WITH stability achieved, it is time for growth to kick in. Following the economy’s subpar performance during FY09-FY13, when average GDP growth clocked in below 3pc, the current government, despite facing considerable headwinds, has delivered a growth of 4.1pc in its first two years in office.
With stability now achieved — slowdown in inflation, improving external account outlook, and higher GDP growth — the government aims to kick start a much-needed growth phase and is targeting an average 6.3pc growth between FY16-18.
With the discount rate at a multi-decade low and investment set to be infused by the upcoming China-Pakistan Economic Corridor, the stage is now set for an ascent in GDP growth. However energy shortages will continue to hamper economic activities going forward.
Under the medium-term budgetary framework, the government has set a GDP growth target of 5.5pc for FY16, 6.5pc for FY17 and 7pc for FY18. It is also important to note that the composition of the GDP still remains lopsided owing to an overwhelming contribution of consumption expenditures and the timid share of investment and exports.
With the discount rate at a multi-decade low and investment set to be infused by the upcoming China-Pakistan Economic Corridor, the stage is now set for an ascent in GDP growth
The fiscal deficit continues to recede, with FY15’s deficit set to end at 5pc. The government is targeting further consolidation, with a target of 4.3pc for FY16 and 3.5pc under the medium-term budgetary framework for FY18.
Below are some of the budget’s expected impacts on specific sectors.
Banks: Out of all sectors, the banking sector will bore the brunt of the newly introduced measures in the FY16 finance bill. Banks previously enjoyed lower tax rates on dividend income and capital gains.
The new finance bill has completely eliminated this tax differential on various income sources and proposes that all sources of bank incomes be taxed at a uniform rate of 35pc. This is expected to trim the earnings of banks by 8-20pc.
Additionally, a one-time super tax at the rate of 4pc on taxable incomes during tax year 2015 has been imposed, which will further compress the bottom lines of banks during the current year.
Cement: The allocation for PSDP has been increased significantly by 27pc over the previous year, with a focus on infrastructure development. This will boost demand for cement. Though the increase in the duty on coal to 5pc from 1pc will marginally raise costs by around Rs2-3 per bag, the industry will easily be able to pass it on to consumers.
Oil and gas: The oil and gas sector remained relatively insulated from the newly introduced fiscal measures. Though exploration and production (E&P) companies will attract the one-time super tax of 3pc as the corresponding changes have also been proposed in the income tax schedule for them, it will not materially impact the sector’s valuations. Earnings for FY15 are expected to dip by around 4pc.
For oil marketing companies, the imposition of the 3pc super tax will impact their FY15 earnings.
Meanwhile, significantly higher allocation for infrastructure programmes, including the re-surfacing of M2, is expected to revive bitumen sales in the coming years, which will be beneficial for APL.
Fertilisers: The customs duty on the import of di-ammonium phosphate (DAP) and urea has been increased from 0-2pc, which is expected to be positive for Fauji Fertiliser Bin Qasim; however, we think the development will be ‘neutral’ for Engro Fertiliser.
FMCGs: While zero-rating for various fast moving consumer goods (FMCGs) products like packaged flavoured milk, yoghurt, concentrated milk, cream, cheese, butter and desi ghee etc has been withdrawn, UHT milk still managed to evade the imposition of any sales tax. These measures are expected to be slightly negative for Engro Foods, Nestle and Noon Pakistan.
The federal excise duty on cigarettes has been raised, and the rate of duty on aerated beverages has also been enhanced.
Autos: The budget remained mostly non-eventful for autos, as the import duty structure for locally assembled vehicles and imported cars remains unchanged.
Meanwhile, the increase in the agricultural credit disbursement target coupled with lower sales tax and customs duty on agri-equipment will help improve farm economics, resulting in higher sales of tractors.
Textiles: The budget FY16 remained a mixed bag for the textile sector. The lowering of the advance tax rate to 1-1.5pc from 5.5-8pc and the reduction in the rates for the export refinance scheme and the long-term financing facility by 150bps will cheer the industry. However, the hike in the minimum wage rate and a 1pc increase in the sales tax (3pc) on the supply of raw materials will pressurise margins.
Power: For the power sector, the new budgetary measures remain neutral. In our opinion, dividends on independent power producers (IPPs) will not attract a higher tax rate (applicable on other companies), which may spur new inflows in the sector.
Similarly, the IPPs will likely remain exempted from the super tax owing to the guaranteed return for shareholders and long-term power purchase agreements.
Meanwhile, the sizeable allocation for the upgradation and expansion of the electricity transmission network is expected to bode well for Pak Elektron.
—Taha Khan Javed, Elixir Securities
Published in Dawn, Economic & Business, June 15th, 2015
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