Pakistan: SBP reduces policy rate by 100bps

At its meeting today, the Monetary Policy Committee (MPC) of State Bank of Pakistan (SBP) decided to cut the policy rate by 100 basis points to 19.5%, effective from July 30, 2024.

The Committee observed that the June 2024 inflation was slightly better than anticipated. The Committee also assessed that the inflationary impact of the FY25 budgetary measures was broadly in line with earlier expectations.

The external account has continued to improve, as reflected by the build-up in foreign exchange reserves held by SBP despite substantial repayments of debt and other obligations.

Considering these developments – along with significantly positive real interest rate – the Committee viewed that there was a room to further reduce the policy rate in a calibrated manner to support economic activity, while keeping inflationary pressures in check.

The Committee noted the following key developments since its last meeting:

First, the current account deficit narrowed sharply in FY24 and forex reserves of SBP reserves improved significantly from US$4.4 billion at end June 2023 to above US$9.0 billion.

Second, the country reached a staff level agreement with the IMF for a 37-month EFF program of about US$7.0 billion.

Third, sentiment surveys conducted in July showed a worsening in inflation expectations and confidence of both consumers and businesses.

Fourth, international oil prices have remained volatile in recent weeks, whereas prices of metals and food items have eased.

Lastly, with the ease in inflationary pressures and labour market conditions, central banks in advanced economies have also started to cut their policy rates.

Taking stock of these developments, the Committee assessed that, despite today’s decision, the monetary policy stance remains adequately tight to guide inflation towards the medium-term target of 5 to 7 percent. This assessment is also contingent on achieving the targeted fiscal consolidation, timely realization of planned external inflows and addressing underlying weaknesses in the economy through structural reforms.

Real Sector

Latest high-frequency indicators continue to reflect moderate economic activity. Auto and POL (excluding FO) sales and fertilizer offtake increased on MoM basis in June.

Large-scale manufacturing also recorded a sharp improvement in May 2024, mainly driven by the apparel sector.

The growth in agriculture sector, after showing a strong performance in FY24, is expected to slow down in this fiscal year.

Latest satellite images and input conditions for Kharif crops also support this assessment. However, activity in the industry and services sectors is expected to recover, supported by relatively lower interest rates and higher budgeted development spending.

Based on this, the MPC assessed FY25 real GDP growth in the range of 2.5 to 3.5 percent as compared to 2.4 percent recorded last year.

External Sector

After recording surpluses for three consecutive months, the current account posted a deficit in May and June, in line with the MPC’s expectation. These deficits were largely due to higher dividend and profit payments and a seasonal increase in imports, which more than offset a significant increase in exports and workers’ remittances.

Cumulatively, the current account deficit in FY24 narrowed significantly to 0.2% of GDP from 1.0% in the preceding year. This, along with the revival of financial inflows, helped build the SBP’s FX reserves. Looking ahead, the MPC expects a modest increase in imports, in line with the growth outlook.

At the same time, the continued robust growth in workers’ remittances, along with an increase in exports, is expected to contain the current account deficit in the range of 0 - 1.0 percent of GDP in FY25.

The Committee assessed that the expected financial inflows, including planned official flows under the IMF program, would help finance this current account deficit and further strengthen the FX buffers.

Fiscal Sector

The government’s revised estimates indicate improvement in fiscal balances during FY24, as the primary balance turned into a surplus and the overall deficit declined from last year. However, amidst a shortfall in budgeted external and non-bank financing, the government’s reliance on the domestic banking system increased significantly.

The Committee expressed concern on increasing reliance on banks for deficit financing, which has been squeezing borrowing space for the private sector. For FY25, the government has set the primary surplus target at 2.0% of GDP.

The MPC emphasized on achieving the envisaged fiscal consolidation and timely realization of planned external inflows to support overall macroeconomic stability, and build fiscal and external buffers for the country to respond to future economic shocks.

Money and Credit

The MPC noted that the trends and composition of monetary aggregates during FY24 remained consistent with the tight monetary policy stance. Broad money (M2) and reserve money grew by 16.0% and 2.6%, respectively, well below the growth in nominal GDP.

