Pakistan-Netherlands business collaboration

Federal Minister for Finance and Revenue, Senator Muhammad Aurangzeb, met with Henny de Vries, Ambassador of the Kingdom of the Netherlands to Pakistan discussed ways to strengthen existing economic and trade ties.

The two countries are exploring avenues to deepen their bilateral relations, with a focus on key sectors including mining, IT, oil and gas, agriculture, dairy, and farm production

During the meeting, various aspects of the longstanding friendship and bilateral cooperation between Pakistan and the Netherlands were discussed and priority areas like mining, IT, oil and gas, agriculture, dairy, and farm production for further business collaborations were identified.

The Minister highlighted the government’s economic plan and reform agenda for promoting economic growth and ensuring fiscal sustainability.

He mentioned the economic gains achieved over the last 14 months and reiterated the government’s resolve to stay the course to move the economy on the path to sustained, export-led growth.

He also highlighted the challenges faced by Pakistan on climate front, and its efforts for climate financing and building capacity to ensure climate resiliency through sustainable solutions.

Ambassador de Vries reciprocated the sentiments on strengthening bilateral ties and further expanding cooperation in various fields, including sports.

She mentioned the Dutch cricket team was scheduled to visit Pakistan early next year to play matches and learn from Pakistan’s cricketing prowess.

She also appreciated the ongoing structural reforms in major economic and financial sectors and assured her country’s support for Pakistan’s trade and commerce with European Union.

 

Trump's Victory: Implications for Pakistan

Donald Trump’s second term as the US President is expected to have profound impact on geopolitics and global asset/ commodity prices, which would ultimately have implications for the ongoing macro recovery in Pakistan.

There is a high probability of a “clean sweep” by the Republican Party (it is likely to take control of both the US Senate and House), which will give Trump greater ability to execute his campaign pledges.

Trump’s policies – cracking down on immigration and large import tariffs on China – are expected to be inflationary for the US economy and negative for global growth. If he is able to bring a quick end to both the wars, in Ukraine and Gaza, oil prices are likely to continue falling under the weight of weakening global demand.

There are various caveats to these expectations:

Global experts point to the strength of US institutions in checking/ taming some of the draconian policies Trump has pledged. Second, China has begun rolling out huge stimulus measures, both fiscal and monetary, to revive its ailing economy (particularly its large property sector). This could serve as a boost to global commodity prices.

For Pakistan, the prospect of lower or stable oil/ commodity prices is positive. US-China trade war improves the opportunity to attract Chinese industries into Pakistan. Certain exports out of Pakistan, including steel and textiles, may become more competitive in the US. But, it could be a challenge for Pakistan to execute CPEC Phase 2 in the face of deteriorating US-China relations.

At this stage, the event does not materially affect outlook of continued macro stability in Pakistan – continued disinflation and foreign exchange reserves buildup – and equity market re-rating,

According to Pakistan’s leading brokerage house, Inter Market Securities:

Oil prices are more likely to fall or stabilize around US$70/bbl over the medium term. Trump is likely to encourage greater shale oil production in the US, while at the same time, he would work to bring an end to the conflicts in Ukraine and the Middle East.

Global inflation could make a comeback as Trump promises to slap up to 60% import tariffs on China and up to 20% from elsewhere. He has also committed to deport illegal immigrants from the country – which could stoke another round of labor shortage in the United States.

US interest rates may remain elevated as the resurgent inflation could lead to a slowdown of rate cuts in the US, leading to a stronger greenback against other major currencies. This could mean that global equity flows into the emerging and frontier markets would remain weak.

Raising debt through Eurobonds could therefore become difficult for Pakistan. The USD index has appreciated 5% since September, while the US 10-year bond yield has risen to 4.5% from 3.6% by end September – both have risen in anticipation of Trump’s re-election.

Global growth could be slower and commodity prices, depressed if Trump administration impose higher import tariffs on China, then growth in China could be undermined (notwithstanding the stimulus measures the Chinese government has recently begun rolling out. This would spell an extended period of down-trending commodity prices and a global oversupply in some key commodities (steel, petrochemicals) and products (EVs).

Weak US participation in achieving global climate goals could reverse or slow down the recent trend of multilateral lenders (IMF, WB and ADB) ramping up loans to developing economies for building defense against climate change.

Possible implications for Pakistan

A decline in global commodity prices would maintain the dis-inflationary trend in Pakistan. However, a fresh wave of global inflation will be felt in Pakistan through a stronger greenback and imported inflation. At this stage, the brokerage house maintains it outlook for average inflation in Pakistan over the next 12 months to be around 9% and expect the State Bank of Pakistan (SBP) to cut the policy rate up to 11% by June 2025.

US-China trade war could make some exports out of Pakistan more competitive in the US, compared to imports from China. These would include HVA textiles, flat steel, tires and cement. However, if PKR-US$ remains stable while other regional currencies depreciate against the greenback, it could undermine the competitiveness of Pakistani exports.

Pakistan could see greater Chinese FDI. As Chinese industries would continue to set up facilities outside China to avoid import tariffs, some could potentially be set up in Pakistan. However, for this to happen, Pakistan would have to offer a more stable policy environment to Chinese investors, and the government may have to drop plans to renegotiate the power tariffs of CPEC power plants, in our view.   

 

Iran-Pakistan to finalize free trade agreement

Iranian Industry, Mining, and Trade Minister Mohammad Atabak said a free trade agreement with Pakistan has been finalized and the list of commodity items subject to the agreement will be prepared and released in two months.

In a meeting between the Head of the Iran Chamber of Commerce, Industries, Mines, and Agriculture (ICCIMA) Samad Hassanzadeh and Pakistani Ambassador to Iran Muhammad Mudassir Tipu in Tehran in late June, the officials stressed the need for Iran and Pakistan to exercise barter trade and free trade to materialize a US$10 billion trade target.

During a meeting between Atabak and Pakistan’s Federal Minister for Commerce Jam Kamal Khan in mid-October, the two sides discussed trade ties between the two countries, with both agreeing that economic exchanges should be promoted further.

The two ministers met in Pakistan’s capital Islamabad on the sidelines of the 23rd meeting of the Council of Heads of Government of the Shanghai Cooperation Organization (SCO).

Atabak told IRNA that he and the Pakistani minister discussed trade ties between the two countries and agreed to hold further talks in order to explore ways to remove obstacles to the promotion of bilateral trade.

