JS Securities Limited – JS Research Beep

Karachi, September 18, 2018 (PPI-OT): Populist measures outweigh belt-tightening in Finance Bill 2018 amendments

In the second major step by the new government following the gas price increase yesterday, Finance Minister (FM) Asad Umar announced the Finance Supplementary (Amendment) Bill 2018 in today’s National Assembly session. From the market’s perspective, street expectations revolved around potentially stringent and belt-tightening measures by the FM; however, the actual announcements carried a populist tone. This resulted in the market witnessing a short covering rally, as the market closed the session on a bullish note, up by over 600 points.

However, restrictive measures earmarked for the curtailment of twin deficits, which was the need of the hour, seem to have gone unattended. Additionally, the FM has quoted a 5.1% fiscal deficit target for FY19 – whereas last year fiscal deficit stood at 6.6% – for which strict measures need to be taken. Moreover, the FM himself stated that if austere measures are not taken, the fiscal deficit could reach 7.2% of GDP for FY19! To illustrate our point, the government needs to bring down the fiscal deficit by 1.5% of GDP (or ~Rs500bn) during FY19 (5.1% minus 6.6%). In contrast, relief measures already announced stand close to ~Rs150bn, which would further increase the deficit to ~Rs650bn. Only time will tell whether the measures which were not clearly quantified, will be sufficient to bring down the deficit to the targeted level.

Key deficit-curtailment measures made in the FM’s speech are listed below:

The rate of withholding tax on non-filers has been increased to 0.6% on banking transactions

Removal of the conditions that non-filers could not purchase new cars (Positive for Autos) or buy properties valued (greater than) Rs4mn

Increase in FED on imported cars of (greater than) 1,800cc engine capacity from 10% to 20% (Positive for Autos)

FED on cigarettes to increase, smuggling to be curbed

Increase in duty on several imported luxury items, including increase in duties on expensive imported phones

Tax exemptions and certain allowances for prime minister and other government officials have been abolished

Income tax rate on 400k to 2400k (first two slabs) to be unchanged. Tax for the higher slabs of salaried class to be increased but would remain lower than FY18

PSDP target has been set at Rs725bn as compared to Rs661bn achieved in FY18. This is comparatively lower than Rs800bn set by the previous government earlier in the FY19 budget

In addition, the FM announced the following key relief measures:

Provision of urea to farmers by increasing local production and import of 100k tons. Subsidy of Rs6-7bn has been approved.

Sehat Insaf Card (Health Insurance) to the tune of Rs540k per family in FATA and Islamabad to be introduced, which is already being provided by the PTI government in KPK. Instructions have also been given to Punjab government to implement the same in that province

Release of Rs4.5bn for completion of a housing scheme for under-privileged labourers

Minimum pension has been increased by 10% for Employees Old Age Benefit Institutions (EOBI) pensioners, where 85% of all pensioners fall within this category

Regulatory Duty for raw materials of export oriented industries to be made exempt, with relief totaling Rs5bn

Rs44bn benefit for the Punjab-based textile sector through reduction in RLNG costs (Positive for Textiles)

Petroleum levy increased to the tune of Rs100bn during the last budget to be reversed by the government