Pakistan Stock Exchange benchmark index up 2.84%WoW

The week ended on March 29, 2024 witnessed bullish trend at Pakistan Stock Exchange. Overall, the first four trading days cumulatively added around 2,000 points pts, with the benchmark index closing at 67,005 points, up 2.84%WoW on Friday, following a slight profit-taking session noted on the last trading day of the week.

Positivity loomed over the successful last review of IMF’s SBA, the new incumbent government's steps and commitment towards reforms. A new tax regime ordered for retailers and wholesalers, piloting initially in major cities, aimed to broaden the tax base. While similar taxation measures have failed previously, if successful this time, these could set the stepping stone for tax base broadening.

With FTSE Russell retaining Pakistan in the secondary emerging market for the next six months, further optimism prevailed.

Inflation outlook also presented a positive stance, with March 2024 CPI expected at 20.6%YoY, turning current real interest rates into positive territory after 38 months.

GDP growth for 2QFY24 was reported at 1.0%YoY, supported by a 5% annual growth in the agriculture sector, but dragged down by a 0.8%YoY contraction in industrial activity.

On the political front, reconstituting economic councils/committees, with the exclusion of the finance minister from heading CCI and previously from ECC (which eventually reverted), is causing confusion among the investors and likely to cause some delays in initiating reforms.

Smuggling of petroleum products from Iran is on the rise again as indicated by OCAC and PALSP, which is likely to hit adversely local refineries.

Overall, market participation improved with daily traded volume averaging at 330.7 million shares as compared to 323.5 million shares a week ago, up 2.2%WoW.

Other major news flows during the week included: 1) Tax collection gap rose to whopping PKR 5.8 trillion, 2) Government borrowed PKR181.3 billion debt in a week; 3) M2 was up by PKR149.4 billion in a week, 4) foreign investors’ profit repatriation during 8 month of the current financial year rose 237%YoY to US$759.2 million and 5) Weekly SPI was almost flat.

Transport, Woollen and Tobacco were amongst the top performing sectors, while Jute, Leasing co., and Textile weaving were amongst the worst performers.

Major selling was recorded by Companies with a net sell of US$7.6 million. Insurance absorbed most of the selling with a net buy of US$9.0 million.

Top performing scrips of the week were: PTC, KTML, SCBPL, FFBL and THALL, while laggards included: SHEL, PGLC, PIBTL, ASL and FCEPL.

Emerging risks include additional taxation and increases in international prices. Policy rate story could again come into focus. Analysts expect the first rate cut in the final quarter of the current fiscal year.

Pakistan Stock Exchange witnesses 45.8%WoW decline in average daily trading volume

The benchmark index of Pakistan Stock Exchange (PSX) closed the week ended on February 17, 2023 at 41,119 points, down by 623 points or 1.5%WoW.

The lackluster performance during the week was despite the Supplementary Finance Bill presented to introduce PKR170 billion for mobilizing additional taxes—in line with the IMF’s conditions under the 9th review.

Foreign exchange reserves of the country inched higher by US$276 million to US$3.2 billion during the week, still the import cover remained below one month.

PKR gained 2.5% of its value against the greenback.

Participation in the market declined, with daily trading volume averaging at 153.91 million shares as compared to 284.07 million shares in the earlier week depicting a decline of 45.8%WoW.

Other major news flows during the week included:  1) Tax target raised to PKR7.64 trillion, 2) Debt, liabilities rose to historical-level of PKR63.9 trillion, 3) gas tariff  increased by 16.6% to 124% for different types of consumers, 4) July-December 2022 LSMI output declined by 3.68%, 5) monthly remittances slipped below US$2 billion, 6) Fitch downgraded Pakistan rating on worsening liquidity, policy risks, and 7) car sales plunged 65% in January 2023.

Top performing sectors were: Leasing Companies, Leather and tanneries, and Sugar and Allied industries, while the least favorite sectors were: Textile Weaving, Tobacco, Miscellaneous, and Pharmaceuticals.

Stock-wise, top performers were: PGLC, THALL, FABL, JVDC, and GHGL, while laggards were: PAKT, MUGHAL, KTML, and PSEL.

Flow wise, companies were the major buyers with net buy of US$4.12 million, followed by Banks/DFI US$2.3 million, while mutual funds were major sellers, with a net sell of US$6.11 million.