“Considering the historical and cultural commonalities of the two countries, we should take advantage of the strong potentials to expand trade exchanges between Iran and Pakistan,” the minister stated.

He also said that he invited Kamal Khan to visit the Islamic Republic.

According to the official, the necessary measures will be taken to prepare an agreement to be signed between the two countries during the visit of the Pakistani minister to Iran.

He stated that the current amount of trade exchanges between the two countries is not acceptable from the point of view of both Iran and Pakistan, and considering the strong relations and common links of the two countries, the two sides are confident that they will be able to increase the volume of trade exchanges several times.

The Pakistani minister spoke with IRNA as well. He described his talks with the Iranian minister as constructive, and said that visiting Iran is on agenda of his plans.

“We had good talks with my Iranian counterpart and reached constructive agreements, and we believe that there are many remaining tasks that the two countries are determined to pursue,” he said.

In mid-July, the 11th meeting of the Joint Border Trade Committee of Iran and Pakistan opened in the southeastern Iranian city of Zahedan, where the two sides pursue the increase of bilateral trade to US$10 billion per annum.

Pakistan's Ambassador to Iran Muhammad Mudassir Tipu, who attended the meeting online, announced that Iranian and Pakistani delegations are scheduled to discuss the mechanism to increase mutual trade.

The Islamic Republic of Iran's consul general in Quetta, Pakistan's consul general in Zahedan, and other senior officials of Sistan-Baluchestan province took part in the meeting.

Such joint meetings are held to pave the way for reviewing obstacles, removing barriers, and developing trade and economic relations between the two friendly and neighboring countries.

The two sides make the necessary coordination to help improve trade and economic ties, exchange economic delegations, organize joint exhibitions, attract bilateral investment, and establish joint industrial centers and retail markets.

The head of the Pakistani delegation to the 11th meeting of the Joint Border Trade Committee said that Islamabad strongly supports the development of joint markets and investment, which can increase the level of trust between the two nations.

Irfan Javed added that Pakistan also calls for cooperation in the field of transportation because it can affect the livelihood of the people who are living in border regions.

The deputy coordinator of economic affairs of Sistan-Baluchestan governor’s office said that Iran is keen on expanding trade exchanges with Pakistan.

PSX benchmark index inches closer to 90,000

Pakistan Stock Exchange (PSX) witnessed bullish sentiments throughout the week ended on October 25, 2024. The benchmark KSE-100 index recorded its highest-ever closing, just shy of the 90,000 mark ‑ closing at 89,994 points, up by 5.6%WoW.

This marked the highest weekly return in 27 weeks and 47th highest weekly return since the index's inception.

More importantly, KSE30 index also reached all-time high at 28,395 points.

The week started with positive momentum buoyed by settlement of political noise following the passage of stalled 26th Constitutional Amendment.

The optimism consolidated with swing of corporate result announcements and favorable economic developments.

According to AKD Securities, the rally was broad-based, with 80 out of 100 companies delivering positive returns.

Leading sectors were Fertilizer, Cement, and Banks, primarily due to strong annual growth in results. On the macro front, current account posted a surplus for the second consecutive month at US$115 million for September 2024.

Foreign exchange reserves held by State Bank of Pakistan (SBP) increased by US$18 million to US$11.0 billion as of October 18, 2024.

Market participation also improved significantly, with average daily traded volume rising by 23%WoW to 532 million shares from 432 million shares a week ago.

The PKR remained stable against the greenback, closing the week at 277.6 to a US$.

Other major news flows during the week included: IT exports surged 42%YoY in September 2024, 2) Banking sector deposits were up by 19%YoY to PKR31.3 trillion at end September 2024, 3) Sales tax on tractors hiked to 14% from 10%, 4) Loans to private sector were up 4.9% to PKR8.4 trillion at end September 2024, and 5) Nepra approves KE's generation tariff with key adjustments.

Cement, Refinery, and Mutual Funds were amongst the top performers, while Modarabas, Textile composites, and Vanaspati & allied industries were amongst the worst performers.

Major net selling was recorded by Foreigners with a net sell of US$16.4 million. Mutual Funds and other organizations absorbed most of the selling with a net buy of US$20.4 million.

Top performing scripts of the week were: KOHC,CHCC, AICL, KEL, and ATRL, while laggards included: ILP, PIBTL, LOTCHEM, IBFL, and NESTLE.

Market is expected to remain positive, with primary focus on the upcoming MPC meeting, where an anticipated rate cut could further bolster market momentum.

Despite the recent rally, valuations remain attractive, with the market trading at a P/E of 4.0x and offering a dividend yield of 11.2%.

AKD Securities recommends focusing on sectors that stand to benefit from monetary easing and structural reforms, particularly high-dividend-yield stocks that are likely to re-rate as yields converge with fixed-income returns.

Top picks include, OGDC, PPL, MCB, UBL, MEBL, FFC, PSO, LUCK, MLCF, FCCL and INDU.

 

Pakistan: 200bps cut in policy rate anticipated

Monetary Policy Committee (MPC) of State Bank of Pakistan (SBP) is scheduled to meet on November 04, 2024 for adjustment in policy rate

According to a poll conducted by Pakistan’s leading brokerage house, Topline Securities, 85% of the participants expect that the central bank will announce a minimum rate cut of 200bps.

Out of these 63% expect the interest rate to be cut by 200bps, 30% expect a cut of 250bps, while 8% anticipate a cut of more than 250bps.

The brokerage house believes that the larger rate cut expectations in the upcoming monetary policy meetings are driven by the single-digit inflation reading of 6.9% in September 2024, which is expected to continue in October 2024 within a range of 6.5% to 7.0%.

Significant fall in YoY inflation in recent months is on the back of faster food disinflation and downward electricity prices adjustments (FCA).

The brokerage house is also of the view that the SBP will announce a rate cut of 200bps, similar to the cut of 200bps in the last monetary policy meeting, taking total cut to 650bps.

This will be 4th consecutive cut of this cycle.

Post this rate cut of 200bps, real interest rates will remain at +860bps, still higher than Pakistan’s historic average of 200-300bps.

In order to absorb any external and budgetary shock, the brokerage house believes, Central bank will continue to keep positive real rate in range of 300 to 400bps in medium terms over forward looking inflation.

6-minth KIBOR and 6-months T-Bills are down 324-359 bps from last MPC meeting.

