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Urgent Action Needed on Wheat Support Price to Avoid $1 Billion Import Bill

Khashif Sarfraz
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Urgent Action Needed on Wheat Support Price to Avoid $1 Billion Import Bill

Ministry Urges Swift Action on Wheat Support Price

The Ministry of National Food Security and Research has called on Prime Minister Shehbaz Sharif to quickly announce a new wheat support price and set procurement targets. The ministry warns that failing to act could lead to wheat imports worth over $1 billion.

This urgency comes from conditions set by the International Monetary Fund (IMF), which advises the government to refrain from intervening in agricultural markets. However, farmers are left uncertain about the government’s intentions regarding a minimum support price, making it difficult for them to plan for the upcoming Rabi season.

Potential Impact on Wheat Production

The Ministry of Food warns that without a clear wheat price and procurement plan, there could be a significant reduction in wheat planting this season. This might increase wheat imports, which have averaged $1 billion annually in recent years. In 2023, the government set the wheat support price at Rs3,900 per 40 kg, offering an 18% profit margin. Despite this, domestic wheat production consistently falls short of self-sufficiency.

IMF Conditions and Government Commitment

The IMF has recommended that Pakistan avoid setting support prices for agricultural products as part of a broader effort to deregulate markets. Finance Minister Muhammad Aurangzeb has committed to phasing out price controls by 2026. The ministry, however, has proposed that the government set the wheat support price for Rabi 2024-25 and then discontinue the policy from the next season to align with IMF agreements.

Policy Options on Wheat Pricing

The ministry has presented three options for the government:

  1. Announce a profitable wheat support price for Rabi 2024-25 and set procurement targets.
  2. Avoid setting a support price but allow wheat to be procured at market rates.
  3. Refer the matter to the Economic Coordination Committee for a decision on wheat pricing and procurement.

The ministry emphasized the importance of making a decision before the Rabi season to ensure farmers have the confidence to plant wheat. Without this, Pakistan could face another year of costly wheat imports, worsening the country’s economic situation.

Conclusion

The Ministry of National Food Security stresses the need for quick policy action on wheat pricing to prevent a reduction in wheat sowing for Rabi 2024-25. Delaying this decision could lead to further reliance on wheat imports and strain Pakistan’s already fragile economy.

KSE-100 Index Hits Record High at PSX, Surpasses 87,000 Points

Khashif Sarfraz
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KSE-100 Index Hits Record High at PSX, Surpasses 87,000 Points

KSE-100 Index Hits New Record at PSX

The Pakistan Stock Exchange (PSX) continued its upward momentum on Wednesday, with the KSE-100 Index surpassing 87,000 points for the first time. The index closed at an all-time high of 87,194.53 points, marking a gain of 727.96 points or 0.84%.

During the day, the index touched a record intra-day high of 87,309.22 points, reflecting strong market activity and optimism.

Energy Stocks Drive the Market

The energy sector was a key driver of the rally. Stocks of major companies like HUBCO, K-Electric (KEL), Pakistan Petroleum Limited (PPL), Oil & Gas Development Company (OGDC), and Attock Refinery Limited (ATRL) showed significant gains, drawing investor interest.

What’s Fueling the Rally?

Market experts believe the rally is due to growing expectations of a central bank rate cut, driven by lower inflation forecasts. Mohammed Sohail, CEO of Topline Securities, explained, “The drop in yields in the secondary market, political stability, the successful Shanghai Cooperation Organisation (SCO) summit, and strong mutual fund investments are key reasons for this surge.”

Previous Day’s Gains

This record-breaking session comes after Tuesday’s strong performance when the KSE-100 Index closed at 86,466.58 points, a gain of 409.06 points or 0.48%. That rise was led by aggressive buying from local investors, supported by institutional interest.

Trading Volumes

Trading volume on the all-share index dipped slightly to 699.29 million shares from 722.21 million the previous day. However, the total value of traded shares increased to Rs26.82 billion from Rs25.02 billion.

