CONTENTS
12 12 How might the Coronavirus outbreak affect Pakistan’s economy? 16 DIRBS is a bust, but there may be a way out yet 20 Citibank Pakistan scaled back, and became bigger than ever 26 Rs5.2 trillion tax target? Pakistan will needs a miracle
30 30 Will the PBIT be the catalyst Punjab needs to become an investment hub? 34 Change the sheriff, do not increase our taxes Nadeemul Haq 36 Two years after commencing operations, PIBT finally manages to make a profit
37 37 Faltering Fauji: why a lack of expansion will hurt the cement company in the long run 40 Meezan Bank had a profitable 2019, but stays cautious for the year ahead 41 Rising interest rates bolster profits at Bank Alfalah
welcome
Absurd demands from would-be autocrats The news that the government of Pakistan plans to demand that social media giants such as Facebook, Twitter, TikTok, etc. set up offices – including setting up servers – inside Pakistan as a condition of being allowed to operate in the country is so blatantly absurd that we were hoping we would not have had to address it at all. Unfortunately, given the kind of small-minded policymaking that is currently taking place in Islamabad, perhaps we should not be surprised that the idea was being considered. Let us break down precisely why this is absurd. At the moment, Facebook and Google both have market capitalisations that exceed the total size of the entire Pakistani economy. We are not in a position to dictate terms to these companies at all. While Pakistan may account for a substantial number of users for their websites, the country accounts for an insignificant proportion of both revenue and profits. In other words, we need them way more than they need us. Secondly, in what universe is it a good idea to try to get a company to do more business in your country by threatening to kick them out if they fail to comply with new, capriciously imposed legal requirements that would dramatically increase their cost of doing business in the country and reduce its
desirability? What, precisely, does the government think it will achieve by acting like a petulant child? And lastly, why does the government believe that the additional demand that they be allowed to dictate what type of content is available on what are fundamentally (user-generated) content companies is likely to go well? Yes, these companies occasionally bend their rules for larger, more important economies, but we are neither of those things. Why does the government of Pakistan insist on embarrassing its citizens with these childish demands that reflect neither an intelligent understanding of how the world works, nor the emotional maturity of dealing with the country’s economic reality? Of course, the fact that the government wants to impose these conditions as a means of seeking to control what the citizens of Pakistan say or think is the most offensive of all aspects of this preposterous proposal. The only relief is that the government will likely be laughed out of the offices of the largest, most powerful companies in the world when they go to present these so-called “demands”.
Farooq Tirmizi Managing Editor
Executive Editor: Babar Nizami l Managing Editor: Farooq Tirmizi l Joint Editor: Yousaf Nizami Reporters: Syeda Masooma l Taimoor Hassan l Abdullah Niazi l Meiryum Ali Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) l Layout: Rizwan Ahmad l Photographers: Zubair Mehfooz & Imran Gillani l Publishing Editor: Arif Nizami l Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk
FROM THE Managing EdiTOR
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The numbers for the generation of electricity can be a reliable barometer of economic activity in the county. In the chart above, for instance, it is immediately obvious that there was a sharp decline in economic activity in the fiscal year ending June 30, 2019. What is even more telling, however, is the manner in which the country’s electricity grid generates power, specifically the fuel mix utilised to generate electricity. Over time, Pakistan’s fuel mix has grown simultaneously cleaner and dirtier. It is cleaner in the sense that 39.1% of Pakistan’s electricity generation comes from non-carbon-based sources for the 12 months through November 2019, which is a sharp rise from 29.9% as recently as fiscal year 2018. However, notice the rise of coal-fired power plants in the energy mix, which is wiping away whatever progress the country is making towards reducing our carbon footprint.
News IN NUMBERS
IN BRIEF Good news for Pakistan: the country managed to escape the Financial Action Task Force’s blacklist, and will remain on the grey list until June
2020
Pakistan has been on the FATF’s grey list since July 2018 for not meeting its conditions regarding terror financing.
Gold prices in the local market rose this week to an alltime high of
Rs93,650 per tola, up from Rs1,150 per tola. The surge mirrors the international market, where gold rates have risen from
$23
per ounce to $$1,635 per ounce, mostly due to fears over the COVID-19 outbreak.
A panel on ‘Financial Inclusion and Women Empowerment’ at the upcoming Karachi Literature Festival featured State Bank Governor Reza Baqir, HBL CEO Muhammad Aurangzeb, Planning Minister Asad Umar, and Advisor to the Prime Minister on Institutional Reforms Ishrat Hussain; it also featured no women. After online flak, as of now, the KLF has removed the ‘manel’ from their website.
‘Tis the season for banks’ end-of-year financial statements: high interest rates in the second half of
2019
have led to almost all Pakistani banks seeing a rise in their profitability. Faysal Bank’s profit rose
24%;
Askari Bank’s profit rose 59%; Bank Alfalah’s profit rose 19%; and HBL’s profit rose 25%.
The Supreme Court has ruled this week that the CEO of Pakistan International Airlines cannot have two jobs. The recently removed CEO of PIA, Arshad Malik, was also a serving Air Marshal of the Pakistan Air Force.
President Arif Alvi has ordered a
2%
job quota in all banks for differently abled people. The order came after a meeting with the State Ban Governor Reza Baqir on financial inclusion for differently abled people, such as special credit schemes, and providing bank forms in Braille.
Online produce and grocery delivery service Mandi Express has raised an astonishing
$725,000 in pre-series A-Round from Lakson Venture Capital, and Disrupt.com. The services documented the value chain at Karachi’s Sabzi Mandi, and collects price data for buyers at daily auctions.
The Ehsaas Programme kicked off this Friday, with seed money of Rs12 billion. Punjab Chief Minister Usman Buzdar claims the programme will benefit 1.8 million people directly, and another 6.4 million people indirectly.
The Federal Board of Revenue has sent notices to 24 fashion houses and designers for tax evasion. The list includes Wardah Saleem, Saniya Maskatiya, Waqar J. Khan, Rozina Munib, Saleha, Mahin, Ayesha Sarfaraz, Basic, Sable Vogue, Zuri by Zainab Fawad, House of Farah V and Sanam Chaudhri. Interestingly, all of the above names had a recent showing at a boutique in Karachi, with the FBR’s list copying even the order of the names presented. 11
I
By Meiryum Ali
f you think the global paranoia and hysteria surrounding the 2019 coronavirus outbreak is a little overblown, you are wrong. The disease, which began in Wuhan, China, and has now been named COVID-19 (CO-rona VI-rus D-isease 19) has now infected more that 70,000 people and killed more than 1500.
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Though the fatality rate is much lower than the Severe Acute Respiratory Syndrome (SARS) epidemic of 2003, and Middle East Respiratory Syndrome (MERS) epidemic of 2012, the infection rate is much higher. Hong Kong’s public health epidemiologist recently declared that up 60% of the world’s population could be infected, if the virus is not stopped. Southeast Asian countries have more than 30 or so cases reported (with the virus even reportedly reaching Bali). In response, China is doing what it does best: imposing lockdown on massive chunks of its own population. It is not just the control of people or goods in at least 16 of its own cities that have been quarantined – China has even started disinfecting its own bank notes. And the country has every reason to panic – it is the world’s second biggest economy, with a GDP of $13.6 trillion, and an average growth of around 7% every year. Last year, growth was at about 6%, which is slow by Beijing’s standards. But now, analysts are predicting anywhere between a 5% to 3% growth rate in 2020, because of the virus. Why is this happening? As The Guardian recently reported, many factories have delayed opening after the lunar year out of fears of the virus. Small and medium businesses have been extremely affected by the general climate of fear. And the impact is also being felt regionally: Chinese tourists, a big source of income in Southeast Asian countries, have dropped significantly by 55%. There is a precedent of global diseases causing mayhem on the world economy. Consider the SARS epidemic of 2003, which killed around 750 people and infected 8,000. The damage was estimated to be between $30 to $50 billion. And right now China’s economy represents 10.9% of global goods imports in 2018, compared with 5.3% in 2003, when SARS happened. Even now, some economists are speculating that COVID-19 could shave off 0.3 percentage points off global growth. And then in the midst of this global paranoia and financial worry, there is Pakistan, China’s next door neighbour. Whatever you can say about the global response, one thing is certain: on just about every level, Pakistan’s reaction to COVID-19 has been patently absurd. There seems to be no national coherent policy about what to do, regardless of what officials from the ruling Pakistan Tehreek-i-Insaf (PTI) claim. First, Dr. Zafar Mirza, Special Assistant to the Prime Minister on National Health Services, Regulations and Coordination showed up at airports for photo ops with screeners – that simply check for fever. There are 41 flights from China to Pakistan weekly, and yet Paki-
“We are thankful to the Pakistani government and people for showing solidarity in our difficult time which provide us strength and more confidence” Yao Jing, Chinese Ambassador to Pakistan
stan did nothing to check up on the passengers coming in. When it finally banned flights on January 29th, it had to then un-ban flights just three days later, because of unofficial Chinese pressure. As a reminder, even North Korea has curbed travel from China to North Korea. Despite this casual attitude displayed when it comes to flights, simultaneously Pakistan remains one of the few countries that refuses to evacuate its own citizens trapped in Wuhan. There are currently 800 Pakistani students who remain stuck in China. Some are praising Pakistan’s pragmatic approach, arguing that Pakistan does not have the capacity or resources to be able to take handle an outbreak. This is true – Pakistan is also one of two countries in the world that can not seem to eradicate polio, forget COVID-19. Let us for now take the word of Dr Zafar Mirza, who claims that there are still no confirmed cases of the virus in Pakistan. Let us hope that stays true, if for the sake of our own healthcare infrastructure. But what about our sluggish economy? If China’s factories are shut down, or are delayed, can our economy handle the disruption? Can it withstand the effects of COVID-19? If you look at recent reports, it does not look promising.
Pakistan’s industries
T
he first to be affected are our industries. A February 11 report prepared by AKD Securities, an investment bank, is somewhat ominously titled “Coronavirus has all the trappings of a ‘black swan’”. (A black swan, by the way, is a low probability event, with extreme consequences.) The report makes the case that Pakistan, which is geographically and closely aligned with China, will be negatively affected by the manufacturing disruptions on China. In particular, the country’s domestic import of goods will definitely be impacted, and there might also be a chance of possible supply chain
disruptions. The major trade risk is based on the fact that China has a very strong position in Pakistan’s import mix. Consider: of the top 20 commodities imported in the fiscal year 2019, China was the top supplier for 18 of them. These include: electrical material for telephones, fertilizers, synthetic yarn, semiconductors, medical instruments and others. For 12 of these commodities, China constituted more than 50% of the total value imported. For 10 of those commodities, China forms 25% or more of the total global export market. According to the analysts at AKD, there are significant risks to the cable and electrical and autos supply chain in Pakistan. That is because much of the core parts of these industries are sourced from China. These include flat steel grades, semiconductors, air conditioning parts, and compressors. The problem is not just that there is a supply chain problem – it is that, China, being China, has a very large share in global markets for all sorts of products. So even finding alternatives countries that provide those goods will be a “tough and expensive” challenge for Pakistan. For instance, China has a near monopoly on the production of synthetic filament, fiber and yarn. It also has a large share in steel and chemicals. In fact, any industry that has components sourced from China, or requires sponsors of Asian origin, will have difficulty in the upcoming period. The report claims that supply chains for industrial manufacturing, auto assembly and parts, food equipment, steel and chemicals are all susceptible to some form of delay or disruption. Because of this, capital expenditure is likely to rise within industries. That is because sourcing equipment from Europe or other developed East Asian countries will probably lead to cost overruns. On the bright side, though, any long cycle
EPIDEMICS
“For many of these countries [reliant on China’s Belt and Road Initiative], the projects are a major driver of investment growth. Interruptions to capital or labour availability, or delays in implementation could hurt growth, if the effects of the viruses were prolonged” Anuskha Shah, analyst at Moody’s infrastructure projects, such as those in power or transport will have a little more leeway. This is because of the nature of those project’s extended timeline, which means COVID-19 will hopefully have subsided. Interestingly, there is a possibility, where some local manufacturers might actually have an advantage in the short term due to this outbreak. Any local manufacturers that produce the above mentioned goods that China used to export to Pakistan, will now be able to reap some kind of benefit. This benefits non-urea fertilizer companies the most. According to the report, this could include Fauji Fertilizer, particularly in the domestic market for Diammonium Phosphate (DAP) fertilizers. The Fatima Group could also benefit, particularly in Calcium Ammonium Nitrate (CAP) and Nitrogen, Phosphorus and Potassium (NPK) production. Additionally, ICI Pakistan and Lotte Chemicals, which produce synthetic filaments, can also benefit. However, these are just a few small players. On a whole, it is not likely that just because China has slowed down their production, that Pakistani production and exports can suddenly pick up. As the report clearly states, “We believe export growth emanating from any decline in global exports are at this point far-fetched.” This is because our exports are generally of low complexity. And much of our exports themselves are also reliant on semi-finished or processed imports that are linked, again, back to China. In reality if our exports are actually to benefit, it will be less to due to the the COVID-19 outbreak, and more to to do with the long term, Pak-China Free Trade Agreement (FTA), which has at least 313 tariff likens that do not have duties applicable. The report has points about the market as well: essentially, that “From a market perspective, heavy weightage banks and the upstream oil and gas sector are well shielded from the crisis. Also energy intensive industries, like cements or Regasified Liquid Natural Gas (RNLG) reliant textiles might momentarily benefit from the risk of slow Asian growth.” Is there still hope? Markets will only
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respond better if they see any improvement in the economic slowdown. That will mean seeing economic activity resume in major cities, industrial activity resume, and a slowing of additional confirmed cases. As of now, that still remains to be seen.
