June 04 - 10, 2007


Pakistan has entered a period of strong demand growth for cement domestically, driven by rapidly rising per capita income levels, heavy government public infrastructure spending and a historically unparalleled private sector interest in mega construction projects. Added to this is the rapid increase in exports, with easy sea access to one of the world's fastest cement consuming regions, the Middle East as well as close land access to Afghan and Indian cement markets.

Today, Pakistan's cement industry comprises of more than 30 companies having more than 35 large and mini plants. The industry at present has an installed capacity of 31 million tones tpa and most of the industry players are operating at the healthy capacity utilization rates. Despite the fact that the Pakistan cement industry has clocked a total consumption of 68 m tons for the last four years (July03-Apr07). Pakistan has the lowest per capita cement consumption numbers in the region even though it has grown 67kgs to 111kgs over the last five years. There has been very healthy cement demand in both domestic and export markets. On cumulative 9 months basis, the domestic demand of the country grew by 25.49% whereas the total sales including exports grew by 30.54%. On the supply side, the cement production capacity of the country has also increased significantly as some new plants also came into operation whereas others are starting operation shortly. The total production capacity of the country by end of June 2007 will be around 35 million ton against the expected annual demand of 21 million ton with an estimated average growth of 25%. The surplus production capacity available to the country may be channeled out to the neighboring cement deficit countries for a couple of years as there will be a shortage of cement in the region because of huge mega construction activities all over GCC and South East Asian countries including India. The export market of India is now opened up for Pakistan cement manufacturers because of shortage of cement.


* Public Sector Development Program (PSDP) target for FY07 is set at Rs435bn by the government (Rs270bn for federal, Rs115bn for provincial and Rs50bn for earthquake rehabilitations activities). This is 60% higher compared to last year's Rs272bn target (Rs204bn for federal, Rs68bn for provincial).

* 5% duty relief on import of coal in last budget help reducing sector cost.

* Introduction of Rs10bn fund for the construction of 5 mega dams (Bhasha, Kalabagh, Akhori, Munda and Kurram Tangi).

* Removal of sales tax on construction industry machinery.

* Freight subsidy of Rs720mn on imported cement (i.e. for 0.6mn tons cement having Rs60/bag subsidy).


Central Excise Duty (CED): Central Excise Duty was slashed from Rs1,000 per ton to Rs750 per ton in the budget of FY04. Since then the amount has been at the same level despite several attempts made by the manufacturers hence going forward we anticipate it to remain at those levels.

Development Outlay: According to the media sources, the government may allocate Rs520bn for PSDP in the Budget FY08, translating into an increase of Rs90bn over the FY07 PSDP.

Export Endowment: Pakistan ranks 48th among a total of 116 cement exporting countries. Currently Rs25 per ton of rebate is expected to be increased to give a boost to export in view of excess cement supply in the country by local producers.

Discontinuation of Ban on Exports: Government ended ban on cement exports and recently the Indian government abolished 12.5% custom duty levied on cement, thus allowing duty-free import. We expect this to continue as the surplus cement requires to be channeled out.


Pakistan in the recent years has turned into a global hotspot for automobile industry as well the key sourcing base for the auto components. Growing at CAGR of 50% percent during the last five years, out of which the cars registered 41%, Motorcycles 58%, LCVs 37%, Buses (-7%), Trucks 41%, and Tractors 20%. During a period FY01-06 sale in car assembler's has surged to 32%. Pakistan auto sector as a whole contributes 0.3% of world production of 66.5 million passenger and commercial vehicles. World installed capacity for passenger and commercial vehicles is 85 million units.