Almost the entire growth in M2 was led by bank deposits, while currency in circulation remained almost at last year’s level. As a result, the currency to deposit ratio improved, as it declined from 41.1% at end June 2023 to 33.6% at end June 2024. At the same time, the improvement in external account increased the contribution of net foreign assets in monetary expansion.

Meanwhile, the growth in net domestic assets of the banking system decelerated amidst subdued demand for private sector credit. The Committee viewed these developments as favorable for the inflation outlook.

Inflation Outlook

As expected, headline inflation rose to 12.6%YoY in June 2024 from 11.8% in May. This increase was primarily driven by higher electricity tariffs and Eid-related increase in prices, which were partly offset by the downward adjustments in domestic fuel prices.

Core inflation, meanwhile, has steadied around 14 percent over the past two months. The MPC assessed that while the inflationary impact of the FY25 budget is largely in line with expectations, the available information indicates that the full impact of these measures may now take some time to fully reflect in domestic prices.

At the same time, the Committee noted risks to the inflation outlook from fiscal slippages and ad-hoc decisions related to energy price adjustments.

On balance, after considering these trends – and accounting for the sufficiently tight monetary policy stance and ongoing fiscal consolidation – average inflation is expected to remain in the range of 11.5 to 13.5 percent in FY25, down significantly from 23.4 percent in FY24.

PSX average daily volume up 23.8%WoW

Bullish momentum persisted through the first four days of the week, as the KSE-100 index reached its highest-ever closing of 80,283 points on Thursday. Overall, the benchmark index closed at 80,213 on last trading day on the week ended on July 07, 2024, with a gain of 1,767 points, up 2.25%WoW.

With an overall positive market landscape, participation also increased with the average daily traded volume rising to 440 million shares as compared to 355 million shares a week ago, up 23.8%WoW.

The finance minister confirmed positive progress in talks with the IMF, the lending authority appraising of the announced changes in electricity and gas tariffs effective July 01, 2024, with the likelihood of a staff level agreement (SLA) within this month.

On the inflation front, CPI for June 2024 was reported at 12.57%YoY, in-line with the consensus. Meanwhile, trade deficit for June was reported at US$2.39bn, taking FY24 deficit to US$24.09 billion, down by 12%YoY.

On the external front, foreign exchange reserves held by State Bank of Pakistan (SBP) rose by US$494 million on a weekly basis to US$9.39 billion.

Finally, the domestic currency slightly weakened against the greenback, ending the week at PKR278.38/US$ (down 0.01%WoW).

Pakistan’s Oil Marketing Companies (OMCs) recorded their highest sales in 19 months, reaching 1.45 million tons in June 2024. Domestic cement sales fell 4.6% to 38.18 million tons in FY24.

Other major news flows during the week included: 1) GoP decided to shut down Pakistan Steel Mills, 2) Cabinet approved PKR5.72/unit hike in Nepra base tariff, 3) Pak-Afghan rulers reestablish contact for talks and 4) Power minister promised tariff relief.

Top performing sectors were INV. Banks / INV. COS./ Securities Cos, Leasing Companies, Exchange Traded Fund, Jute and Commercial Banks, while Synthetic & Rayon, Woollen, Close-end Mutual fund, Tobacco, and Textile Composite were amongst the worst performers.

Major net selling was recorded by Mutual Funds with a net sell of US$13.65 million. Foreigners absorbed most of the selling with a net buy of US$7.69 million.

Top performing scrips of the week were: AKBL, NBP, PSX, BOP and PGLC, while laggards included: IBFL, THALL, PAKT, HGFA and FCEPL.

According to AKD Securities, market is expected to return its focus to negotiations with the IMF, to be a key market trigger in the near term.

The rally is expected to continue amidst the market's attractive valuations, with the forward P/E continuing to remain below 4.0x. At these levels, the brokerage house anticipate that sectors benefiting from monetary easing and structural reforms will remain prominent.

Its top picks include OGDC, PPL, MARI, MCB, UBL, MEBL, HUBC, FFC, LUCK, MLCF, FCCL and INDU.