Long term growth and financing for Pakistan
T
here is one more interesting report on COVID-19 – this time from the international credit rating agency Moody’s. The report, “Governments most exposed to economic repercussions of coronavirus tend to have strong fiscal and external buffers”, prepared by analyst Anuskha Shah makes the case that the economic effects of the outbreak will continue for a number of weeks, after which they will tail off and normal economic activity will resume. However, the direct impact of the outbreak will fall on Asia Pacific (APAC) (which includes Pakistan), and not so much on Europe and the Americas. For the world, those economic implications will exhibit as a fall in tourist arrivals (which is already happening), weaker exports of goods to China, and disruption in the Chinese supply chain. Most of the impact will be on countries that rely on Chinese tourists, like the Maldives, Thailand, Cambodia, and Vietnam. Other countries that will be impacted are those that export heavily to China, such as Taiwan, Hong Kong, Malaysia, and South Korea. Finally, commodity-producing countries might be impacted, such as Zambia and the Republic of the Congo. Fortunately, (or unfortunately, depending on how you look at it), Pakistan neither relies heavily on Chinese tourists, nor exports substantially to China, nor really produces commodities. However, there are two ways in which Pakistan’s economy might be affected. The Moody’s report takes the view that this COVID-19 outbreak is temporary, and will pass in a few weeks or months. And that even the countries that are most exposed, have ample fiscal buffers to deal with a transitory shock. However, if there is a sustained outbreak
that might start having implications for countries that are doing so great. That would include frontier markets, like ourselves. As the report notes, about 130 countries globally, specifically in Central Asia, sub-Saharan Africa and APAC, are engaged in Belt and Road projects with China. “For many of these countries, the projects are a major driver of investment growth. Interruptions to capital or labour availability, or delays in implementation could hurt growth, if the effects of the viruses were prolonged.” This would mean that CPEC projects might have to be put on hold. As of now there are 10,000 to 15,000 Chinese nationals working on different CPEC projects in Pakistan. Many of these nations did go home for the Lunar year break, and due to the virus, many did not return home. Any further complications or delays might hamper the progress of the $62 billion CPEC initiative. Though if you were to hear just last week Chinese Ambassador to Pakistan Yao Jing, and Federal Planning Minister Asad Umar, nothing has, or will stop CPEC. Indeed, Jing said: “We are thankful to the Pakistani government and people for showing solidarity in our difficult time which provide us strength and more confidence.” And if the virus were to continue, then there would be other additional second order effects. The report notes, that “As market volatility rises, sovereigns that rely on foreign-currency borrowing may face tighter financing conditions.” These include frontier market countries with nearer-term funding needs, such as Mongolia, Sri Lanka, and Pakistan. Needless to say, with as many disruptions as the the disease outbreak has currently caused, one would have hoped that the government of Pakistan would have a better approach to containing any damage that might occur. As the old saying goes, however, hope is not a strategy. Neither is showmanship, which the current administration seems to excel at. n
EPIDEMICS
By Syeda Masooma
O
n May 10, 2018, the Pakistan Telecommunication Authority (PTA) launched Device Identification, Registration and Blocking System (DIRBS) as per the guidelines of Telecom Policy 2015. In a few more months, the service became operational. You might remember it from the time when PTA’s text message service of verification of mobile devices through 8484 became frequent. The second wave of importance for DIRBS came when PTA announced that mobile phones with non-compliant SIM or IMEI functionality will be blocked by January 15, 2019, and therefore all such phones should be registered through DIRBS to avoid blocking.
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Reportedly, PTA started blocking unregistered phones from January 16, which sparked another debate about whether these phones could be unblocked in the black market. Profit covered that story in detail, showing that it was indeed possible to bypass PTA’s blocking and get non-compliant phones to become regularly operational again. Then came the option of one imported phone per Pakistani coming to the country from abroad to be registered free of customs duty through DRIBS, putting this system back into the news, and then one final time when this offer was taken away by PTA. DIRBS is the system that is used to make a phone PTA compliant through registration and paying the due custom duties and taxes as per the prices of handsets. However, there is more to the story, and not all of it is good.
Background of DIRBS
T
his system was pegged to have been launched as an effort to curb the risks associated with the use of illegal mobile handsets in the country. The system is intended to verify, detect and discourage illegal, non-compliant, non-tax paid handsets and devices. It works by authenticating currently active devices on cellular networks and ensuring continual monitoring as new devices are activated. The reason that this sort authentication became necessary in the first place was the way mobile phones actually come to Pakistan before they can be displayed in a shop somewhere. There is the strictly legal route and the shadier methods where you buy phones without the original box and charger from a dingy shop for too good a price.
“The most expensive phones come with more than one SIM slot, and sometimes even with one for an e-SIM specifically such as iPhones. So lets say a dealer will take three IMEIs for two or three different phones – one SIM from each phone – and get them registered as one phone. Since most people use one SIM anyways, or they have to pay a lower price so they choose to be okay with one functioning SIM only, so they go along with it” Muhammad Ahmed Butt, Director SmartLink Technologies When a handset is imported through legal channels, the custom duty and any related taxes are already paid on the import and at the same time the International Mobile Equipment Identity (IMEI) number of the phone is registered with PTA. Sometimes, the phones brought through regular channels as well do not have their IMEI numbers registered, but these phones come individually, for instance, an expatriate bringing one with them when they visit their families. So there is a small, yet persistent portion of mobile phones that are not smuggled but not registered with PTA either. However, any such phone can be made PTA-compliant and its IMEI numbers can be registered by paying the due taxes and uploading information on DIRBS. On the other hand, the phones imported through grey channel are not registered, and often end up in the market without payment of duties and taxes. It makes them much cheaper for someone who buys them knowing that they are smuggled. At the same time, the fact that PTA has no record of them whatsoever, and the authority cannot trace their usage, such phones are also more likely to be used for criminal activities. DIRBS was put in place to cater to this latter type of mobile phones by making it impossible for such phones to work in the country. The impact of the measures undertaken through this system, however, has been that unsuspecting phone users have found their devices blocked. Law abiding citizens thinking they are buying a legitimate phone have also discovered that their device was smuggled only after they get blocked. So theoretically, you could be gifted a brand new iPhone from your brother in Dubai, replace his UAE sim with your local sim and have the device work perfectly for as long as two months before the PTA catches on and your phone literally turns into a very fancy, very shiny, very expensive brick. What do you do when that happens? You
go to the PTA, of course, who tell you that the registration price for the phone is Rs15,000. If you cannot afford it, then you are in trouble. Nobody is going to buy a blocked phone and your best bet is probably to buy a smaller, cheaper phone to make calls and send text messages, and use it as a data hotspot to use whatsapp and other features on your unregistered phone. Another notable factor here is that the tax brackets applicable on imported phones are decided on their original sale value, and not depreciated prices. This means that if anyone buys a phone off the second hand market or is gifted one by a relative or friend, irrespective of how old the phone or the model, the payable tax amount would still be calculated on the original sales prices. The tax amounts and custom duties on mobile phones have also undergone much fluctuation in the past one year, with three different policies coming in on March 12, July 10, and September 15 during last year. As per the latest updates, the taxes and duties payable are as follows:
of mobile phone imports is another debate. We will discuss that in the next section.
Why has DIRBS failed in most of its intended aims?
O
ne of the key aims for DIRBS was to control the illegal trade of mobile phones, both in the form of grey channel imports as well as the snatching and stealing of mobile phones ending up in the second hand mobile market. On both these fronts, the market realities seem to point towards DRIBS failing. An earlier story Profit covered had narrated how the IMEI numbers blocked by PTA were being unblocked in the black market. Now, with tighter controls, the methods to bypass regulations have become more notorious. “The most expensive phones come with more than one SIM slot, and sometimes even with one for an e-SIM specifically such as iPhones. So lets say a dealer will take three IMEIs for two or three different phones – one SIM from
Disclaimer: The above figures have been obtained by the available SROs on FBR, PTA, and Customs department websites, and are updated as of July 2019. Sales tax figures are updated as of January 2020.
Even with these fluctuating rates, there are still more areas under impact from DIRBS. The debate on whether DIRBS has actually been effective to control smuggling or black channels
each phone – and get them registered as one phone,” says Director SmartLink Technologies, Muhammad Ahmed Butt speaking with Profit. “Since most people use one SIM anyways, or they
TELECOMMUNICATION
have to pay a lower price so they choose to be okay with one functioning SIM only, so they go along with it.” The PTA is aware and keeping abreast with these developments, however. In response to this they have declared registration by putting different IMEI of the same model an illegal activity. “PTA is actively carrying out audits and all such identified devices are being addressed. Such cases are being handed over to law enforcement agencies for legal actions. Furthermore, such devices shall be blocked as per procedure” they said in a statement. “PTA has also been informing through print, electronic media & SMS to all consumers to ensure that at the time of purchase, they should check all IMEIs programmed in the device and confirm status by sending SMS to 8484, through PTA website or via Android App.” “Once a user sends IMEI of the device through the above mentioned mechanisms, the system will provide status of IMEI along with the model and make to which such IMEI belongs. The added information of model enables users to verify if the device is genuine or tampered i.e. an IMEI of a different model is copied on the actual device.” An official from a telecom operating company, speaking on the condition of anonymity, also explained that phones being stolen and sold on the market was still very much happening. “The only difference is that instead of being resold in the local market, they are now smuggled somewhere abroad. The only place those stolen phones are not going to work is Pakistan. They are fully functioning everywhere else” they said. However, when it comes to tax collection, from the perspective of PTA, DIRBS is doing an excellent job. As per reports, PTA has said on record that more than 10 million mobile phone handsets were imported during fiscal year 201819 and around Rs 28.8 billion were collected in taxes as a result of DIRBS. Likewise, between January and April 2019 approximately 7.6 million phones were imported and the government collected a record Rs 15.1 billion under the head of duties and taxes, indicating that increased in legal imports of mobile devices. The figures for 2019-2020 fiscal year are not yet available, but the general consensus among mobile phone vendors as well as regulatory authorities is that tax collection has definitely improved as a result of this system, so this is one area where DIRBS deserves the applause it gets from the government. According to PTA’s statement to Profit, “Since the launch of system, the legal import via formal channels has seen an increase from previous years. In 2019, a total of 28.02 million mobile devices (16.28 million complete units & 11.74 million locally assembled) were imported. Whereas, in 2018 a total of 17.26 million devices (12.06 million complete units & 5.2 million locally assembled) were imported.
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Furthermore, 4G devices connected to mobile operator networks increased from 16% in January 2018 to 31% as of Dec 2019. Whereas, 3G devices connected to mobile operator network has decreased from 19% in January 2018 to 13% as of Dec 2019. This reflects that users are preferring to migrate/utilize 4G based devices over 3G.”