Falling inflation expectations, the 6M KIBOR and Treasury bills rate are down 324-359bps since last monetary policy meeting on September 12, 2024 and currently hovering at 14.43% and 13.8%, respectively. This also suggest, market participants are expecting a big rate cut in upcoming meetings.

The brokerage house expects policy rate to come down to 13% by Jun 2025 with average inflation expectation of 7%for FY25.

 

Pakistan Stock Exchange posts 2.3%WoW gain

Pakistan Stock Exchange began the week ended on October 11, 2024 on a strong positive note, sustained its momentum through the initial days, with the benchmark index rising to a record high of 85,669 points on Wednesday. However, concerns in the power sector amid the termination of IPP contracts, coupled with some profit-taking in the last two sessions, dragged the index to close at 85,483 points on Friday, posting an increase of 1,951 points or 2.3%WoW gain.

Overall positive sentiments were largely driven by improved liquidity in equity market, as local funds continued to shift flows from fixed-income assets due to declining interest rates.

Investors’ optimism was further bolstered by the visit of a Saudi delegation, which resulted in the signing of 27MoU’s worth US$2.2 billion, and discussions surrounding the Reko-Diq stake sell.

The GoP finally terminated Power Purchase Agreements (PPA) with five Independent Power Producers (IPPs) during the week, with discussions regarding 17 more IPPs lined up for future negotiations to shift from Take-or-pay model to Take-and-pay.

On the macroeconomic front, workers' remittances inflow remained robust in September 2024, totaling US$2.85 billion or 29%YoY increase.

While the trade deficit for the month was reported at US$1.78 billion, current account is expected to remain stable, with a potential surplus for the period.

Moreover, in efforts to address the tax gap from the 1QFY25 deficit, GoP communicated likely tax hikes to the IMF, particularly on direct imports (mainly machinery) and advanced import taxes.

Furthermore, a tax on agriculture is expected to be implemented from July 2025, according to the Finance Minister.

Amid the positive momentum, market participation also surged by 51.3%WoW, with average daily traded volume rising to 518 million shares, from 342 million shares in the earlier week.

Foreign exchange reserves held by SBP increased by US$106 million WoW to US$10.8 billion as of October 04, 2024, a 2.5-year high.

Other major news flows during the week included: 1) Public debt in August 2024 surged to PKR70.4 trillion, 2) Task force to discuss mechanism for 35% gas sale to private firms, 3) Rebasing of electricity tariffs likely from January 01, 2025, and 4) Car sales surged by 24%YoY in September 2024.

Transport, Modarabas, and Woollen were amongst the top performing sectors while the laggards included: Power Generation & Distribution, Vanaspati & Allied industries, and Paper & board.

Major selling was recorded by Foreigners with a net sell of US$18.9 million. Mutual Funds absorbed most of the selling with a net buy of US$22.6 million

Top performing scrips of the week were: PTC, PSO, ATLH, LCI, and PPL, while top laggards included: HUBC, KOSM, NCPL, YOUW, and LUCK.

Going forward, the market is expected to remain positive, supported by declining interest rates, likely to continue driving flows towards equity market.

Despite recent highs, market remains attractive, trading at P/E of 3.7x and a dividend yield of 12.7%.

Pakistan’s leading brokerage house, AKD Securities recommend focusing on sectors that stand to benefit from monetary easing and structural reforms, particularly high-dividend-yielding stocks, which are expected to rerate as yields align with fixed-income instruments. Top picks include: OGDC, PPL, MCB, UBL, MEBL, FFC, PSO, LUCK, MLCF, FCCL and INDU.

 

 

 

 

Pakistan: Digitalization and Economic Development

Governor, State Bank of Pakistan, Jameel Ahmad has stated that rapid technological change has not only enabled banks to offer innovative financial services to customers but also empowered regulators to ensure compliance effectively and efficiently through advanced data collection and processing capabilities. He stated this in his keynote address at the 13th Bank of The Future Forum, focusing on the critical theme of ‘The Future of Banking’. The event, organized by Systems Limited, brought together distinguished dignitaries, eminent industry leaders, and fintech experts to discuss the evolving landscape of the banking sector in Pakistan and globally.

The Governor’s address covered many themes and underscored the SBP’s commitment to fostering innovation and digitalization within the banking sector, paving the way for a dynamic financial sector in Pakistan. The Governor shared the SBP’s digital transformation started in 2002, when SBP implemented the Temenos Banking System, and an ERP system for non-banking transactions, as well as a data warehouse for massive data-related requirements. In 2008, SBP implemented the Real-Time Gross Settlement System called PRISM for processing wholesale, large-value, institutional payments. Recently, SBP established its state-of-the-art, Tier-3 data center, the first of its kind in Pakistan.

The Governor shared that in 2008, SBP issued regulations for branchless banking services to enable the delivery of basic banking services from retail stores and kiryana shops. This initiative has resulted in a significant increase in the number of unique bank accounts, from 16% of the adult population in 2018 to 64% in 2024. He shared that in 2022, SBP issued the framework for establishing Digital Banks in Pakistan to further facilitate the entry of IT-enabled, non-banking entities into the financial services industry. As a result, in principle approvals were issued to five applicants who will shortly start pilot operations in the country.

The Governor shared that in line with international trends, SBP started working on transforming its retail payments industry by implementing the state-of-the-art ISO-20022 payment standard. Hence, Raast, our instant payment system based on the ISO 20022 standard, was launched in 2021. In a short span of almost three years, Raast has processed around 850 million transactions valuing over PKR 19 trillion. Today, with 38 million unique Raast IDs, the system processes an average of 2.5 million transactions a day. He shared that SBP is also working on integrating Raast with the Arab Monetary Fund’s instant payment system called Buna to facilitate millions of Pakistanis living in Arab countries in sending their remittances to Pakistan with ease and convenience.

The Governor shared that as a result of SBP’s efforts, today in Pakistan, we have around 59 million branchless banking wallets, 19 million mobile banking apps, another 3.7 million e-money wallets, and 12 million internet banking users. Since 2020, the overall number of retail transactions processed digitally has increased by 30%, and the share of digital payments in total retail payments by volume has risen from 76% in FY23 to 84% in FY24. The number of transactions processed using mobile and internet banking is growing at an annual rate of 70% and 30%, respectively. This is not surprising as the majority of our population is young and adept at using mobile apps.

