EUR 8.54 For Business Accounts Only

Pakistan Budget_Time to go all in! (AKD Daily, Jun 14, 2021)

AKD Daily

Pakistan Budget: Time to go all in!

Budget’22 – Striking a balance between deficits and growth! With consolidation done and dusted, the PTI government has upped the ante targeting strong growth delivery in the second last year before elections (and realistically the last year before campaigning begins). For FY22, the GoP has budgeted a GDP growth target of 5% while limiting fiscal and primary deficits to 6.3% and 0.7% of GDP. Tax collection at PkR5.83tn appears a tough ask where the government appears banking on growth fueled tax collection with the differential likely being met through a combination of Administrative steps and withdrawal of certain exemptions under sales tax. Learning from previous budget, the GoP has continued rationalization of custom duties on import, particularly raw material, thereby incentivizing a myriad of industries. Budget’22 has also brought policy action to the fore with tenets of the much awaited Refinery Policy incorporated while steps towards structural reforms within the Energy sector have also been undertaken.

.. while keeping its social under-linings: Budget’22 has kept up with PTI’s manifesto of social upliftment wherein an amount of PkR255bn has been allocated for social protection. At the same time, a total of PkR30bn has been allocated to the Naya Pakistan Housing Authority (NPHA) with PkR3bn allocated as mark-up subsidy on the same. Moreover, the GoP will continue special initiatives of the PM including Kamyab Jawan, Sehat Card, Billion Tree Tsunami etc. 

Capital market likely to give a big hurrah! For the PSX, reduction in the CGT rate to 12.5% for filers from previous 15% is a key development and comes after years of demand by the investment fraternity. Sectoral developments aside, the CGT development alone can potentially propel the market above 50k level. At the same time, removal of WHT on marginal financing by the NCCPL and removal of WHT collected from members by the PSX are also material positive.

Cometh the Refinery Policy! Budget’22 has brought to the fore policy action with tenets of the much touted Refinery Policy being implemented. In this regard, the GoP has imposed a 10% duty on MS and HSD while at the same time, CD on crude has also been reduced to 2.5%, resulting in effective protection of 7.5% on Mogas (previous: 0%) and 7.5% on HSD (previous: 7.5%). A 10 year tax exemption has also been provided to deep conversion new refiners as well as BMR projects of existing refiners. With the aforesaid measures materially positive, BYCO comes out as a clear beneficiary given upgradation already under way. At the same time, turnover tax for refineries has also been reduced to 0.5% from previous 0.75% under section 113 of the ordinance.

Bringing partial PHPL debt on-book – Possible E&P (read: OGDC) resurgence on the cards? Structural reforms within the Energy chain appear to be carried forward from last year where off- balance sheet financing in the form of PHPL is partially being brought on-books, in our view. In this regard, Budget’22 documents have placed an amount of PkR118bn as subsidy in PHPL where we opine this might be used to pay off the TFC outstanding with OGDC (PKR125bn). We believe, based on our previous recommendations to the GoP, the same amount can likely be re-routed back to the Government through higher OGDC dividend. Our stance is corroborated by GoP’s dividend expectations, where dividend from OGDC has been projected at PkR56.5bn (indicative: PkR15.4/sh) compared to FY21 dividend of PkR25.5bn (indicative PkR: 6.9). The story is similar for PPL with dividend expectation of PkR15bn (indicative: PkR8.2/sh) compared to FY21 estimate of PkR4.6bn (indicative: PkR2.5/sh).

Budget broadly positive across a myriad! From overall market perspective, Budget’22 will resonate as a winner with the investment community. Apart from above highlighted Refineries and E&Ps, other beneficiaries of Budget’22 include Steel (removal of 5% CD on HRC – ISL, ASL), Cements (Federal PSDP at PkR900bn, big ticket dams), Autos (reduction in GST on 850cc below vehicles to 12.5% and removal of FED on the same – PSMC), Pharmas (exemption of CD and ACD on APIs), Food (tax exemption on packaged soybean seed, milk, dairy etc. – UNITY; exempted export of unpackaged meat, live chicken, reduction/exemption of CD on inputs for poultry industry – ASC, TOMCL), Footwear (duty relaxation on RM – SRVI, BATA, SGFL) and Chemicals (duty relaxation on RM – ENGRO, EPCL).

AKD Research