Auto Industry in Pakistan because of its gross sales turnover of Rs 214 billion during 2005-06 contributed to GDP by 2.8% and its contribution to indirect taxes i.e. Rs 63 billion was over 9% of country's indirect taxes. Auto Industry share in the total manufacturing sector remains at 16% by the close of 2005-06 which was only 6.7% during 2001-02. Auto Industry claims to have invested Rs 98 billion by the year 2005-06. The industry forecast on investment for the next 5 years amounts to approximately Rs 184 billion out of which assembler's investment is projected at Rs 39 billion, while the vendor's estimated investment would be around Rs 145 billion. Being highly capital intensive in nature, the auto industry in Pakistan is in the phase of excess supply right now. Apart from that, the industry is cyclical in nature and very much depends upon the growth of the economy as well the per capita income. Due to very robust performance of Pak Suzuki Motors and hence the resulting boom in the consumer demands, auto industry is witnessing its best times at present. With average penetration level at the lower side and huge growth in lifestyle the demand is supposed to grow further in the future. Favorable government policies and increased infrastructure spending is supposed to keep the momentum on. In addition to the strong domestic growth, whooping trade deficit is a point to worry with total exports were to the value of US$ 35 million during 2005-06 which in the current fiscal year has surpassed US$65m.


* To honor Government's commitment to WTO's TRIMs agreement on phase out of Deletion Programmes, an alternative system known as Tariff Based System (TBS) was introduced in the budget FY07.

* The budget also allowed flexibility in the gift/transfer of luggage scheme via an exemption of duty and taxes on vehicles imported by a privileged person or by diplomatic representatives and banned the imports of used cars which were more than 5 years old.

* Government abolished custom duty on import of tractor. CKD duty on buses, trucks and dumpers was also cut to 10% from 20%. Also CBU duty has also been reduced to 30% from 60%. Trucks and dumpers of more than 5 tons are exempt from sales tax.


Under new policy regime: Auto Industry Development Program (AIDP) a 5-year auto policy (FY08-12) announced during FY07, is expected to be announced in the coming budget to provide long term duty structure to local auto industry. AIDP envisages production turnover of Auto Industry to reach Rs 600 billion by 2011, the contribution of Auto Sector to GDP to reach 5.6% and the share of Auto Industry in the manufacturing sector to reach 25%. AIDP aims at doubling the contribution of auto industry to GDP and its turnover to 600 billion rupees in the next five years and reaching to an export level of US$ 350 million for components mostly to the international after market and to the OEMs. Motorcycles, tractors and cars are expected to identify markets for themselves, thus raising export potential to US $ 300 million by the year 2011-12.

Import Duty on CBUs & CKDs: Under AIDP proposed policy, gradual reduction in import duties on non localized parts i.e. CKD (Completely Knocked Down kits) will remain unchanged at 50% until FY10, thereafter it would be reduced to 45% (instead of 35%) by FY12 ultimately boost margins of local assemblers without price reduction. However, for CBUs (Completely Built Units) no change has been made below 1500cc segment. For cars above 1500cc segment, there is a gradual decline in duties. For both 1500-1800cc & above 1800cc segments duty will come down to 50% by FY12 from their existing structure of 65% and 75% respectively.

Depreciation on Used Car Imports: In addition to AIDP proposal's reduction in depreciation rate from 2% per month to 1% per month with a maximum limit of 25% on used cars.

Five Year Tariff Plan for Two Wheelers: Tariff on CBU and CKD kits to be gradually reduced to 50% and 15% from current level of 60% and 20% respectively.

Five Year Tariff Plan for Tractor and HCVs: Duty on localized CKD component would be reduced from current level of 35% to 25% by FY11.


Fertilizer is the prime industry for the smooth performance of all sectors of the economy. At present, Pakistan is facing a shortage of fertilizer due to a faster increase in offtake than production. The gap between demand and supply has broadened and, therefore, fertilizers are being imported. In the past five years, on an average 1,417k tons of fertilizers were imported each year. Urea imports averaged around 550k tons (35% of total) in the past three years while that of DAP averaged around 847k tons (51% of total). As far as the demand supply dynamics in the local urea industry is concerned, the total domestic urea production, in 2006, fell short of 0.65m tons to meet the total local demand and this gap was plugged through imports. This gap is expected to widen further as we expect the urea demand to rise annually by 3%. The expected commissioning of a small capacity by Fatima Fertilizer in 2009 will have a minor effect on this gap. However, the new expansion of Engro will develop a short term glut before the ever-rising demand for urea overtakes the supply.

