Pakistan Investors Cheer Finance Bill But Budget Holes Remain

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Pakistan stocks have been rallying since Finance Minister Asad Umar presented what he called a “mini-budget” — officially called the Finance Supplementary Bill of 2019. The bill aims to improve the business environment in the South Asian nation, and investors applauded the measures. However, analysts from one firm note that more information on Pakistan’s financial standing is still needed.

Pakistan targets businesses

Credit Suisse analysts Fahd Niaz and Farhan Rizvi outlined and analyzed the details about the Finance Supplementary Bill, which is now up for debate in the Pakistan Senate. The bill proposes to offer tax relief to important sectors while offering incentives for the capital markets in Pakistan. It also tweaks the taxation regimes, although it doesn’t improve any new direct taxes.

However, the big problem the Credit Suisse team sees is that it doesn’t address the continuing shortfall in tax revenue or address Pakistan’s national deficit.

Boosting profitability in most sectors

The Finance Supplementary Bill of 2019 proposes to abolish the Super Tax for non-banks starting in July. The tax is currently set at 3%, and it’s scheduled to be phased out in three years if the new bill doesn’t pass. Banks will still pay the 4% Super Tax levied on them until about 2021, and instead of the tax falling 100 basis points annually until then, it will be kept the same.

The bill also proposes to remove the 5% tax on undistributed reserves for companies with payout rations that are less than 20%. The CS team notes that this provision had previously forced some companies to life payouts in an attempt to avoid having to pay the tax. The Pakistani government also plans to offer relief on the inter-corporate dividend.

The Finance Supplementary Bill could also incentivize investments in Special Economic Zones in Pakistan. Officials plan to remove customs duties and sales taxes on imports of machinery and equipment for plants and greenfield projects. They also want to extend the income tax holiday for this sector for five years after these projects are commissioned.

Pakistan stocks rally, but more details needed

The Credit Suisse team expected stocks in Pakistan to react positively, and they certainly have so far. They specifically highlighted the benefits the bill would provide to the auto, fertilizer and textile sectors. They also expect some tailwinds in the form of earnings upgrades after the relief measures are officially enacted. Based on the sectors which should benefit from the Finance Supplementary Bill, the analysts especially like Engro Fertilizers, Pakistan Petroleum and Lucky Cement.

However, from a fiscal standpoint, the Credit Suisse team believes more information is needed. When revealing the finance bill, Umar didn’t provide any details on the status of Islamabad’s negotiations with the International Monetary Fund for a bailout. He did say they intend for the next IMF program to be Pakistan’s last, however.

The Credit Suisse analysts also believe the new finance bill “lacks any concrete measures to address the continued revenue shortfall and curtain fiscal deficit.”

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