K-Electric Ltd led the volume chart with 207.63 million shares, followed by WorldCall Telecom with 42.92 million shares and Pakistan International Bulk Terminal (PIBT) at 33.97 million shares.

Market Activity Overview

On Wednesday, 447 companies were traded, with 214 gaining, 173 declining, and 60 remaining unchanged. Meanwhile, the Pakistani rupee stayed steady against the US dollar, closing at 277.73, a minimal increase of Rs0.01.

Government Ends Energy Subsidies to Tackle Circular Debt Crisis

Khashif Sarfraz
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Government Ends Energy Subsidies to Tackle Circular Debt Crisis

Government Withdraws Energy Subsidies

In a bold move, the government has announced the withdrawal of all subsidies on electricity and gas. This applies to federal and provincial subsidies and is a part of efforts to address the ongoing circular debt crisis in Pakistan’s energy sector. The International Monetary Fund (IMF) has been informed about the new measures aimed at stabilizing the economy.

Circular Debt Crisis Reaches Rs4.8 Trillion

Pakistan’s energy sector has accumulated an unsustainable circular debt of Rs4.88 trillion. The electricity sector alone accounts for Rs2.794 trillion, while the gas sector adds another Rs2.083 trillion as of early 2024. This mounting debt has become a significant burden on the national economy.

To counter this, the government plans to raise gas tariffs starting February 15, 2025. Additionally, it will halt gas supply to captive power plants by January 2025, further aligning energy tariffs with production costs.

Energy Tariffs to Reflect Production Costs

The government has committed to collecting the full cost of electricity and gas production from consumers. This marks a shift away from the long-standing practice of providing subsidies. The new policy includes regular adjustments to energy tariffs to prevent the accumulation of further debt.

Gas Tariff Hikes and Privatization Plans

In line with the plan, the Ministry of Finance will notify gas tariff increases by February 2025. The government will also implement other reforms, including the privatization of electricity distribution companies.

In addition, efforts will be made to reduce line losses and improve the overall efficiency of energy distribution networks. These steps aim to make the energy supply more sustainable and cost-effective, preventing the circular debt from spiraling further out of control.

Oil Industry Raises Alarm Over Restrictive Fuel Pricing

Khashif Sarfraz
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Oil Industry Raises Alarm Over Restrictive Fuel Pricing

Oil Industry Concerns Over Restrictive Pricing

The oil industry in Pakistan has raised serious concerns over the restrictive pricing of motor fuels, which has reportedly caused significant financial losses. The Oil Companies Advisory Council (OCAC), representing refineries and oil marketing companies (OMCs), expressed these concerns in a letter to the Oil and Gas Regulatory Authority (OGRA) chairman. The council warned of potential consequences if the pricing issues were not addressed promptly.

Losses from Reduced Customs Duty and Freight Margins

The OCAC highlighted a deviation from the government-approved pricing formula, effective from October 16, 2024. In particular, customs duty on high-speed diesel (HSD) was reduced from Rs15.18 to Rs13.26 per litre, a Rs1.92 decrease. According to the OCAC, this reduction will result in a loss of around Rs700 million for the industry during the second half of October.

In addition to customs duty cuts, the inland freight equalisation margin (IFEM) was also reduced. The IFEM for HSD was slashed by Rs3.04 per litre and for petrol by Rs4.07 per litre. These cuts were made by including an adjustment to the refinery regulatory duty of Rs3 billion. This, the industry claims, will lead to a less-than-expected recovery of freight costs, creating additional financial pressure on oil marketing companies.

Call for Consistent Pricing Adjustments

The OCAC urged OGRA to ensure that price adjustments are spread evenly across multiple pricing periods to avoid sharp fluctuations and financial exposure for the industry. The letter highlighted that OGRA has always insisted on spreading adjustments evenly, particularly related to recoveries for pipeline losses and other costs.

The advisory council emphasized that manipulating oil prices is unsustainable and could lead to further challenges for an industry already struggling with various issues. These include high financing costs, smuggling, insufficient profit margins, high turnover tax, and the impact of sales tax exemptions.

