were to happen, will Punjab be able to wean itself away from external crutches?

74 Percent think Pakistan Can Survive without IMF: Survey

Almost three fourth or 74 percent of all Pakistanis believe that Pakistan can survive without taking loans from the International Monetary Fund, a survey revealed.

Gallup Pakistan, the Pakistani affiliate of Gallup International, carried out the survey earlier this month. It took a sample of 2,754 men and women in rural and urban areas of all four provinces of the country. Around 25 percent of the respondents said taking loan was essential for Pakistan’s survival and one percent remained mum on the issue.

A balance of payment crisis compelled Pakistan to seek $11.3 billion IMF loan in 2008. Strings attached with the loan invited harsh criticism from the political parties and business groups. The three-point reform agenda requires implementation of re- formed sales tax, reduction in budget deficit and end to government subsidies. While several politicians and associations cen- sure IMF conditions, they remain clueless on what alternatives the country has in store to support the ailing economy.

– Daily The News


IMF Members Vow to Confront Crisis, Prevent Escalation

IMF Survey online

D etermined to prevent the global economy worsening further and plunging into stagnation, IMF members vowed collec-

tively to do whatever it takes to tackle a “precarious situation” and

restore both confidence and financial stability, Singapore Finance Minister Tharman Shanmugaratnam said.

Although the epicenter of the current instability was in the euro area, the world faced “a combination of financial risks with a weak- ening global economy, and contributing to that is a problem of a lack of confidence, in particular, a lack of confidence in the credibil- ity of policy actions to arrest the crisis,” said Tharman, who is chair- man of the IMF’s main policy-setting body, known as the IMFC.

“We face a confluence of sovereign debt and banking risks, with the epicenter of that being the euro area. But it is underpinned and complicated by the fact that we also face a weakening global econ- omy, especially in the advanced economies, including the United States, and there are signs of that already having effects in the rest of the world,” Tharman told reporters.

IMF Managing Director Christine Lagarde said she was struck by the common recognition and shared diagnosis of the problems, and the determination to act decisively. “There was no denial, no finger pointing, it was about recognition and support.”

Advanced Economies at Center of Response

The International Monetary and Financial Committee (IMFC), which represents the Fund’s 187 member countries, said in a com- muniqué that the global economy had entered a dangerous phase, calling for exceptional vigilance, coordination, and readiness to take bold action from members and the IMF alike. “We are encour- aged by the determination of our euro-area colleagues to do what is needed to resolve the euro-area crisis. We welcome that the IMF stands ready to strongly support this effort as part of its global role,” it said.

Advanced economies were at the core of an effective resolution of current global stresses. “The strategy is to restore sustainable pub- lic finances while ensuring continued economic recovery,” it said.

Critical is implementation by the euro area of a July 21 decision to increase the flexibility of the European Financial Stability Facility, maximizing its impact, and improve euro-area crisis management and governance. Lagarde, attending her first IMF-World Bank An- nual Meetings since becoming Managing Director last July, said the key to resolving the current difficulties in Europe, and particu- larly the Greek crisis, was “implementation, implementation, imple- mentation.”

She presented an IMF action plan to help build up the world’s de- fenses and buttress stability in the face of flagging global growth.

buttress stability in the face of flagging global growth. She stressed that IMF members needed to

She stressed that IMF members needed to move more quickly to officially approve previously agreed changes in IMF quotas and representation that would give greater say in running the institution to dynamic emerging markets.

Rising Risks

The annual meetings have been dominated by market nervous- ness about difficulties in Europe over sovereign debt and banking risks. Financial stability risks have risen sharply in recent months, as slower economic growth, market turbulence in Europe, and the credit downgrade of the United States have weighed on the global financial system, according to the IMF’s latest Global Financial Stability Report, released ahead of the meetings.

The IMF presented a Consolidated Multilateral Surveillance Re- port (CMSR), the first time that it pulled together all its work on sur- veillance and global prospects. “The path to recovery has nar- rowed, but the path is still open, if action is taken now,” the report said. “Countries must adopt comprehensive action across all pol- icy levers, and implement them in a globally-coordinated way. This is what is needed to secure strong, sustainable, and balanced growth.”

Pledge to Act Decisively

Tharman said members were prepared both to confront the current crisis and to take the medium-term steps needed for fiscal and structural reforms to put the world on a firmer footing.

“What we know is that no-one is going to be immune from prob- lems in any one part of the world. Problems of the euro area in par- ticular are problems that will affect all of us. We are not a decou- pled world,” he added.

Lagarde said the world was at a critical juncture, but a lot had been done to tackle major problems, including improved financial regu- lation, better crisis management, tighter governance of the euro area, and strengthening bank capital. “So we are half way there. It is a question of pushing hard to get to the other side”


Focus A Leadership Role for Asia in Reshaping the Post- Crisis Global Economy By Dominique Strauss-Kahn,

A Leadership Role for Asia in Reshaping the Post- Crisis Global Economy

By Dominique Strauss-Kahn,

Former Managing Director of the International Monetary Fund

W e find our- selves at a

pivotal moment in history. The last two years have revealed deep fissures in the global economic and fi- nancial framework, making it abundantly clear that the world of to- morrow cannot achieve long-term success based on the rules of yesterday. A fundamental reset is needed—across economic sec- tors, and across economic regions. We now have a historic oppor- tunity to lay the foundations of a safer and more stable economic and financial framework.

In my address today, I wish to explore some of the changes needed to achieve this objective. I will focus on three priorities in particular: achieving a healthier balance of demand across coun- tries; strengthening the international monetary system; and man- aging better the risks posed by financial institutions. Achieving these will depend in large part on how well countries work together. In this regard, I am greatly encouraged by the emergence of a more inclusive, and thus stronger, global governance framework.

I believe that Asia should play a leadership role in guiding the global economy to a new, more sustainable path for growth. This is not only appropriate, given Asia’s economic weight in the world, but also necessary, since Asia is such an important part of the so- lution. And so I will begin my remarks with some observations on the opportunities and challenges that Asia faces as we move into this new, post-global crisis era.

I. Asia’s Challenges and Opportunities in the Post-Global Crisis Era

Over the last decade, Asia has become an even bigger player on the economic world stage. Thanks to sound macroeconomic man- agement and far-reaching structural reforms, growth over the last ten years has averaged a remarkable 6 percent per year, raising Asia’s share in the global economy to about one third. Rapid eco- nomic growth has boosted living standards and lifted millions out of poverty.

The strength of Asia’s economies has helped them weather the global financial crisis, and today the region is leading the world into economic recovery. Thanks to strong fundamentals and quick and forceful policy responses to the crisis, Asia has performed consid- erably better than other regions of the world—and has thus played an important role in supporting the global recovery. We expect

Asia’s GDP growth to pick up to 5¾ percent next year, compared to only 3 percent for the global economy.

But to ensure continued success for generations to come, Asia will need to adapt to the new challenges presented by the post-global- crisis economy. This imperative is widely recognized by Asian pol- icy makers, who are moving rapidly to identify the key elements of

a new developmental model that can deliver sustained economic

growth. In particular, they realize that because there are limits to the pace of export growth, domestic and regional demand will need to play an increasingly important role in underpinning Asia’s growth.

Long-term success will also depend critically on Asia’s active par- ticipation in international efforts to build a stronger global economy. As Asia’s economies have risen in global stature, so too has their voice on the international stage. At the G-20, Asia is represented by six countries. And at the IMF, Asia’s quota is rising as our gov- ernance reforms move ahead, bringing the region’s economic voice in line with its weight in the global economy. Now is the time for Asia to use its stronger voice to contribute to global efforts to re- shape the economic and financial landscape.

What is the global context facing Asia now?

While I am hopeful that the global economy has turned the corner, the recovery remains fragile. Policy makers should therefore keep supportive measures in place until a recovery is firmly established and conditions for unemployment to recede are in place. In some emerging markets, including a few in Asia, the recovery is further along, and crisis support policies may need to be unwound sooner rather than later. But in other regional economies, where the recov- ery is less firmly established, policy stimulus should be maintained for longer.

Regardless of the extent of economic recovery, it makes sense for policy makers in all countries to start planning their exit strategies now. This applies to monetary policy, fiscal policy, and financial sector support. Such early planning will help the eventual unwind- ing of exit policies and ease the transition to more normal eco- nomic conditions.

In economies that face serious concerns about fiscal sustainability,

it will be particularly important to identify the longer-term reforms needed for eventual fiscal consolidation. These concerns are greatest in the advanced G-20 economies, where gross public debt is forecast to reach an average of 118 percent of GDP in

2014. Fiscal reforms that advance consolidation but do not slow the recovery—for example, entitlement reform and strengthening fiscal frameworks—should be implemented now.