Problems
W
hen DIRBS was launched, PTA put an ‘amnesty’ policy in place that all those phones that were operating in Pakistan before January 15 would continue to function, but those that have not been registered (or those with invalid IMEIs) will be paired with the SIM card – and therefore the users’ details – being used in that phone. While there was the option of getting such an IMEI registered with up to five different SIM cards, due to complete absence of any awareness campaign carried out at that time, most users did not get their phones registered for more than one number that was already being used. Fast forward to when these invalid IMEIs were blocked. Now if any of those users, whose phones were paired with their SIM card, were to change their number or sell the smartphone in second hand market, now that phone will not work. Such IMEIs will now only work with that one SIM card which was operational at the time of DIRBS implementation. Another direct impact of this system has been on the affordability of mobile phones. There is an argument here, that before such a policy the sellers or importers of mobile phones who used to import phones through black channels also used to sell those on lower amounts. However, those mobile phone dealers and distributors who have always been dealing through legal channels believe DIRBS to be a blessing. Corona virus has been more of a problem for importers who deal with Chinese mobile phones. Director SmartLink Technologies, Muhammad Ahmed Butt, who is also an official distributor, wholesaler and retailer of mobile phones operating out of Hafeez Center in Lahore said that the government reducing taxes had initilly been a big plus point. “When the government reduced taxes, my initial investment that I had planned now fetched me a higher number of mobile phones because now my costs were less. Likewise, when I can afford it at a lower price, I can also afford aggressive marketing so in a way this actually helps business” he said. Another mobile vendor named Ishtiaq operating out of Blue Area Islamabad said that his business had actually gone up. “ Some customers were obviously those who had to replace their phones because they either did not know when this system was being put in place
or they simply deemed the tax amounts to be high enough to rather just buy a new registered phone altogether.” Concurring with Ahmed’s statement he said, “The newer lower taxes also allowed us to do more trading, and not just on the phones on which taxes are reduced. The fact that our costs are lower means that we can now afford to sell even more expensive phones with a lower margin and still make profit. So the market is doing well for us at least.” Customers, however, have a unanimous opinion on this taxation and registration policy, and that is that it has made mobile phones more expensive. Profit spoke to shop vendors, students, ride hailing captains, businessmen and marketing professionals, who all seemed to express dissatisfaction with the policies brought by DIRBS although some labeled them as necessary hardships for the betterment of the country. One project manager at MOL Pakistan said, “I cannot survive without an updated phone, nor can I afford to have my phone simply go off, so I need to buy a good phone irrespective of its price and now definitely it is more expensive. I don’t mind however because there needs to be some rules put in place for our nation to get into the habit of paying taxes.” A tobacconist who owns a shop in G-9 sector Islamabad told Profit, “Phones are now a necessity and not just for making calls. This uncertainty in taxes and when PTA is going to block our phones for whatever reasons is simply a headache. A person spends so much on a phone and then one day it just goes off. PTA only knows how to block phones, when there is a sit-in or a religious holiday or when they feel they can squeeze more money out of people like us. They don’t bother even telling people or conducting some sort of an awareness session to at least tell people on what scheme they have thought now to make our lives difficult.” Taking things further than just public opinion, this impact on affordability of smartphones might have more grave consequences than just angry populace. The Prime Minister’s view of Digital Pakistan is also under threat. Smartphones and IoT devices play an essential role in that regard but if people are not able to afford smartphones or use them properly then how will they use digital services? Blocking of smartphones has eventually led to a slowdown in data/internet/digital adoption amongst mobile customers across industry. While smartphone vendors might have seen a small boom in their business, it is still lower than the speed with which Pakistan started adopting technology. Data collected through independent resources as well as data taken from the PTA website reveals that the market in the country is still growing but in 2018, the growth rate fell by
0.8% and in 2019 the slowdown in this growth was calculated at 4.5%. With the current economic slowdown overall coupled with higher taxes on mobile phones, it is not difficult to see which way this growth would go in the near future. Another nugget of data shows that a total of 68 million handsets have been included in the industry blacklisted handsets. Amongst these are 11.5 million handsets that were blacklisted as of 15 January 2019. Since January 16, 2020 another 56.5 million handsets have been blocked or blacklisted. Out of these, 20.5 million (36%) have invalid IMEIs, while 34 million (60%) are handsets with valid IMEIs but tax has not been paid on these within the 60 days stipulated time period and 2.3 million (4%) handsets blocked have been reported stolen IMEIs.
So what is the way out?
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rofit sat with officials from telecom operators, mobile phone operators and an economist who requested anonymity to come up with potential solutions that do not affect tax collection, promote data security, and also makes the registration and digitization process easier for the Pakistani Diaspora. Here are the suggestions: Resolve issues with policies instead of discounting the policies: One of the biggest reasons why ‘one custom duties free imported phone’ policy was discontinued was that it led to massive data theft from NADRA and travel agents for illegal registrations. Instead of strengthening laws and implementation of stricter controls on data, PTA conveniently chose to stop offering the policy altogether. Despite the fact that every attending member of the Senate Standing Committee on IT and Telecom, as well as all members of National Assembly Standing Committee on Finance recommended the continuation of the policy, the regulating authority decided that it was easier to stop the privilege than it was to stop its misuse. The lack of effort from PTA can still be seen from the fact that even though it has been reported and confirmed to and from PTA that certain biometric machines given to SIM card
vendors have been causing data leakage, only 36,000, out of approximately 174,000 machines, have been recalled. For the rest, the PTA has given the telecoms time till September. This simply means that until September 2020, the data of those who buy SIM cards can be leaked and misused, without any authority taking quick and necessary actions. Awareness sessions is PTA’s responsibility and they should regularly follow it From changes in taxation, to changes in smart phone registration policies, to allowing telecoms the time period of 180 days to reissue dormant SIMs, PTA has an unbroken record of not bothering to hold any awareness sessions, not even for the digitally literate. Time and time again, it has been reported, not just by Profit but also by other publications, that mobile phone and telecom customers have found themselves to be in trouble because of lack of communication from the regulator to the general public. Here too, PTA’s response was of complete denial, as their statement to Profit said, “PTA not only runs awareness campaigns on all important issues pertaining to consumers but also direct operators from time to time to run such campaigns. Since the launching of DIRBS number of awareness campaign cycles were run to educate consumers about the new system. PTA is effectively using social media platforms to aware consumers on telecom related issues.” No details of any such campaigns were given, and Profit’s own research did not find any evidence of any awareness campaign except periodic tweets or text messages telling customers about the services of finding out the number of registered numbers on their ID cards. The taxation amounts should be adjusted to depreciated values of smartphones The mobile phone industry is highly volatile, and smartphones are one of few products that lose their value immensely once they are out of their box packaged by the original assemblers. There is also a very active second-hand mobile phone market in Pakistan, which is large enough to be a concern for the government. Many expatriate Pakistanis bring mobile phones, both new and used, as gifts for their families back home. The custom duties applicable on mobile
One of the biggest reasons why ‘one custom duties free imported phone’ policy was discontinued was that it led to massive data theft from NADRA and travel agents for illegal registrations. Instead of strengthening laws and implementation of stricter controls on data, PTA conveniently chose to stop offering the policy altogether
phones should reflect their market value and not their original sales price. To avoid corruption in the sense that everyone might try to show their phones as used before getting them registered, the taxation model should be updated according to the release date of phone models as opposed to the time of sale on the receipts. Installation of invoicing systems on mobile shops With problems like IMEI duplication or clubbing of different IMEIs from different handsets, there is a risk and also some complaints where more than one person had either the same IMEI or had a phone with an IMEI registered to someone else. For registration purposes, they have to establish proof that which of those multiple people actually brought the registered phone with a valid IMEI and which one had one with duplicated or stolen IMEI number. The original buying receipt is the only trustworthy proof in such a case, which in Pakistan’s context not many people keep the receipt safe for long periods. A solution to this problem can be digitally printed and recorded receipts with the mobile phone sellers. In turn, this policy will also pave the way for the PTA and the government to keep a better record of the number of mobile phones sold and purchased and taxes and custom duties paid on those phones. When PTA was asked why isn’t there such a policy already in place, they said that it does not fall under their responsibility. “Introduction of invoicing is not related to PTA. However, for the convenience of buyers and sellers PTA has introduced 3 mechanisms to register mobile devices; Through USSD short code *8484#, PTA website portal, and through all mobile operators franchise/custom service centers.” Involve stakeholders in the decision making process This should be a no-brainer when it comes to policy making. Consumers, telecom operators, importers and traders of mobile phones, regulatory authorities, and ministry of telecom as well as ministry of science and technology are all key stakeholders in the policies related to mobile phone usage. By simply including representatives from all key stakeholders, PTA can avoid the problems following the sudden policies and keep the channel of change smooth, not just for the government but also for the general public. While the telecom operators, mobile phone vendors and general public all denied any effort or invitation from PTA before formulation of policies, the authority claims to have included all relevant stakeholders. “PTA has involved all stakeholders prior to implementation of DIRBS which includes mobile operators, GoP, manufacturers and other relevant stakeholders. After due consultation, all regulations/SOPs were developed accordingly.” n
TELECOMMUNICATION
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E
By Farooq Tirmizi and Meiryum Ali
ight years ago, it looked like it was over. On March 17, 2012, a story appeared on the front page of The Express Tribune, breaking the news that Citibank Pakistan was about to sell off its retail banking division and drastically shrinking its physical and financial footprint in the country. And in the next few months, that is exactly what happened. In November 2012, Citibank announced
that it would sell its credit card and consumer lending portfolio to Habib Bank Ltd. Citibank had already sold off its mortgage lending portfolio to BankIslami Pakistan in 2009. So, the news that it was completely shutting down its retail presence sounded a lot like a prelude to the bank shuttering its presence in Pakistan completely. This was less than four years after the global financial crisis began in the United States and shook the world. And global banks were exiting Pakistan at the time. RBS Pakistan, which had acquired ABN Amro’s assets in Pakistan, sold off its operations in the country to Faysal Bank in June 2010.
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HSBC had announced its intention to sell off its Pakistan branches in early 2012 as well. And, at the time, it had become widely understood that Barclays was struggling in Pakistan and likely to exit the market entirely. So the idea that Citibank might be thinking of exiting Pakistan – while still a shock – was not entirely inconceivable. Of course, Citibank management at the time issued the usual denials and statements saying they remain committed to the Pakistani market. But the market was highly sceptical. In the eight years since then, however, it turns out that the market was wrong, and Citibank management was correct: the global bank remains committed to its corporate and investment banking operations in Pakistan and – in 2019 – passed an important milestone: it earned higher profits than at any point in the last two decades, and likely in its history in the country. And its return on equity – the all-important measure of bank profitability – is higher than it has ever been over the past two decades for which data is publicly available. Despite accounting for just 0.7% of the banking industry’s deposits, as of September 30, 2019, the latest period for which financial data is available, Citibank Pakistan accounts for 2.5% of its profits. And Citibank was able to do this by going back to its roots: a global corporate and investment bank, with a presence across most economies around the world, a connecting financial institution that forms part of the backbone of the global financial system.
Citibank’s unique place in Pakistan
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here is perhaps no foreign bank that captures the Pakistani imagination more than Citibank. Despite being much smaller than its current rival Standard Chartered, Citibank seems to have produced more financial leaders in Pakistan than any other financial institution. In both Corporate Pakistan – as well as the government – it means
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“We are the market leader in the MNC space. About 70-80% of MNCs [operating in Pakistan] are banking with us” Amir Masood, head of multinational business at Citibank Pakistan
something special to be able to call oneself an “ex-Citibanker”, more so than any other financial institution. The bank’s alumni in Pakistan include two former federal finance ministers – Shaukat Aziz and Shaukat Tarin – one of whom (Aziz) went on to become Prime Minister. They also include two provincial finance ministers – Murad Ali Shah of Sindh and Hashim Jawan Bakht of Punjab – one of whom (Shah) went on to become provincial chief minister. While Shah and Bakht are both from politically influential families, Aziz and Tarin’s rise in the federal government was in no small part due to the stature they gained as being highly successful global bankers who spent a significant portion of their careers at Citigroup. Why Citi, though? Of the world’s major financial institutions, many have had a presence in Pakistan, including Bank of America, Chase Manhattan (the predecessor to JPMorgan Chase), in addition to HSBC, and, of course, Standard Chartered. So why is it Citibank that is valued as the training ground for the country’s financial leaders? There are two reasons why this is the case: Citi’s longevity in Pakistan, and its access to global capital markets and investors.