The Governor shared that it is heartening to see the emergence of a vibrant fintech sector in Pakistan. These fintechs are striving hard to identify new markets and use cases and offer their tech-enabled services. He encouraged the IT sector to play a pivotal role in this transformation.

Pakistan: OGDC performance in FY24

Pakistan’s leading exploration player, Oil & Gas Development Company (OGDC) held its analyst briefing where in the management discussed the recently announced FY24 financial results with equity analysts.

Net sales of the company for the year under review rose to PKR463.7 billion, up 12%YoY, mainly due to higher wellhead prices. The average realized prices for crude oil slipped to US$68.7/bbl, down 4.3%YoY, while realized gas prices rose to PKR712.9/mmbtu, up 17%YoY.

Production activity during the year was reported at 33,100 bpd of crude oil (up 2%YoY), 717mmcfd of gas (down 6.1%YoY) and 717tpd of LPG (down 0.4%YoY), respectively.

Forced curtailments by SNGP and reduced intake by power companies led to fall in oil and gas output during the year.

Production was notably impacted in aging fields including Nashpa, Chanda, Dhok Hussain, and Uch, with output declining by 138,500 barrels of oil and 19,600 mmcf of gas, respectively.

Company operated in 54 Exploration Blocks (22 blocks with full ownership and 32 blocks as operated JVs), covering an area of 99.3k sq. km as at June end 2024.

On the drilling front, company spud 13 wells, with seven being exploratory and six developmental. This resulted in five discoveries during the year: Chak 214-1, Dars West-2, Kharo-01, Togh-2 and Nur West-1 (tight gas well), with combined daily production of 481 bpd of oil and 28mmcfd of gas, respectively.

With regards to 2D/3D seismic activities, company conducted 1,236/1,201 sq. kms of surveys during FY24.

Jhal Magsi development project has received approval for marginal gas pricing by the ECC. Significant construction milestones have been achieved, with commissioning expected during the current month.

Uch (requirement under GSA with UPL) and KPD-TAY (+100mmcfd) compression projects are presently in the detailed engineering phase, with completion expected by March 2026.

Opex were up 32%YoY during the year, with the primary reason being the lease expiry of three major fields. This led to additional payments to the GoP in form of an incremental charge of 15% of wellhead value.

Company's contract expenses were notably higher during the period, driven by various production optimization studies conducted across multiple fields.

Additionally, operations in sensitive areas resulted in increased security expenses as well.

Company also recognized PKR23 billion in impairment charges related to interest receivables from GoP’s TFCs.

Regarding the expected production profile and reserve size of the Abu Dhabi Block, management noted that the block is still in the appraisal stages. Regarding company's share in production, management stated that discussions with ‘ADNOC' are ongoing.

AKD Securities maintains its 'BUY' stance on the stock with a June 2025 target price of PKR180/ share, alongside a DY of 10% for FY25.

  

 

Elections in Indian Occupied Kashmir

This article explores the complexities and consequences of holding elections in a region where the very foundation of democratic principles is under siege.

As India prepares to hold assembly elections in the disputed territory of Jammu and Kashmir (J&K), a cloud of skepticism and dissent hovers over the region. For many Kashmiris and their leaders, these elections represent not a democratic exercise but a cynical attempt to legitimize India’s occupation and control over the region.

The announcement of the elections has been met with sharp criticism from prominent Kashmiri leaders such as Altaf Hussain Wani and Abdul Hameed Lone, who have denounced the move as a desperate ploy to deceive both the international community and the local population.

Since the abrogation of Articles 370 and 35A in August 2019, Jammu and Kashmir has undergone a dramatic and controversial transformation. Once a state with special autonomous status, it was downgraded to a union territory under direct control of the central government in New Delhi.

This move was widely condemned by Kashmiris and has been perceived as an assault on the region’s unique cultural, political, and religious identity. The central government’s subsequent actions, including changes to domicile laws and the intensification of military presence, have only deepened the sense of alienation and resentment among the local population.

In this context, the upcoming elections are viewed by many as an attempt to present a veneer of normalcy in a region that remains deeply troubled.

The Indian government’s narrative is one of democratic engagement and development, but this is a narrative that rings hollow for those who live under the constant shadow of militarization and political repression.

The skepticism surrounding the elections is not without reason. Historically, elections in Jammu and Kashmir have been marred by low voter turnout, allegations of rigging, and widespread disenchantment with the political process.

For many Kashmiris, the electoral process is seen as a tool used by the Indian state to project an image of legitimacy while the underlying issues of self-determination and human rights remain unaddressed.

Leaders like Altaf Hussain Wani have been vocal in their criticism, labeling the upcoming elections as a “drama” designed to create a false impression of normalcy.

Wani’s assertion that these elections are nothing but a sham reflects the broader sentiment among Kashmiris who feel that their voices are being silenced and their aspirations ignored.

The elections, in their view, do not represent a genuine opportunity for democratic expression but rather a strategic maneuver by the Indian government to consolidate its control over the region.

The Indian government’s portrayal of the elections as a step towards restoring normalcy and democracy in Jammu and Kashmir is met with widespread skepticism.

While the central government insists that the elections are a democratic exercise, the reality on the ground tells a different story.

The ongoing militarization, the curtailment of civil liberties, and the lack of meaningful political engagement with local leaders have created an environment where true democratic expression is impossible.

For many Kashmiris, the elections are a façade—an attempt by the Indian state to project an image of stability and legitimacy to the outside world while continuing to suppress the region’s demand for self-determination.

The electoral process, rather than addressing the root causes of the conflict, serves to entrench the status quo and perpetuate the cycle of violence and repression.

The upcoming elections in Jammu and Kashmir may proceed as planned, but their legitimacy and effectiveness are in serious doubt. For the elections to be meaningful, they must be more than just a box-ticking exercise.

These must be accompanied by a genuine commitment to addressing the aspirations of the Kashmiri people, including their right to self-determination as enshrined in United Nations Security Council resolutions.

A comprehensive approach to resolving the Kashmir issue is needed—one that goes beyond electoral politics and addresses the fundamental grievances of the people.

This includes the demilitarization of the region, the restoration of civil liberties, and meaningful dialogue with all stakeholders, including those who have been marginalized or excluded from the political process.