The resurgence of capital flows to emerging markets, including several in Asia, is presenting policy challenges. This resurgence reflects the favorable outlook for the region, but also a renewed ap- petite for higher-risk assets as financial conditions normalize. While capital inflows are generally beneficial, they can raise risks

of rapid and potentially destabilizing movements of currencies and

asset prices.

Policy makers have several tools to mitigate the effects of these in- flows. They include exchange rate appreciation, tighter fiscal pol- icy, and, where appropriate, lower interest rates. In addition, macro-prudential instruments can limit the risk of asset price bub- bles. Market-based controls on capital inflows can help reduce the volatility of such flows. But these measures are costly and tend to lose effectiveness over time.

A final point here. A particular challenge for all of us, particularly

the externally-oriented Asian economies, is the risk of protection- ism with unemployment still rising in the advanced economies. As we go forward, we must all work together to contain this threat and its potentially damaging effects on growth.

II. Priorities for Reshaping the Post-Global Crisis World

I would now like to discuss three important priorities for reshaping the post-global crisis economy—and the role for Asia in meeting them.

A. Global Rebalancing

The first priority is to achieve a more stable distribution of demand across the world.

As you all know, global imbalances widened significantly in the run-up to the crisis. By this I mean that current account deficits in some countries, and current account surpluses in others, had be- come very large.

Now imbalances are not necessarily bad. They may reflect differ- ences across countries in the rate of return on investment, or differ- ence in the degree of risk or liquidity of different assets. But there are several reasons why imbalances can be bad. Large imbal- ances may reflect domestic problems or distortions, which could lead to potentially painful adjustment problems over time. They could result from problems with the international monetary system and exchange rate regimes, which could cause potentially sys- temic problems later on.

In the IMF’s view, a large part of the imbalances before the recent

crisis reflected such problems and distortions. Addressing these remains essential for reducing imbalances. And in fact, while global imbalances have declined during the crisis, they remain large and could widen again as the global economy normalizes. Thus, resolving this issue is essential for securing a sustained

global recovery.

I am therefore greatly encouraged by the central importance that

the G-20 has given this issue. At their Pittsburgh summit, the lead- ers of the G-20 adopted a Framework for Strong, Sustainable, and Balanced Growth, which sets out a mutual assessment of policies

and their implications for global growth. This shows commitment at the highest political level to ensure that global imbalances are ad- dressed—and also reflects a shared understanding that all nations must do their part to secure strong, sustainable and balanced growth going forward. As requested by the G-20, the IMF will lend analytical support to this effort, contributing our deep experience with cross-country analysis and policy assessment.

Now, what can be done to rebalance global demand in a last- ing way?

In economies that have run large current account deficits, national saving needs to increase. In many of these economies, including the United States, fiscal consolidation must take priority. And in those that have experienced asset price busts, financial sector re- pair will be essential for a lasting recovery.

In economies that have run large current account surpluses, do- mestic demand needs to be stronger. In euro area economies and Japan, competition in product and labor markets should be in- creased. What about emerging Asia? Rebalancing in these coun- tries will imply increasing domestic demand—investment in most countries, but in China notably, consumption.

I would like to elaborate on the implications for Asia. But at the out- set, let me emphasize that openness must remain an essential ele- ment of Asia’s growth model. The region’s strong outward orienta- tion, as reflected in the high ratio of trade and financial flows to GDP, has been a key factor in its remarkable economic perform- ance.

Singapore is a good example of the benefits of openness. Its econ- omy is extremely open—gross capital flows are roughly the same as GDP, while exports and imports together account for about four time GDP. This openness, combined with pragmatic mac- roeconomic management, structural reforms, and a business- friendly environment, has been a cornerstone of Singapore’s eco- nomic success, raising real income per capita five-fold in a genera- tion.

Rebalancing therefore does not mean that Asia should become in- ward looking and reduce trade. Rather, it means reinvigorating do- mestic demand and boosting intraregional trade through structural reforms aimed at boosting rates of return for investments in domestically-oriented sectors and removing impediments and bot- tlenecks to domestic spending. Such a recalibration of Asia’s growth model is very much in the region’s self-interest. In particu- lar, it would reduce the region’s dependence on demand from out- side Asia.

With some notable exceptions, including China and India, invest- ment in Asia has shown broad-based weakness during the last ten years. At the same time, however, Asia has significant long-term development needs. Governments in the region should therefore step up their public investment programs, where there is fiscal space to do so. They should also accelerate efforts to create a regulatory environment that provides the right incentives for pri-

vate investment, including those related to public-private partner- ships.

Investing in infrastructure holds tremendous promise. While Asia has some of the most modern infrastructure in the world—as we can see by looking around Singapore—there are still large gaps in transport, energy and communications. Closing these gaps will re- quire a lot of resources—the ADB, for example, estimates that Asia Pacific countries need to invest about $8 trillion over the next dec- ade. Such investment would not only boost productive potential, but would also help in the fight against poverty, by improving ac- cess to basic services such as electricity and clean water. Invest- ing in education also remains a priority in many Asian countries, and could help alleviate the shortage of skills that constrains in- vestment in some industries. And finally, investment in low-carbon, or “green” growth would also be worthwhile. Technological innova- tion is key to managing climate change at a reasonable cost. And innovation in Asia is already making major contributions.

In the case of China, with its large external surplus, the govern- ment is committed to boosting private consumption as the way to rebalance its economy. I agree that this is the right way forward. Improving social policies—particularly healthcare, pensions, and education—is needed to make more funds available for consump- tion. Developing financial markets to ensure a better allocation of capital, providing saving vehicles that raise household income, and expanding the availability of insurance products would also help. To free up resources that have become tied up in rising cor- porate savings, corporate governance should be strengthened. And to ensure that these structural boosts to consumption do not lead to overheating, policy makers will need to continue keeping a close watch on credit and other asset markets.

Let me make one final observation on rebalancing, which relates to exchange rates.

For the world to succeed in its rebalancing efforts, exchange rates must be allowed to reflect medium-run fundamentals. Based on our analysis, many Asian currencies are still undervalued related to those of their major trading partners, while the euro is somewhat overvalued on this basis. So long as this remains the case, the price signals sent about the returns from tradable goods compared to those from nontradable goods will continue to be skewed—thus delaying the rebalancing across countries, and more specifically the necessary recalibration of Asia’s growth model. In my view, the region should not resist a gradual appreciation of its exchange rates, which I consider an important prerequisite for long-term re- balancing.

B. Strengthening the International Monetary System

Moving now to the second priority, I see strengthening the interna- tional monetary system as an important complement to demand rebalancing.

The recent experience has demonstrated that fast-paced and hard-hitting financial crises can lead to an extraordinarily large de- mand for official resources. In some countries, such resources are needed to address underlying balance of payments problems. And in others, such demand may purely result from global liquidity shortages that have no relation at all to domestic conditions. For countries that have been building up precautionary reserves as a

form of self-insurance, there have been costs—primarily the missed opportunity to invest in domestic projects with a high social rate of return. For all these reasons, I see a clear need for global fi- nancial insurance.

I believe that the IMF has the potential to serve as an effective and reliable provider of such insurance, as long as we are able to re- duce—and at the end get rid of—the stigma associated with the IMF in some parts of the world, while dealing with the moral hazard problem. In doing so, we can also provide a framework for harmo- nizing global and regional safety nets. The international commu- nity has already given a strong endorsement of the IMF as the key institution for meeting the financial needs of our members. Our lending resources have been tripled, to $750 billion—including about $172 billion in contributions from our Asian members. This has allowed us to provide critical financing to a broad array of countries hit by the crisis. However, to serve as a truly dependable global lender of last resort, the Fund will need considerably greater resources.

But it is not just the amount of our resources that matters—it is also how we deploy them. This is why we have overhauled our general lending framework to make it better suited to country needs. An im- portant component has been streamlining conditions attached to loans. We have also introduced the Flexible Credit Line, the so- called FCL, through which the IMF now offers a pre-emptive insur- ance facility—without any conditionality—for members with strong policies.

We continue to seek ways for our resources to better meet our members’ needs. One possibility is to build on the success of the FCL and enhance predictability of access to IMF crisis financing. A specific option here would be to make consideration of FCL eligibil- ity an automatic part of regular surveillance. And for members that do not qualify for the FCL, we could consider designing alternative contingent instruments that also have an element of automaticity.

But even more important than our resources and our financing mo- dalities will be the confidence—and the trust—of our member countries. Without these, we will be hard pressed to succeed in our efforts to strengthen the international monetary system. Address- ing valid concerns about our governance is a critical priority in this regard.

How can Asia contribute to strengthening the international monetary system?