Citi’s path in Pakistan
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iti is not even close to being the global bank with the longest stretch of operations in Pakistan. That honour belongs to Standard Chartered, which has been
operating in what is now Pakistan since 1863, when it opened its branch in Karachi, what was then its sixth branch in the world (the first five were in Calcutta, Bombay, Shanghai, Hong Kong, and Singapore). Having said that, Citi has certainly been around for a long time, having first opened a branch in Karachi in 1961 and having continuously maintained its presence in the country since then. That cannot be said of other global financial institutions, most of which have all left Pakistan by now, with very few exceptions. Chase Manhattan left in the 1980s, Bank of America in the 1990s, and JPMorgan and Credit Suisse tried in the early 2000s, but gave up within a few years and left. But longevity alone does not account for Citi’s allure. If that were it, Standard Chartered would be Pakistan’s most admired foreign bank. What makes Citi unique is the fact that – among the major global capital markets players in the world – it is the only one that has a longstanding presence in Pakistan, and one that it has used in order to help the government of Pakistan gain access to cash from global investors for its bonds and to help Pakistani companies gain access to global investors. In short, it is the only major global investment banking franchise with operations in the country. In this regard, Citi’s competitors in Pakistan are not Standard Chartered and Habib Bank. They are JPMorgan and Goldman Sachs, neither
“Citibank is a phenomenon, a cult really. There’s something about this organisation which I had never figured out which creates a like a romance for it. One thing is for sure that it makes everyone an entrepreneur and that’s what matters. Everyone is involved in decision making from day one with full authority and of course ruthless accountability” Zafar Masud, former director general of National Savings and ex-Citibanker of which operates in the country at all. Standard Chartered, while a London-headquartered global bank, does not have a significant presence in investment banking. It is a strong corporate and commercial bank, but not an investment bank. In the world of capital markets and investment banking, Standard Chartered shows up nowhere in the global league tables (essentially, a ranking of financial institutions by total investment banking revenue). Citi, on the other hand, is consistently in the top 5, earning $4.3 billion in investment banking revenue in 2019, according to data from Refinitiv, a financial data provider owned by Reuters. What does any of this mean? It means that while Standard Chartered can use its rupee-denominated local deposits to buy local, rupee-denominated bonds from the government of Pakistan, if Islamabad wants to issue dollar-denominated bonds to investors outside the country, the only bank with a local office it can talk to is Citi. (Technically, Deutsche Bank has also been a global investment banking powerhouse, and has offices in Pakistan, but its global investment bank has effectively self-immolated, so the less said about that, the better.) And this is not just a theoretical capability: it is one that Citigroup has actively cultivated, having served as the government of Pakistan’s investment banker on nearly all global bond
issuances, and several privatisation transactions as well. “We are a trusted advisor to the government of Pakistan. The first Sukuk bond was in 1996 with Citi (a floating rate bond). We have led every [bond offering] transaction for the sovereign,” said Nadeem Lodhi, CEO of Citi Pakistan, at a press event in Karachi in December 2019. And it is not just the government of Pakistan. When it came time to sell their investment in K-Electric, the only investment bank that Abraaj Capital could realistically turn to was Citi, which had strong mergers and acquisitions advisory teams in both Europe and the Asia-Pacific regions, where Abraaj was most likely to find buyers. Citi was awarded the mandate to serve as the sell-side advisor to Abraaj in the summer of 2014 and were ultimately able to find a willing buyer in Shanghai Electric. (The transaction has yet to close, but that is mostly due to regulatory reasons.)
Innovating for the Pakistani financial market
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t is not just its ability to offer global investment banking services in Pakistan that has given then institution an outsize level of influence in the country. It is also the fact that
a majority of innovation in Pakistani banking has come from Citi. In the early 1990s, it was a team of Citibank executives that decided to re-invent the very notion of consumer banking in Pakistan, introducing products like credit cards, auto loans, and significantly expanding the scope of the country’s mortgage market. At the time, the bank was led by Shaukat Tarin. “We practically invented consumer banking in Pakistan,” said one former member of Tarin’s team at Citibank. “Before us, nobody had heard of a credit card and there was hardly any mortgage or auto financing.” This strategy led the bank to start expanding its physical presence in the country in the mid-1990s, opening up branches beyond the three in Karachi, Lahore, and Islamabad to include other cities as well, ultimately taking its branch network in the country to 18. That expansion beyond the three major metropolitan areas led the bank to expand its offerings and start localising them in somewhat unexpected ways. For instance, Citibank was the first bank in Pakistan to start issuing cheque books in Urdu. It created Pakistan’s first 24hour customer service center. And it basically invented the concept of “priority banking” for high net-worth clients in Pakistan. It was able to be that innovative in large part because of a unique culture that the bank
BANKS
was able to foster among its employees, who felt a fierce loyalty and sense of ownership about the institution and the businesses they were building within it, almost as though the bank itself was just a platform for their own entrepreneurship. “Citibank is a phenomenon, a cult really,” said Zafar Masud, a former Citibanker who has served as the director general of National Savings. “There’s something about this organisation which I had never figured out which creates a like a romance for it. One thing is for sure that it makes everyone an entrepreneur and that’s what matters. Everyone is involved in decision making from day one with full authority and of course ruthless accountability.” All of those developments in the early 1990s began to truly pay dividends in the early 2000s, which was likely the heyday of Citibank Pakistan. By 2002, Citibank accounted for 2.7% of total banking sector deposits in the country, but 8% of the sector’s profits. (Admittedly, this was in large part due to the fact that the major banks in the country were still mostly stateowned and only just coming out of their decades of loss-making that began with former Prime Minster Zulfikar Ali Bhutto’s disastrous nationalisation policy of 1974.) The peak for Citibank Pakistan in terms of size came in 2007, when it grew to have $1.1 billion in deposits and $1.5 billion in total assets. In terms of profitability, its best year was 2004, when the bank earned $32.8 million in net income. Return on equity that year hit 33.6%, an impressive level even by the heady standards of the pre-crisis era. (A note on return on equity calculations: at Profit, we calculate return on equity by dividing net income for a period by the total equity at the beginning of that period, or the end of the previous period. We understand that the convention is to use the average of the equity over the period in question. However, it is our contention that using beginning equity is a more accurate reflection of the return on equity since it reflects the amount of equity capital available to the business before it started making those returns.)
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“We are a trusted advisor to the government of Pakistan. The first Sukuk bond was in 1996 with Citi (a floating rate bond). We have led every [bond offering] transaction for the sovereign” Nadeem Lodhi, CEO of Citibank Pakistan
At the time, the bank was led by Zubyr Soomro, a graduate of Karachi Grammar School and the London School of Economics, who had started his career in 1971 at Citibank in Karachi and risen by 1981 to become its first ever local head of corporate banking (previously, the position had typically been headed by an American). After stints at Citi in Pakistan, the Middle East, and the United Kingdom, Soomro spent a little under three years as the Chairman and President of United Bank from 1997 to 2000 to help restructure the bank ahead of its eventual privatisation. He then returned to Citi as its country head in February 2000, a position he held for the next eight years. (And yes, in case you are wondering, he is from the Soomro family: his father was former National Assembly Speaker Elahi Bux Soomro, and his cousin is former Senate Chairman Mohammad Mian Soomro.) Fortuitously for Zubyr, he made the decision to retire when he reached the age of 60 in March 2008, a few short months before the global financial crisis devastated Citi’s operations worldwide, including in Pakistan. Unfortunately, his successor Arif Usmani had to deal with the fallout.
The post-crisis clean up
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n many ways, what Citibank went through in Pakistan was not at all different from what the rest of the banking industry went through in the aftermath of the financial crisis. The difference, of course, was that Citi’s global home in the United States was also going through an extraordinarily difficult time that saw them having to accept a $45 billion bailout from the United States Treasury. Nonetheless, the speed and scale of destruction on the balance sheet of Citibank Pakistan is breathtaking. In 2006, the bank’s infection ratio (bad loans as a percentage of total lending) was just 1.1%, a number that rose to 2.1% in the next year. By 2010, however, the infection ratio was 21%, and peaked in 2012 at an astonishing 25.4%. With bleeding that bad, it is no surprise that Citi decided they needed to make a radical change. The bank began by selling off its consumer lending portfolio to BankIslami Pakistan in 2009, and then went ahead and sold its retail bank branches to Habib Bank in 2012. At that point, with retrenchment to core
markets (Pakistan has never accounted for more than 0.2% of Citigroup’s global profits), it would have been tempting to think that Citigroup might decide to sell the rest of its franchise and leave the country altogether. Yet that is not what they did. Instead, they scaled back on the desire to revolutionise consumer banking in Pakistan and exited the business altogether, and began focusing on the bank’s roots: corporate and investment banking services to their large global clients, large local financial institutions, state-owned enterprises, and the government itself. Citibank’s core business in Pakistan is its relationships with the local subsidiaries of large multinational companies (MNCs). “We are the market leader in the MNC space. About 70-80% of MNCs [operating in Pakistan] are banking with us,” said Amir Masood, head of multinational business at Citibank Pakistan, at that press event in December 2019. That business includes not just deposits and loans, which the bank provides those clients, but also foreign currency exchange transactions, which are a lucrative business for the bank. In the 12 months ending September 30, 2019 – the latest period for which financial statements are available – the bank earned Rs2.7 billion in revenue from its foreign exchange business, which accounts for over 10% of the entire banking
sector’s foreign exchange business. Then there is the investment banking business, where the company advises clients on mergers and acquisitions. “First we helped Telenor buy Tameer Bank, and then we helped Ant Financial with their stake in Telenor Microfinance Bank,” said Nadeem Lodhi. “We also helped with the K-Electric sale to Shanghai Electric.” The bulk of Citi’s revenue in Pakistan – about 62.5% – comes from old-fashioned deposit-taking and lending. While the bulk of Citi’s lending portfolio consists of government bonds, in which the bank is an active market-maker, its corporate lending portfolio has more than doubled over the past two years and stands at Rs54.3 billion as of September 30, 2019. Most impressive, however, are two numbers pertaining to its profitability: net income for the 12 months ending September 30, 2019 crossed the previous record of $32.8 million, and will likely cross that 2004 record when the full financials for 2019 are released. Even more astonishing is the return on equity, which hit 44.6% during the same period, the highest ever in the two decades for which data is publicly available. And all of this has happened even as the bank continues to clean up its balance sheet. Bad loans as a percentage of the total lending book are now down to just 4.7%, though much of that decline is due to an increase in the size of the
lending book and not necessarily a volumetric reduction in bad loans.
Where to from here?
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he key lesson from Citi’s experience in Pakistan seems to be to stick to one’s core business and not try to pursue business lines that may seem lucrative but may be more difficult to manage. While Citibank Pakistan’s management did not offer meaningful guidance on any potential changes to their strategy over the coming years, one suspects that the management feels relatively comfortable with their strategy thus far. As the government begins to contemplate more privatisation transactions, the bank may once again find itself in a position to help serve as the government of Pakistan’s investment banker and lead many of those transactions. And as its clients continue to grow their businesses in Pakistan, its corporate lending portfolio is likely to continue growing at the expense of its government lending. One thing remains certain, however: unless one of its bigger American rivals (and realistically, that really just means JPMorgan) decides to jump into the fray in Pakistan, Citi will retain an outsize influence in the Pakistani financial system that goes well beyond its relatively miniscule local size. n
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By Hassan Naqvi
he only certainty in life is death and taxes, Benjamin Franklin is supposed to have said. In Pakistan, however, few things have been as uncertain as taxation. Not because people are not being taxed, they are and often unfairly so, but because in the more than seven decades since independence, all efforts undertaken under the guise of tax reform have fallen flat. With no serious thought or uniform goal being applied to the redesign and restructure
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of the tax system, the system we have as of now has been cobbled together with an assortment of different flavoured patchwork. In December of last year, the International Monetary Fund (IMF) slashed the Federal Board of Revenue’s (FBR) tax collection target to Rs5.238 trillion from Rs5.503 trillion. The Rs265 billion reduction was some breathing space for the FBR, which faced a shortfall of Rs211 billion in the first five months of the current fiscal year. As per the State Bank of Pakistan’s (SBP) annual report on the state of Pakistan’s economy for 2018-19, withholding tax has fallen from 43pc to Rs76.4 billion in 2018-19 as compared to Rs133.4 billion in the preceding
“In the west, they reduce taxes for kick starting economy. Here, they want to increase taxes. But who here is thinking about the details? We merely sign in a dotted line and then are stuck in the cycle all over again” Dr Nadeem ul Haque, Economist and former Deputy Chairman Planning Commission fiscal year. The report further mentions that the overall collection of withholding taxes reduces by 8.2pc to Rs960.7 billion in the fiscal year 2018-19 as compared to Rs1,047 billion in the preceding fiscal year. A very cursory glance at the revenue collections of the FBR shows that it requires around Rs2.828 trillion in the last five months of the current fiscal year to achieve the target of Rs5.238 trillion. But rather than doubling down, the FBR’s response has been desolate, asking the IMF to once again revise the tax target again to Rs4.8 trillion instead of Rs5.2trillion to help with the shortfall. And while no decision has been taken on this matter, collecting the Gargantuan Rs5.2 trillion would mean having to collect an average Rs567.5 billion every month from now onwards to achieve the mammoth target.. In the wake of this doom and gloom and nail biting, Profit reached out to leading economists and tax consultants to find out just what i going on, and whether Pakistan and the FBR could still salvage something out of this reality, and achieve its revised collection target of Rs5.2 trillion?