Ultimately, the future of Jammu and Kashmir cannot be decided through elections alone. It requires a concerted effort to heal the wounds of the past, respect the rights and aspirations of the Kashmiri people, and work towards a peaceful and just resolution of the conflict. Only then can the promise of democracy be truly realized in this troubled region

Courtesy: South Asia Journal

Pakistan's biggest problem: lack of good governance

The matter of grave concern is that Pakistan suffers from three deficits: 1) budget deficit, 2) trade deficit and 3) trust deficit. Though we have listed trust deficit on number three, may economic analysts term it ‘mother of all evils’. The public trust in the ruling regime is at the lowest ebb. That is the reason Pakistan’s GDP growth rate has been hovering around 3 percent for years.

According to the experts the GDP growth rate is low because new investment is scanty, balancing, modernization and replacements are virtually nonexistent. To be honest the existing units face declining capacity utilization, which is leading to closure of the productive facilities.

The ruling regime often take pride in saying, ‘Pakistan is one of the best performing market’. The reality is around 500 companies are listed at the local stock exchange and only a small number of new companies listed is the last one decade. Banks are thriving because of huge investment in the government securities, exploration and production companies make fortune due to high international prices of crude oil, fertilizer plants are working below optimum capacity utilization, country imports huge quantity of refined products because of dismal capacity utilization and the list can continue.

To overcome budget the government has imposed huge taxes on each and every product, including lifesaving drugs and food items. Imposition of petroleum development levy increases power generation cost as well as transportation and logistics cost. High electricity and gas tariff encourage theft, which is evident from ballooning circular debt.

Over the last three years no effort has been made to contain expenditures, which prompts the government to borrow more, to be honest the government borrows to pay off the debt.

To conclude the government is creating new entities, which promise bringing in huge investment. One fails to understand if the existing industries are closing, local entrepreneurs and educated people are leaving the country, why should foreigners select Pakistan as an investment destination? The rulers must remember actions talk louder than words.

Will Modi come to Pakistan to attend the SCO meeting?

The PML-N love for India has invited Indian Prime Minister Narendra Modi to the upcoming Shanghai Cooperation Organization (SCO) meeting in Islamabad, despite India-Israel relationship, particularly in munitions supply and ongoing genocide in Gaza.

One of the narratives is that Pakistan being the host has to extend the invitation to India, but the other narrative is that Modi should decline the invitation and send foreign minister instead.

The two countries downgraded their diplomatic ties in August 2019 and recalled their high commissioners. This is now the longest period in peacetime that the two countries have been without their top diplomats in each other’s capital.

SCO is a multilateral platform, but Modi’s presence in Islamabad would nevertheless would be seen significant. If nothing else, the sidelines of the SCO summit offer the two sides a chance to start talking about talks.

It is a harsh reality that the hawks on both sides are not interested in normalization of relationships. India considers itself a regional super power, it has joined various economic cooperation groups, but seems least interested in relations with SAARC members.

There is no denying that there are major differences between the two countries, as well as the thorny disputes that they have fought many wars on. There seems no hope of easing the tension, yet for a like SCO offers opportunity to establish working relationships.

Pakistan made the first move in May last year when then-foreign minister Bilawal Bhutto-Zardari went to Goa to attend the SCO’s Council of Foreign Ministers. Though the reception in India was far from warm despite the significance of his visit, Bilawal’s presence sent a positive signal that Pakistan remains open to engaging with New Delhi diplomatically.

The SCO is a multilateral platform and, therefore, of limited import as far as India-Pakistan ties are concerned. Still presence of Indian delegates in Islamabad should bring some positivity. If nothing else, the sidelines of the SCO summit offer the two sides a chance to start talking about talks.

 

Why Gwadar airport opening was postponed?

According to media reports, Pakistan has postponed the opening of a nearly US$250 million airport over security fears, dealing another blow to efforts to boost Chinese investment in its crisis-hit economy.

Prime Minister Shehbaz Sharif was due to perform the inauguration of New Gwadar International Airport (NGIA), close to a port at the center of the US$50 billion China Pakistan Economic Corridor (CPEC).

The planned opening on August 14 — Pakistan’s Independence Day — was suddenly halted over what local officials said were security concerns after mass protests brought southwestern Gwadar to a near standstill this month.

No new opening date has been announced for the US$246 million China funded project, which got off the ground following a grant deal with Beijing in 2015.

“All the required work and prerequisite arrangements on the New Gwadar airport have been completed and it’s ready for flight operations,” a government official familiar with the situation told Nikkei on condition of anonymity.

The delayed opening — after an initial postponement last year — comes amid concerns that lower-than-expected demand for flights into the region, beset by deadly militant attacks and a separatist insurgency, would quickly turn it into a white elephant.

The single-runway airport, about 45 kilometers from Chinese-controlled Gwadar port, is spread over 4,300 acres (1,740 hectares) and can handle large-body planes like the Airbus A380. That will make it the country’s largest airport by size, ahead of Islamabad’s gateway.

Gwadar’s faltering efforts to kick off as a major hub have led to just three weekly scheduled flights to a smaller airport in the area from Pakistan’s commercial capital Karachi — and some of those trips are routinely canceled.

Even with Chinese airlines expected to start running direct flights once the new airport opens, analysts warn there’s little chance of a surge in demand.

“The inauguration of NGIA is symbolic in nature because it is not commercially viable for any airline in the short term,” Afsar Malik, an expert in airline economics, told Nikkei Asia.

Successive Pakistani governments have claimed that the multibillion-dollar investment framework with China would help turn Gwadar into the next Singapore.

The country’s prime minister ordered that half of all sea cargo for government agencies, originally destined for southern Karachi, instead be unloaded at Gwadar’s port — highlighting its underuse.

Some fear the area’s newest transport hub will become the next Mattala Rajapaksa International, a large Sri Lankan airport built with a Chinese loan that’s been dubbed the “world’s emptiest international airport” due to a lack of flights.

“Vanity projects are not new for the Chinese, they have built similar projects back home which have limited use,” said Mohammad Shoaib, an assistant professor at Quaid-i-Azam University Islamabad. “The Chinese are biding their time and the NGIA can be of use once Gwadar kicks off. … In the meantime, NGIA and old Gwadar airport can be used by other support missions from China.”

This month, Gwadar saw huge protests staged by groups pushing for civil, political and economic rights for locals in resource-rich Baluchistan province, home to the China-funded port.