Any news regarding a successful Staff Level Agreement with the IMF would lead to euphoria in the market, with the GoP having already introduced the PKR170 billion additional taxation measures demanded by the international lender.

The market may remain jittery in the near future due to higher inflation readings, weakness in the PKR and the effects of the hike in utility tariffs. This has led to expectations of further hikes in interest rates in the country, which has the potential to continue to keep the market range-bound.

Analysts continue to advocate scrips that have dollar-denominated revenue streams to hedge against the currency risk, which include the Technology and E&P sectors.

Eroding foreign exchange reserves rendering State Bank of Pakistan helpless

One of the prime mandates of the central banks around the world, particularly of the third world countries, is to manage exchange rate efficiently and effectively, and State Bank of Pakistan (SBP) is no exception.

However, the recent free-fall of parity raises many questions that include:

1) Isn’t SBP allowed to intervene?

2) Has SBP lost capacity to intervene?

3) Aren’t some groups having vested interest responsible for the present trauma?

 With the utmost disgust, I have to say that the SBP is helplessly watching from the sidelines as the rupee is registering from one all-time low to another low.

Even a Pakistani of ordinary wit understands that in the absence of enough foreign exchange reserves, the SBP can only watch the trauma helplessly.

Please allow me to say that purposely created political turmoil has become the source of all kinds of shocks, pushing Pakistan to imminent default.

Added to political instability are: 1) structural weaknesses of the external sector, 2) higher global prices of fuel and food commodities, 3) geopolitical pressures rendering Pakistan helpless and 4) delay in the revival of the International Monetary Fund (IMF) program.

Between April 7 and July 22, rupee has lost more than 21% value against US$.

Now, the most disturbing question is how long will the rupee continue to decline?

I am afraid neither the Government of Pakistan (GoP), nor the SBP has the reply. Copybook reply being presented is, “Things will become better when US$ 1.17 billion tranche is released, hopefully in last week of August”.

However, analysts say Pakistan needs around US$35 billion for debt serving etc. Therefore, IMF tranche is peanuts and inflows from China, Saudi Arabia and UAE will provide a temporary breathing space only.

One needs not be a genius to understand that if Pakistan’s import bill of goods and services continues to eat up more than 90% of the foreign exchange earnings through remittances, export proceeds and foreign investment then hardly anything is left for external debt servicing.

I am forced to infer that the GoP will continue to borrow for debt servicing and will never attain comfortable level of foreign exchange reserves in the foreseeable future.

Pakistan: Painful Path to Recovery

I am pleased to share with my readers a report by IMS Research. You may not agree with all the points, but it makes a good basis for an ‘Academic Discussion’. Pakistan needs a ‘home grown plan’ to overcome its inadequacies.

According to the brokerage house, FY23 Federal Budget saw the government attempt to widen the tax net, but the brunt eventually fell on the existing narrow tax base in the shape of higher corporate and personal taxes.

The benchmark index of Pakistan Stock Exchange (PSX) shed 3.6% (6.6% in US$), with turnover thinning out even further.

Foreign institutions and local insurance companies remained aggressive sellers. Pakistan is inching closer to the IMF program, but investor confidence remains low due to a sticky current account deficit, and ugly inflation prints around the corner.

That said, we believe risks are largely in the price, with default likely be avoided as the IMF agreement draws near. 

Inching closer to the IMF program

Pakistan has significantly reduced energy subsidies and sharply raised direct taxes. The 7th and 8th IMF reviews are reportedly being combined and Pakistan could see US$2 billion program resumption.

The FY23 Budget attempted to widen the tax net on real estate and retailers, but ultimately could not avoid further burdening the narrow tax base.

Most large corporates will now face additional 10% tax in in 2022, which reduces to a permanent +4% in subsequent years.

Improved fiscal discipline reduces the load on the monetary side but the State Bank of Pakistan (SBP) could yet raise rates on July 07, 2022 monetary policy, with the next inflation print expected north of 18% and international oil prices failing to come off. We expect an increase of 100bps, which will take the Policy Rate to 14.75%. This may be the last rate hike of the cycle though.    

Improving relations with others

Chinese commercial banks have recently disbursed loans of US$2.3 billion, negotiations are underway with Saudi Arabia to enhance the deferred oil payment facility, and UAE is reportedly interested in acquiring stakes in state-owned entities listed at the PSX.