Urea offtake during the four months of current calendar year (January April 2007) was down by 35% to 1,054k tons as against 1,615k tons in 4M/CY06 whereas DAP offtake was up by 9% to 226k tons, over 207k tons in 4M/CY06. The major reason for the decline in urea offtake is the start of the Kharif season where the application of the DAP becomes necessary for the crops along with another reason being provisioning of subsidy on Phosphatic and Potassic Fertilizers. Whereas the relatively low growth in DAP offtake is because of the sky high prices of the product in the international market. Prices has also peaked during the current calendar year as the cost of raw material in surging by leaps and bounds. Price of 50kg bag of Urea remained flat around Rs536 per bag while that of Phosphatic fertilizers specially DAP surged by 17.9% to PRs1,113 per bag. At the end of April 2007, total inventories of Urea and DAP were 800k tons and 80k tons respectively.


Fertilizer Subsidy: For FY07, the government set Rs12.3bn as fertilizer subsidy (for urea & other fertilizers). Last year, the government gave Rs5.0bn as subsidy, as per Budget documents.

Agricultural Credit: In FY07 government set target to increase credit availability for the farm sector for which SBP was directed to take appropriate steps so that there is a substantial increase in agricultural output.

Custom Duty on Machinery & Agri-based Incentives: In order to provide relief to the farmers, government removed custom duty on agricultural machinery and tractors.

Water Resource Management: Rs68bn have also been allocated for water resource management projects.


New Fertilizer Policy: The industry is in dire demand for the new fertilizer policy which was supposed to be announced in the last budget as the previous one expired in FY06. Hence we can anticipate a brand new policy for fertilizer in the coming budget.

Upward Revision in Agriculture Credit: Government is to increase the agriculture credit target to Rs200bn on account of the proposal made by SBP to the Federal Government to exempt income tax of 35% (levied on banks at present) on interest income earned by commercial banks from agricultural loans.

Investment in Capital Goods for BMR/Expansion: Investment in capital goods of the fertilizer industry was concentrated in the BMR of the existing units as the gas supply was a prime constraint. Recently two projects got approval from the government of Pakistan for establishing new fertilizer plants. Currently, import of plant, machinery and equipment (manufacturing sector) is subject to:

* Plant/Machinery not manufactured in Pakistan: Customs duty @ 5%

* Plant/Machinery manufactured in Pakistan: Customs duty @ 15%

In light of the aforementioned, it is expected that government would provide some duty relief on proposed fresh investment.


Pakistan has walked headlong into the first stages of a massive power shortage, propelled by an expanding economy and pent-up demand. The government has initiated an aggressive generation expansion plan in anticipation of the growing electricity hunger - 13.4GW (69%) by 2016 - and is committed both financially and policy-wise to implementing it. Government has initiated many fast track projects which will come online within a period of two year for which no feasibility is required.

Last power policy was announced in the year 2002. A number of lPPs had been agitating over the issue of inadequate protection against risk of variations in currency exchange rates in the policy for power generation Project 2002. Besides they had been highlighting discrimination in rate of (RoE) to local and foreign investors and lack of coverage to risk of nation wide fuel shortage, the sources continued.

These issues are further elaborated as under:

Currency exchange rate: The "Policy for Power Generation Projects 2002" states that: 'bidders may include separate components in the CPP and EPP which are subject to adjustment only for variations in the exchange rate between the rupee and dollar, between the reference date and date of payment". Similarly performance guarantee and Letter of Credit (L/C) from the sponsors are also denominated in dollars.

The ministry was of the view that the policy covers the risk of currency exchange rate variation between dollar and rupee. However, Engineering Procurement and Construction (EPC) contracts of IPPS were not necessarily in dollars because of sourcing of equipment and financing from various markets (eg. US, UK, Japan and Europe). Therefore, IPPS had been contending that they were being exposed to impact the currency exchange rate variation affecting their costs, which was a risk beyond their control.

Parity in roe for local and foreign investors: At present Nepra allows return (currently 15%) in dollar terms on foreign exchange component of roe (by adjustment of Rupee component of tariff for dollar to rupee exchange rate) while local component of equity was allowed the return in rupees (without any adjustment). The lpps had been contending that this discrimination should be removed.

On roe, the ministry said that it should be allowed in one currency i.e. Dollars. All roe (for foreign exchange and rupee based equity) be converted to equivalent dollars amount at reference exchange rate (as noted in Nepra's determination) and adjusted for variations in US$/Rs rates as presently being done for return on foreign component of equity.