Beijing has grown increasingly wary about future investment after its nationals working in Pakistan were targeted in a series of deadly attacks. The country is grappling with a rise in militant activity ranging from Islamists aiming to topple the government to separatists seeking to carve out a homeland in Baluchistan.

Islamabad, already struggling with a shattered economy, has pledged to boost security for workers and, in June, said it would launch fresh counterterror operations nationwide.

Despite hopes the new airport will draw more Chinese money, some are not convinced it would mean much for a local population of mostly poor fishermen.

“Air travel is quite expensive for the majority of people in Gwadar,” said Mariyam Suleman, a local now based in Canada. “The airport is more to accommodate the government officials, diplomats and international delegations rather than the local population.”

 

Pakistan Stock Exchange Nosedive Starts

Lately, the benchmark index of Pakistan Stock Exchange has witnessed a massive fall. While many of the leading brokerage houses are talking about quick recovery, some of the cynics like me are getting jittery. There is a growing consensus that the benchmark index may plunge below 60,000 by end September 2024.

I am amazed to note that none of the brokerage house is talking about this likely fall, seems they have been told explicitly by the high-ups in the government to remain silent. The government, particularly the finance minister is using the rising index as an indicator of the robust performance of the economy of the country.

I am sure many of the readers may not like my expression, “In no way the benchmark index of the Exchange is the true indicators of the robustness of the economy of Pakistan”.

My premise is based on the following: 1) the index is based on 100 out of total listed around 550 companies, 2) bulk of the index points pertain to around 30 blue of the blue chip companies, 3) substantial holding is by institutions and foreigners, and 4) bulk of the daily trading volume is generated by “Day Traders”.

Coming back to likely substantial fall in index, the readers are advised to keep following points in mind and watch market movement closely: 1) income of commercial banks will decline due to the reduction in interest rate and shrinking appetite of the private sector borrowers as well as consumer financing, particularly car financing, 2) E&P companies are likely to witness fall in earnings because of declining crude oil prices and mounting circular debt of the energy sector, 3) the ongoing IPP saga may also result in selling of these shares as well as reduction in income, and 4) profitability of fertilizer companies is being marred by persistent hike in gas tariff.

Going two steps forward, I believe bearish spell in the United States, may lead to a situation we have witnessed in 2008. At that time the fall was led by subprime loans and this time it will be led by technology companies.

 

 

Wishes are horses and beggars are riders

Reportedly, Pakistan has sought the re-profiling of more than US$27 billion in debt and liabilities with friendly nations — China, Saudi Arabia and the UAE — to secure a 37-month IMF bailout package and ease energy sector foreign exchange outflows and consumer tariffs.

Finance Minister Muhammad Aurangzeb on Sunday said Islamabad had already asked the friendly bilateral trio of lenders to roll over its more than US$12 billion annual debt portfolio by three to five years to secure the IMF board’s approval for a US$7 billion economic bailout.

This is on top of Islamabad’s request to Beijing to convert imported coal-based projects to local coal and re-profile more than US$15 billion in energy sector liabilities to create fiscal space amid difficulties in timely repayments.

Pakistan has a peculiar financial arran­gement with these three countries in the shape of commercial loans and SAFE deposits that are rolled over every year and form major part of the IMF program in terms of external financing needs.

Pakistan has now requested the maturity period of these loans — US$5 billion from China, US$4 billion from Saudi Arabia, and US$3 billion from the UAE — to be extended to at least three years, offering greater predictability under the IMF program.

Speaking at a news conference after returning from China, Finance Minister said the Chinese side acknowledged Pakistan’s foreign exchange difficulties and wanted to help in new business ventures and the re-profiling of energy sector payments besides playing its role in supporting Pakistan’s case at the IMF board as one of the major stakeholders.

He said the process of debt and equity rescheduling had been started and would now go to the working groups with relevant financial institutions and sponsors of Chinese projects for which Pakistan was hiring local Chinese consultants.

“Between now and the IMF board meeting we have to ensure confirmation of external financing” from friendly bilateral partners, the minister said. However, he explained that the Chinese energy sector debt re-profiling had nothing to do with the IMF program as other prior actions had been completed and structural benchmarks were under implementation.

Minister said he was in contact with the Chinese, Saudi and UAE finance ministers for extension in debt rollover for three years and they had assured their support that would place Pakistan at a very comfortable position in terms of external financing gap.

“I can assure you we are at a very good place on external financing for the next three years, including year-one, year-two and year-three,” he said.

Without going into details, he said the IMF had worked out a financing needs assessment for three years that also included its own US$7 billion Extended Fund Faci­lity. After rollovers from friendly countries, the remaining external financing gap would become very manageable, he said.

Responding to a question, the minister said Pakistan was not seeking any incremental financing from friendly countries. “The only incremental thing is an extension in maturity period for three years instead of yearly rollovers,” he said.

Minister said that the issue of energy sector repayments was initially taken up by Prime Minister Shehbaz Sharif with President Xi Jinping of Chian during his visit to Beijing and followed it up with formal letters to Prime Minister Li Keqiang.

As part of the process, Finance Minister along with Power Minister held meetings with Chin­ese finance and energy ministers and the governor of the Chinese central bank to understand the context of Pakistan’s ability to pay, economic stability and relief in energy tariffs.

He said the two sides discussed conversions of Chinese power projects to local coal and how to take their technical, logistical and financial parameters forward.

Secondly, financial re-profiling would also need to be discussed with banks and project sponsors one by one. “They have recognized this and the process would now move forward on that basis,” Minister said.

He said the re-profiling of CPEC debt was also discussed the governor of Chinese central bank and “we would need to go for project by project given the CPEC structure”.

“Very positive discussions have taken place from my perspective,” he said, adding the debt of Chinese independent power producers (IPPs) was manageable as their legal payments were being made, but the issue pertained to return on equity to project sponsors mainly because of foreign exchange which required to be rescheduled to create fiscal space.

Minister, however, clarified that Pakistan was seeking the re-profiling of payments and not “haircuts” — debt waiver or interest rate cuts.

He stressed the importance of long-term structural solutions for economic challenges. He acknowledged the difficulties faced by all segments of society due to high interest rates, energy prices, currency devaluation and increased tax burdens but emphasized the necessity of tough measures given the loss of fiscal space.

“We have no more choice of doing what we have been doing in the past for short-term relief and objectives.”