Pakistan: Federal Budget FY25 Highlights

The Federal Budget was announced on Wednesday with a commitment to continue the fiscal consolidation seen last year. Most of the targets are in line with IMF guideline which will help in getting long term financing facility.

While no major reforms were seen on the exports, energy and other sectors, many tax exemptions have been removed.

Government has adapted significant tax measures to get incremental tax revenues of PKR3.7 trillion, taking total FBR taxes to PKR12.97 trillion from current year estimated number of PKR9.25 trillion.

Including petroleum development levy (PDL) in tax revenues, the FBR tax to GDP ratio for FY25 is estimated to reach 11.5% from 9.62% in FY24. For last five years this has remained 9.7% of GDP. To recall, PDL used to be tax revenue till FY20.

Analysts believe, tax measures taken under this budget are quite balanced and less inflationary than expected, as earlier it was considered that government will increase GST by 1% etc. These measures will pave the way for IMF program, if approved from the parliament.

Overall budget aims to ensure primary surplus of 2% of GDP or PKR2.5 trillion (excluding provincial surplus 1% of GDP), which is in line with the IMF guidelines.

 Some of the key announcements from the budget are: 

GDP growth target

Government has set a GDP growth target of 3.6% for FY25 as against provisional GDP growth of 2.4% for FY24. Government expects Agriculture, Industrial and Services sector to grow by 2.0%, 4.4% and 4.1%, respectively during FY25.

Analysts believe, GDP target of 3.6% is achievable as industries has started reflecting V shaped recovery; LSM index in 3QFY24 has achieved growth of 1.47%. Approximately 50% of the subsectors have recovered and posted positive growth. Going forward, with the expected decline in interest rates, industrial growth target of 4.4% seems achievable. Services sector is also expected to grow 4.1% on the back of low base, expected recovery in industrial growth and subsequently in advances of the banks, the services sector is also expected to post more than 4% growth.

The total budget outlay is set at PKR18.87 trillion for FY25, up 25%.

Markup Expense

Markup expense is envisaged at PKR9.8 trillion, 18% higher than revised estimate for FY24. Surge in Markup expense is primarily due to increase in debt to finance fiscal deficit. This will take markup expense as % of tax revenues to 75% from 5 year average of 63%. Actual interest expense for FY25 may remain lower than projected numbers due to expected fall in interest rates.

Current Expenditure

Total Current Expenditures are estimated at PKR17.2 trillion for FY25, up 21% from revised estimates of FY24. Government has earmarked subsidies of PKR1.4 trillion as compared to revised estimates of PKR1.0 trillion for FY24.

Development Expenditure

Development expenditure is estimated at PKR3.8 trillion for FY25, up 58% YoY; within this, federal PSDP is kept at PKR1.5 trillion, up 80% from revised figure for FY24. In federal PSDP, 81% of the budget is diverted to existing projects, while only 19% is allocated for new projects.

Defense Expenditure

The Defense Expenditure has been set at PKR2.1 trillion for FY25, 14% higher as compared to PKR1.86 trillion for FY24.

Revenue

FBR Tax Revenue target has been set at PKR12.97 trillion up 40% for estimated collection of PKR9.25 trillion for FY24. This is higher than average growth of 20% in last five years. Though the target is high, Government is likely to collect around PKR12 trillion based on the new tax measures. The balance numbers can be achieved through reduction in significant higher PSDP allocation.

The Non Tax Revenue target has been set at PKR4.8 trillion up 64% from last year’s revised estimate of PKR2.9 trillion, where the government has budgeted PKR1.3 trillion under petroleum development levy (PDL) up 33% from FY24 estimated number of PKR960 billion.

From State Bank, government has estimated dividends of PKR2.5 trillion, more than 157% higher than FY24 number of PKR972 billion. This seems to be higher than the governor state bank’s comment in analyst briefing on April 29, 2024 that SBP will provide over PKR2 trillion to the government next year.

