Author: ibraheem123

  • Experts predict two per cent rate cut as inflation plummets to 44-month low

    Experts predict two per cent rate cut as inflation plummets to 44-month low

    Business owners look towards the State Bank of Pakistan (SBP) to cut interest rates yet again as the inflation rate reached a low of 6.9 per cent in September 2024. The interest rate is expected to fall around two per cent to 15.5 per cent – the lowest in around four years.

    The SBP, like other national central banks, uses the interest rate as a tool to control the inflation rate. With annual inflation rates touching 29.18 per cent in 2023, the SBP set an interest rate of 22 per cent to maintain skyrocketing price levels.

    With inflation rates touching a 44-month low, however, economic experts believe that the state bank will reduce the policy rate.

    Recently, inflation rates have been dropping steadily and September’s sharp decline of 28 per cent in the monthly inflation rate is proof of just that. This is certainly good news for businesses that have been affected by high inflation rates.

    This is because they had been suffering from having to pay extortionate “menu costs”. Menu cost refers to the expense a business has to pay to order new price tags, put up new billboards, and as the name suggests, print new menus.

    Aside from these costs, the previous year saw a slowdown in sales as customers experienced a “sticker shock” factor every time they found out that prices had increased. However, with inflation rates expected to fall to as low as six per cent in October, businesses are expected to recover even faster than last year’s surge in inflation.

    This expected drop in interest rates is likely to spell great news for businesses. This is because investors who had their money parked in savings accounts in banks will find it more profitable to invest in actual businesses.

    This will create a huge shift in funds from savings accounts to business projects.

    For reference, the average return to the sugar industry, considered to be extremely profitable, in 2023 was 18 per cent while interest rates sat at over 20%. A rational businessman would not forgo a risk-free return in favour of a risky investment that has a lower return.

    With interest rates projected to drop to 15.5 per cent, however, a shift in funds will likely be seen from banks to businesses.

    Moreover, the PSX (Pakistan Stock Exchange) has seen an incredible year, sitting at just under 89,000 points. Increased investor confidence is likely to continue with dropping interest rates as more money will pour into the stock exchange from banks.

    Aside from the increase in projected investment levels by external investors, business owners will probably be more inclined to finance projects using debt if interest rates drop. This is because they will know that they now have to pay much lower interest payments if they borrow money.

    Likewise, consumers might also take up these cheaper loans to buy items from businesses – increasing the sales of business owners. If SBP slashes interest rates, businesses are set to profit enormously.

  • Power play: Hope for businesses with 8.55 billion rupee reduction in bills

    Power play: Hope for businesses with 8.55 billion rupee reduction in bills

    Businesses and consumers prepare to celebrate as they may soon see a reduction in their utility bills of up to PKR 8.55 billion. This is because the Central Power Purchasing Agency-Guaranteed (CPPA-G) has proposed for Discos (electricity distribution companies) to decrease the per unit price of electricity by PKR 0.7.

    The lower cost of electricity will serve to greatly benefit households and industries, which consume 47 per cent and 28 per cent of the electricity used, respectively. Businesses in the cement, steel and textiles sectors stand to benefit in the form of higher profits, as they are large consumers of electricity.

    Textile exporters stand to benefit the most as their products will become more attractive to customers in international markets due to their lower prices. Textile exports already stand at an impressive USD 16.655 billion in 2023, with more to gain if the proposal goes through.

    While discos are to return this amount, this won’t be too tough on most of them as they are owned by the government directly. However, the owners of K-electric will not be too thrilled if the proposal is accepted, as it is privately owned, and it will reduce earnings due to the PKR 0.7 negative adjustment.

    For average households and above, this adjustment will reduce the monthly electricity bill by about PKR 150 to PKR 450, resulting in them having more money available. When this money is available to consumers, it will likely create more sales for the goods and services of local businesses.

    Aside from the negative adjustment charges, the coming of winter will also greatly reduce the average electricity bills, allowing local businesses to cash in on consumers having more money available.

    The reduced electricity bills are likely to help grow local businesses while also improving the overall standard of living for Pakistanis. However, businesses are experiencing uncertainty in decision-making with the constantly changing electricity tariffs and adjustment charges.