Responding to a question, the finance minister said Pakistan has moved forward with both the United States and China, aiming to advance the phase two of CPEC under which Chinese business were to relocate to Pakistan, while the US was Pakistan’s largest trading partner and the European Union had provided the GSP Plus status to help prop up Islamabad’s exports.

He said that during his visit to China, he also engaged with his counterpart and the central bank chief to explore opportunities in the Chinese capital market — the second largest in the world — through Panda bonds. He said Pakistan would register for the US$1 billion equivalent of Panda bonds but tap around the equivalent of US$150 million to US$200 million.

Minister said industrialists should also acknowledge that Paki­stan’s economy was such that it immediately ran into a foreign exchange crisis as it tried faster economic growth, and hence, it would be prudent not to fall again into the import restriction regime that could be more painful.

He hoped the stability in foreign exchange and macroeconomic indicators would soon improve Paki­stan’s credit rating and gradually move towards export-led growth, FDI creating exports and return to the international capital markets.

Past efforts for public sector rightsizing did not bear fruit because of large portfolios, the minister said, adding that he was pushing for “bite-size” restructuring by taking only five shortlisted ministries — Kashmir Affairs and Gilgit-Baltistan, Safron, Industries and Production, IT and Telecom, and Health — in the first instance while protecting the rights of workers and asset values.

 

 

Pakistan Stock Exchange benchmark index declines 2.61%WoW

Pakistan Stock Exchange experienced volatility throughout the week ended on July 29, 2024, heavily influenced by political noise. The benchmark index lost 2,088 points 0r 2.61%WoW at close at 78,029 points.

With Pakistan's agenda yet to be included in the IMF board meeting, authorities are focusing on fulfilling other external financing requirements, with efforts including visit to China for possible debt rescheduling, especially of power producers.

The Finance Minister engaged with global rating agencies, Fitch and Moody's, aiming for a possible improvement in the country's credit rating to facilitate capital raising through external sources.

In the last T-Bills auction, yields dropped by 30-56 bps, indicating market expectations of a 50-100bps cut in the upcoming Monetary Policy Committee (MPC) meeting on Monday. However, experts anticipate the MPC to maintain the status quo due to the re-emergence of strong inflationary pressures from food supply disruptions and recently announced revenue measures in the FY25 budget.

The July 2024 inflation is expected to clock in at 10.96%YoY as compared to 12.57%YoY in the preceding month. On the external front, foreign exchange reserves held by the central bank declined by US$397 million to US$9.03 billion as at July 19, 2024.

With the said volatility in market, participation decreased by 27.3%WoW, with the average daily traded volume falling to 337 million shares, from 464 million shares a week ago.

On the currency front, PKR largely remained flat against the greenback throughout the week, closing the week at 278.3/US$.

Other major news flows during the week included:1) Forex reserves declined by US$369 millio, 2) Income estimates slashed to PKR9.1 trillion, 3) Auto financing registered downward trend for second straight year and 4) GoP announced to pull out of fuel pricing process, giving OMCs free hand.

Leasing, Vanaspati & allied industries and Textile spinning were amongst the top performers, while ETF’s, Inv. Banks/ cos., and Jute were amongst the worst performers.

Major net selling was recorded by mutual funds with a net sell of US$5.0 million. Foreigners and insurance co. absorbed most of the selling with a net buy of US$4.6 million and US$4.4 million, respectively.

Top performing scrips of the week were: PAKT, GADT, JVDC, FFBL and LCI, while laggards included: NCPL, NPL, KAPCO, INIL and FCEPL.

Going forward, market’s focus will primarily be on the MPC meeting scheduled for Monday, with any rate cut to boost investor’s confidence and draw increased attention to the cyclical sector.

Additionally, the anticipated approval from the IMF executive board next month is likely to support bullish momentum.

Sectors benefiting from monetary easing and structural reforms would remain in the limelight.

Pakistan clinches a new deal with IMF

In a most anticipated event, Pakistan authorities have reached Staff Level Agreement (SLA) with International Monetary Fund (IMF) for a new 37 months Extended Funded Facility (EFF) of US$7 billion. This new program aims to strengthen the macroeconomic stability and set the road for resilient and inclusive growth. This agreement will now be followed by board approvals which normally takes couple of weeks after the SLA.

Our note of dissent

We are of the opinion 1) Pakistan already suffers from unsustainable debt servicing and the new agreement would never enable the country to come out of debt circle. Pakistan will keep on borrowing and repaying through the nose, 2) Hike in electricity and gas tariffs will further erode competitiveness of the local manufactures and adversely impact exports, 3) the country does not have infrastructure to workout cost of crops and in turn income of farmers, the proposed 45% rate would be meaningless, 4) the breach of “confidence deficit” will widen further 5) the hatred against “ruling elite” is already on the rise and 6) in case anti-government demonstration start, these could turn violent and create serious law & order situation.

The press release issued by IMF conditions this agreement to timely confirmation of necessary financing assurances from Pakistan’s development and bilateral partners.

Some of the key milestones or reforms that Pakistan has already taken or will take over the course of the program are:

Increase in tax to GDP ratio by 300bps: 

1-      Under this 37-months program, the Government has to enhance tax to GDP ratio by 300bps. Measures to achieve half of this target (150bps) are already taken in FY25 budget by removing various exemptions and broadening the tax base.

2-       Taxing the untaxed and undertaxed: 

Under this program, Government has also changed tax regime of exporters from 1% of turnover full and final regime to normal tax regime, wherein exporters will now be paying tax equal to other corporates at 29% of profit before tax plus applicable super tax. Also, in a bold move, Government has taxed retail sector and plans to introduce tax on agriculture income from January 2025.

3-      National Fiscal Pact to be signed: 

The new national fiscal pact is likely to be signed between provincial and federal government for fair fiscal balance between federal and provincial units. Through this, provincial governments will be required to spend higher on education, health, social protection, and regional public infrastructure investment, enabling improved public service provision. This will result in lower expenditures of federal government in above areas. However, there is no timeline given for such measure.

4-      Monetary Policy: 

On monetary policy stance, IMF has noted, it will continue to focus on supporting disinflation.

5-      Privatization: 

On privatization side, it is noted that, highest priority is given to most profitable State Owned Enterprises (SOEs).