Industry Urges Price Formula Implementation

The OCAC called for an immediate revision of prices based on the government-approved formula to ensure the oil sector’s viability. It stressed the importance of implementing the pricing formula in its true letter and spirit to avoid supply chain disruptions.

The council also pointed out that without proper pricing mechanisms, the industry’s challenges could worsen, threatening the overall stability of the oil supply chain in Pakistan.

Pakistan’s Forex Reserves Cross $11 Billion Amid Positive Economic Indicators

Khashif Sarfraz
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Pakistan’s Forex Reserves Cross $11 Billion Amid Positive Economic Indicators

Pakistan’s Forex Reserves Reach $11 Billion After 30-Month Gap

Pakistan’s foreign exchange reserves, held by the State Bank of Pakistan (SBP), rose to over $11 billion as of October 11, 2024. This marks an increase of $215 million in a week and a significant milestone after 30 months. The reserves have grown for 12 consecutive weeks, reflecting an overall increase of $2 billion in three months. The International Monetary Fund’s (IMF) $7 billion loan program, initiated in September, contributed to this rise. The inflow of IMF funds, along with strong remittance inflows, supported the growth.

Rupee Stability and Improved Import Cover

The Pakistani rupee appreciated by Rs0.05 against the US dollar in the inter-bank market, ending a brief losing streak. The SBP’s active dollar purchases to repay foreign debt and boost reserves played a role in this stabilization. With the latest surge, Pakistan’s import capacity has expanded to over two months, a significant improvement from less than one month in June 2023. The SBP Governor predicts that foreign exchange reserves will rise to $13 billion by June 2025, supported by healthy remittance inflows and export growth.

RDA Inflows and Market Impact

Roshan Digital Account (RDA) inflows also contributed positively, increasing by $168 million in September, bringing total deposits to $8.75 billion since the scheme’s inception. Net inflows amounted to $1.53 billion, stabilizing reserves. Overseas Pakistanis primarily invested in Naya Pakistan Certificates (NPCs), Shariah-compliant NPCs, and the stock market.

Economic Outlook for FY2024-25

Despite positive trends, Pakistan’s economy faces challenges. The SBP’s annual report indicated that while industrial and services sectors are expected to grow in FY2024-25, the agriculture sector may not maintain its momentum due to a decline in cotton arrivals. The central bank forecasts real GDP growth between 2.5% and 3.5%, up from 2.5% last year. The services and industrial sectors show recovery, while remittances are projected to reach $32-33 billion in FY2025. However, volatility in global energy prices poses a risk to economic stability.

Inflation and Policy Adjustments

Headline inflation has been on a downward trend, falling to 6.9% in September 2024. The SBP lowered the policy rate by 4.5 percentage points to 17.5%, reducing borrowing costs and supporting industrial expansion. Despite the challenges posed by global oil prices and fiscal slippages, inflation is expected to remain in check.

The SBP continues its efforts to stabilize the economy through fiscal consolidation, maintaining positive real interest rates, and boosting foreign exchange reserves. While structural challenges like low investment, climate change risks, and energy sector inefficiencies remain, the outlook for FY2024-25 is cautiously optimistic.

Chinese Firm Commits $1 Billion for PRL Upgradation

Khashif Sarfraz
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Chinese Firm Commits $1 Billion for PRL Upgradation

Chinese Firm Pledges $1 Billion for PRL Upgradation

A Chinese investment corporation has agreed to invest $1 billion in Pakistan Refinery Limited (PRL) to support its upgradation project. This move will significantly enhance the refinery’s production capacity, boosting it from 50,000 barrels per day to 100,000 barrels per day. However, the Chinese firm has placed a strict condition on the deal. They have made it clear that they do not want any government involvement in the repayment process. The Chinese company expects PRL to repay the loan in dollars, without interference from the Pakistani government.