No direct measures were announced in the budget.

Subsidy for Power Sector: Government allocated subsidy of Rs55bn to the power sector, including Rs13.6bn to KESC as compensation for difference in actual and notified tariff and PRs21bn to WAPDA as GST subsidy and subsidy on tube wells in Balochistan.

PSDP Allocation for Power: In Federal Budget FY07, the GoP allocated Rs68bn in the PSDP for Water and Power Division and earmarked an amount of Rs52.21bn (as compared to Rs43bn in the last budget) as allocation for WAPDA sponsored projects.


New Power Policy Expected: In the coming budget we expect mitigation of inconsistencies and announcement of new Power Policy. The new Power Policy will go a long way in encouraging major capacity additions in the power sector. These amendments in the power policy would only be applied to those power projects that got license under Power Policy 2002.

Government Subsidy: Government is expected to allocate substantial subsidy to WAPDA and KESC in Budget FY08 to compensate them for their rising cost of production. WAPDA may be allowed to spend Rs37bn over and above the proposed Public Sector Development Program FY08 for power generation.

Subsidy for Water and Power Division: Water and Power Division is expected to get Rs51bn for the projects execution in water sector in FY08 as compared to Rs48bn in FY07.


There are a total of 32 commercial banks (excluding Islamic banks) currently operational in Pakistan. Of these, only two are state-owned (NBP and First Women's Bank), two are provincial government-owned banks (BOP and Bank of Khyber), 20 are local private banks, and 8 are foreign banks. Figure 30 presents an overview of how the banking system's assets are broken down into these various segments. Pakistan's banking sector has evolved at a very rapid pace since the 1990s. Financial sector liberalization and reforms were introduced in the 1990s. Commercial banks nationalized in the 1970s began to be privatized in the 1990s, as the government realized the importance of an independent and privatized banking sector. Also, in the 1990s, several new licenses for operating a commercial bank were issued to local entrepreneurial groups. The likes of Union Bank and Prime Bank, which have now been taken over by Standard Chartered and ABN AMRO, respectively, are products of this very process. After which, NIB acquired PICIC and Samba acquired Crescent Commercial Bank. The government also brought in seasoned bankers from multinational banks to reform the sinking giants such as Habib Bank (HBL) and United Bank (UBL). Both now stand privatized, with UBL sold to a consortium of Bestway Group of UK and Abu Dhabi Group of Shaikh Nahayan, and HBL sold to the Aga Khan Foundation. Pakistan's banking sector had historically been dominated by the Big Five banks. These Big Five are National Bank of Pakistan (NBP), Habib Bank Ltd. (HBL), United Bank Ltd. (UBL), MCB Bank Ltd. (MCB), formerly Muslim Commercial Bank Ltd., and Allied Bank of Pakistan Ltd. (ABL). These Big Five have now been joined by a sixth, Bank Al Falah (BAFL), which has accumulated total assets greater than ABL.

In 1Q2007, earnings of listed commercial banks in Pakistan continued to grow as their profitability went up by 24% to Rs18.3bn versus Rs14.8bn in 1Q2006. This positive profitability growth momentum continued to grow since last six years. During the first quarter, earnings growth in banks was mainly driven by rising net interest income of the banks which from Rs28.0bn in 1Q2006 rose by an impressive 31% to Rs36.7bn in 1Q2007. Net interest income grew mainly on the back of higher spreads between lending and deposits rates. As per SBP data, banking sector average spread in first 2 months (Jan-Feb) of 2007 went up by 20bps to 7.47% from an average 7.27% in the first 2-months of 2006.


* The Federal Budget FY06-07 carried a surprise for the banking sector. Nonfund income of banks was brought into the tax net as an excise duty of 5% was imposed on the fee-based income of banks. While in itself a negative development, we believe that the commercial banks are likely to pass on this incremental cost to their clients/customers, thus neutralizing the impact.

* Withholding Tax on cash withdrawal exceeding Rs25,000/- was doubled to 0.02%, aimed at encouraging documented transaction of bank depositors.

* Rates of National Savings Schemes (NSS) were increased in the range of 36 to 140 basis points.