6-      Other Measures: 

Few other important measures are, phasing out of agriculture support prices, phasing out incentives granted to special economic zones, refraining from new regulatory or tax based incentive, or any guaranteed return scheme including those projects which are channeled through Special Investment Facilitation Council (SIFC).

Some of the key measures which Pakistan took before clinching this deal were: 1) increasing the power tariff, 2) increasing the gas rates, 3) approval of budget FY25, and 4) amendment in SOEs law, as per news report. It is believed that some of these measures were taken as part of the prior actions of the new deal.

 

Pezeshkian wants better ties with Iraq and Pakistan

Iran's president-elect, Masoud Pezeshkian, has emphasized the importance of strengthening relations with both Iraq and Pakistan in separate phone calls with the leaders of both countries. 

During his conversation with Iraqi President Abdul Latif Rashid, Pezeshkian highlighted the strong bonds between Iran and Iraq, stating, "The extent of political, economic, cultural and religious ties between Iran and Iraq needs no explanation." He expressed hope that these relations "will be further deepened in the new era with the cooperation of the high officials of the two countries." 

President Rashid reciprocated these sentiments, congratulating Pezeshkian on his election victory and describing the relationship between the two countries as "deep, strong, and in line with the interests of the two nations." He added that Iraq is "interested in maintaining and promoting these relations and also creating a basis for further cooperation in the new era."

In his conversation with Pakistan's Prime Minister Shehbaz Sharif, Pezeshkian reiterated his commitment to strengthening ties between the two nations, stating, "I express my desire to further deepen relations between the two brotherly nations."

Sharif echoed this sentiment, highlighting the positive momentum built during the late President Ebrahim Raisi's visit to Pakistan, stating, "The agreements between the two countries... paved the way for a mutually beneficial partnership." He further emphasized Pakistan's commitment to "developing all-out ties with Iran" and discussed ways to enhance cooperation "particularly in trade, commerce & investment, and foster a stronger partnership for regional stability." He concluded by stating, "As brothers and neighbors, our two countries have a shared vision for building a better future together for our people."

Iran, which shares its longest borders with Iraq and Pakistan, has been adamant about advancing cooperation with the two countries, particularly in trade and security. It signed security pacts with both states during the Raisi administration in order to tackle terrorist groups funded by extra-regional forces. 

Pezeshkian has vowed to continue the late Raisi’s path, who emphasized the strengthening of ties with neighboring and regional countries. Additionally, the president-elect pledged to enhance cooperation with Russia and Turkey during separate phone calls on Monday.

The president-elect has also addressed Resistance forces in recent days, indicating that he plans to continue the previous administration’s support for freedom fighters in the region.

In his letter to Hezbollah’s secretary-general, Pezeshkian vowed Iran would continue to back the Resistance, dashing Zionist hopes for a diminished emphasis on resistance groups with a reformist Iranian government in office. 

 

Pakistan-Iran to strength ties for regional peace and stability

Pakistan’s Prime Minister Shehbaz Sharif and President Asif Ali Zardari on Saturday felicitated Masoud Pezeshkian for his election as the president of Iran.

Pezeshkian won Iran’s runoff presidential election on Saturday, besting Saeed Jalili by promising to reach out to the West and ease enforcement on the country’s mandatory headscarf law.

A vote count offered by authorities put Pezeshkian, as the winner with 16.3 million votes to Jalili’s 13.5 million in Friday’s election.

Sharif congratulated Pezeshkian on X and said he looked forward to working closely with the president-elect to further strengthen Pakistan-Iran bilateral ties and promote regional peace and stability.

“As neighboring countries, Pakistan and Iran enjoy a close and historic relationship. We must ensure a bright future for our two peoples through mutually beneficial cooperation,” the Pakistan premier said.

In a separate statement, President Zardari extended his felicitations to Pezeshkian and expressed confidence that Pakistan-Iran relations would grow further stronger under his leadership.

“Pakistan looks forward to working together with Iran for the peace and prosperity of the region,” Zardari said.

Pezeshkian’s win still sees Iran at a delicate moment, with tensions high in the Middle East over the Israel war on Gaza, Iran’s advancing nuclear program, and a looming US election that could put any chance of a detente between Tehran and Washington at risk.

 

Pakistan: Current Account turns negative

Pakistan’s current account (CA) posted the first deficit in four months in May 2024, of US$270 million against a surplus of US$499 million a month ago.

CA deficit during 11MFY24 grew to US$464 million against a deficit of US$3.8 billion in the corresponding period last year.

A large primary income deficit of US$1.4 billion was the key reason behind the negative figure, without which CA balance would have been comfortably positive, despite a wider good trade deficit.

The primary deficit ballooned to US$1.4 billion (highest ever level) due to US$1.5 billion worth of payments. These payments included interest on foreign debt and backlog of dividends of multinational companies. As per the central bank, the latter has been nearly completely settled; hence the primary income deficit should moderate to around US$500 million in the coming months.

Goods trade deficit was reported at US$2.0 billion in May, higher than US$1.8 billion in April and doubling YoY. 

Imports of US$5.0 billion were at the highest level in FY24 to date, up 13%MoM and 35%YoY.

The sequential growth in imports was led by seasonally higher petroleum imports (up 8%MoM) and 12% higher machinery imports. Iron & Steel imports (scrap and other raw materials) rose 40%YoY.

This is also seasonal and does not point to a sustainable rebound in construction activity (down 3%YoY in 11MFY24). 

Exports were up a healthy 17%YoY, mainly driven by exports of textiles (up 18%YoY, seasonal) and food (up 55%YoY. Rice exports doubled YoY).

Remittances in May were an impressive US$3.2 billion, up 15%MoM and 54%YoY, ahead of the Eid-ul-Adha holidays, likely to normalize to around US$2.5 billion in the coming months, in our view.

SBP’s Forex reserves were reported at US$9.1 billion

SBP’s Forex reserves remained flat around US$9.1 billion by mid-June 2024, equivalent to just about two months’ imports.

The SBP began cutting interest rates in June, by 150bps, taking the policy rate to 20.5%.

Many industries (cement, autos, steel) are operating at very low utilization levels (50-60%); any likely increase in imports could increase trade deficit.

Tough budgetary measures for the real estate and textile industries may extend the spell of weak demand a few more months (keeping the growth in imports moderate).

CAD crossing US$500 million is a key risk and can have negative implications for the exchange rate, inflation and monetary policy,.

 

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.