The (qualified) hot takes
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ccording to Sakib Sherani, even if the IMF gives Pakistan another breather and drops the target down to Rs4.8 trillion, there would still be some shortfall. The former member of the Prime Minister’s advisory council and acclaimed economist says that Pakistan is unlikely to collect taxes more than Rs4.7 billion, and that is if the FBR really picks up their game and takes the issue head on. And there are no unexpected events that take place in the meantime. Sherani adds that the target under the Fund program required an increase of 45 percent over the previous year’s collection, and was highly unrealistic given the sharp slowdown in the economy as well as the steep fall in imports - a major source of tax revenue. Sherani also pointed towards the protracted absence of FBR Chairman Shabbar Zaidi and the rumours surrounding his possible resignation
or removal. If the FBR is to collect even the Rs4.7 billion that Sherani thinks they can manage as a best case scenario, they need an all hands on deck full guns blazing performance. Instead they have a plastic bag Chairman floating in the wind and a board authority that has been hostile to him from the very first day of his appointment. Not the best of starts. Agreeing with Sherani, Senior Economist and Economic Advisory Council (EAC) member, Dr. Ashfaque Hasan Khan, set an even lower figure than Sakib Sherani’s Rs4.7 trillion figure. “If the FBR manages to even collect Rs4.4 trillion in the current depressing state of the economic landscape in the country, I will be the happiest person in the world” he said. Nadeem ul Haque, the former Deputy Chairman of the Planning Commission, agreed with Mr Sherani and Dr Khan’s estimations, however took a more critical approach to the IMF policies. The career economist was of the opinion that that absurd target based on absurd assumptions were ignorant of economic thinking based purely on coercive tactics. “In the west, they reduce taxes for kick starting economy. Here, they want to increase taxes. But who here is thinking about the details? We merely sign in a dotted line and then are stuck in the cycle all over again” he says. Yasir Mahmood, an avid reader of political economy and technology, a former diplomat and London School of Economics (LSE) graduate who is presently running his own technology company, says that the Imran Khan led PTI govt agreed. The target was too ambitious according to Mahmood, and the government had agreed to the IMF’s demands without properly assessing the capacity of the FBR. “The FBR will not be able to collect more than 4.7 Trillion despite record new taxes of 780 billion in the last budget” Yasir adds, miming the earlier figure estimated by Sherani. He was also critical of the government’s anti-imports streak, adding that he believed that the import compression due to current account deficit has also led to revenue shortfall as over 50 percent taxes are collected at import stage. His final contention was that the FBR and PRAL lack the ability to run automatic forensic audits
of filers. “No agreement of any fixed tax has been reached so far with small retailers which make up the bulk of Pakistan’s cash economy, as the IMF is not in favour of fixed tax for small and medium retailers,” he says. Despite its claims, the government has not followed through on the crucial aspect of digitisation and documentation of the economy to formalize it. At this rate, they are simply repeating the mistakes of past governments. Leading Economist and Professor of Economics at the University of Central Punjab (UCP) in Lahore, Dr. Qais Aslam, says that Pakistan’s government has envisaged the collection of Rs5.2 trillion in revenue collection. However, in January 2020 alone, the FBR could collect only Rs321 billion or 75.5pc of the envisaged target of Rs425 Billion that they were supposed to for the month if they wanted to stay on track. While this was still more than the amount they collecte in December 2019, Although this Rs321 billion was more than what FBR had collected in December 2019. In the first six months of this budget year, the FBR had collected just Rs2.080 trillion, although they had already revised the target of collection downwards to Rs2.367 trillion, which the FBR could not achieve. Dr. Aslam says the problem FBR is facing on one hand is its historic incompetence and inadequacies to actually tax the rich through direct taxes. He explains that although the FBR just over the past 6 months has been able to get 2.3 million tax filers, an unprecedented amount in Pakistan’s history, it has not amounted to much. Headlines celebrating the FBR’s historic collection achievements every month, steady increase and widening of the tax net is actually not that impressive at the end of the day, because the numbers still do not add up to a pretty picture. He adds that it should be noted that according to the Census 2017 there are 32 million households in the country and 20 percent of which are rich households – which means that there are at least 6.4million households that should be tax filers and only 2.3 million have filed their tax returns, leaving anther 4 million households that should be filing their income tax returns.
TAXATION
The economist further states that the FBR has been claiming that it has all the information about the property, vehicles, school fees and foreign travel information of Pakistanis, but has as yet not used this information to bring the big fishes into the tax net. The UCP Professor adds that the government has instead given a tax amenity scheme to the tax evaders, and has also tried to bring in an ordinance to give tax rebates to big businesses and investors that was hurriedly taken back due to political backlash. In a first and controversial statement, Dr Aslam feels that NAB being declawed has also caused a shake up, since it has given a sense of security to future and past corrupt individuals, who have another opportunity to evade taxes or to embezzle the federal and provincial exchequer. “The government can only tax the poor through indirect taxes, through increase in electricity and gas charges as well as through increase in petroleum prices where ordinary citizens cannot evade these indirect taxes and charges levied on energy and products of daily usages. This is no way to go about fixing a shortfall” he tells Profit, “The PTI government in its present budget had also done away all the rebates given to professionals, professors and IT specialists by the previous regimes in order to increase its revenue, but failed to bring into the tax net the private practice of doctors, advocates and other such income generators that are not documented due to FBR’s own incompetence and corruption” he goes on. “My fear is that the bigger issue of tax collection would remain the decline in the growth rate of the economy.” There are other fears as well, and none of them appetizing. In this time, agricultural production has come down from 21 percent of the GDP to 19 percent of the GDP. Large Scale Industry is only contributing 13 percent of the GDP and has declined from 20 percent contribution to GDP over the years. The imports of luxury items has been reduced by the government’s policy of curtailing
“If the FBR manages to even collect Rs4.4 trillion in the current depressing state of the economic landscape in the country, I will be the happiest person in the world” Dr Ashfaque Hassan Khan, Member of EAC
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current account deficits and exports have only gone up by 5 percent as a result. The revenue from these paltry exports is depleted by the rupee- depreciation against the foreign currencies. It is, for all intents and purposes, a lose lose situation. “All of this downward trend in the economy and decrease in income generating and profit making opportunities only decreases the ability of FBR to collect revenue from different sources,” Dr. Aslam says. “And if Shabbar Zaidi resigns in the middle of the budget year, it will have an adverse impact on the officials of the FBR who have become leaderless this month. We will be lost.” Dr. Aslam’s observation is that that FBR seriously needs a pro-people restructuring for better service delivery under the five principles of fairness, simplicity, equity, revenue collection and good governance. And while these economists are more or less on the same page, the Adviser to Chief Minister Punjab on Economic Affairs and seasoned Economist, Dr. Salman Shah, gives us a sense of just what the government is thinking and where they are trying to go with their current policies. “The real target is a primary deficit of 0.6 percent of GDP. If the revenue falls short of target, then proportional reduction in expenditures would be needed to still meet the primary deficit target” he tells Profit.
So what happens now?
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ll of the economists and tax experts that Profit reached out to were of the same opinion for once, that Pakistan cannot achieve its tax target of Rs5.2 trillion for the fiscal year 2019-20, and a more realistic figure would be somewhere around Rs4.5 trillion if all goes well. The only exceptions, however, were Leading Tax consultants of Pakistan, and visiting faculty members at the Lahore University of Management Sciences (LUMS) Dr. Ikramul Haq and Huzaima Bukhari. Both are optimistic, but because they claim they have a plan that could
help the FBR achieve its tax target by June 30, 2020 if implemented. “We also gave the plan in September 2018 but thePTI ministers did not implement it. Otherwise we would have been collecting Rs.5 trillion even last year,” they say while speaking to Profit. Prime Minister Imran Khan has constituted a committee headed by State Minister for Revenue, Hammad Azhar, to come up with a “massive and comprehensive reform programme before the close of the financial year”. But it produced nothing, even though it was required to meet once every fortnight to devise strategies for revenue collection. “The new Tax Reforms Committee, claiming to comprise ‘best-minds’ of Pakistan, constituted by the then Federal Finance Minister Asad Umar on October 18, 2018 did not bother to consider the Action Plan given by us in a personal meeting with Finance Minister and Minister for State on September 12, 2018, for the eight months (November 2018 to June 2019) and the revenues of billions of rupees and year ended with record fiscal deficit of 8.9 percent of GDP and FBR registered negative growth of 0.4 percent” they said. “If the PTI government wants optimum collection of taxes to meet revised target of Rs. 5.2 trillion without hampering business growth and investment clime, it still has time to implement the following agenda for the remaining months of the current fiscal year.” In the article they wrote for The News on Sunday (TNS) on September 9, 2018, they mentioned the following: 1. “Securing returns and finalising of assessments of all the persons who paid substantial tax in advance through withholding mechanism but have not filed returns till 31-03-2019.” 2. “Till May 31, 2018, total companies registered with Security & Exchange Commission of Pakistan (SECP) rose to 86,876 whereas corporate income tax returns filed were less than 35,000. All companies that have not filed returns should be issued notices and assessments should be finalised before 3103-2019 so that recovery can be made before 30-06-2019.” 3. “Retrieval of tax loss by taking action against the beneficiaries of the loan-write offs under the law [Explanation to section 18(1)(d) of the Income Tax Ordinance, 2001].” 4. “Recouping of sales tax losses due to under-invoicing and under-reporting.” 5. “Recoupment of tax loss by transfer pricing of all, especially the following sectors: a. Pharmaceutical b. Telecommunication c. Beverages d. Automobiles
“Even if the IMF gives Pakistan another breather and drops the target down to Rs4.8 trillion, there would still be some shortfall. Pakistan is unlikely to collect taxes more than Rs4.7 billion, and that is if the FBR really picks up their game and takes the issue head on” Sakib Sherani, Economist and former member of PM’s Advisory Council d. Food 6. “On the basis of following withholding tax information, all the persons who did not file income tax returns should be brought to tax net by the respective LTUs/RTOs:” a. “Tax deducted under section 236 of the Income Tax Ordinance, 2001 on mobile bills exceeding Rs. 48,000 annually.” b. “Tax deducted [section 235] on commercial electricity bills exceeding Rs.100,000 annually.” c. “Tax deducted [section 235B] on domestic electricity bills exceeding Rs. 120,000 annually.” d. “Amount of tax deducted on banking transactions [sections 231A, 231AA and 236P] exceeding Rs.25,000 annually.” e. “Tax deducted on profit on debt [section 151] exceeding Rs.36,000 so that FBR can know the amount of investment wherefrom this profit on debt was earned.” f. “Tax deducted on purchase and sale of immovable properties [section 236C, 236K and 236W] in immovable property exceeding Rs.10 million to know the source of investment.” g. “Tax deducted on purchase/registration of vehicles [section 231B(1), (2) and (3)] to ascertain the source of amount invested in purchase of vehicle(s).” h. “Tax deducted on lease of vehicles [section 231B(1A)] to ascertain the source of investment made and sources wherefrom monthly installments are paid.” 7. “Assessments in the case of all non-filers positively by 31-03-2019 to ensure recovery by 30-06-2019. 8. Scanning and X-raying of each and every incoming and outgoing container. 9. Recouping of loss of custom duty by tracking down under-invoicing through data/information matching 10. Crackdown on smuggled goods.”