Progress includes the appointment of a new US Ambassador to Pakistan for the first time since 2018, the visit of the German Foreign Minister, and a positive outcome in the recent FATF plenary with exit from the grey list looking likely subject to on-site verification.

A European Union mission also reached Pakistan to assess GSP+ compliance, and the broader improvement in relations with the West should help Pakistan’s case in our view.

The brokerage house assigns little probability to Pakistan procuring oil from Russia, even though local refineries have been asked to assess suitability, with political considerations likely to win out over economic ones.

Key risks

The government is digging in, going by its increasing willingness to take tough decisions and secure the IMF program. While coalition partners such as MQM have expressed discontent at the results of local body elections in Sindh, and PML-N rule is vulnerable in Punjab, it is difficult to envisage the coalition fracturing at this stage.

Imran Khan is a lot quieter but remains a uniting factor for the ruling parties, no matter their disparate nature.

For the economy, stabilization measures are underway and Moody’s decision to downgrade Pakistan’s outlook to Negative has not been matched by the other major credit rating agencies.

Corporate profits will hurt in the near-term, owing to the 10% super tax for 2022, but the impact on recurring profitability is modest. On market cap to GDP, Pakistan is cheaper than its Covid low and nearly as cheap as its trough during the global financial crisis.

 

Pakistan: Like Minister, Prime Minister also lacks rational thinking

Yesterday, I posted a blog; its title was How can Finance Minister sound so dumb? My heart was even heavier to read the news today, “Prime Minister Shehbaz announces Rs28 billion relief package to mitigate impact of fuel price hike”.

I have all the reasons to believe that the prime minister is not fully aware of nitty-gritty of managing economy of Pakistan. However, he has a team of ‘economic experts’, which is fully aware of the targets agreed with the International Monetary Fund (IMF) and prevailing state of the affairs.

Having gone through the details I arrived at the conclusion that the prime minister is either stubborn or does not listen to what is being advised by the experts.

Reportedly, on Friday, Prime Minister Shehbaz Sharif announced his government would launch a new relief package of Rs28 billion per month to protect the poor from the burden of petrol and diesel price hike.

Any government has a right to pay subsidy provided it has enough money in its kitty. Pakistan already faced huge budget deficit, therefore, it can’t afford to pay untargeted subsidies.

Prime minister said under the relief package, the premier said, 14 million poor families, comprising 85 million people, would be given Rs2000 per family. I am surprised to read his statement as he is creating a new breed of baggers. He is also opening floodgates of corruption.

He said this was in addition to the monetary assistance being given to them under the Benazir Income Support Program. This relief package will be added in the next budget, the premier said.

Prime minister hasn’t come out of the shadow of Imran Khan. In his first address to the nation — a day after his government removed fuel subsidies and increased the price of petrol by Rs30, he made two points: 1) it was because of the previous government  2) he had to take the difficult decision with a heavy heart.

He termed the PTI government's decision to grant fuel subsidy a trap for the upcoming government. "Petroleum prices are increasing worldwide but they (PTI government) subsidized fuel despite knowing that the treasury cannot bear its burden."

The hike in petroleum prices is a universal phenomenon and Khan can’t be blamed for this. The added insult is huge depreciation of Pak rupee. This depreciation was mostly because of failure of the incumbent government to revive relationship with IMF.

This is also to remind the prime minister that his government is yet to announce increase in electricity and gas tariffs. Would he further increase the subsidy?

In my opinion, much of the burden of common man would be reduced if government orders 50% reduction in the remunerations of MPAs, MNAs, Senators and Ministers.  Similarly ‘fuel’ allocations should also be reduced to half.

If common man is required to pay higher prices of petroleum products, electricity and gas why perks of elected representatives can’t be reduced to half?

 

 

 

Miftah Ismail sounds too amateur

Finance Minister Miftah Ismail said on Thursday that he was leaving for Washington to meet International Monetary Fund (IMF) officials for the revival of a loan facility. In the same breath he added to travel to London on the way, where he would meet PML-N supremo Nawaz Sharif.

He disclosed his intension to meet the IMF Managing Director, Chief Executive Officer of the World Bank, Ministers of Turkey, Saudi Arabia and China. If he has planned so many meeting, was any agenda prepared or it will be just saying hello to each other?