Asia’s regional reserve pool already plays an important role in the provision of global financial insurance. With $120 billion in pledged reserves from its Asian members, the Chiang Mai Initiative pro- vides an important complement to IMF financing. We should think about ways in which such these regional resources—as well as those in other regions—could be combined with our FCL to make this instrument even more effective.

C. Creating a safer and more stable financial system

Let me now address a third priority, namely to make the financial system safer and more stable. The crisis has revealed weak- nesses in the regulatory and supervisory frameworks in many countries, failures in risk management systems of large financial institutions, and a breakdown in market discipline. Reforms are

needed on many fronts to address these weaknesses, so that we can protect the financial system against future crisis.

While I have been encouraged by the international reform effort, I am very concerned that time is running out to adopt the sweeping changes needed to truly reshape the global financial system. As fi- nancial markets recover and banks become profitable again, memories of the crisis have already begun to fade—raising the risk that the political momentum needed to push through significant re- forms will dissipate. Markets already seem to be sensing this, and

a worrying return to “business as usual” may already be taking

place in financial institutions. We must make every effort to ensure that we do not lose our focus or our determination to implement

deep and lasting reforms.

What is the relevance of all this for Asia?

Broadly speaking, Asia’s financial systems and institutions are fac- ing considerably less pressure for financial restructuring and regu- latory reform than those at the epicenter of the crisis. Thanks in part to the significant structural changes made in Asia’s financial sectors following the 1997/98 crisis, the region’s financial systems proved resilient to the most recent crisis. The fact that corporates were relatively low leveraged was also a major factor.

But Asia must not let down its guard, as new risks will continue to emerge within and across borders. It will be essential to maintain a strong supervisory regime going forward, including by building up risk assessment capabilities and adopting a macro-prudential ap- proach to supervision. Regional policy makers should also ensure that as new global standards emerge, their regulatory and supervi- sory frameworks are made consistent with new norms. In addition, they should play an active role in international efforts to design a coherent framework for cross-border crisis management.

I also hope that Asia does not draw the wrong lesson from the cri- sis—namely that financial development inevitably causes crises,

and therefore should be put on the back burner. I agree with Minis- ter Tharman, who noted recently that “the basic direction of travel

in the emerging world has to be towards continued, gradual open-

ing up and further diversification of their financial systems”. Moving ahead with the development of Asia’s financial markets, and in par- ticular its capital markets, will be critical for making the best use of the region’s significant savings in support of domestic demand.

III. A New Global Governance Framework

Let me turn now to the importance of strengthening international collaboration.

The emergence of a new global governance framework has lent critical support to international efforts to tackle the crisis and se- cure a sustainable recovery. With the G-20 taking on a central role

in fostering the international policy dialogue and in advancing re-

form initiatives, we now have a much broader set of countries sit- ting at the decision-making table. And thanks to Asia’s strong rep-

resentation at the G-20, the region has a solid platform from which

to make valuable contributions to reshaping the global financial ar-

chitecture. Next year, Asia will be hosting the G-20, with a leaders summit planned for November in Korea. The world’s attention will be very much focused on Asia—with high expectations for the re- gion to lead the global economy into a new period of sustained and

strong growth.

Governance reforms at the IMF are an important part of creating a more inclusive, and hence stronger, global governance frame- work. Under the quota reforms agreed in 2008, underrepresented countries in Asia stand to gain nearly 3 percentage points in quota share, raising Asia’s overall IMF quota to about 19 percent. The re- gion is likely to gain even more under the recent agreement to shift 5 percent of quotas toward dynamic emerging markets and devel- oping countries. I am hopeful that this shift will be completed by early 2011.

We look forward to our Asian members’ support as we seek to meet the new responsibilities given to the Fund at our Annual Meetings in Istanbul. We will be reviewing our mandate, such that it is sufficiently broad to encompass the whole range of mac- roeconomic and financial sector policies that affect global stability. We will also be assessing how the IMF could provide better insur- ance against volatile capital flows. As I noted earlier, we’ve been asked to provide support the G-20’s mutual assessment of poli- cies. We have also been tasked with assessing options for how the financial sector could help shoulder the costs of government inter- ventions to repair the banking system.

We in turn seek to deepen our engagement with Asia.

We must strengthen our channels for hearing views from the re-

gion. This morning, for example, we held the inaugural meeting of

a new advisory group of eminent persons from various Asian coun-

tries. We look to this group to provide insights into developing is- sues and priorities in Asia, and how the IMF can best help in meet- ing those challenges. We also seek ways to strengthen our links with regional groups, such as ASEAN and EMEAP, which have be- come important fora for discussing near-term challenges and de- vising longer-term development strategies for Asia.

Finally, as I discussed earlier, the redesign of our lending facilities

is allowing us to match the conditions in borrowing countries better.

New IMF-supported programs in Sri Lanka and Mongolia are pro- viding critical financing to address balance of payments pressures.

IV. Closing thoughts

We are meeting at a truly momentous time in history—with the op- portunity to make momentous decisions that will benefit many gen- erations to come.

“A changed world order is upon us”—as Minister Mentor Lee Kuan Yew said a few days ago in Washington. A change most certainly for the better, with a more inclusive—and thus stronger—system of global governance. For Asia, a change that brings tremendous op- portunities to contribute to the reshaping of the post-crisis global economy—and indeed, carries a responsibility to help craft the global solutions needed to secure strong and sustainable growth for the long term. And for the IMF, a change that will allow us to be- come more legitimate in the eyes of our members, and hence more effective.

Let us not waste this opportunity to build a better tomorrow

Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund delivered this lecture at Monetary Authority of Singapore on November 13, 2009


IMF: What should Pakistan Do?

By Anjum Ibrahim

I nformed sources in the Ministry of Finance have begun referring to the possibility of the government allowing the International Monetary Fund's (IMF) Stand-By Arrangement (SBA), stalled since May 2010, to lapse and instead seek a new assistance pack- age from the Fund of around 3.5 to 5 billion dollars. The question is if this is good thinking?

The remaining amount of the SBA is around 3.2 billion dollars so first off one would be compelled to assume that seeking up to 5 bil- lion dollars maybe premised on either a sharp deterioration in for- eign exchange reserves, which is simply not the case at present, or seeking a higher amount to allow the government considerable latitude in negotiations with the Fund. This, if reflective of the eco- nomic team's thinking, is inappropriate to put it mildly for three ma- jor reasons.

First, the IMF team is going to play the numbers game to its own satisfaction. Or, in other words, the federal government would have to provide the IMF an entire set of numbers that satisfy the team before any loan agreement is signed. In case of the IMF dis- satisfaction with numbers, either in terms of revenue generation or in terms of expenditure, the deal is unlikely to go through. The re- cent major faux pas by the Federal Board of Revenue (FBR) with respect to net collections on the last day of fiscal year 2010-11 has, without doubt, raised the level of IMF mistrust with the figures esti- mated by the economic team. This, no doubt, would be a key ele- ment in determining the success of the talks whenever the govern- ment submits targets/claims to the Fund as a prerequisite to begin negotiations on either a new package or indeed to reactivate the stalled SBA.

Second, the stalled SBA is a reflection of the government's failure to comply with the agreed programme conditions. That conditions are definitely going to be considerably harsher in the case of a new programme stands to reason. And given the IMF mistrust, it is very likely that the IMF team may focus on a large number of pre- programme conditions, whereby implementation would be prior to the loan agreement and release of a tranche. And finally, with the economic meltdown in several Eurozone countries leading to a growing number of economies with unsustainable budget deficits seeking assistance from the IMF global resources to bail out the Pakistan economy once again, given major governance issues both in terms of tax collections and expenditure, is unlikely. Addi- tionally the US had played a critical role in successfully persuading the Fund to support Pakistan during the last three fiscal years, however, with strained relations it is unlikely that the US will use its clout in the IMF to ensure support for Pakistan.

But, the economic team may well argue, Pakistan is entitled to IMF assistance, which is premised on our quota. According to the IMF website Pakistan's quota is 1,033.7 billion SDRs (0.43 percent of total) with one dollar equivalent to 0.67734 SDR. There is therefore no deterrent for Pakistan to receive more assistance from the Fund based solely on its quota. The deterrent, however, is a growing mistrust between what the Pakistan economic team promises -

promises/commitments as incorporated in the policy documents, including the budget which have consistently proximated towards IMF conditions - and what it has delivered and by that logic is able or willing to deliver in the future.

So where does economic salvation lie for Pakistan? If the eco- nomic managers are going to seek yet another package, thereby allowing the existing SBA to lapse, then one would urge the eco- nomic team to place the draft agreement with the Fund in parlia- ment. It is critical that any future IMF programme be debated in parliament and voted on, so that the team can legitimately inform the Fund staff that the country's entire parliament is behind it.