Tax Policy Board
T
he bottom line, according to everyone, is that Pakistan cannot hope to come out of the prevailing fiscal mess if the present tax system and
structure persist. “We need tax policies that encourage investment and economic growth, especially leading to greater employment opportunities. Higher growth will lead to greater revenues,” Dr. Ikramul Haq and Huzaima Bukhari tell us. They add that growth-oriented tax policy should be enforced through Policy Board envisaged in section 6 of the FBR Act, 2007—best brains should be included in it after fulfilling all the requirements mentioned therein. “The government must concentrate on sustainable higher economic growth that will automatically increase taxes.”
Tasks for LTUs & RTOs
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he recommendations from Bukhari and Dr Haq have been the immediate filing of returns/assessments of all the persons who paid substantial tax in advance through withholding mechanism but have not filed returns. The tax consultants’ shares that SECP’s registered 107,062 companies till November 2019, whereas income tax returns filed are not even half of this number. “All companies that have not filed returns should be issued notices and assessments should be finalised by 30-042020,” they demand. As per their plan for FBR, they recommend retrieval of tax loss by taking action against the beneficiaries of loan-write offs [under Explanation to section 18(1)(d) of the Income Tax Ordinance, 2001]. They further recommend recouping of sales tax losses due to under-invoicing, under-reporting and non reporting, recoupment of tax losses by transfer pricing of these sectors namely Pharmaceuticals, Telecommunications, Beverages, Automobile, Food and others.
Actions on basis of withholding tax
T
he tax consultants recommend tax deduction on Mobile bills [s 236] exceeding Rs. 24,000 annually; Commercial electricity bills [s 235] tax
exceeding Rs.36,000 annually, Tax deduction on domestic electricity bills [s235B] exceeding Rs.60,000 annually; Banking transactions [sections 231A, 231AA and 236P] exceeding Rs.24,000 annually. They also recommend tax deduction on profit on debt [s. 151] exceeding Rs.36,000 so that source of investment can be determined; Purchase/sale of immovable properties [sections 236C, 236K and 236W] to determine investment in immovable property exceeding Rs.10 million. They further add Tax should also be deducted on Purchase/registration of car [section 231B(1), (2) and (3)] to know source of amount invested in purchase of car; Lease of car [s 231B(1A)] to ascertain the source of investment made and sources where from monthly installments are paid. They recommend FBR to utilise available data (withholding statements)/collection of information, wherever required; Collation of data regarding non-filers; Securing income tax returns from non-filers by issuing notices and Assessments/amended assessments in the case of non-filers positively by April 30, 2020.
Tasks for Customs wing
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he tax experts from Lahore recommend the custom wing to scan and X-ray each and every incoming and outgoing container; recouping of losses by tracking down under-invoicing through available data and information. “Once this is done the IRS should recover evaded sales tax and income tax and custom wing should also conduct crackdown on smuggled goods,” they said in their answers. The reviews are largely hopeless, with even the best case scenario a shortfall of some extent or the other. The few radical suggestions that are in are being ignored. Will the PTI government be able to achieve the revised target of Rs5.2 trillion by June 2020? It seems unlikely, but the plan of Dr. Ikramul Haq and Huzaima Bukhari aimed at reaching the said target might be a good shot. For now, there is just complacency. n
TAXATION
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By Shahab Omar
n 2009, the Punjab government set-up the Punjab Board of Revenue and Trade (PBIT). The Musharraf era had just ended, the Pakistan Muslim League Nawaz (PML-N) was in power in Punjab and the hot concept on the block was public private partnership (PPP). Public private partnership still is a hot concept. It is one of those ideals that everyone is agreed upon but nobody does anything about. But the PBIT over more than the decade that it has been operational has been an interesting experiment. The PBIT’s mission statement job is essentially to attract new investments in the province and strengthen the existing ones by promoting local investment opportunities, making paths easier for businesses and highlighting the distinct advantages of Punjab as a business location. The PBIT is a functioning part of the Punjab government, but what makes it unique is that it is also an advisory organization that advises private companies and investors rather than the government. While it is part of their job to promote investment in government enterprise, but also to realistically advise potential investors, because the PBIT’s job can only be done on a basis of trust. The investors must trust them to be their advocates and contact in the Punjab government. The concept is particularly interesting because it is
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“Punjab has never portrayed itself as an investment destination.Now we are really making a push to try and bring investors into Punjab. We have other roles as well, such as assisting businesses and entrepreneurs which intend to invest in the manufacturing and services sectors of Punjab. But the main idea is to foster an environment” Jahanzeb Burana, Chairman PBIT the first provincial venture of its kind. The PIBT was set up as part of the international promotion agency (IPA). The only other such board was the national level Board of Investment (BOI) which had been established under the IPA way back in October 1992. Since the PITB being formed in 2009, KPK has opened its own investment board but one that has seen little action of public attention. The one in Punjab, however, has been active. But being active and sending out press releases is one thing, and success and utility is another. In recent times, the PITB has been trying to revamp, and the man leading it is their chairman, Jahanzeb Burana. Profit sat down with him to discuss the PITB’s journey, its current mode of operation, and its future plans.
The board’s role
“A
t PBIT, we strive to ensure that this transformation is sustainable and impactful and we have a strong in house mechanism for that” Burana tells us. The statement could have come straight out of a catalogue. His words are not devoid of substance, but they are covered in a careful veneer of bureaucracy. “The PBIT is committed to enhancing the global competitiveness of Punjab and its businesses and we have created a mandate for that” he continues. Burana has come to the PBIT after an illustrious career. With an undergrad degree in economics from LUMS, he went on to the Harvard Business School for his MBA. His hi-fi education under his belt, he went on to start his investing career in San Francisco, working for a social-impact venture investment fund. He later joined a Zurich-based private equity fund in their Singapore office, investing in SMEs in Asia. Right before joining PBIT, Burana was part of the direct investment team at the Islamic Development Bank, a multilateral financial institution headquartered in Jeddah. Currently, he also serves on the Punjab government’s boards for Public-Private Partnership (PPP), the Punjab Industrial Estate Development and Management
Company and a few other public sector entities. But while stock answers from a man so prolific on paper are always frustrating, which is why it was a relief to see that he did have some thoughts, and more importantly knew how the place he was in charge of was running. “Punjab has never portrayed itself as an investment destination” he tells us. It is the image of Punjab as agrarian that he wants to break and make room for it to be an industrial hotspot. “Now we are really making a push to try and bring investors into Punjab. We have other roles as well, such as assisting businesses and entrepreneurs which intend to invest in the manufacturing and services sectors of Punjab. But the main idea is to foster an environment proactively through Special Economic Zones (SEZs).” To hear him speak of it, the PBIT intends to become a very strong catalyst for the reaction Punjab needs to foster industry and investment. The PIBT’s full list of services includes providing information regarding the opportunities for investments, as well as facilitating companies which are looking for joint venture partners. On a bigger picture level, the PBIT is also Punjab’s marketing team for investment, and are responsible for making a case for the province and promoting it worldwide as one of the better investment locations in Asia.
SEZs and Investment facilitation
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f public-private partnership was a hot concept, SEZs are boiling. They are all anyone can talk about in regards to CPEC and the PBIT wants to have their own in Punjab. As they SEZ authority in Punjab, they are responsible for evaluating the applications or proposals from developers to affirm their Industrial Parks as SEZs. For a one time import duty exemption on machinery, equipment, spare parts, consumables in Special Economic Zones, PBIT is responsible to issue a confirmation letter on the status of the applicant prior to seeking the permission from the relevant department/agencies to claim for the
exemption. “Investors are always invigorated to converse their project interests with PBIT officers” Burana explains. “They can also obtain information on major public and private projects, prevailing sectoral policy framework, existing incentive regime, financing options, trade statistics etc. from PBIT.” Once again, the role of the PBIT more than anything else seems to be one in which they act as facilitators for investment. So while they may in fact be a government constituted and paid board, they only get any action when they have a reputation to be good advisors, to have the government’s ear, and to cut a good deal with the government on behalf of the investors rather than the other way around. “Our mandate is to get investments” Burana says. “Any investor with an interest in investing needs a smooth flow of work and we aim to provide that. Punjab is also the piece where most of the investment is coming and presently we have roughly $ 3.2 billion investment in pipeline and some projects are on ground.” This $3.2 billion investment currently coursing through the Punjab is somehow not particularly well known, but extensive. The investment includes ceramics, tiles, commercial trucks, glass manufacturing, and a variety of other businesses. “We facilitated two investments, one was the tyres of trucks and the other garments. The garment investment will hopefully be inaugurated in April by Prime Minister Imran Khan, and this company makes sports apparel for PUMA, ADIDAS etc” Burana tells us. “The turnover of this company is 200million US$ and it is a Shanghai based company that is setting up its garment units on Multan Road, Lahore. We are also facilitating them in acquiring a larger piece of land for a private special economic zone because they want to do the whole thing on their own.” But as Burana himself admits, while $3.2 billion is no loose change investment, it still does not spell the big bucks that Punjab and the country needs. “It is a big amount but, compared to
INVESTMENT
the central GDP it is very little. There is also the problem that these $3.2 billion will not materialize in a day or in a year, but will be used over a period of time.” “There is a challenge for Pakistan because if we see that FDI as a percentage of GDP which is a ratio monitored internationally has never been more than 1 or 1.2 % and this is the average in the last 40 years. The highest was 3% in 2006 - 2007 due to different reasons but the main pattern is 1 to 1.2 % pattern remained consistent” he explains. “Healthy countries with healthy economies have FDI to GDP ratio of 4 to 5%. Our FDI has always been 2 – 2.5 billion dollars annually as per state bank figures. The investments in Pakistan are almost 15% which is one of the lowest in the world and also in South Asia because Bangladesh has 30%. Our domestic investment is very low compared to GDP. These things cannot be fixed in one day and it will surely take some time.”
job is to find the correct investment for an investor somewhere in Punjab, and it is Punjab’s job to provide said investment. “The PBIT never has specific projects to market and it was only pitching in the government’s projects. Even the government does not have a ready-made pipeline where the private sector can come in for Public Private Partnership Projects (PPP)” says their Chairman. “So we made our focus on three types of investments: G2G, G2B and B2B. We are not a sponsoring or execution department and we have only the developing budgets available with us. So in this case we cannot ask the government all the time for giving us the funds that’s why we set up this investment advisory function. And now in house we identify the private sectors investment opportunities and create feasibilities for them and help them through advisory roles in setting up their business and investing in the market.”
Why the middle man?
Strategic investments
T
he PBIT thus seems to play the role of a strange middle man caught somewhere trying to do well by everyone. It is the Punjab government they represent but the investors that they must look after. But as their Chairman claims, the board actually plays a significant role in the investment cycle. “Investments have their own life cycle. From looking at the market and then putting in investment is a complete cycle for an investor” he explains. So when investors come to the board, some are coming in just to get an initial feel of the market. Other more serious investors are coming in when they have a feel but have some issues like NOC, Environment Department matter. That is where the board steps in and facilitates the investor. “There are many investments in the pipelines and their issues are resolved on priority basis. As soon as their issues are resolved they start up the company.” The role of the PBIT thus becomes two pronged, with the first part being advice and the second being the focal point through which investors can get through to and be heard by the Punjab government. “One of our mandates is Investment Advisory which none of the other IPAs are doing so far but PBIT is the first one to do this. When an investor comes in, he asks for tangible investment information” says Burana. “There are two types of investors who have the idea of the market and they know how and where to invest, the other type of investors are those who have no idea about the market and they come here to get a feel of the market and understand the environment. Then we guide them where to invest.” This is where the board is set apart from a PR or marketing agency, because they do not have specific projects or products to sell. Their
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n the functional side of things, the PBIT used in house capacity to do all the budgeting on its own. Similarly, the board is working on preparing feasibility and financial modeling of healthcare projects in South Punjab, which is a Rs 7 billion. “So we are bringing in the local investors for this project. Now if the marketing for this kind of project was being done through any company, it would charge a handsome amount from the government” Burana tells us. “We have very concrete conversations with the investors because we have worked really hard on developing the feasibility and financial plans for the investors. We provide the investor with realistic opportunities and do not give them any unrealistic ideas.” It is these strategic investments that the PBIT is also trying to focus on these days. Strategic initiatives are those initiatives which bring systemic improvement in investments because the overall investment environment needs natural improvements. “Since British left these government regulations were not revised so there is a need for massive reform in these regulations. It is the regulations that can change the profile of investments destination, the more we will be pro-business the more will be the business” says Burana. “The lead time period between the coming of investor and investing is defined by the regulations if they are pro-business.” He gave the example of when the board had proposed that they could lead the project of reforming the regulations, and in March 2019, the Prime Minister of Pakistan adopted and initiated the project of PRMI Pakistan Regulations Modernization initiative under the Chairmanship of Razzaq Dawood and Ishrat Hussain. “Now this has become a federal level thing and we are grateful that our initiative has been
taken up by the government and now the World Bank is also involved in the process. It is not an easy thing but it will be done with the passage of time because it requires a re-think of the entire regulation regime. The team will be coming to Punjab so that a cabinet committee level is there in Punjab to oversee this project.”
