Govt relief package falls short of investors’ expectations

March 25, 2020 (MLN): Prime Minister Imran Khan has announced a multi-billion stimulus package to prevent the negative impact of the situation arising out of the outbreak of Coronavirus and to facilitate poor people in the prevailing circumstances.

The package that has reserved a 200 billion rupees for the labor class, 100 billion rupees for the release of the tax refund, 100 billion rupees for Small and Medium Enterprises and agriculture sectors, fifty billion rupees for Utility Stores, to name a few, has been lauded by several spectators.

Much to the joy of the commoners, and perhaps to the dismay of Commercial Banks, the State Bank of Pakistan cut the policy rate by a further 150 basis points to 11 percent on Tuesday.

These steps by the Federal Government and State Bank to stimulate the virus-hit economy were expected to have a far-reaching positive impact on the welfare of the general public and the sentiments of the investors, but did the market reach the way it was supposed, or perhaps expected to?

To answer this question, we might have to wait for a few more days, even weeks or months, to let the impact of these policies fully materialize. For now, we can just say that the market failed to absorb any positivity stemming from this development, as it lost a humungous 2,102 points yesterday and is on its way to losing further points in today’s trading session.

Going by the expectations put forth by several brokerage houses, the additional cut in Policy Rate is likely to strain the local exchange rate, specifically against the USD. It may be relevant to note here that at this point, the PKR is trading at its lowest since June 2019. However, a report by Topline Security believes that the cut in interest rate will help government manage its fiscal books, where 1.5% cut is likely to result in interest savings of around Rs. 200 billion for the government.

As mentioned before, the relief package was designed to please both, the general public and the investors. However, the Capital markets have not responded the way it was expected to and perhaps for all the right reasons. A report by AL Habib Capital Markets holds that the expectations of the investors were not fully met in the relief package, as many of them were looking for a probable market support fund; and cut in Capital Gains Tax, Corporate Tax, and Tax on Dividends.

On the contrary, it is being argued that the package was never meant to satisfy the requirements of the investors anyway, as it was specifically designed to provide relief to the labor and low-income groups, and to put a positive strain on the inflation. It is now being held that the CPI figures for the month of March will be recorded at 10.4% YoY, as opposed to the 12.4% reported in the previous month.

While every other sector is suffering the brunt of Covid-19 currently, it seems that Commercial Banks are going to get the highest hammering, now that the Central Bank has opted for further monetary easing. According to the report prepared by Next Capital, the earnings of the Banking Sector is likely to diminish by 5% to 18%, most of if being accorded to a decline in Net Interest Income. However, Banks that have a higher allocation towards long-term fixed-rate bonds are likely to be on a safe side.  

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