Short of that it is now clear that the Fund staff are unwilling to ac- cept promises/commitments especially those contained in the budget for 2011-12 because of the following: (i) the FBR Chair- man, for at best not verifying that the figures he presented in his press conference were gross and not net and, at worst, being com- plicit in overstating revenue figures in an attempt to appease the IMF concerns that revenue generation has been better than ex- pected; (ii) inaccurate information on external resources in 2010- 11 as provided in the current year's budget, the prerogative of the Economic Affairs Division; (iii) failure to impose the value-added tax to the extent agreed; and (iv) failure to eliminate the inter- circular debt as promised by the Finance Ministry in its Letter of In- tent submitted to the IMF.

However, in case the economic team opts for the better option namely to stay with the SBA then too it is advisable to lay the de- tails of the SBA loan agreement with the Fund in the parliament. True, the agreement has already been signed and committed to by the government, even though the Finance Minister and the State Bank governor who signed on the dotted line on Pakistan's behalf are long gone, yet if parliament's voting results reveal that those against certain tenets of the remaining conditions of the agreement are in the majority then too the government would be in a stronger position to renegotiate the stalled SBA terms than it is now.

Pakistan is a perennial borrower from the Fund and the PPP, the PML (N) as well as military strongmen have all borrowed from the Fund when in government. There is no doubt that the country re- mains economically fragile due to (i) the tendency of governments (civilian or military) to overburden those already taxed rather than to tax the rich and the influential, (ii) utilities are priced progres- sively higher rather than government departments/ministries com- pelled to clear their bills, (iii) current expenditure is never slashed in the event of an unsustainable budget deficit while development ex- penditure that creates jobs and thereby disseminates wealth is, (iv) accountability remains the prerogative of the centre that continues to be lax in going after the corrupt - be they politicians, bureaucrats or military men; and last but not least (v) mega-scandals are left to the courts to pursue and in case of involvement of government loy- alists the investigation that would lead to a guilty verdict is compro- mised. There is a solution to all these issues however they appear insurmountable because of a complete lack of political will

Meritorious Article

Human Governance: Bringing the Meaning of Integrity in the Life of Professional Accountants

By Arfah Salleh, PhD, FCPA, Aziuddin Ahmad, PhD, Universiti Putra Malaysia

This is one of the Articles of Merit, judged as such under Professional Accountants in Business - Articles of Merit Programme 2009, for distinguished contributions to Management Accounting, established by the Professional Accountants in Business Committee (PAIB), (under its former name of FMAC) of IFAC.

I ntegrity as a manifestation of ethics and values has been syn- onymous to the image of the accounting profession. How- ever, corporate events of the last decade have abridged this goodwill so that reputational risk now stands among the risks that the accounting profession faces today. The findings of the International Federation of Accountants (IFAC) 2008 Global Leadership Survey only reaffirm the concern among profes- sional accountants globally of the need to restore stakeholders’ confidence of the integrity of the profession and its commitment to serve the public interest. We offer some critical thoughts and responses to this issue through questioning the mould of reality and the lens of seeing the model of the world in order to bring back meaning to the profession. Models work well only when their assumptions represent reality.

In Search of a New Meaning - The Reality

Einstein’s advice in solving a problem is to find solutions from a di- mension higher than where the problem was created. By truly liv- ing to this adage, the quantum physicists’ fraternity managed to solve many centuries-old phenomena otherwise unresolved using the laws of classical science following Cartesian-Newtonian’s four hundred years thinking tradition. A new world view of reality founded upon the interconnectedness and non-separability be- tween subject and object of the universe was arrived at and New- ton’s law was discovered to be only an approximation of the actual workings of the universe. This unearthing however did not come by without unexpected challenges. For instance, it was almost incon- ceivable when entangled atoms that were separated were still found to influence one another despite no longer being in physical contact. The reality of this non-locality and non-causal effect phe- nomenon became a fundamental grounding for further quantum breakthroughs yet, it remained one that Einstein himself could not comprehend as making sense during his life time.

While the phenomenal contribution by quantum theorists has made its way to the annals of human civilization, there is much that the accounting fraternity can emulate with respect to the approach that the scientists have adopted towards making meaning in life, both of theirs and others. Evidence abounds in scientific docu- ments of the quantum physicists’ strong conviction to a higher cause in being meaningful to humankind by questioning the mean-

ing of life itself.1 What was exceptional was their willingness to let go of legacy to the extent of considering even ideas which ap- peared radical against the then accepted norm. By the end of the 20th Century, earlier defined general scientific tenets had been re- placed with a new set of a scientific body of law.

The following table summarises some of the fundamentals of to- day’s science.


Table 1: Tenets of science

Classical Cartesian/Newtonian (specific case)


Einsteinian Quantum

(general theory)

The universe is a collection of

The universe is a web of relationships (the “oneness” or interconnectedness of universe is

objects (objects in the universe can stand alone since “oneness”


interconnectedness is not the



underpinning of the universe)


Matter is made up of “things”

Matter represents bundles of energy in relationship to each other

The world is a clockwork machine and is objective, hence we count only what can be measured

The world is a great thought (presence of consciousness) and


subjective, hence we measure


what counts

We understand things by taking them apart (reductionism & fragmentation)

We understand things by looking at the whole (non-reductionism & non-fragmentation)

Knowledge comes in pieces (hence silo-thinking is an accepted norm)

Knowledge is seamless (silo- thinking provides a non-realistic view of the world)

Observer and the observed are separated

Observer cannot be separated from the observed


phenomenon happens through


phenomenon is non-causal

causal-effect and the following

effect and the following principles apply:

principles apply:























(wrong/right, good/bad)


Only empirical/ observable phenomena count towards scientific data

Experience (including the non-

observable) is data and a source


scientific knowledge

Despite the developments in science, social science including ac- countancy has remained within the domain of the classical Carte- sian/Newtonian science foundations, till today. With regard to the accounting profession, the unending incidences of accounting scandals and corporate misdeeds including the current credit crisis has made it imperative for a shift in the paradigm of thinking in or- der to bring back meaning to the profession. By bringing back meaning, we mean the profession re-actualizing its intended pur- pose for existence framed against the actual reality of the universe. The etymology of “to account” as “to explain” denotes clearly the element of discharging the original duty as a steward or custodian of public trust. It is enhanced public trust that will be able to bring back value in the long-term to the profession for the worth of the ac- counting profession can only be judged by the party using its serv- ices. In order to effectuate sustained ethical behaviour among ac- countants, it is the motivation for such behaviour that needs to be addressed for human behaviour is only a shadow of their essence.

Questioning the Tradition

On the basis of the tendency to remedy unethical behaviour with more stringent rules and regulations through the corporate govern- ance mechanism, observers cannot be faulted for surmising that the approach has been reactionary and externally driven. Notice how the Sarbannes-Oxley Act came into existence in reaction to Enron? Likewise, more legislation is expected to be imposed to regulate the financial market in response to the credit crisis. It is this lens of viewing the human as controllable through an external mechanism that we posit needs a revisit. Against the backdrop of the likes of Madoff and other cases of degradation of human val- ues, the continued use of the same lens to motivate accounting professionals and to formulate the education model for future pro- fessional accountants in discharging their duties to society seri- ously needs re-examination. Obviously it does no harm to consider solutions from a higher dimension as reminded by Einstein or to actualize real thinking out of the box. The public at large cannot be assumed to have continued faith in the profession if all that can be offered is more of the same thing.

But how did such a perception of humans as being motivated by an external influence come into the thinking of accountants in the first place? This has its roots in the same earlier classical Cartesian- Newtonian science whose laws quantum physics managed to de- bunk. Modern-day accountancy, being a human discipline is much influenced by the social science thinking of Comte. When Comte first established a new discipline of the human and social science in the mid 19th Century, quantum theory had not made its mark. Al- though Goethe had begun questioning the fundamentals of classi- cal science in the late 18th Century, the mainstream thinking pre- vailed especially in light of the successful scientific endeavours which gave rise to the industrial economics. It must however be borne in mind that the scientists community at that time never im- posed their way of thinking about the behaviour of atoms on to the social science mindset. Rather, it was the social and human scien- tists who were obsessed with wanting to be scientific in order to create a sense of respectability and an aura of intellectual respect- ability. The phenomenon to adopt en-bloc the physical laws for in- animate objects to create science-based laws to explain human

Figure 1: The Visible Light Band

Figure 1: The Visible Light Band Source: NASA (2009)

Source: NASA (2009)

behaviour is what scientists termed “scientism.” Comte mean- while, introduced “positivism” as an ideology towards entrenching the essence of the Enlightenment about the positive role of hu- mans in understanding the world phenomenon. Positivism was in- tended as a human-based religion where the role of spirituality and consciousness was removed. Humans subsequently became so- cial atoms or social animals within the fabric of society.