What investments is the PBIT raking in?
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nother project under the umbrella of the board’s strategic initiatives is the reformation of technology companies. It is a big ask, and Pakistan's technology companies in Punjab and elsewhere have not been at an acceptable level. While they still lag behind, the PBIT claims their efforts over the past four years have a lot to do with this. “There is increased awareness, and some role in this was played by the companies like Zameen.com, Pak Wheels, OLX etc. This sector now has Air Lift, Car First etc, and this is a sector which is excelling and has a lot of employment potential and has vibrancy” says Burana. “We have regulations made since 1947 in which the IT sector does not fit in. Similarly, we have no regulations for the Careem and UBER Service to fit in. So to facilitate these sectors the regulations need to be modernized and should be reformed so that these commodities can be adjusted.” “We have spent one year with all the relevant stakeholders like the government sector, IT companies and these companies like Uber and Careem for making amendments in these regulations and reforms.” But where they are regulating and advising investments like technology, they are still involved in more traditional spheres. One of the reforms they are suggesting in the strategic initiatives is that of the Garments Economic Corridor Project for FWO. “The idea is that along with the cities these economic zones can be developed. These are not our mandate but these initiatives are very important to uplift the economic environment.” “Green Field projects are also coming to Pakistan, and the government has given tax holiday incentives to them for 5 years. Due to certain factors, these projects are slow but I think these will also improve.” According to Burana, Pakistan faces an issue of perceptions. Punjab is ripe for investment, he says, but foreign investors are hesitant because of the image that the country has. “Many ambassadors come to us and when they see the infrastructures like roads etc. their perceptions change. There are not many issues in Pakistan which otherwise have become the perception of people living abroad” he says. “We lack narrative building at a national level. We also lack branding of Pakistan at an international level.” n
INVESTMENT
OPINION
Nadeemul Haque
Change the sheriff, do not increase our taxes
The refrain of donors is: ‘our taxpayers should not pay for your development’. When some of us say, ‘please folks keep your money and the poor quality of consultants it brings; leave us to our devices’, they start pouting. So what is this thing about the tax-to-GDP ratio? It is said that our tax-to-GDP ratio is now 11 percent of GDP, which by international standards is very low. Donors point to selected countries with a higher taxto-GDP ratio without establishing a basis for a comparison. Are they implying all countries should have the same ratio? Examine the advanced countries: the US with 27 percent, the UK with 39 percent, Sweden with 46 percent, and Germany with 41 percent. Does this mean the US should increase taxes to 46 percent? Yet the US wants to lower taxes. Let us face it: there is no theory that tells us that all tax-to-GDP ratios should be the same. Those who use this argument on the media should be reminded of this simple truth. If we want to compare our tax performance, perhaps we should go back in history and see how the advanced countries did when they were at our level of development. In 1901, the United States and United Kingdom had a per-capita income of bout 60 million uneducated children will enter our about $4,500 and $3,700 respectively. Their tax-to-GDP ratios labour force over the next decade. All of us should were 7 percent and 10 percent respectively. focus our attention to jobs and growth if we are Through most of the First World War the UK’s tax-toto have any peace here. Yet our policymakers are GDP ratio remained in the low teens. Pakistan has a per capita tailing donors into thinking that all economics income of around $1,500; should we really be aiming for OECD revolves around increasing the tax-to-GDP [gross tax rates? domestic product, a measure of the total size of the Why then has our focus been on the tax-to-GDP ratio economy] ratio. As if tax alone will solve all our for the last few decades and not on growth? What if our taxproblems. to-GDP ratio went up to about 15 percent? Would that mean higher growth and more employment for people? All over the world people associate a tax cut as a policy instrument for stimulating growth. Only in Pakistan will a tax increase stimulate growth. Do they really think that investors will invest more, workers will work Nadeemul Haque harder, and savers will save more because taxes increase? is an economist and the This theory belies all received wisdom as well as empirical evidence: taxes take from production; former Deputy Chairman of they do not increase it. the Planning Commission of There is also another false assumption: more revenues will be spent wisely and judiciously, giving Pakistan, and the former Vice us more public goods like education, health and infrastructure. Chancellor of the Pakistan Recall in 2002 a rescheduling generated fiscal space. Yet a decade later, debt piled up, as well as a Institute of Development humungous energy deficit, bankrupt public sector enterprises (PSEs), failing education systems, and a Economics. He previously deteriorating law and order situation. worked for decades at the Were societal investments for public goods made? Not at all. Why then do we hold on to the asInternational Monetary Fund.
The government’s obsession with taxing the already taxed, instead of cracking down on actual theft, is an appalling set of policies that will only damage the country’s economic growth prospects
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sumption that more revenues will automatically increase welfare through better public good generation? Another theory that donors love to put forward is that when people pay taxes they have (or will have) more control over governance. The fee-paying theory of revenue is not cognisant of literature. The Sheriff of Nottingham, despite continuously increasing taxes, gave no representation to people. This brings us to the heart of the problem. Taxes follow a social contract and a certain need for creating public goods. That is why through history, the sovereign’s power to tax has been severely curbed through parliaments and popular vote. Kings and governments had to prove a need to tax through identifying clear public welfare programmes that the tax was going to finance. This was at the heart of enlightenment thinking. Donors have forgotten this history. Instead, without regard to public welfare they want the sheriff to get more taxes. On the other hand, people in Pakistan are
asking what their taxes are used for. ‘I get no public service, yet I pay high taxes. Why?’ This is a frequent lament. People are intuitively in line with enlightenment thinking. Surprisingly, the donors’ philosophy remains anti-enlightenment, forcing all Pakistanis to pay more regardless of the quality and quantity of public service. Remember there is no applause when the Sheriff of Nottingham raises his tax collection because everyone knows he is collecting for his own welfare. Our poor governance and failed public service delivery mechanisms are well-known. Should we give such a system more revenues? Surprisingly, that has become the mantra. What did the system do well when they had more money in their hands? They engaged in poor quality projects that did not deliver social returns. They also engaged in self-dealing — maximizing their own perks, plots and welfare schemes. They created unnecessary and unprofitable public sector enterprises. When I raise this argument with donors,
they point to the need to raise taxes to meet with the variety of donor initiatives that they want in the country, ranging from social protection to money-laundering to environment. So, we should tax our people more to follow agendas determined in some dark corridor where we had no say. Taxes and revenues should be increased in line with what enlightenment has taught us. Our governance system needs reform to make it responsive to people’s needs and to develop its capacity for public service delivery and for public policy. Reform will also remove the mechanisms of rent-seeking such as perks and plots and align public servants’ incentives with public service delivery. When people see a responsive and capable public sector, their willingness to pay will increase. To me it seems that public service delivery reform must come before revenue collection. Donors have got it wrong. Change the sheriff or taxes will go waste. n
COMMENT
Two years after commencing operations,
PIBT finally manages to make a profit
Higher realised tariffs help the port terminal operator hit positive net income for the first time
T
he Pakistan International Bulk Terminal (PIBT) managed to turn its losses into profit, at least according to its recently released positive financial results for the second quarter of the fiscal year ending June 30, 2020. The company posted an earnings per share of Rs0.22, as compared to the loss per share of Rs0.76 reported during the same period last year. Similarly, its gross profit grew by a substantial 148%, from Rs338 million last year to a gain of Rs837 million this year. The company’s sales for the second quarter of this year stood at Rs2.15 billion, which was higher than analysts’ expectations. “This result is above our expectations, mainly due to the higher than estimated realized tariff,” said Syed Noman Ahmed, research analyst at Insight Securities, a securities brokerage firm, in a note issued to clients on February 14. “We believe this could be due to higher realized tariff, as compared to our estimation of $6.5 per ton. As a result gross margins increased to 33.3% in the second quarter of fiscal 2020 from 29.1% reported in the first quarter of fiscal 2020, while coal handling remained at 2.2 million tons,” said Ahmed. PIBT is a bulk terminal that handles goods that are transported unpackaged in bulk, such as coal and certain types of cement, which are loaded directly into the cargo hold
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of ships, without any containers or packaging of any kind. Bulk terminals require different equipment to move goods onto and off ships compared to regular container terminals. A terminal like PBIT makes its money by
charging exporters and importers money on a per ton basis for the cargo it handles in the loading and unloading from ships that dock at the terminal. PIBT is currently charging $6.5 per ton and $5.5 per ton for coal and clinker
handling respectively. According to Ahmed, the tariff can be further broken down into $6 for handling, and $0.5 for storage. The higher tariff can be attributed to recent truck strikes in January 2020 that lasted at least a week. The higher profitability this year did lead to more money flowing to the Workers Welfare Fund, and Worker’s Profits Profitability Fund. While ultimately better for workers, this did dilute any positive impact that the appreciation of the rupee during the second quarter might have passed on, according to Ahmed. PIBT is Pakistan’s first terminal for handling coal, clinker and cement at Port Qasim Authority (which handles more than 40% of Pakistan’s cargo). The company had signed a Build Operate Transfer (BOT) contract with Port Qasim Authority in November 2010, for the construction and development of a coal and clinker terminal for the next 30 years. The terminal started commercially operating in July 2017. As of today, PIBT has a built capacity for handling up to 12 million tons of coal, 4 million tons of cement, and 4 million tons of clinker per year. The relative success of PIBT is due to a robust demand for coal from the power and cement sector, in addition to relative stability returning to the exchange rate between the rupee and the US dollar. PIBT represents a play on Pakistan increasingly relying on imported coal for its energy needs, as well as the ability of the country’s cement sector – particularly producers in the southern region – to continue exporting their products to the Middle East and Africa. In the near future, Pakistan Railways is likely to construct a railway track to tie PIBT’s terminal with the railway network, subject to the Planning Commission’s approval. Once that railway line is completed, the port terminal will be able to serve even more coal-fired power plants than it currently serves. Coal has significantly lower energy density than oil. That means that, per unit of volume, coal releases much less energy than oil. As a result, it can be too expensive from an energy cost perspective to transport coal by truck over long distances, such as that from the port to power plants further up in the northern parts of the country. The only efficient way to transport coal over land is by rail. That is why the introduction of the railway line leading up to the bulk terminal would be a critical improvement in the nation’s energy production infrastructure. However, critics point out that, by adopting coal-fired power plants at a time when the country is beginning to feel significant negative impact from global climate change, the government is only adding to the country’s physical and economic vulnerability to the devastating
effects of climate change, which are likely to hit Pakistan worse than most other countries in the world. In addition to handling the imports of coal, PIBT also handles the export of cement from plants located mainly in Karachi, Hub, and Port Qasim. Pakistan has significant surplus capacity to produce cement and has been a net exporter for much of the past two decades.
Increases in construction activity in both the Middle East and Africa are likely to cause a boost in the use of the bulk terminal to export cement from Pakistan to those regions. The terminal has been part of a publicly listed company since before it even began operations, and raised part of the equity to finance the terminal’s construction from the proceeds of its initial public offering.