Tax Rates: Tax rates for Pakistan's banking sector have been gradually reduced to 35% from a level of 50% over a five-year period. We assume that the corporate tax rate is likely to continue at 35% for banks, with no taxes on capital gains, and the usual 5% tax on dividend income in the coming budget.

Paid-Up Requirement: SBP requires all banks to increase their paid-up capital to Rs6 billion by the end of 2009. Therefore, the minimum paid-up capital requirement for commercial banks operating in Pakistan at end-2007 stands at Rs4 billion. Hence no new addition is expected in this regard in the budget.

Exemption of tax on Agricultural Loans: The SBP has made a proposal to the federal government to exempt income tax of 35% (levied on banks at present) on interest income earned by commercial banks from agricultural loans in the upcoming budget for FY08. This would bode very healthy for the banking sector, which we expect to be implemented.


Pakistan oil and gas sector comprises of Exploration and Production sector, oil market companies as well as gas distribution companies. Oil and gas pricing in Pakistan is governed by one of the four petroleum policies and is determined at the time of signing the concession agreement. As a result, pricing varies from one field to another. Over time, the Government of Pakistan's policy initiatives have revised pricing terms on oil and gas to offer better economic terms to the E&P operators. Pakistan has a well-developed gas transmission infrastructure with a combined transmission network over 9,000 km, distribution network (mains and services) of over of 70,000 km (see exhibit 20). Two government-controlled companies run this network. Sui Southern Gas Company Limited (SSGCL) has the exclusive license to service the Southern provinces of Sindh and Balochistan while Sui Northern Pipelines Limited (SNGPL) hold the exclusive license to service the Punjab and NWFP provinces. Gas represented 41% of the total energy mix in FY2000 and this has increased to 58% in FY2005, with gas now being the major source of energy for Pakistan. Gas demand has grown by 8% pa since FY2000 and is expected to grow at 6% pa to FY2010E according to the Oil and Gas Regulatory Authority (OGRA). This compares with oil demand growth of -1.5% between FY2000-FY2005 and a forecast growth of 2.5% to FY2010E by Pakistan Ministry of Petroleum & Natural Resources. Oil has steadily been substituted by cheaper gas (for power generation), LPG (for heating purposes) and CNG (for transportation use) over the past few years. Given Pakistan's oil deficit (it imported 49% of oil consumed in FY2005), and declining domestic production, we expect the representation of gas and LPG in the energy-mix to continue to rise.

In Pakistan oil consists of 28% of the primary energy mix while gas consists of 50%. As shown by the figure below, Pakistan's oil consumption CAGR from 1990- 2005 has been 3.29%. It is keeping pace with the rest of the developing countries in oil consumption growth. In addition as China, India, Indonesia and Malaysia are all at a higher stage of development than Pakistan their higher CAGRs for oil are predictive of Pakistan's future oil consumption growth. In terms of per capita energy consumption, there is a lot of scope for growth with Pakistan having one of the lowest oil per capita ratios; global average oil consumption per capita is 1.55 tons while Pakistan sits at a miniscule 0.10 tons per capita.

The OMC market is dominated by PSO, having a market share of 66% while Shell Pakistan and the smaller Attock Petroleum (APL) account for 14% and 6% of the market respectively. The industry has an oligopolistic structure with high competition between the largest players for increased market share.


* For the E&P sector, the Federal Budget FY07 is a non event owing to the deregulated nature of upstream oil and gas industry.

* Oil refining and marketing sector also escaped from any direct or indirect budgetary measure. Although there were two negative developments (1) Reduction or elimination of Petroleum Development Levy (2) Reduction in custom duties on High Speed Diesel (HSD).


New Petroleum Policy: Petroleum policy has become more favorable over time Oil and gas is produced in Pakistan under one of four Petroleum Policies which were created in 1991, 1993, 1994/7 and 2001 (and OGDCL expects a revised Petroleum Policy in 2007). Petroleum Policies outline fiscal terms and pricing regimes and each individual Petroleum Policy has a stabilization clause to ensure that the terms are maintained for any license awarded (and field developed) under the duration of the policy, irrelevant of future Petroleum Policies. Therefore, the new Petroleum Policy is expected in the upcoming budget.

Nothing apart the Petroleum Policy is expected for the oil and gas sector.