    While there is a negative adjust charge right now, many speculate that discos are likely to advocate for higher tariffs in the near future to recuperate any losses.

    Businesses are aware of this potential scheme and are weary of the constant changes in electricity, which is a major input in the production of most goods.

  • Cotton’s potential revival: Strong harvest drives 52 per cent increase in ginning factories

    Cotton’s potential revival: Strong harvest drives 52 per cent increase in ginning factories

    Cotton farmers breathed a sigh of relief as the final bale of their successful harvest was loaded onto trucks en route to the ginning factories. After a 48 per cent decline in cotton output from last year, the first fortnight of October recorded an 8.87 per cent increase compared to the same period last year, reigniting the hopes of many in the cotton industry.

    The cotton harvest crossed the one million bale mark compared to the same time last year. This increase in the yields, amounting to an extra 90 thousand bales of cotton, resulted in 184 ginning factories reopening. That is an incredible 52.27 per cent increase in the number of operational factories. The owners of these factories are set to benefit as the factories have gone from collecting dust to receiving cotton trucks.

    At these factories, cotton is cleaned and refined by separating it from impurities such as leaves, dirt and, most importantly, cotton seeds. These seeds are a major byproduct of the purification process and a source of profit for the factory. If farmers manage to increase yields, factory owners can count on getting more seeds with each additional deposit of raw cotton to the factory.

    The availability of these extra seeds will likely translate into an increase in the production of cottonseed oil and animal feed. This is going to spell good news for businesses involved in poultry as the increased supply of animal feed in the market will potentially result in lower feed prices for their hens.

    Due to lower cotton production levels earlier in the year, import deals to bring in approximately 3 million bales of raw cotton have been formalised. However, the cotton is still not on Pakistani shores.

    The wait times associated with the import of cotton by Pakistan from the United States, which sources most of Pakistani cotton imports, is a staggering 44 days. If this cotton was sourced internally from local farmers, however, this time could be cut down to just 2-3 days. Unfortunately though, farmers cannot currently scale up production to meet the domestic demand of cotton.

    If cotton farmers can continue to ramp up production, the business community will not be the sole beneficiary. Pakistan has been importing billions of dollars of cotton, recently being the 5th largest importer of the raw material in 2022. If local farmers can meet domestic demand, the economy will be spared a huge import bill, thereby reducing the balance of the trade deficit, which stood at a glaring $24.8 billion in FY 2023.

    October may mark the end of the woes faced by farmers this year. However, only time will tell if they can reach the level of production they enjoyed just a year prior.

  • Reko Diq to possibly secure $4.5 billion in loans and investments

    Reko Diq to possibly secure $4.5 billion in loans and investments

    Bilateral sources line up to extend loans totalling USD 4.5 billion to Pakistan for the Reko Diq mining operation. Business owners surrounding the mining facility prepare to celebrate as the influx of funds will serve to promote business activity in the region.

    The greatest potential lender is the EXIM (Export-Import) Bank of the United States, which is interested in lending USD 1.5 billion to the Reko Diq mining operation.

    Other lenders like the World Bank, Asian Development Bank and bilateral sources like Canada, Japan, and Germany, among many others also expressed their interest in the project by offering to pitch in the combined value of three billion dollars in loans.

    The inflow of foreign investments and loans is bound to improve the transportation infrastructure of the area around the extraction site – primarily roads. Saudi Arabia has already offered to invest USD 150 million in infrastructure as part of the Saudi investment package into Reko Diq, which has still not been accepted by Pakistan.

    The new roads that will get paved for transporting gold and copper out of the mines will also be used by local businesses to move goods from warehouses to stores. Travel times and costs will witness a drop, helping businesses in the area improve their supply chain.

    This will also make the area around Reko Diq more accessible to tourists and travellers, which will rake in more traffic. With the increase in visitors, local shops, restaurants, rest stops, and other businesses will have the chance to attract more customers.