Upholding to the foundation of the universe as being only of the material, scientism and positivism have determined the develop- ment of human behavioural theories. Despite quantum theory demonstrating the oneness or interconnectedness and non- locality of the universe, social scientists and accountants alike con- tinue to model their reality on a fragmentized, causal-effect per- spective. Any non-observable phenomenon is to be removed from the knowledge domain due to its non-verifiability. It is an assump- tion too, that humans, as the observer of a phenomenon in the uni- verse, must be separated from the observed in order to be objec- tive: hence removed of their values lest biasness remains.

Following this underpinning, gradually, the human-as-machine model became the keystone to the theory of human behaviour. Hu- mans are viewed as devoid of feelings and emotions or other non- observable quality, in other words, removed of spirit and dynamism while success in terms of material achievements becomes the yardstick. The progress that ensued the industrial era further rati-

Table 2: Traditional vs. New Perspectives on Humans

Traditional View Humans are viewed as machines/ social atoms and behave like inanimate objects Humans follow command-control rules and human behaviour is predictable Humans are value-free hence non-biasness can be achieved Humans are viewed as resources similar to other assets

Decision-making is about judgment and exclusion Order comes from having structure and conformance

Equilibrium is the target

New Thinking Humans are sentient being with spirit and consciousness

Humans do not conform to command-control rules and human behaviour is not predictable Humans are value-laden/non-value free and cannot achieve non-biasness Humans are viewed as potentials having emergent qualities unique to oneself Decision-making is about perception and making choices Meaning comes from freedom of information and goes beyond conformance It is the edge of chaos that is the target

fied this conveyor-belt thinking of the need for standard operating procedures and a high degree of standardization and control for the purpose of mass production in the name of efficiency and maxi- mization of shareholders’ value. To emphasize the value-free hu- mans, the non-observable traits of humans became known as the soft side of human skills as opposed to the hard or the main. This is where the reality of the flaws of the lens sets in. While on one hand, humans are to assume machine-like controllable properties in or- der to achieve efficiency, on the other, humans are expected too, to be ethical through a disclosure culture. But it is a fact that ma- chines are devoid of spirit, and with machines too, any defects could only be known through discovery and not disclosure! The ca- veat emptor rule that transfers the onus of discovery to the buyer is another impediment to the much sought after transparency and disclosure ethos. So how could this paradox be reconciled?

First, we investigate the perception of reality that is founded upon materiality. For this purpose, we offer the following diagram that depicts the spectrum of light demonstrating the proportion be- tween that which is visible and non-visible.

The preceding diagram illustrates that the physical eye is only sen-

sitive to a narrow band of light, the “visible light” between 400 to

700 nanometres (NASA, 2009). This is extremely minuscule com-

pared to the entire electromagnetic spectrum which spans from 10- 6 nanometer which is about the diameter of a hydrogen atom to be- yond one hundred kilometres. While the width of the visible light is

300 nanometres, the width of a human hair is in the range of tens to

hundreds micrometres meaning that the capacity of the physical sense to observe the material is very limited. Given that the unob- served part or bblind spot is far enormous and is real, despite not being able to be detected by the physical sense, rejecting the non- observable means that the picture about any phenomenon is in- complete. Imagine making decisions just based on the observable! The universe is not a collection of objects but a web of relation- ships. Yet, a model of reality typically framed by accountants usu-

ally is about the material only, with the non-material and non- observable omitted in the name of objectivity. Observable too, be- came equated with measurable.

But should this lens of reality prevail now that quantum theory itself has been proven as a reality of the workings of the universe? Al- though history shows that until the 20th Century, many of the social science models have worked well, we cannot be certain of the fu- ture. In view of the evidence in science establishing that the non- material part makes up more than 95% of the universe (Rosen- blum and Kuttner, 2006) and that consciousness is a reality, we strongly call for a change in the mindset of accountants. The blind spot needs to be made visible!

Overcoming the Blind Spot

In cognizance of the fact that the human eye is not capable of “see- ing” radiation with wavelengths outside the visible spectrum, scien- tists have resorted to using other special apparatus to take up and illuminate the “blind” spot. Likewise, in the context of accounting, accountants must learn to move on to a different device to address the shortcoming of limiting to only one decision-making tool. Ac- countants need to appreciate that as humans, they are endowed with three faculties: the sense perception (eye of flesh); the intel- lection (eye of mind); and contemplation (eye of heart). Steeped in the tradition of materiality and objectivity, accountants tend to overly emphasize the physical sense perception and intellection. To sense the non-material attributes of humans, accountants should move to the use of contemplation or the eye of the heart, given the limitation of the physical eyes of flesh and intellection as the mode of knowing.

We illustrate this point through an analogy of the fisherman’s net designed to catch fish from a lake. A fisherman equipped with a net of 5 cm2 mesh would only be able to capture fish larger than 5 cm in size. Can the fisherman now conclude that the fishes in the lake

are all larger than 5 cm? After all, it is only this phenomenon that

his physical sense perception could confirm. His intuition may say that there are obviously smaller-sized fishes but in the absence of any verifiable evidence, he has to reject this probability. Let us pon- der the parallel of the fisherman’s case and the accountants’ view of reality. First, accountants, like the fisherman, must recognize that a tool designed for a particular purpose usually would not be able to perform well if not completely failing to perform other tasks

it is not meant to. Like the net which is meant to catch fishes rather

than extrapolate the size of fishes, the sense perception and intel- lection faculties are devices to sense and address the material and physical only. Accountants thus are called to find an additional new lens to rectify their inability to view a more complete representation

of the bigger picture of the universe. The non-material needs to be included to provide for wholeness of the accountancy world in which ethics and integrity are of primacy. Otherwise, based on logic and reasoning, ethics, values and integrity cannot be among the expected attributes of accountants for these elements cannot be captured by the accountants’ current material net.

Another fundamental underpinning of thinking that accountants need to revisit is the world view of what is means to be human. Given that the development of science has profound impact on hu- man and social sciences, that the tenets of new sciences are now the accepted general rules of science means that accountants should not ignore this established fact. Based on the work of quan- tum physicists especially of Pauli2 and Stapp (1985; 1995; 2009), the pioneering work of Wheatley (2006), and the earlier thinking of Goethe,3 we share a new perspective of thinking about human and organizations vis-à-vis the traditional with accountants.

It is only with a new thinking order that the challenges and vagaries

of the 21st Century knowledge economy can be addressed. It is timely too that accountants move up in their plane of thinking to ac- cept the significance of the non-material and the importance of

viewing the interconnectedness of subjects in shaping the world. Likewise, in respect to integrity, we wish to emphasize that integrity


not an object but a relationship between subjects which results in


perception. The lens that we use to develop and nurture integrity,


akin to the 5 cm2 mesh net, then needs to be supplemented, for

otherwise, integrity would not emerge. Therefore, until and unless integrity is accepted as a non-material, non-controllable reflection or shadow of the internal or essence of humans, integrity cannot be expected to be part of the accountants’ trait equation. Integrity is about doing the right thing even when no one is looking. The busi- ness world has seen how the efficacy of the current lens which views integrity as one that can be actualized through a governance structure dominated by material reward or deprivation is found to be non-sustainable. The quintessence of integrity as a manifesta- tion of one’s values, ethics and governance paradigm needs to be better comprehended by using this new perspective of thinking. In light of professional accountants having a significant role in chal- lenging conventional assumptions of doing business; redefining success; and in encouraging and rewarding the right behaviours among others as identified by IFAC (IFAC, 2009), what could be a more fitting opportunity than to begin by challenging the underpin- ning of reality itself. It is only when the assumptions of reality are reflected in the model of thinking that the model becomes applica- ble.

The Bigger Picture of Governance

As far as governance as a mechanism to oversee the conduct of

accountants and body corporate is concerned, the issue of it being

a rule-based box-ticking device has been much debated. The fact

that Enron passed the test of corporate governance reinforces such thinking. But is such belief justified? When governance is pre- sented in the form of a checklist of processes that needs to be ad- hered to, would it be wrong for the governed to focus on meeting the requirements of performing the processes rather than the spirit of conducting the processes? After all, the source of a non- compliance report is the omission of some procedures identified in the roll. For as long as governance is treated as a process4 rather than a moral compass guiding the internal behaviour of human, the mindset of box-ticking a checklist is hard to be removed. According

to Kay (2009), based on his experience, members of the board could become more concerned with finding an answer that would stand up to external challenge as encapsulated by the process rather than finding the right answer. Emphasis on procedure over substance meant that an opportunity to exercise skill and judgment drained away. The danger with process too is that it can never end. “There is always someone else who might be consulted, always some additional consideration that might be relevant” (Kay, 2009, p.1). So is governance all about process?