Faltering Fauji: why a lack of expansion will hurt the cement company in the long run The company failed to invest when the rest of the industry did, and now faces worse prospects once the economy start growing again
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n the surface, Fauji Cement seems like a success story: in the generally bad spell the cement industry seems stuck in, Fauji Cement stands out as debt-free, with lower finance costs than its peers. It even managed to have gross margins of 14% in fiscal year 2019, which is much higher than its competitors average of 2-4%, and second only to Lucky Cement, at 15%. So what is the problem? There are several problems actually, if one reads investment bank EFG Hermes’ latest report issued to clients on February 14. Fauji Cement managed to post better results than its peers because it has, essentially, refused to expand. In the short run, this is a ‘blessing in disguise’, but it will hurt the company in the long run, argues research analyst Jawad Shamim. Whenever the cyclical recovery kicks in, Fauji’s competitors will have a greater capacity to cater to demand because they expanded much earlier (most expanded in the years between 2006 and 2009). If Fauji was to play catch up, it would have to buy a plant
at the exchange rate Rs155 to a dollar, as opposed to the earlier Rs115 to a dollar. Then of course, the construction time of the plant itself, of around 30 to 36 months, would eat into the recovery cycle period – which means any expected benefit will bypass Fauji completely. This lack of operational expansion is actually quite a big problem. Fauji underinvested in cost-efficient projects like captive and waste-heat power plants. Its upcoming 2.5-megawatt (MW) solar plant simply does not add much. This means that Fauji is over dependent on the grid (deriving 57% of its power from the grid in 2019). Any electricity tariff hike will severely impact the over exposed cement company. The report also dubbed Fauji’s export business as ‘unexciting’, especially after the closure of exports to India. Meanwhile, the rest of the cement industry has expanded, almost to the point of being oversupplied, which means that Fauji’s share of the market is also set to decline. Shamim expects the local market share to drop from its average of 7.5% during 2017 and
PORTS AND SHIPPING
2019, to 5.2% by 2024. This will translate into lower volumes for Fauji Cement: Shamim expects dispatches to decline 6% per annum over 2020 and 2021, with utilisation to decrease to 80% (compare that to the average of 91% between 2018 and 2019). In short, this gloomy outlook means predictably less earnings. “We cut our fiscal year 2020-2022 earnings by 41% on average on weaker margins and lower market share. We lower our target price for the stock to Rs13.0,” the report says. EFG Hermes is categorical about who to watch out for instead: “We, therefore, prefer better-equipped cement names – Lucky Cement and Maple Leaf Cement Factory – as a better way to play the cycle.” Part of the issue for Fauji Cement relative to its peers in the cement industry may be the dividend bias that the company’s holding group – the Fauji Foundation – has from some of its larger businesses such as Fauji Cement and Fauji Fertilizers. There are five things that a company can do with its after-tax profits, each of which has
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different consequences for the company’s risk profile and growth prospects. Capital expenditures Cash reserves for a rainy day Mergers and acquisitions Dividend payouts Share buybacks Given the mandate of the Fauji Foundation to generate cash to be distributed to orphans and widows of fallen soldiers, the foundation often ends up requiring its portfolio companies to pay out significantly larger sums of money in dividends than other investors might. As a result, comparatively little is left for capacity expansion, unlike its competitors, which are freer to reinvest their profits without necessarily having a strong mandate to deliver cash dividends. Over time, however, the Fauji Foundation may need to find a better balance between those two mandates. It cannot afford to have its significant investment in Fauji Cement continue to lose market share, and eventually erode its ability to generate cash flow in the future for the sake of getting cash dividends now.
Pakistan’s cement industry is a highly competitive one, where the struggle to gain market share gets particularly cut-throat. While there have been multiple attempts to organise it into an oligopolistic cartel – like the sugar industry – those attempts invariably fail to keep the industry united on a single approach for very long. Over the next few years, the government of Pakistan is expected to resume its spending on building up the country’s physical infrastructure, which will require an expansion in the amount of cement consumed in the economy. In addition demand for housing continues to rise throughout the country, and real estate developers are putting up increasingly sophisticated development in a greater number of cities. All of that portends well for cement manufacturers more broadly, but especially for those who have invested in expanding their capacity to meet rising demand from their existing customers. Those who find themselves constrained – such as Fauji Cement – may find themselves locked out of the market. n
CEMENT
Meezan Bank had a profitable 2019,
but stays cautious for the year ahead
In what appears to be the application of a counter-cyclical strategy, the bank appears to be pumping the breaks on growing its lending book after a robust year
T
he country’s largest Islamic bank witnessed an unusually good run in 2019, according to its recently released financial statements. The sixth largest bank in Pakistan in terms of deposits, Meezan Bank saw a 19% increase in its deposits in 2019. This is much higher than the industry growth of 10%.
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Its earnings per share hit Rs12.12, or a 74% increase year-on-year, while its return on equity touched 31% in 2019. Its profit after tax in the fourth quarter of 2019 also jumped 86% to Rs4.7 billion. Meanwhile, net interest income – the difference between the amount of interest a bank can charge its clients on loans and the amount of interest it pays out its depositors – in the fourth quarter jumped 46%, while other,
fee-based income jumped 95%. This unusually good run of earnings meant that even with a 30% increase in operating costs during that quarter, the bank’s efficiency ratio – the ratio between its operating costs and total revenue before adjusting for the costs of bad loans – actually managed to decline by 43%. Meezan Bank is part of the general wave
of Pakistani banks that did well in 2019, as higher interest rates, particularly in the second half of the year, lead to a recovery in the banking sectors’ profitability on the whole. Yet even with interest rates set to decline in the second half of 2020, the bank is optimistic that return on equity will remain within the 20-25% band. However, the bank still has a somewhat prudent and cautionary approach, moving forward. “Advances reported a 4% year-on-year decline during calendar year 2019, taking their advances to deposits ratio (ADR) down to 53%, the lowest since calendar year 2015. The decline was a strategic decision as the bank desired to stay prudent in the ongoing economic slowdown and avoid any possible asset quality deterioration,” wrote Amreen Soorani, research analyst at JS Global, a securities brokerage firm, in a note issued to clients on February 17. Continuing its ‘prudent strategy’, the bank booked general provisions worth Rs1.5 billion in 2019, of which most was booked in the fourth quarter. The management is targeting a similar ADR in 2020 as in 2019. It also hopes to grow deposits in 2020, aiming to cross the Rs1 trillion mark (or a growth of 13%). The bank already has 760 branches, of which 100 were opened in 2019; it aims to open a further 150 in 2020. Meezan is the largest Islamic bank in the country, an enviable position to be in considering the relative attractiveness of the Islamic banking market relative to the rest of the market. In the 15 years between 2003 and 2018, deposits in the conventional Pakistani banking system have grown at average rate of 20.2% per year, according to data from the State Bank of Pakistan (SBP), from Rs1.8 trillion to Rs13.4 trillion. That number is impressive, until you take a look at the growth rate of the Islamic banking sector: during that same period, deposits at Islamic banks and Islamic banking windows of conventional banks grew at an average of 65.1% per year, from Rs14.4 billion to Rs2.2 trillion, according to Profit’s analysis of bank financial statements and State Bank data. Inflation during this period averaged 8.8% per year. To understand the magnitude of just how much of a difference that divergence in growth rates can make, consider this fact: deposits in the conventional banking system are 6.3 times higher than they were 15 years ago. Islamic banking deposits in Pakistan are nearly 151 times higher over that same period. In 2003, Islamic banking constituted just 0.8% of all banking deposits. At the end of 2018, that number stood at 16.2% of total deposits. What makes this rise particularly attractive for the banks, however, is that it does not come at the expense of their conventional
businesses. “A significant portion of Islamic banking customers come from populations that were previously unbanked, thus creating a new revenue source for banks,” wrote Savina Joseph and Constantinos Kypreos, two analysts at Moody’s Investor Services, the global ratings agency, in a note issued to clients on Thursday, September 19, 2019. In short, no bank can afford to not be in the Islamic finance business in Pakistan. The World Bank’s Findex database estimates that, as of 2017, 79% of Pakistani adults did not have a bank account. And given the fact that Pakistan’s population is 97% Muslim, a substantial proportion of people prefer to use Islamic banking systems for their financial needs.
While it is not possible to say with certainty what proportion of Pakistanis would prefer an Islamic bank over a conventional banking option, there are some revealed preferences of consumers visible in the data: for every new rupee that came into the banking system in Pakistan in 2018, about 30.3% went into the Islamic banking system and 69.7% went to the conventional system, according to Profit’s analysis of SBP and bank financial data. Over time, Meezan has been able to dominate the Islamic banking market in Pakistan and has never really let go of its status as the country’s leading Islamic bank, with a market share of just over 36.2% in 2018, a number that has remained largely steady over the past decade. n
Rising interest rates bolster profits at Bank Alfalah Bank saw profits rise by 24% in 2019 off the back of rising interest rates, a trend analysts expect to continue over the coming year
A
s interest rates in Pakistan rise, the net interest margins for Pakistani banks has also risen, leading to increased profitability. Bank Alfalah is one such passive recipient of this short run of good fortune. In its recent financial results for 2019, the bank’s profit after tax grew 24% year-on-year to Rs13 billion. The cumulative dividend for 2019 was Rs4 per share. Much of this is to do with the rise in the net interest income. Though it remained largely flat on a quarterly basis, on a yearly basis it increased by 42%. Net interest income refers to the difference between the amount of interest a bank is able to charger borrowers on its lending portfolio and the amount of interest it pays out to its depositors. For most banks, net interest income forms the bulk of their revenue. “This increase was largely attributed to Bank Alfalah’s timely exposure in high
yielding bonds and a favorable deposit mix.” according to Syed Masroor Hussain Zaidi, a research analyst at BMA Capital, an investment bank, in a note issued to clients on February 14. This is not to say that Bank Alfalah did not have other income: its non-interest income did show an ‘impressive’ growth of 10% on a quarterly basis. The bank also managed to keep its operating costs flat from one quarter to the next, despite rising inflationary pressures (inflation touched 14.6% in January 2020, the highest level in years). The combination of generally contained operating costs, and a rise in total income, meant that the cost to income ratio was reduced to 52% in 2019, a marginal improvement from the 57% witnessed in 2018. Still, it seems that Bank Alfalah will continue to rely on the net interest income to keep it afloat in the year ahead. “Going forward, we expect expansion in net interest income to remain the central theme for the
BANKS
ongoing year.” said Zaidi. He did, however, note that the bank’s higher exposure in lending to small and medium-sized enterprises may exert some stress on the loan portfolio. The list of the top five banks in Pakistan has consisted of the same names since 1959, with minimal movement in the rankings, until 2005, when Bank Alfalah, a bank that had at that point existed for only seven years in its current form, overtook Allied Bank to become the fifth largest in the country. While it has since then slipped back into sixth place, Bank Alfalah is the one bank that was not content to leave the Big Five in peace and has consistently had the ambition to grow into their ranks, possibly even break into the top three. It is a bank that has ambition baked into its DNA, and its past CEOs, despite their very different management styles, have strived to somehow preserve that culture. The story of Bank Alfalah starts with the Bank of Credit and Commerce International (BCCI) and its operations in Pakistan. The Bank of Credit and Commerce Internation-
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al was one of the most notoriously corrupt banks in the recent past of the global banking system and it started in Pakistan, founded by Agha Hasan Abedi, a man who got his start at Habib Bank in 1946, but then went on to create United Bank Ltd (UBL) in 1959, and the BCCI in 1972 after UBL got nationalised. The BCCI started off from an office building on Karachi’s McLeod Road (in what is now Bank Alfalah headquarters) but quickly grew to become the seventh largest private bank in the world, along with it introducing an entire generation of Pakistanis to the world of international banking. The fraud that caused British regulators to shut down the bank in 1991 is, of course, now a well-documented part of banking history, but it did have a significant legitimate business that left orphaned assets in its wake after the bank was disbanded worldwide. In Pakistan, its assets consisted of three branches in Karachi and Lahore. The State Bank of Pakistan took over those assets in 1992 and renamed them Habib Credit and Exchange.
The move to seize BCCI’s Pakistan assets coincided with the deregulation and privatization of the Pakistani banking sector. In 1997, Habib Credit and Exchange was bought out by a new banking entity backed by Middle Eastern investors: Bank Alfalah. Bank Alfalah’s majority shareholder is Sheikh Nahyan bin Mubarak Al Nahyan, a member of the royal family of Abu Dhabi. His brother, Sheikh Hamdan, has been the chairman of BAFL’s board since 2002. Both brothers are minor members of the UAE federal cabinet. Incidentally, a different branch of the Nahyan family were the original investors in UBL, so Nahyan involvement in Pakistani banking goes back almost as far as there has been such a thing as Pakistani banking. How Bank Alfalah grew from almost nothing to being one of the largest banks in Pakistan is a story in its own right, but suffice it to say that the bank is a powerhouse when it comes to consumer lending, in large part because its sponsors have always wanted it to focus on financing the growing middle class of Pakistan. n
BANKS