    Moreover, foreign investments will bring foreign workers to the mining zone who will need housing, food, and other services. New businesses could spring up to meet these needs, which will likely create jobs and reduce the current unemployment rate of 9.13 per cent, which is second only to Kashmir.

    The Government of Balochistan owns a 25 per cent stake in the mining operation. If the loans flow in, Balochistan’s economy will likely see an improvement along with the businesses that call it home.

  • Iran-Pakistan trade talks could yield sugar exporters a 500 million dollar sweet deal

    Iran-Pakistan trade talks could yield sugar exporters a 500 million dollar sweet deal

    Businessmen across Pakistan watched the developments of the meeting between Iran’s Minister of Trade, Mohammad Atabak, and Pakistan’s Commerce Minister, Jam Kamal Khan.

    The meeting ended with an agreement to remove the existing barriers to trade that could greatly increase trade and business activities on both sides of the border.

    The meeting in Islamabad sparked hope for future trade with Iran as the delegation from Tehran invited Pakistan to attend further talks regarding the improvement of economic ties.

    Pakistani sugar exporters would benefit enormously if talks between Islamabad and Tehran led to trade deals. This is because Iran currently spends over half a billion dollars annually to meet its sugar demand – a potential market for Pakistani exporters.

    This is prime time for sugar producers to capture lucrative export deals as the ECC (Economic Coordination Committee) has already directed banks to facilitate the export of an additional half a million tons of sugar.

    Currently, Iran imports sugar from as far away as Belgium and Brazil, a process that can take a staggering 40 days. The Pakistani market, however, could supply sugar to Iran within just 3-4 days due to the fact that the two countries are neighbours. 

    Pakistani businessmen in the agricultural sector will also reap a lot from this potential partnership, just like sugar producers. That’s because in 2023 alone, Pakistan imported nearly half a billion dollars worth of fertilisers, and Iran is a net exporter, so a trade deal between the two neighbours is possible.

    If realised, the import of Iranian fertilisers is likely to drive down fertiliser prices locally, which would benefit farmers. The lower production costs would help increase profitability for farmers and could also make Pakistani agricultural exports even more competitive than they already are in the global market.

    Perhaps the most exciting possibility, however, is the potential for the export of Iranian petroleum to Pakistan. With petrol prices sitting at an uneasy PKR 247 per litre, importing oil from Iran at special rates due to “special clauses” in trade deals could provide relief to both businesses and consumers.

    Atabak has extended an invitation to Jam Kamal Khan for further talks in Tehran, sparking speculation that a trade deal could soon become a reality, which would mark a major step forward in bilateral relations.

    If the discussions result in trade agreements, businesses from both nations will benefit. Industries and citizens are expected to enjoy lower costs and shorter delivery times for imports. The future could very well see Iranian fertilisers being used to grow Pakistani sugarcane, only for that same sugar to make its way back to Iran – a sweet cycle of trade.

  • Taxed for holding back: Banks face 197 billion rupee bill for avoiding private sector loans

    Taxed for holding back: Banks face 197 billion rupee bill for avoiding private sector loans

    Bankers across Pakistan grow uneasy as their pleas to get tax exemptions fall on deaf ears.

    The government, as per the conditions attached to the IMF loan, can not exempt banks from the “additional” tax of PKR 197 billion.

    The reason why banks find themselves in this situation is because of their excessive lending to the government. As per lending regulations, banks are not supposed to withhold loans from the private sector while extending credit to the government.

    To discourage this practice, the government introduced a tax rule in 2022 to encourage banks to increase the number of loans to the private sector. Three major banks alone face a staggering PKR 71 billion tax bill alongside other banks that did not comply with this rule.

    While lawmakers in Islamabad have expressed interest to relieve banks of these additional taxes, IMF rules have their hands tied. Earlier in the year, tax exemptions were in the works. However, Prime Minister Shehbaz Sharif scrapped the idea.

    Following the glaring silence and lack of action regarding the exemption of additional taxes, banks might now scramble to give out billions in loans to the private sector to avoid the tax.

    This spells great news for businesses who are seeking loans as the current situation will likely ease borrowing. With the two per cent State bank slash in interest rates last month and the possibility of future decreases, it seems like high time for businesses to start expanding using debt.