If good governance is about taking actions in order to actualize ac-

countability at once to the three strands of the self; community and the universe and its people, then governance as a process cannot encapsulate this essence of decision-making. A process-based governance structure cannot but promote a compliance-to- rules mindset. A higher dimension of purpose to behave with rightness- of-action which is internally-driven and self-governed is sorely needed. But for such a phenomenon to take place, the focus on governance cannot remain on the corporation. Although corpora- tion is legally a person, corporation is not a human person with the

essence of a sentient being. Corporation itself is without spirit. As a body that is brought into existence through the passing of the rule

of law, corporation is to observe the letter of the law. Yet, good gov-

ernance is about substance, not form and observing the spirit of the law rather than letter only. Therefore, against the backdrop of the discoveries of new sciences where consciousness has gained centrality, it is the humans within the corporation who provide the soul of the corporation are those who need to be governed. The next section, underscores the reason how this human-centric

frame of governance which we termed human governance can make meaning and create value and sustainability for the profes- sion.

From Corporate Governance to Human Governance - Towards Value Creation and Sustainability

We believe by now, the reasons to move along the paradigm of thinking into one where its assumptions do reflect the reality, have been established. Just how would human governance bring mean- ing to the profession and how different is it from corporate govern- ance?

On the latter, briefly, human governance is an inter- nal, inside-out and values-based conviction to guide the human as the sentient being to behave whereas corporate governance is an external, outside-in rules and regulations to legislate the behaviour of corporation, as a legal person. Human governance looks at the axiology, encompassing the traits of val- ues, religion, belief system, culture, and ethics in or- der to foster a culture based on trust where human within the organization is viewed as the soul of the organization. The belief is that rightness-of-action by an individual is not about being right according to some codified rules or man-made laws but bench- marked against the primordial and innate nature. Hence, human governance when actualized by pro- fessional accountants, allows for the emergence of high ethical values and moral conduct. To act to- wards upholding public trust through accountability for the self; community and universe would become second nature.

Table 3: Corporate Governance vs. Human Governance

Corporate Governance (For the Legal/Artificial Person)

Human Governance (For the Sentient/Spiritual Being)












Beyond conformance


Caveat emptor


Edico venditor




















Principle- & values-based


Legal enactments


Innate nature (fitrah)


Rules & compliance


Good conduct & beyond

Corporate Governance (For the Legal/Artificial Person)

Human Governance (For the Sentient/Spiritual Being)


Newtonian classical

o compliance




Quantum science






Letter of law





Spirit of law

characteristics of ethics and moral values are accepted by ac- countants that a governance structure to address them can be for- mulated. Any amount of codification of the “dos” and “don’ts” for ethical conduct would be futile in the absence of an internal per- sonal belief system for ethical behaviour. Ethical conduct should be the result of a true conviction which emanates from the heart: it is neither about logical rationality nor only for reason to meet the external requirement. That accountants need to move from the atomistic classical science paradigm of thinking to the quantum physics’ web of life now becomes a prerequisite. In the image of the larger universe, this means that rather than being obsessed with the planets as the objects for instance, it is the space within the planets that needs attention too. Precisely, this thinking para- digm has led to the discovery of the expansion of the universe over time.

When human governance as an internal moral compass is being practiced, integrity can be observed. But because integrity is only a symbol of the inner state of values, in order to encourage integrity, it is the shaping of the internal character that needs to be nurtured. Towards this end, we argue for a holistic approach in tackling in- tegrity, just as the etymology of integrity suggests. Integrity which originates from Middle English “integrite” and Latin “integritas” from “integer” denotes wholeness or completeness. Unlike the cur- rent tendency to differentiate and fragmentize between religious and moral values; culture; belief system; and legal codes following the Enlightenment episteme, the way forward to allow for the emer- gence of integrity is to reintegrate all the components. Integrity must always be taken as the output of the integration of all the above. In short, not only must a professional accountant possess the relevant technical knowledge, he or she must also be able to at once internalize and actualize an internal conduct that promotes integrity. Johnson, in questioning a basic principle of human, wrote

A human-centric governance framework transcends

organization type and structure because the unit of analysis is at the level of the individuals within the or-

ganization. Regardless of the work setting, a

human-based, internal mechanism of governance will always have human values as its guiding principle. This means that professional accountants will be guided by the same values structure irrespective of the business outfit they are working in. In the presence of this principle-based governance, attempts to de- sign separate governance codes for the corporation, enterprise or public sector become housekeeping. However, the focus of human governance to bring about accountability beyond the self and a work culture beyond compliance means that the best in a profes- sional accountant can be brought out. Likewise, when guided by the conviction to be accountable at once to the self; community and the universe and its people, professional accountants would be- lieve in the need to integrate sustainability into the objective, strategies, management, and definitions of success of their organi- zations. The need for an external mechanism to enforce sustain- ability becomes less significant. When behaviour is solely guided by a deep sense for rightness-of-action, the lure of material re- wards to compromise values also appears less attractive. It is only with ethical conduct too, that public trust of the accounting profes- sion can be brought back. With public trust, comes public confi- dence which is translatable into value creation.

While the adoption of human governance holds much promise for

a more sustained ethical behaviour among professional account-

ants, the issue of how to inculcate human governance remains pressing. We begin by calling for serious recognition of the neces- sity to view the universe as a web of relationship among its parts and between the parts and the universe whole. If reality remains a collection of objects and observables equated to measurable, then we cannot place non-objects and non-measurable traits like values and ethics into the equation. Moral values for instance cannot be measured but can only be meaningful against or in relation to some

frame of reference. Likewise, ethics is a perception that arises out

of a relationship in a set of network. It is only when this relational

that, “Integrity without knowledge is weak and useless, and knowl- edge without integrity is dangerous and dreadful” (Johnson, 1759, Ch. 41). And to ensure that integrity becomes the pillar of behav- iour, sole reliance on legal codes as the enforcement mechanism has to be reduced. Codes, rules and legislation are merely remind- ers to complete the integrity wholeness. To facilitate this reintegration, accountants need to get familiar with the descriptive relevant to both the corporate and human govern- ance ethos in moving from a legal person frame of mind to that of the sentient being. We list some of the relevant ones in Table 3. Each descriptive should be seen as forming a continuum between on one end, meeting the legal requirement and the other, as a hu- man person of sentient origin. What is hoped for is that account- ants begin to identify the position they are currently in with respect to the spectrum and embark there on, on a journey towards reach- ing the human governance pinnacle. Since human governance is human-centric and values-based, the journey too is peculiar and special to each individual for it is shaped by one’s milieu, much in- fluenced by religion, culture and belief system, among others.


On the basis of the goodness that human governance could bring to the profession, the way forward is for professional accountants to begin to accept the culture of human governance as the core guiding principle for professional conduct. Despite our conviction in the ability of this values- and principle-based governance to bring back the meaning of integrity in the life of professional ac- countants, we do not posit for an abandonment of corporate gov- ernance. Corporate governance, enterprise governance, public governance or any other governance structure which focuses more on the processes could now play a role as the back stop. Through this approach, a more holistic governance framework will be put in place so that ethical behaviour as originally meant to be in the realm of the accounting profession can be re-actualized to cre- ate value and preserve sustainability


1 Such as by Schrodinger (1944) in his work titled, “What is life?"

2 Such as that cited by Atmanspacher, H. (1996)

3 In the work of Bortoft (1996)

4 For instance, the definition by UNESCAP on good govern- ance states that governance is the process of decision- making and the process by which decisions are implemented.


Atmanspacher, H. (1996). The hidden side of Wolfgang Pauli: An eminent physicist’s extraordinary encounter with depth psychology. Journal of Consciousness Studies, 3(2): 112-26

Bortoft, H. (1996). The wholeness of nature: Goethe’s way of science. Ed- inburgh: Floris Book IFAC (2008). 2008 IFAC Global Leadership Survey on the accountancy profession – Summary of results. IFAC IFAC (2009). IFAC Sustainability Framework. IFAC












Kay, J. (2009). Box-tickers should not be the ones making decision. Finan- cial Times, 29 April. Retrieved 1 July, 2009 from:


NASA (2009). What wavelength goes with a color? Atmospheric Science Data Centre. Retrieved 6 April, 2009 from:

http://eosweb.larc.nasa.gov/EDDOCS/Wavelengths_for_Colors.html Rosenblum, B. & Kuttner, F. (2006). Quantum Enigma – Physics encoun- ters consciousness. Oxford: Oxford University Press Stapp, H.P. (2009). The role of human being in the quantum universe. World Futures: Journal of General Evolution, 1556-1844, 65(1): 7 –


Stapp, H. (1995). Values and the Quantum Conception of Man (LBL- 37315) Paper presented at the Unesco Symposium, Tokyo, Septem- ber Stapp (1985). Conscious and values in the Quantum Universe, Founda- tions of Physics, 15(1): 35-47 UNESCAP (2003). What is good governance? United Nations Economic and Social Commission for Asia and the Pacific Wheatley, M. (2006). Leadership and the New Science: Discovering order in a chaotic world. 3rd Edition. San Francisco: Berrett-Koehler Pub- lishers.