On Wednesday, he had told media persons that his priority was to secure one tranche of US$1 billion from the IMF and prepare for the coming budget and not to club two quarterly reviews.

He didn’t bother to thank overseas Pakistanis who have sent more than US$23 billion in nine months of the current financial year. One may recall, his government has decided not to give voting rights to overseas Pakistanis, despite their longstanding demand.

He was a bit ruthless in saying that the IMF program was stalled following the premature end of the Imran Khan government. He was not cognizant of the fact that the no-trust motion, which brought Imran Khan Term to an abrupt end, was initiated by his party in collaboration with political parties?

Ismail revealed that the IMF wanted Pakistan to do away with subsidies extended by the previous government, including those on fuel prices and power tariffs — two relief measures that former Prime Minister Imran Khan had announced right before the filing of a no-trust motion against him. The move had invited criticism with many describing it as going against Pakistan's commitments to the IMF for the US$6 billion Extended Fund Facility.

He failed to recall that soon after coming into power Shehbaz Sharif, refused to approve a summary of hike petroleum prices prepared by Oil& Gas Regulatory Authority (OGRA).

It may be worth reminding that the single-point maiden meeting of the Economic Coordination Committee (ECC) of the newly formed federal cabinet on Tuesday approved Rs69 billion for immediate reimbursement of price differential claims (PDCs) to the oil industry on account of cheaper sales of petroleum products than the cost of purchase. Wasn’t this a violation of commitment with the IMF?

In an attempt to contain budget deficit he expressed intention to save by cutting the development budget to Rs600 billion, instead of Rs900 billion, which might not be spent in any case by the ministries.

He was delighted to inform, “We will not cut a penny out of Benazir Income Support Program”. He went to the extent of saying to compensate; wheat flour price has been reduced by Rs150 per 10kg, while sugar would be sold at Rs70 per kg through utility stores. Edible oil price has also been reduced. Has he any realization that selling at reduced price, means providing subsidy?

 

Time to resolve economic crises facing Pakistan

Dawn newspaper in its Editorial has termed Pakistan’s current economic situation dire. The new coalition government has inherited an economy encumbered with rising price, widening fiscal and current account deficits and diminishing foreign currency reserves. 

The country also faces a volatile political environment.

Former Finance Minister, Shaukat Tarin’s contention that the PTI has left the economy in a better shape than it had inherited in 2018 may not be rejected, but the challenge of turning it around, or at least providing some relief to inflation-stricken citizens anytime soon, is a formidable task for the new set-up.

It has rightly highlighted that exaggerating the facts will not help either. The estimates of fiscal and current account deficits given by Miftah Ismail at his Tuesday presser are on the higher side. But Pakistanis have seen this pattern before: every new government needlessly amplifies the economic crisis to discredit its predecessors.

Dawn has rejected Miftah’s the claim and said, the current account deficit is growing but is unlikely to reach US$20 billion mark.

The fiscal deficit is burgeoning, and may cross the previous government’s estimates of slightly over 6% of GDP. Yet it is an exaggeration to say it would increase to 10% by the close of the current fiscal year.

Foreign exchange reserves are down, yet State Bank of Pakistan says, country’s external financing needs for the present fiscal year are fully met from identified sources.

There is no denying to the facts that the economy is in deep trouble, and indeed in a worse state than what the PTI had inherited.

The situation has been worsened by the IMF decision to delay the US$ one billion tranche due to the third tax amnesty given by the previous government to the wealthy, as well as political uncertainty in the country.

China is taking its time to roll over its debt of nearly US$2.5 billion as it waits for the political dust to settle.

Once the IMF is back as expected, since Miftah promises to honour Islamabad’s commitments to the lender, and China rolls over its loan, the reserves are likely to start rising.

The question is do the new rulers have the acumen to fix the two major structural problems for reviving the economy.

That requires massive growth in tax collection, by expanding taxpayers’ base and eliminating exemptions to the powerful, as well as the privatization of state enterprises to reduce the gap between income and expenditure.

Further, governance and policy reforms are needed to substantially raise productivity for boosting exports and paying import bills.

The coalition may not have much time to undertake all these fiscal and productivity reforms, but it can initiate changes to restructure the economy for a sustainable turnaround in the longer term.

It is hoped that the incumbent government will neither resort to populist moves ahead of the elections nor put additional burden on the masses.