    The primary beneficiaries of the potential loans will most likely be small businesses. The reason behind this is their lack of assets to pledge as collateral to secure funding alongside the lack of good will that currently exists as a result of a non-existent credit history.

    Ultimately, though, through paying taxes or extending loans, the banks will have to contribute. Either way, the economy is likely to benefit – whether by reducing the federal budget deficit or by fueling business activity.

    The choice may not favour the banks, but the country is likely to benefit regardless.

  • Blackboards to profit boards: Defunding public universities can save 61 billion rupees

    Blackboards to profit boards: Defunding public universities can save 61 billion rupees

    International lenders have informed lawmakers in Islamabad to defund public universities as part of the austerity measures of the new loan agreements. Businesses engaged in the provision of higher education are likely to eye these negotiations with great interest as they stand to benefit enormously if these measures are to be implemented by the government.

    If the Ministry of Finance makes this budget cut, large sums of money can be freed up for cash-strapped Pakistan. This is because the current budget to fund public universities stands at a staggering PKR 61 billion annually.

    While unpopular, the argument for budget cuts does have its merits: 80 per cent of public universities are expected to default in 3-4 years.

    Is it better to just cut losses and let the universities fend for themselves?

    International lenders certainly think so as they suggest that universities, after being defunded, should boost enrollment levels, fire unwanted staff and most importantly, increase tuition fees to stay afloat.

    In the absence of government funding, will these measures alone save public universities from going bankrupt?

    The provision of education is a multibillion-rupee business in Pakistan. Following these new developments, education businesses are preparing to mint money off of the wave of students that will likely come their way.

    If public universities are to implement fee hikes, students are likely to opt for private universities. This is due to the fact that private universities are more likely to possess better facilities than their public counterparts.

    Furthermore, if public universities start to default, private universities will get a further boost in enrollment levels, as students will be forced to switch institutions to continue their education. This migration of students from public to private universities will result in higher profit levels.

    This influx of students into these private institutions will serve to benefit their owners directly. However, the same cannot be said for students who will have to bear a higher cost to earn their degree. More concerningly, the closure of public universities might result in the monopolisation of the education sector as public institutions will cease to be valid alternatives.

    For now, all eyes are on the Ministry of Finance. Will public universities be defunded to appease international lenders, or will budget cuts be sought elsewhere?

  • The cost of unrest: PTI protests could deter foreign investments at SCO summit

    The cost of unrest: PTI protests could deter foreign investments at SCO summit

    As Islamabad ramps up security efforts for eight high profile delegations attending the SCO summit 2024, Pakistan Tehreek-e-Insaf (PTI) has thrown a spanner in the works. While whispers of multibillion dollar international investments deals can be heard amongst lawmakers in Islamabad, murmurs about a potential PTI march on the SCO summit are also raising concerns.

    With world leaders slightly shaken by the recent BLA attacks that claimed the lives of two Chinese engineers in Karachi, economic negotiations are progressing relatively unhindered. However, a possible large scale mobilization of PTI protestors poses a severe threat to the economy and businesses.

    This is because foreign investors are likely to perceive Pakistan as a suboptimal destination for their investments due to political instability. This pullback of investor funds will come at a cost to the Pakistani economy in terms of a loss of potential FDI – A loss that cash strapped Pakistan cannot afford to bear.

    As such, in preparation of wide scale protests and possible riots, the government has imposed section 144 until the conclusion of the SCO summit to deter the gathering of dissidents and rioters. This move is a way to portray a politically stable picture of Pakistan so that the multibillion dollar deals with Saudi Arabia and China are not at risk.

    The projects for which Pakistan wants to secure investments include the Reko Diq mining operation and the completion of the M1 railway from Karachi to Peshawar. If investors sense danger from large rallies and protests, Pakistan will lose out – big time.

    There will be no clear winners if PTI protests break out while the SCO summit is in session. Perhaps it would be best if a moratorium of hostilities is observed between the government and opposition. Will PTI temporarily put its differences aside for the interest of the nation or will political interest prevail?