Dollar Repayment and Export Plans

Currently, the State Bank of Pakistan (SBP) allows the private sector, including refineries, to retain dollars for investment purposes. The Chinese firm has urged that such controls should be eliminated to ensure smooth repayment. PRL has assured the investor that it will generate the required dollars through the export of petroleum products. These earnings will then be used to repay the Chinese investment corporation. Additionally, China Export & Credit Insurance Corporation (SINOSURE), which promotes China’s foreign trade, has also insisted on no government control over the dollar remittances.

PRL’s Expansion and Modernization Goals

PRL is currently undergoing an upgradation project to transition from a basic hydro-skimming process to a deep-conversion process. This shift will allow the refinery to produce Euro 5 compliant high-speed diesel (HSD) and motor spirit (petrol), reducing its reliance on the less profitable furnace oil. Although after the expansion, PRL’s annual production of motor spirit is expected to rise from 250,000 tonnes to 1.5 million tonnes. Similarly, HSD production will increase from 600,000 tonnes to 2 million tonnes. This project aligns with PRL’s strategy to meet growing domestic demand and contribute to a more environmentally friendly energy landscape.

Collaboration with China’s United Energy Group

PRL has signed a memorandum of understanding (MoU) with China’s United Energy Group (UEG) to begin the refinery’s significant expansion. The partnership will play a crucial role in modernizing Pakistan’s energy infrastructure and improving fuel quality. In addition, PRL has signed licensing agreements with Honeywell UOP and Axens, global leaders in refinery technology, to produce gasoline and diesel that meet Euro 5 specifications.

Pakistan Refinery Policy and Future Investment

Pakistan’s Oil Refining Policy for Up-gradation of Existing/Brownfield Refineries 2023 incentivizes refineries to upgrade their plants and produce Euro-V fuels. The policy offers a 2.5% incremental incentive on HSD and a 10% incentive on petrol in the form of deemed duty for seven years. However, PRL, along with Attock Refinery Limited (ARL) and National Refinery Limited (NRL), has committed to investing a total of $3 billion in upgrades. Once Pak Arab Refinery (Parco) and Cnergyico PK join the project, the total investment will reach $6 billion. The Cabinet Committee on Energy (CCOE) recently extended the deadline for refineries to sign implementation agreements for these upgrades, ensuring that the upgradation of Pakistan’s energy sector continues at a steady pace.

LHC Rules Against Retroactive Property Tax

Khashif Sarfraz
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LHC Rules Against Retroactive Property Tax

LHC Blocks Retroactive Income Tax on Property Transactions

The Lahore High Court (LHC) has ruled that the Federal Board of Revenue (FBR) cannot impose newly introduced income tax rates for late filers on past property transactions. The decision came after the Defence Housing Authority (DHA) filed a petition, challenging the FBR’s application of higher tax rates on deals closed in earlier tax years.

DHA argued that the amendments made through the Finance Act 2024, which introduced higher withholding tax rates for filers, late filers, and non-filers, should only apply to transactions made after the law’s enactment. The LHC agreed, ruling that the law cannot apply retroactively unless explicitly stated.

Impact of New Tax Rates on Real Estate

The court clarified that Rule 1A, which introduced the new tax categories, “shall not affect past transactions”. This means property deals concluded before the 2024 Finance Act cannot be taxed under the new rates.

In the 2024 budget, the government raised withholding taxes on:

  • Property sales: 4% for filers, 8% for late filers, and 10% for non-filers.
  • Property purchases: 4% for filers, 8% for late filers, and 20% for non-filers.

Despite these increases, withholding tax collection dropped by 7% in the first quarter of the fiscal year. The FBR collected Rs48 billion, down by Rs3.1 billion compared to the previous year, reflecting slower activity in the real estate sector.

Court’s Recommendations to the FBR

The LHC stressed that fiscal laws cannot be applied retroactively unless this is explicitly stated by lawmakers. The court suggested that the FBR should hire experienced draftsmen to avoid such legal challenges in future legislation.

Moreover, the extension of tax return deadlines this year has further complicated the issue. The FBR extended the deadline to October 30, which diluted the purpose of the late filer category. This also turned it into a tool for additional tax collection rather than a means to encourage timely filings.