Arfah Salleh, PhD, FCPA, Aziuddin Ahmad, PhD, Universiti Putra Malaysia.

Mr. Zahid Anwar, FCMA Climbed the Mount Kilimanjaro Mr. Zahid Anwer, a Pakistan national born

Mr. Zahid Anwar, FCMA Climbed the Mount Kilimanjaro

Mr. Zahid Anwer, a Pakistan national born in Multan, a Fellow of Cost and Management Accountant of Pakistan (from Institute of Cost and Management Accountants of Pakistan), who was awarded gold medal in February 2000, and Chartered Accountant from Institute of Chartered Accountants of Pakistan, a member of Adventure Foundation Pakistan, having keen interest in Skiing, Camping and Trekking, Rafting, Scuba Diving and Paragliding, was motivated by Mr. Nazir Sabir, who climbed the Mount Everest, to climb the Mount Kilimanjaro in Tanzania.

Mr. Zahid Anwar is the first Pakistani, who had the honour and distinction of climbing the Mount Kilimanjaro (5895 meter high peak, which is also known as UHURU PEAK, one of the seven summits in the world, Africa’s highest peak and the highest Free Standing Mountain in the world) in May this year. It was also singular honour for him that he hoisted the flag of Pakistan on the top of the Summit.

Mr. Zahid Anwar completed this expedition in 06 days by using Coca Cola route and traversed 98 km distance. By doing so, Mr. Zahid Anwar has not only brought a distinction for him as a Pakistani but also promoted soft image of Pakistan in Tanzania.


Article Seizing Opportunities, Pursuing Our Goals By Göran Tidström, President IFAC S ince the last edition

Seizing Opportunities, Pursuing Our Goals

By Göran Tidström, President IFAC

S ince the last edition of IFAC News, IFAC has continued to seize opportunities, speak on behalf of the profession, and

partner with other organizations to enhance the relevance and stature of the global accountancy profession.

In May, I was personally gratified to be present at the launch of the Pan-African Federation of Accountants (PAFA)/Fédération Panafricaine des Experts-Comptables (FEPEC)—a regional or- ganization composed of 37 professional accountancy organiza- tions from 35 countries. The formation of PAFA has been sup- ported by IFAC for a number of years and is a historic event for the accountancy profession, and for Africa. We expect PAFA to play a key role in enhancing collaboration, developing the profession, and supporting emerging economies within Africa.

In June, we co-organized a very successful CReCER in Buenos Aires. On the day preceding the event, IFAC organized a meeting with the presidents of the Latin American and Caribbean profes- sional accountancy organizations. It was an extremely productive meeting, and it was gratifying to see how the links between IFAC and the Latin American and Caribbean member bodies have be- come stronger over the years—as well as how vibrant the profes- sion is in this region of the world. You can find more details on these events on page 6.

Also in June, IFAC submitted the Private Sector Taskforce of Regulated Professions and Industries’ (PSTF) interim report to the French Ministry of Finance, for consideration by the G20 deputies. The PSTF—which is comprised of private sector representatives from professions and industries subject to regulation, including ac- counting, auditing, investment, banking, insurance, and related ar- eas—aims to facilitate economic stability in the world’s capital mar- kets. The report, Regulatory Convergence in Financial Professions and Industries, emphasized that international standards are es- sential for a sound and stable global economy; they provide com- parability and consistency for investors, regulators, and market participants, and are a critical issue for capital markets. A final re- port will be submitted in September 2011.

In July, we responded to consultation papers on the IFRS Founda- tion Trustees’ Strategy Review and the European Commission’s (EC) Green Paper on the EU Corporate Governance Framework. We consider these comment letters to be valuable opportunities for IFAC to raise our profile and the profile of the global accountancy profession, and will continue to respond to consultations where our views are relevant. More details on IFAC’s responses can be found on page 9.

Also in July, we met with the Monitoring Group (MG) to review our progress in addressing the recommendations in the Review of the IFAC Reforms—Final Report. This was our first meeting under new MG chairman Fernando Restoy, and we were pleased that the discussions continued to go well and that the MG expressed satis- faction at the actions we have taken and those we have planned. We are very proud of the improvements IFAC has made, and con- tinues to make, and remain committed to enhancing diversity, transparency, and accountability in the public interest. At this

meeting, we also discussed the EC’s signals that it is con- sidering the best way to introduce ISAs into national laws; needless to say, we welcome this consideration.

As the year pro- gresses, IFAC continues to spotlight our strategic focus areas, in- cluding sovereign debt and public sector finance. Ian Ball, IFAC CEO, has made a number of key speeches on this topic in recent months, and the IPSASB has increased outreach activities and is developing new tools and resources to communicate the value of IPSASs and accrual accounting. We will continue to advocate in this area, as well as to comment on the evolving situation in Europe—and its impact on both the public sector and the private sector.

Sustainability and integrated reporting also continue to be impor- tant strategic issues. Our work with the International Integrated Re- porting Committee (IIRC) is progressing, and we have made strides in raising awareness. We expect the IIRC to produce a dis- cussion paper in the third quarter; the paper is intended to demon- strate the links between environmental, social, governance, and fi- nancial factors, and lay the foundation for a framework for these factors to be systematically taken into account in reporting and de- cision making.

From stronger alliances with regions of the world, different indus- tries, and other organizations, to the rapidly evolving sovereign debt crisis and the push to sustainability—the world, the economy, and our profession will change dramatically in the coming months and years. We must keep pace with this change—indeed, we must lead it. I am confident in IFAC’s and the profession’s ability to do so

About the Author: Göran Tidström is president of the International Federation of

Accountants (IFAC). Prior to this role, he served as IFAC deputy president (2008-2010). A European representative to IFAC since 2000, he became a member of the IFAC Board in


A highly regarded expert on international and European audit and accounting issues and a frequently requested speaker, Mr. Tidström has more than 30 years of experience as a public accountant with PricewaterhouseCoopers in Stockholm, Sweden, where he is a past partner and former chair. Mr. Tidström's clients have included many of the largest in- ternational companies in Sweden; he has been engaged as an arbitrator and investigator, and has helped restructure major companies. Currently, he is responsible for the audit of Sweden's second largest global company.

He was a founder of the European Financial Reporting Advisory Group (EFRAG), the European private sector body that gives European input to the International Accounting Standards Board, evaluates new International Financial Reporting Standards for use in Europe, and recommends endorsement to the European Commission. Mr. Tidström served as chair of the EFRAG Supervisory Board (2002-2009).

Mr. Tidström was also a member and president (2000-2002) of the Council of the Fédéra- tion des Experts Comptables Européens, the European accountancy organization. He has been a chair and a member of numerous standard-setting and policy-making bodies for fi- nancial reporting, tax, corporate governance, and capital market regulation practices.


Article Exploring Acquisitions Through Financial Ratios By Qaisar Mufti, FCMA M erchant Banks’ functioning is

Exploring Acquisitions Through Financial Ratios

By Qaisar Mufti, FCMA

M erchant Banks’ functioning is multi-dimensional. They cater un-bridged gap between supply and demand of in-

vestible funds. The banks help enterprises in raising funds and investors to invest their money. In new securities offerings and managing funds, merchant banks play an important role. These

are also referred as investments banks. Role of a merchant banker is dynamic in the wake of diverse nature of services of-

ferings. A merchant banker has to devise instruments of financ- ing for commercial propositions in accordance with require- ments of his customers. Merchant banks do not accept depos-

its from public like ordinary commercial banks.

Role of merchant banks in equities and debt instruments’ pri- vate placements, market making, mergers, acquisitions and corporate structuring is pervasive. Also acting as underwriters

of both listed and non-listed securities, the banks assist indi-

viduals, companies, institutions and governments in raising

funds. Sales force of the banks call on high-net-worth investors

to suggest trading ideas. To fit specific requirements, trading

desks in merchant banks price and execute trade, structure new products.

Merchant banks operations extend beyond issue management to project and corporate counseling, portfolio management, consultancy on sick units, providing and procuring venture capital, leasing financing, trusteeship for instruments of re- deemable capital, arranging international finances etc. At times, as divisions of commercial banks, non-banking financial institutions, financial and corporate consultants, merchant banking activities thrive.