Fiscal Deficit

The government has estimated a fiscal deficit at PKR7.3 trillion, 5.9% of GDP (6.8% excluding provincial surplus) for FY25 as compared to estimated Fiscal Deficit of PKR7.8 trillion, 7.4% of GDP (7.9% excluding provincial surplus) for FY24. This includes provincial surplus of PKR1.2 trillion in FY25 as compared to revised estimate of PKR539 billion for FY24.

Primary Balance

The government has primary surplus target of PKR2.5 trillion (2.0% of GDP) for FY25 as against estimated surplus of 0.4% for FY24. IMF estimates primary surplus of 0.4% of GDP for FY25 in its May 2024 report. Excluding provincial surplus, primary surplus would be 1% of GDP for FY25 and deficit of 0.13% for FY24.

Current Account

Interestingly government projects a Current Account Deficit of US$3.7 billion for FY25, which will be higher than FY24 as it is expected to be a year of surplus of US$100-200 million.

Taxation Measures

Government has relied on natural increase in Tax Revenues in line with estimated 17% increase in nominal GDP along with few of the following measures;

Increase in FED on cement by PKR1/kg to PKR3/kg. This will yield revenues of approximately PKR40 billion to Government.

Pensions reforms will save approximately PKR40 to PKR45 billion.

Capital gain tax for non filers is increased to 45%, while for the filers it is proposed uniform 15%.

Exporter (textile, IT, and rice etc) will be required to pay normal tax, earlier it was 1% full and final tax. This will help Government to collect extra PKR50 to PKR100 billion.

Tier one retailers of textile and leather will be required to pay 18% from 15%.

Standard sales tax of 18% on mobile phones will result in additional tax revenues of PKR50 to PKR100 billion.

Sales Tax exemptions granted to FATA/PATA are removed in phased manner. This will bring additional taxes of PKR10 to PKR20 billion.

Removal of exemption on custom duties on import of Hybrid vehicles and luxury electric vehicles.

No of slabs for salaried tax are reduced, while the maximum tax is proposed to be unchanged. However, for non salaried person, maximum slab is increased to 45%

Advance withholding tax on non filers Retailers, Wholesalers, and distributors is increased to 2.5% from current 1%.

Increase in PDL limit to PKR80 per liter (minimum PKR60) on HSD and MS oil. This will help government to collect around PKR350 billion.

Pakistan: Federal Budget Hoping Against Hope

Certainly concerted efforts have been made to mend relationship with International Monetary Fund (IMF) while preparing Federal Budget for the next financial year.  Intentions may be good but a lot will depend on the commitment and plans to meet the targets. 

Keeping in view the fragile nature of the coalition government, diversity in the mind set of party leaders and high commodity prices, there is many a slip between the cup and the lip.

The Government of Pakistan, in Federal Budget FY23 has set a GDP growth target at 5% and inflation at 11.5%. Many analysts say that the GoP will have to make extra efforts to achieve these targets, mainly because the central bank has already raised policy rate by 675bps another 100bps is anticipated in the name of tightening of monetary and fiscal policies.

Inflation target will also likely be missed as global commodity prices are likely to remain on upward trajectory. The inflation and Petroleum Development Levy (PDL) collection target are at odds. The PDL collection target has been set at Rs750 billion for FY23. There is hardly a realization that higher PDL collection will result in CPI outages, conversely efforts to contain CPI may result in shortfall in PDL collection.

Other than the aggressive PDL collection targets, which will likely be missed, the GoP has done well to protect masses from further inflationary pressures. Personal income taxes have also been relaxed which will improve purchasing power of the masses and help in face saving of the coalition government.

The tax collection target is a slightly lower than Rs7.3 trillion which was initially being reported in the press, but still represents a 17%YoY jump from estimated collections in FY22. Efforts have been made to make taxation more equitable, with new revenue measures targeting large landowners and the big corporates and retailers. However, little effort has been made to bring agriculture sector in the tax net.

The budget projects a uniform increase in all major taxation heads, including direct taxation, sales taxes, custom duties and FED but the most notable increase comes from the projected Rs750 billion collection of PDL. Given the soaring crude oil prices in international market, analysts see a likely shortfall in collection under this head which will need to be compensated elsewhere.