Future Outlook

This ruling serves as a reminder that clearer laws are essential for effective tax collection. While past transactions are protected by this ruling, the FBR will need to balance its push for higher compliance with its need to meet revenue targets in the future.

Habib Bank Limited Reports PKR 14.5bn Profit for 3QCY24

Khashif Sarfraz
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Habib Bank Limited Reports PKR 14.5bn Profit for 3QCY24

HBL Reports PKR 14.5bn Profit for 3QCY24 with Strong Non-Funded Income Growth

Habib Bank Limited (HBL) reported earnings of PKR 14.5 billion (EPS: PKR 9.85) for the third quarter of 2024 (3QCY24), reflecting a year-on-year (YoY) decline of 13% but a quarter-on-quarter (QoQ) increase of 1%. For the first nine months of 2024 (9MCY24), the bank’s total earnings reached PKR 44.0 billion, a 3% YoY increase. Along with the results, HBL announced a cash dividend of PKR 4/share for 3QCY24, taking the total payout for 9MCY24 to PKR 12.0/share.

Key Highlights of 3QCY24 Results

  • Net Interest Income: HBL’s interest earned in 3QCY24 amounted to PKR 218 billion, up 14% YoY and 4% QoQ. However, interest expense also rose by 23% YoY and 4% QoQ, reaching PKR 154 billion. As a result, Net Interest Income (NII) stood at PKR 64 billion, reflecting a 2% YoY decline but a 4% QoQ increase.
  • Non-Funded Income (NFI): The bank’s Non-Funded Income surged by 63% YoY in 3QCY24, bringing the total for 9MCY24 to PKR 60.7 billion, marking a 59% YoY increase. This significant growth was driven by a 20% YoY increase in fee income, which reached PKR 36.6 billion. Additionally, foreign exchange income soared to PKR 5.6 billion, compared to PKR 1.6 billion in the same period last year. Other income also saw a remarkable 110% YoY increase to PKR 9.3 billion in 9MCY24. The bank recorded a PKR 6.6 billion gain from the sale of securities, a significant improvement from a PKR 307 million loss in the same period last year.
  • Provisioning: HBL recorded a provisioning charge of PKR 8.9 billion in 3QCY24, bringing the total provisioning for 9MCY24 to PKR 19.0 billion. This is a sharp increase compared to the PKR 7.4 billion provisioning charge in 9MCY23.
  • Operating Expenses (OPEX): The bank’s OPEX rose by 8% YoY and 4% QoQ, amounting to PKR 47.9 billion in 3QCY24. Despite the increase, HBL’s cost-to-income ratio improved slightly, standing at 56.5% compared to 57.1% during the same period last year.
  • Effective Tax Rate: The bank’s effective tax rate increased to 49.3% in 3QCY24, up from 48.1% in the same period last year.

Outlook

HBL’s 3QCY24 results show solid growth in non-funded income, particularly from fees and foreign exchange gains. However, rising provisioning charges and higher operating expenses indicate some challenges. The bank’s continued focus on non-interest income sources is expected to support future earnings, despite a higher tax burden and rising costs.

PSX Rebounds with 578-Point Surge

Khashif Sarfraz
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PSX Rebounds with 578-Point Surge

PSX Gains 578 Points as Political Tensions Ease and Corporate Earnings Shine

The Pakistan Stock Exchange (PSX) saw a sharp rebound on Tuesday, advancing by over 550 points driven by a surge in blue-chip stocks and renewed investor confidence during the corporate earnings season.

The KSE-100 index initially dipped to an intra-day low of 84,856.21 points, reflecting losses from the previous day. However, it quickly reversed course as political tensions eased following the opposition’s decision to call off planned protests.

Investor optimism surged with strong corporate earnings forecasts and key developments at the Shanghai Cooperation Organisation (SCO) summit. Additional factors contributing to the market’s rise included rupee stability and ongoing government discussions surrounding China-Pakistan Economic Corridor (CPEC) phase-II.