A Merchant Bank in USA is subject to Securities & Exchange

Commission (SEC) and Financial Industry Regulatory Authority

(FINRA) regulations. In Pakistan they are under the discipline

of Securities & Exchange Commission of Pakistan (SECP) in

terms of Non-Banking Financial Companies Rules and Regula- tions (NBFIs Rules). In India, Securities & Exchange Board of India (SEBI) regulates these banks. UK has the Securities & In- vestment Board (SIB), under Financial Services Act, 1986, with wide powers to put in place fair practices on the part of all those engaged in investment or merchant banking business like stock brokers, jobbers, unit trust managers, life insurance agents, pension funds managers and financial consultancy.

In common day to day reference, terms like ‘tak-

eovers’, ‘mergers’, ‘amalgamations’, ‘acquisitions’ etc. are considered synonyms exchange. Acqui- sitions and Mergers (AM) involve transfer of an entire undertak- ing for shares of the transferee company-given in exchange to subsisting shareholders in the ratio of their holding. AM are strategic decisions that can introduce a paradigm shift of busi- ness. On rejuvenations of enterprises AM have volumes to tell. They help usher rejuvenation at a pace and volume internal de- velopments would normally not. Of the activities merchant banks get into AM is a core activity.

In the melee, as a mater of course, AM appear great on paper. However, real test is after these are put in place, when people from different organizations collaborate to turn the plans into action and finally into results. Value is not created until after the combinations. Due to this, despite pressure for a quick secre- tive go that surrounds almost all AM decisions, managers of the game, which include consultants and advisers of the exercise, do not make their decisions lightly.

Financial Statements Provide Kick Start

Financial statements present condensed position of a date and summarized operating results for a period. Personal judgment is enshrined in financial statements with conventions in deciding:

a particular method or combination of methods to estimate depreciation, depletion, amortization or provision for re- ceivables no longer collectible.

compile merchandise inventory figures.

choose the method of inventory valuation for purposes of charge to cost.

record certain expenditure as capital instead of revenue and vice versa.

Operations presented by financial statements are historical in nature which can hardly be used for analysis of segments and phases of business during the operating period. For an AM ex- ercise relatively deeper information and segmental data, both

with regard to financial position and operations would be called for. Financial Ratios are used to compare return relationships. Through these, risk and returns of different entities can be com- pared by investors and creditors. A merchant bank needs these to make intelligent investment and credit decisions. To gauge feasibility or efficacy of a proposition, merchant banks en- grossed in AM exercises apply many tests, based on tech- niques drawn from different disciplines.

Role Financial Ratios Play

Analysis of financial ratios would always be there. The ratios categorized from different angles provide profile of a compa- ny’s economic properties, its strength and its operating, finan- cial and investment characteristics. These normally are:


Activity analysis.


Liquidity analysis.


Term-debt and solvency analysis.


Profitability analysis.

Knowledge gained through accounting ratios is used to the end of:

testing efficiency of operations,

determining investment value of the enterprise concerned, and

deciding whether financial and operating policies, methods or practices should be continued or altered.

Inflexible Arithmetical Exercises

The process of evaluation can not possibly be reduced to in- flexible arithmetical exercises. Too much reliance on mechani- cal means may not be good. All ratios or indicators have their limitations. Ratios do not always have something definite to say. Technical analysis may not be effective where capital is small.

Accounting ratios and equations do not have to be used in iso- lation. Judgment will have to be based on judicious discretion taking into account all the relevant factors. Such factors would include quality and integrity of the management, present and prospective competition and yield on a scrip comparable with share of the company being analyzed. Not to be overlooked will be the possibilities of ‘window dressing’ of accounts being ex- amined.

Dose for Change

Going into financial ratios by merchant banks would also be with the view point of exploring their alteration given the identi- fied ‘dose of change’ after AM. For example, the doers of an AM exercise would consider steps which go to alter the gross profit margin. They could look into reducing the operating profit per-

centage through pegging-up percentage allocations for market- ing overheads by pushing-up incentives for the marketing force. This process may be to target increase in volume of oper- ating profit.

An expert assisting an AM exercise can not afford to ignore state of:

production and marketing strategies,

changing price levels and

fixed and variable costs complexions

On profitability and financial health of the enterprise. He can not be oblivious of similar ratios obtaining in other (competitive) business concerns. It is study on this pattern which decides whether sales should be augmented, production pattern re- shuffled and capacity should be increased to bring down cost, particularly fixed component of cost, and whether outside fi- nancing would be required to push-up level of operations.

The process of evaluation can not possibly be reduced to inflexible arithmetical exercises. Too much reliance on mechanical means may not be good. All ratios or indicators have their limitations. Ratios do not always have something definite to say. Technical analysis may not be effective where capital is small.

In the planning process prices and / or sorts of costs are pro- jected at the desired points with a view to put in place machin- ery to achieve the targets.

Hereinafter are cited some ratios, projection of change in which may be in pursuance with an AM plan. What follows is neither a scientific outline for ratios modification nor enumerated are all the steps under each head. Engaging attention of the AM team, this is listing of ideas for probe under each heading.

This scribe is aware that information on a number of points herein below, the AM team may not eventually be able to have.

Gross Profit to Sales

whether service industry, industrial or commercial activity.

graph of market share enjoyed by the entity.

effect of changes in duties and taxes on gross profit margin.

competitive strength of the company and obsolescence.

stability of the company - % decline in sales to erode gross profit.

reliance on associated / group companies for business.

prospects of increase in gross profit margin.

depreciation, depletion and amortization methodology.

weightage and segment to sales and gross profit.

sensitivity associated with governmental policies.

strategic depth of sales revenue.

cyclical trends associated with business of the entity.

Operating Profit to Sales

sensitivity of marketing overheads in relation to sales.

efficacy of subsisting marketing related incentives.

trends of administration & marketing overheads ratio to sales.

factors leading to variation in marketing expenses, fixed & variable components of marketing expenses.

Net Profit to Sales

spread between operating and net profit margins.

percentages of cash and credit sales in total sales and terms for credit sales.

impact of increase or decrease of days allowed to pay for sale on credit.

amount of interest against short term borrowing charged to operations.

net profit if there were no financial overheads.

Financial Overheads as % Sales and Capitalization

purposes for which term loans utilized and such loans in the pipeline.

term loans as percentage of fixed assets, cushion existing for further borrowing and impact of such borrowing on prof- itability.

possibilities of utilization of short-term loans as term loans and vice versa.

impact of cash dividend in view of the related tax shield missing, particularly when the funds are borrowed for such payment

chances of swapping between types / forms of financing.

implications of further issue of instruments of redeemable capital / debentures.

evaluating impact of:


decrease in credit sales.


increase in credit sales

on financial overheads, cash flows and profit.

Profit After Tax Profit to Equity

characteristics of shares and instruments of redeemable capital issued:


for consideration other than cash, wholly or partly.


traded at a premium or discount.


option for conversion or otherwise.

tax concessions available or existing and time frame for such availability.

post re-organizations, reconstructions, amalgamations or changes otherwise in capital structure.

current and previous liabilities included in tax computations and tax related contingences.

impact of tax in relation to segment-wise profit.

profit arising from normal operations and tax shields asso- ciated with different income categories.

possible changes in accounting policies and their effect on profitability.

tax holidays existing or possible and other tax incentives.

deferred tax / tax rebates available and availed.

claims on equity e.g. conversion of redeemable or pre- ferred capital into ordinary shares, stock options to employ- ees and right options released or to be released to share- holders.

prospects for reduction in tax with change in corporate structure or presentation of tax information.

Earning Per Share

past years’ trend.

past years’ trend of other companies in the same business.

EPS of companies in general.

EPS with all financial overheads written back.

EPS with cost of long term borrowings written back.

major shareholders of the company, nature of their busi- ness and support flowing from them to the company.

sensitivities associated with earnings – comparison with in- dustry averages and impediment with removal of which earning could improve.

effective rate of the company’s EPS in view of right issues made and stock dividends declared.

high & low stock market quotations for shares & debentures of the company and their average prices during last six months.

management’s perception of risk factors.

material contracts in force and in offing.

review of capital available – additions or surplusage.

Debt Equity Ratio

industry relevance:


conventional or non-conventional industry.


consumption goods or capital goods relevance.


production or service industry, fragility associated


production and delivery.

whether licence required for setting-up a project likewise and effective cost of licence.


total loans in relation with total assets and assets under lenders’ lien.

sale prospects of assets and their estimated (sale) value in relation with the investment proposed.

soundness of lenders, prospects of postponement / re- scheduling / restructuring of debts.