Similarly, target of GIDC for FY23 is set at Rs200 billion which is also less likely to be achieved. It may be recalled that the GoP had collected a paltry amount of Rs14 billion under this head during 9MFY22. Out of the incremental tax collection targeted for FY23, the new tax measures are estimated to bring in up to Rs375 billion whereas the remaining amount will be generated through growth in Nominal GDP.

The total outlay envisaged in the budget FY23 is Rs9.5 trillion; out of which current expenditures are targeted at Rs8.7 trillion, while the development expenditures are estimated at Rs808 billion. Of that, the Interest payments are estimated at Rs3.95 trillion, up 29%YoY. This constitutes a whopping 45% of current expenses and 42% of the overall expenses.

The defense expenditures are estimated at Rs1.5 trillion – up 11%YoY, which constitutes 18% of current expenses and 16% of overall expenditures.

Federal Pension expense is estimated at Rs530 billion - up 0.7% YoY as against revised estimates of Rs525 billion for FY22. Furthermore, government plans to setup a pension fund which is likely to fund pension expenditures going forward.

Subsidy disbursements are slated to shrink to Rs699 billion for FY23 from Rs1.5 trillion for FY22. To recall, GoP announced a generous package of subsidies on the consumption of fuel and electricity during 2HFY22 which resulted in the slippages under this head.

Analysts expect the total debt servicing cost to exceed the budgeted target of Rs3.1 trillion as the budget document estimates hefty contribution from external sources for budgetary funding. They expect heavier reliance on local sources for budgetary borrowings where the cost of debt will be higher, thus pushing the overall debt financing number even higher.

This article was first published in Eurasia Review

Pakistan: Likely facets of Federal Budget FY23

Government of Pakistan (GoP) is scheduled to announce Federal Budget FY23 on June 10, 2022. Relations between International Monetary Fund (IMF) and Pakistan have not normalized despite change of Prime Minister. 

While it is anricipated that the upcoming budget will have measures that can ensure austerity and economic stability, the incumbent government is likely to opt for policies which can help the coalition remain in power over the next 18 months.

Budget outlay for FY23 is estimated at around Rs9.5 trillion as against budget of Rs8.5 trillion for FY22.

GoP is anticipated to set tax revenue collection target at Rs7.25 trillion for FY23, which will be 19% higher from the revised target of Rs6.1 trillion for FY22. It is likely to impose new taxation measures of about half a trillion in FY23 budget.

Current expenditure target is likely to be set at 12% of GDP for FY23 or Rs8 trillion which is around 11% YoY higher than what was budgeted for FY22.

Similarly, government is likely to set aside nearly Rs4 trillion for markup payment and Rs1.6 trillion for Defense expenditure.

Federal Public Sector Development (PSDP) is estimated at Rs800bn, as against Rs466 billion disbursed in 10MFY22 and revised budgeted of Rs603 billion for FY22.

Consolidated PSDP (Federal and Provincial) is anticipated at Rs1.4 trillion (1.8% of GDP) for FY23, as against Rs1.2 trillion for FY22.

A few taxation measures that are under consideration include: 1) increase in super tax for Banking sector and re-imposition of super tax on highly profitable companies, 2) increase in tax rate for individuals earning high salaries, 3) reduction in tax concessions and exemptions for various sectors, 4) increase in regulatory duties on luxury items, 5) luxury tax on immovable properties and vehicles,  and 6) increase in taxes for non-filers.

With the economic slowdown, tax revenue target of Rs7.25 trillion will be difficult to achieve for FY23. However, it will depend on the types and amounts of new taxes to be imposed in Budget FY23.

Upcoming budget is likely to be Neutral for Stock Market as we do not anticipate any change in Capital Gain Tax (CGT) rate of 12.5% and tax rate of 15% on dividend income. The budget is likely to be Neutral to Positive for sectors including Technology & Communication, Fertilizer, Insurance and Chemical Sectors. On other hand, it is likely to be Neutral to Negative for sectors including IPPs, Autos, Banks, Oil & Gas Exploration, Cement, Textile, OMCs, Tobacco, Steel and Pharmaceuticals.