As a result, the market gained momentum, with the KSE-100 index surpassing the 85,000 mark, peaking at 85,893.99 points before closing just below that at 85,840.34 points, registering a 578.96 point rise.

Blue-Chip Stocks Lead the Rally

According to Ahsan Mehanti, Managing Director of Arif Habib Corp, the bullish market was led by blue-chip shares. Investors showed confidence due to strong earnings outlooks and diplomatic gains at the SCO summit. Political stability, rupee strength, and progress on CPEC phase-II were key factors driving the positive close.

In its daily commentary, Topline Securities highlighted that the fertilizer and exploration & production (E&P) sectors were the major contributors to the market’s rally. Investor enthusiasm remained high as many anticipated new investment opportunities arising from the SCO summit.

Key contributors to the index’s rise included Mari Petroleum, Engro Fertilisers, Oil and Gas Development Company, Attock Refinery, and Fauji Fertiliser, collectively adding 425 points to the index.

Stock Market Performance Overview

At the close of trading, the KSE-100 index gained 578.96 points or 0.68%, ending the session at 85,840.34. A total of 443 companies were traded, with 202 stocks rising, 174 declining, and 67 remaining unchanged.

The day’s volume leader was PTCL, with 37.9 million shares traded, followed by Hub Power and Kohinoor Spinning Mills. The total trading volume for the day was 422.1 million shares, slightly lower than Monday’s figure of 477.6 million shares, while the value of traded shares stood at Rs24.5 billion.

Foreign investors sold shares worth Rs379.6 million, according to the National Clearing Company of Pakistan Limited (NCCPL).

Outlook

Analysts from JS Global and Arif Habib Limited cautioned that the market may see some profit-taking in the coming sessions. However, investors are advised to book profits at current levels and await future buying opportunities following market dips.

Banks Face Rs197 Billion Tax Burden Due to Excessive Lending to Government

Khashif Sarfraz
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Banks Face Rs197 Billion Tax Burden Due to Excessive Lending to Government

Banks Face Rs197 Billion Additional Tax for Lending to Government

A tax advisory firm, Tola Associates, has projected that banks in Pakistan will face an additional income tax burden of Rs197 billion due to excessive lending to the federal government. This tax will be imposed on 27 banks—both domestic and foreign—that have significant operations in the country.

Additional Tax Due to Low Private Sector Lending

The additional tax stems from the advance-to-deposit ratio (ADR), which incentivizes banks to lend to the private sector. If their lending to the private sector falls below a set threshold, they must pay 10-15% additional income tax. According to Tola Associates, the tax is based on audited financial statements from tax year 2024 and projected liabilities for 2025.

If the banks manage to increase their lending to the private sector in the remaining months of 2024, their tax burden could decrease.

Escalating Tax Liabilities for Banks

The total tax impact on banks for tax year 2024 was Rs612 billion, with significant exemptions. However, the projected additional tax liability for 2025 is Rs197 billion, which could increase further depending on profit levels. The additional tax was introduced in 2022 to encourage private-sector lending instead of government debt, which banks often favor for its lower risk.

Lobbying for Tax Exemption

Banks are actively lobbying the government for an exemption from this additional tax, arguing that they are being forced to lend to the government due to restrictions on direct State Bank of Pakistan (SBP) lending to the state. The Pakistan Banks Association is expected to respond soon.

If granted, the tax exemption could significantly reduce government revenue, worsening the fiscal shortfall. However, under Pakistan’s agreement with the International Monetary Fund (IMF), the government is prohibited from offering such tax exemptions.

Regulatory Evasion and Concerns

Former minister Ashfaq Yousaf Tola has raised concerns about banks exploiting loopholes to evade the additional tax, such as using deceptive practices like “round-tripping” funds. He recommended that the SBP should audit banks to prevent such evasion and proposed changes to calculate the ADR based on a yearly average rather than the year-end balance.

With banks pushing for tax relief, this situation will have a significant impact on Pakistan’s revenue collection and banking sector policies.

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