The Pakistan Stock Exchange’s (PSX) KSE-100 was Asia’s top-performing Index in 2016 but 2017 proved to be a nightmare. Equity-based funds posted negative returns in the range of 10 to 20%, while brokerage houses had to be content with low volumes that put a dent on their earnings. From its all-time high of 52,874.46 points it touched on May 24 last year, the Index is hovering in the range of 45,000 due to buying in select oversold stocks. While some say that political uncertainty was the main reason for the downfall, others tout civilian-military rife and exit of the finance minister as the usual suspects. Despite the Chinese consortium finalizing its deal to buy a 40% stake in the PSX and upgradation by MSCI, PSX failed to attract foreign inflows.
The Pakistan Stock Exchange (PSX) booked a loss of Rs5.63 million in the quarter ended March 31, 2018 compared to a profit of Rs38.66 million in the same quarter last year. Cumulatively in the nine months period, PSX booked a profit of Rs65.57 million (earnings per share of Rs0.08) which was 55% less compared to Rs146.64 million. Revenue dropped 32% to Rs204.97 million from Rs300.12 million. The drop was seen due to receipt of low listing fee, income from exchange operations, service charges, interest income, rental income and no receipt of management fee in the quarter under review.
It is, in this backdrop that large corporations, including foreign companies and banks, are expecting the government to implement wide-ranging tax reforms stating abolition of three to four percent super tax imposed, reduction in corporate income tax rate to 25 percent and sales tax to 13 percent in the new budget. Businessmen expect the government to sort out issues related to higher tax burden on firms, unaffordable energy price, unpaid tax refunds and export rebates, etc. in the next budget. They would also be looking for favorable changes in taxation regime on sources of equity returns (such as capital gains tax, dividend yield and stock split) and the formalization of Economic Reforms Package in the upcoming budget.
Among several budget recommendations made by the PSX to the government, one proposal merits special consideration. The PSX has asked the government to incentivize the companies that are seeking to be listed on the bourse. The Exchange has proposed that tax credit of 20 percent be allowed for five years from the tax year in which a company is listed. The number of companies listed on the PSX is abysmally low at 559, representing a decline from 638 corporations that were traded on the exchange six years ago. On the other hand, the number of firms seeking registration at the Securities and Exchange Commission of Pakistan (SECP) has forever been on the rise.
While this move, on one hand, will provide investors with more options, it remains to be seen whether companies are attracted by this offer as 1) enlistment entails huge paper work and accountability and 2) they prefer bank financing over raising capital through public given the low interest rate environment. Companies in cellular, pharmaceutical, fast-moving consumer goods and other sectors make a lot of profit but do not like to share it with the public. They are of the view that increased profits are invested into capacity expansions and greenfield projects that results in creation of jobs and government’s tax revenue.
According to the corporate sector, the solution to our fiscal problem lies in not taxing the already taxed sectors of the economy rather than broadening the tax base by bringing the shadow economy within the ambit of tax bracket. The government should make policies that push direct tax collection and reduce the burden of indirect taxation on businesses and individuals by restructuring the tax regime and administration. This is important given the fact that foreign food companies are lining up to enter Pakistan, nine automobile manufacturers have announced to set up their plants and cement production capacity is being increased.
The devaluation of the rupee, in two instalments and a short span of time, will make imported industrial raw materials and intermediate goods costlier. Coupled with the levy of surcharge on power tariff, the exchange rate depreciation will raise the cost of production and investment. Anticipating the significant impact of sharp rupee devaluation, the finance and commerce ministries are proposing withdrawal/reduction of regulatory duties on industrial raw materials to bring down the cost of industrial production.
If 2018 sees a smooth transition from one government to the next and economic policies remain consistent, the PSX would make a comeback and investors’ confidence will be restored. Sectors in the limelight are expected to be oil and gas exploration and production (E&P), independent power producers (IPPs), textiles, technology, and banks largely due to the positive implication from the recent rupee devaluation.