Analysts believe that negatives relating to imposition of new taxes on listed companies are already priced in as valuations remain attractive. Market participants are keen to see the overall balance of payment situation and focus to remain on IMF and other foreign exchange inflows along with trend of international commodity prices. 

Pakistan market is currently trading at a discount. Analysts prefer sectors that offer high dividend yield, beneficiary of rising interest rates and currency depreciation.

 

Getting Federal Budget approved should be the top priority of Shehbaz Sharif

In all probability, the incumbent government, headed by Shehbaz Sharif, is scheduled to present Federal Budget 2022-23 in the lower house on June 10, 2022. There is an overwhelming perception that the economic team hasn’t been able to put its much talked about plans and finalized the nitty-gritty.

This impression is based on the fact that Pakistan and International Monetary Fund are still polls apart, mainly because the Pakistani economic team is not paying heed to the instructions of the Fund.

Over the last six weeks the Shehbaz team has not met even the first target of raising prices of petroleum products and electricity and gas tariffs. Most of the time is being wasted on maligning the previous government headed by Imran Khan, rather than taking into account the harsh domestic and international realities.

The team faces the most tedious task of projecting income and expenses targets and meeting the deficit. It is too obvious that the coalition government has fewer options available to boost income and it will not be able to follow any austerity drive because of the mindset of the ruling elite. There is a consensus that the elected representatives will not be ready to accept any substantial cut in their salaries and perks.

It is feared that the axe will fall on federal and provincial public sector development programs. The top priority areas are: 1) improving irrigation system, 2) strengthening electricity and gas transmission and distribution infrastructures. The mounting circular debt can’t be contained without containing rampant pilferages.

For boosting country’s exports, cost of doing business has to be reduced. The top two expenses to be rationalized are interest rate and energy tariffs. The GoP expects to receive US$2 billion from IMF over the next two years. Experts believe that this much amount can be raised by exporting just one item, one million tons urea. The country has the surplus capacity to produce one million ton exportable surplus urea by ensuring uninterrupted supply of natural to the fertilizer plants.

There is no denying to that fact that huge quantities of wheat, edible oil, POL products and even urea fertilizer are being smuggled to the neighboring countries. The key problems are 1) highly porous borders and 2) restriction on the export of these commodities. These problems can be overcome by plugging boarders and bringing necessary changes in the Trade Policy.

Last but the foremost, the economic team has to come out of the illusion that hike in interest rate can help in containing inflation in the country. Let this be known to all and sundry that Pakistan suffers from cost pushed inflation. The biggest loser of hike in interest rate is the GoP. Let me reiterate that GoP is the biggest borrower and with each hike in interest rate, its debt servicing ability is marred.

 

 

 

Pakistan: Coalition on the path to collision

Pakistanis are getting jittery because of the ‘politically loaded’ statements from the ruling coalition as well as the opposition headed by Imran Khan. 

PTI Chairman on Sunday announced that his party's long march towards Islamabad for the country's "battle for real freedom" would begin on May 25, 2022.

He said the main demands for the march to the capital were the immediate dissolution of the National Assembly and announcement of a date for the next general election.

Khan wants to charge the mob by saying, "I want people from all walks of life to come because this is Jihad, and not politics. I've decided and told all my team that we have to be ready to sacrifice our lives."

Imran indicated that the march would convert into a sit-in and continue until his demands are accepted. "We will never under any situation accept them. No matter how long we have to remain in Islamabad we will remain there."

I am surprised at the logic and narrative of Khan. If he wants fresh elections, he should ask his party members (MNAs) to resign and the coalition will have no option but to go for fresh election.

I have a feeling that Khan fears that in case his party members resign the stage would be set for the creation of an interim government and elections would be deferred till completion of the electoral reforms.

PML-N-led coalition government appears unwilling to take the blame for any unpopular decisions it may have to take to fix the economy. It wants guaranteed backing of the powerful military establishment to help it see through the remaining period of its tenure till August 2023.

