IF the Economic Survey for 2019-20 released on June 11 painted a bleak picture of the stock market, the federal budget announced on June 12 seems to have set the stage for even worse performance in 2020-21.

In the outgoing year, investors were handed down a negative return of 13.78 per cent. The survey blamed Covid-19. Between Feb 26 (when the first Covid-19 case surfaced in the country) and the end of March, Rs1.58 trillion was wiped out of market capitalisation. The main equity index managed to bounce back post-March to provide a minor 4pc positive return till the writing of this report.

“The government had dug deep into its pockets to provide the fiscal stimulus package in late March to the stock market. The State Bank of Pakistan (SBP) also cut the policy rate by 425 basis points to 9pc, which put a floor under the market fall. Now what else do they want?” said a senior stock market player who leans towards the ruling political party.

Yet the stock market asked for a lot more. It had proposed the elimination of capital gains tax (CGT) for the next 12-24 months, investment of a certain percentage of the funded pension scheme (of federal government employees) in the equity market, permanent tax exemption of 20pc (instead of the prevailing four-year exemption) to newly listed companies and reduction of the corporate tax rate from 29pc to a level prevailing in regional markets.

As Minister for Industries Hammad Azhar proceeded to read out the budget document on June 12, investors waited in the hope that most proposals by the Pakistan Stock Exchange (PSX) would be accepted. But to everyone’s surprise, there was nothing worth the name “incentives for the capital market”.

A couple of tax relaxations were granted to the construction industry, which is a sector close to the heart of the prime minister. Stockbrokers, analysts and traders termed the budget “disappointing” and “non-event”.

“For the minister, it may be a relief budget as no new tax was imposed. But there was next to nothing that could be described as relief for the stock market,” said a disgruntled market player.

Most analysts grumbled that even the basic demands that the corporate tax rate be reduced and incentives be offered to attract some from the hundreds of thousands of unlisted companies to the equity market were denied. “The Economic Survey revealed that not a single company floated an initial public offering (IPO) in the outgoing year,” said one market watcher. He wondered why economic managers overlooked the fact that it would reduce the government’s dependence on the banking sector if corporate entities mobilised funds from the capital market. On the contrary, withholding tax on dividends from a company where no tax was payable owing to exemption or the carry-forward of business losses was enhanced to 25pc from 15pc in line with the applicable rate on dividends.

Pakistan Stockbrokers Association expressed its disillusionment with the budget, saying it disappointed the market by neglecting altogether the capital market. It failed to meet even the longstanding demand of the market relating to the CGT. “The least it could have done was to sift the short-term and long-term investments and levy the tax accordingly.”

Former PSX chairman Arif Habib, while acknowledging that the hands of budget makers were tied owing to resource constraints, thought it was unwise to have ignored capital mobilisation measures altogether. His initial thought was that it was a “real estate promotion” budget as it seemed to ignore most other sectors.

An analyst, however, interjected that even what had been offered to the real estate and the construction industry was only a pittance. Federal excise duty (FED) on cement has been reduced to Rs1.75 per kilogram from Rs2 per kilogram. Moreover, the CGT on immovable property has been reduced. Along with that, the holding period for taxation of capital gains on the disposal of immovable property is being restricted to four years.

Zulqarnain Khan, executive director of Next Capital, expressed surprise over the fact that the principal demand that the CGT be eliminated for the next 12-24 months was set aside. He recalled that the government used to generate a tidy amount of tax from the stock market in yesteryear, but the budget makers did not give that a thought.

Most other market players were less charitable and used harsh words to describe the document and its authors. But Khurram Schehzad, CEO of Alpha Beta Core, affirmed that the budget can at best be termed neutral. He conceded that there was no mention of the reduction of super tax and turnover tax. “There is a likelihood of a revised (mini) budget and one can hope some incentives will then be provided,” he said.

Samiullah Tariq, head of research and development at Pakistan Kuwait Investment Company, affirmed that popular measures had been taken in the last two years. But given the uncertainty over resource mobilisation in the face of Covid-19, budget allocations were “realistic” this time.

Muhammad Rameez, head of sales at Foundation Securities, believed the budget was positive for cement, steel, fertiliser, fast-moving consumer goods, chemical and insurance sectors. It was neutral for banks, power, textile and exploration and production companies, he said. The budget was mildly negative for the automobile sector, he added.

Topline Securities believed that cement, steel, consumer and pharmaceutical sectors were likely to benefit while the budget was largely neutral for other sectors.

Published in Dawn, The Business and Finance Weekly, June 15th, 2020