  • Tax evaders beware: Finance minister cracks down to boost tax revenues by $21 billion

    Tax evaders beware: Finance minister cracks down to boost tax revenues by $21 billion

    Pakistan is losing out on approximately $21 billion annually to tax evasion. As Finance Minister Muhammad Aurangzeb tightens the metaphorical noose around tax evaders with his crusade, law-abiding citizens could expect better times.

    This is because, as per the latest federal budget, the interest payments of the debt incurred to finance the fiscal deficit of $30.6 billion will be financed using taxpayer funds. However, if Aurangzeb successfully expands the tax net, this fiscal deficit will fall massively to just a mere $9.6 billion.

    Simply put, there are two ways to narrow a fiscal deficit: either the government can cut down on expenditures, or tax collections can be increased. In a bid to reduce the deficit, the finance minister plans to hold corrupt FBR officials accountable. This is to be done by implementing strict punishments: 10-year prison sentences and hefty fines. And with FBR agents raiding non-taxpaying businesses, the government budget deficit is likely to see a turn for the better.

    The primary culprits of tax evasion are big companies that are responsible for 50 per cent of all unpaid taxes, a figure that translates into an annual loss of PKR 3.4 trillion in revenue for the FBR. With Aurangzeb taking strict action against corporate tax fraud, it is only a matter of time before every non-compliant business is paying its fair tax rate of 29%.

    The motivation behind people skipping out on paying taxes stems from an economic concept known as the “free rider effect”. In simple words, people who don’t pay taxes have just as much a right to enjoy security from the police or acquire free healthcare at a public hospital as opposed to people who do pay their taxes.

    Is this morally right? Perhaps not. However, compliance with tax legislation does not seem attractive—not when selling morality can net non-taxpayers $21 billion per annum by withholding taxes.

    Regardless of morality, though, tax evasion is a crime, and Aurangzeb is not playing softball with people who cross him.

  • CPEC energy debt reprofiling: Economic relief at a billion-dollar price tag

    Pakistanis look on with weary eyes as lawmakers in Islamabad plan to celebrate a possible extension of a $15.4 billion loan. The debt reprofiling for energy-based projects attached to the China–Pakistan Economic Corridor (CPEC) will increase the debt amount by approximately eight per cent, which is huge given that it amounts to $1.22 billion.

    What exactly is debt reprofiling in this context?

    Simply put, Pakistan will get five more years to pay back the loan – all the while, interest will keep racking up on the principal loan amount.

    The repayments of this additional sum exceeding one billion dollars will come from taxpayer funds at the end of the day as Pakistan seeks to climb out of the quagmire of the circular debt problem it finds itself in.

    Since the government has planned not to pay this amount by incurring further debt, this reprofiling will translate into higher tariffs on electric bills – an ugly sight Pakistanis are all too familiar with.

    The hike in tariffs is bound to accelerate the existing trend of installing solar panels on residential properties in urban centres. According to a survey by Gallup Pakistan, over 15 per cent of households have some sort of solar panel system installed. This makes sense as it’s a great return on investment, at just PKR 1.5 million for a decent sized plant.

    With prices for a single solar panel listed under PKR 16 thousand, it is possible that the business community linked with solar panels will see astronomical profits once the tariffs are increased.

    However, this can prove disastrous for the FBR and the Chinese power companies operating in Pakistan under the CPEC project. This will be because revenues may decline when people resort to using grid electricity for their electricity.

    Rumours are circulating that in the wake of the extension of the loan, lawmakers might introduce taxes on green meters linked to home-based solar systems. This will be done in an attempt to expand the energy sector tax net once again – as many have found respite in solar power.

    The rumour, however, maybe just that: A rumour.

    This is because Chief Minister Punjab Maryam Nawaz favours a transition towards sustainability, as proven by her scheme to equip 50,000 households with solar power systems.

    Introducing taxes on solar panels will set her sustainability goals back.

    The arrival of the Prime Minister of China Li Qiang, ahead of the high profile SCO (Shanghai Cooperation Organization) meetings will indeed provide relief to the economy. But can the same be said for citizens when the debt burden gets passed off to the taxpayers? Time will tell.