The coalition believes it can handle the PTI march if other things are sorted out with the establishment. Interior Minister Rana Sanaullah has expressed his wish to arrest Khan provided he gets the ‘go-ahead’, as he thinks even one day in prison would make the ousted premier forget politics.

It is highly regrettable that neither Khan nor Sharif understands the gravity of situation. Pakistan has to satisfy the International Monetary Fund (IMF) and seek the ‘fitness certificate’ to pave way for the immediate release of US$1 billion. This would be the preamble for release of funds by other multilateral financial institutions as well as friendly countries.

It is therefore suggested that the ruling junta should show some endurance and Khan should also support the incumbent government in the preparation and approval of the federal budget for the next financial, likely to be announced on June 10, 2022.

In my opinion even the most contentious issues should be discussed and resolved in the parliament and should not be taken to the streets. At present the top national priority is approval of the federal budget.  It is better that Khan and Sharif develop working relations at the earliest.

Pakistan Stock Market Takes a Dip of Nearly 8 Percent

With announcement of FY18 Deferal Budget and Pakistan’s formal inclusion in the MSCI EM Index, the week ended 2nd June 2017 remained eventful. Contrary to the expectations, fiscal prudence superseded election year populist measures in the Budget, while unexpected tax restructuring for the stock market induced further volatility (15% CGT regardless of the holding period, enhancement of tax on dividend to 15%). On the other hand, the transition to MSCI EM Index triggered a sell‐off on the likely rebalancing of the portfolios. The benchmark of Pakistan Stock Exchange index lost 4082 points or 7.75%WoW to close the week at 48,555. The average daily volumes declined to around 295 million shares, but the average traded value soared to its decade high of over US$240 million. Other key news flows during the week included: 1) Hussain Nawaz appearing before the JIT, 2) CPI based inflation in May’17 rising to over 5%, at 30‐month high, 3) GoP reducing the MOGAS/HSD prices, 4) LHC dismissed petitions filed by commercial importers against the anti‐dumping duty on flat steel products, 5) MoF reportedly agreed to provide Rs45 billion to IPPs and OMCs in lieu of circular debt. MSCI Pakistan EM index large and mid‐cap constituents were major losers during the week, where: HBL, LUCK, UBL, MCB and OGDC.With Pakistan formally part of MSCI EM Index, analysts expect short‐term volatility to continue where the market is likely to take guidance from foreign activity. That said, any development with regards to the revised margin financing product along with Panama‐gate’s JIT proceedings are likely to drive sentiments accordingly.

As eventful as it was, the market gained 2.6%MoM during May'17 in anticipation of a populist budget while gearing up for Pakistan's formal inclusion in the MSCI EM index. However, gains remained limited (the market lost 4% since the presentation of Budget FY18) where, contrary to expectations, fiscal prudence superseded election year populist measures in

Budget FY18. Also, an unexpected tax restructuring for the stock market induced further volatility. On the other hand, the transition to MSCI EM Index triggered a sell‐off with the benchmark index losing 1.7%, just a day before formal inclusion of Pakistan in MSCI EM. In this regard, profit taking was evident in MSCI EM stocks with traded value recorded at US$508.7 million, touching its decade high. Going forward, foreign activity is likely to guide the market sentiments in the short term with the market seeing increased volatility until complete re‐balancing of portfolios. However, analysts expect key themes like: 1) materialization of CPEC projects, 2) healthy corporate earnings growth, 3) interest rate reversal and 4) the pressures on the PkR to take center stage until general elections next year.

Despite widening trade deficit, rising by nearly 37% in 10MFY, focus on export‐oriented sectors remained missing in the recently announced FY18 budget. While relief measures under the export package (zero‐rating regime, discounted EFF & LTTF and duty‐free machinery import) were extended and new protectionist measures introduced (GST @10% on import of fabric and 5% RD on import of filament yarn), no solid initiatives were undertaken with regards to energy subsidy (to reduce power cost) and refund claims except allowing of payment of refunds. Moreover, the 1% increase in GST on retail sales to 6% further add to the woes of industry players having a  higher proportion in the local sales mix should they choose not to pass on the cost increment to consumers.