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June 15, 2021 (MLN): The non-government sector has retired a net sum of Rs.42.33 billion during the week ended June 04, 2021, which brings the cumulative net borrowing for ongoing fiscal year FY2021 to Rs.421.82 billion. The net borrowing as of prior week was recorded at Rs.464.15 billion.

According to weekly data released by the State Bank of Pakistan, the sector's borrowing has risen by Rs.234.65 billion over the year since the borrowing as of corresponding period of last year was recorded at Rs.187.16 billion.

The non-government sector is divided into three broad categories namely, the Private Sector, the Public Sector Enterprises and NBFI. Commercial banks are the main source of financing for the private sector, incuding conventional banks, islamic banks and islamic branches of conventional banks.

This fiscal year, the private sector borrowed a net sum of Rs.448.05 billion, whereas the PSE's have retired Rs.33.2 billion and NBFI has borrowed Rs.6.97 billion.

As we disintegrate the inflows and outflows within the private sector, we see that Conventional Banks lent a cumulative sum of Rs.179.44 billion, Islamic Banks lent Rs.118.36 billion and lastly the Islamic branches of Conventional Banks lent Rs.150.25 billion.

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June 15, 2021 (MNL): The Pakistan Stock Market (PSX) remained range-bound on Tuesday as the benchmark KSE-100 index, after oscillating between green and red zone, closed the day’s trade in consolidation on the back of profit booking.

The 100- index concluded the trading session with a loss of 93.52 points or a 0.19% decline to close at 48,632.56.

The investors adopted a cautious stance owing to news reports suggesting a delay in the 6th IMF review, as per the market closing note by Topline Securities.

On the sector front, refineries witnessed profit-taking and closed down by1.59% after news reports suggesting that refineries termed four clauses of the budget as ‘counterproductive’, the report added.

The Index traded in a range of 330.94 points or 0.68 percent of the previous close, showing an intraday high of 48,841.65 and a low of 48,510.71.

Of the 97 traded companies in the KSE100 Index 33 closed up 59 closed down, while 5 remained unchanged. Total volume traded for the index was 699.38 million shares.

Sector wise, the index was let down by Commercial Banks with 46 points, Oil & Gas Exploration Companies with 45 points, Refinery with 24 points, Textile Composite with 19 points and Fertilizer with 17 points.

The most points taken off the index was by PPL which stripped the index of 31 points followed by LUCK with 21 points, SYS with 18 points, ENGRO with 17 points and EFERT with 15 points.

Sectors propping up the index were Power Generation & Distribution with 80 points, Chemical with 12 points, Pharmaceuticals with 8 points, Oil & Gas Marketing Companies with 5 points and Tobacco with 3 points.

The most points added to the index was by HUBC which contributed 52 points followed by KEL with 29 points, TRG with 28 points, FFC with 18 points and PSO with 11 points.

All Share Volume increased by 6.72 Million to 1224.57 Million Shares. Market Cap decreased by Rs.12.61 Billion.

Total companies traded were 403 compared to 413 from the previous session. Of the scrips traded 143 closed up, 237 closed down while 23 remained unchanged.

Total trades decreased by 49,600 to 232,032.

Value Traded decreased by 14.68 Billion to Rs.28.17 Billion

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June 15, 2021 (MLN): The government of Pakistan has acquired an additional debt of Rs.358.36 billion during the week ended June 04, 2021, which brings its total net borrowing for ongoing fiscal year 2021 to Rs.1014.73 billion. As of prior week, the government had borrowed a net sum of Rs.656.37 billion.

According to the State Bank of Pakistan's weekly estimates in this regard, this year's overall net borrowing as of this week has decreased by Rs.933.92 billion over the year as last year's net borrowing for the same period stood at Rs.1.95 trillion.

The government sector borrowings are divided into three broad categories based on the purpose of loan which are budgetary support, commodity operations and others.

Split three ways between these broad categories, the cumulative net borrowing for budgetary support was Rs.915.52 billion, that for commodity operations stood at Rs.96.74 billion. whereas Rs.2.47 billion (net) were borrowed for other miscellaneous operations.

The two biggest source of financing for budgetary support are the State Bank of Pakistan and the Scheduled Banks. This fiscal year, the central bank has been retired a net sum of Rs.1.66 trillion by the government, out of which the Federal Government retired Rs.1.35 trillion, the Provincial Government retired Rs.281.1 billion, AJK Government retired Rs.24.2 billion, and the GB Government retired Rs.10.2 billion.

On the other hand, the Scheduled Banks have lent out a net total of Rs.2.58 trillion out of which the Federal Government borrowed Rs.2.61 trillion while the Provincial Government retired Rs.29.42 billion.

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June 15, 2021 (MLN): In order to achieve inclusive growth target, improve ease of doing business and accelerate the process of industrialization, government has offered a range of incentives and tax cuts in Federal budget for the upcoming FY22.

Initial impression of the budget is positive with respect to the major industries. More or less every segment of the economy has something positive in the budget. Specially, in lieu with IMF consultation, government has extended required relief for the industrial sector to pick the pace of growth.

Going by the budget document, the increment in earmarked amount of PSDP (Rs9.36billion) is evident that government with pro-growth approach is also taking development projects seriously. The allocated budget has the potential to boost construction activities which will ultimately accelerate the allied steel industry.

Meanwhile, government has allocated Rs100bn for the construction of five dams including Diamer Bhasha, Neelum Jehlum, Dasu Phase-1 and Mohmand dam. The mega construction activities of dams will mainly impact on the demand for steel.

Federal government has also proposed Karachi Transformation Plan and allocated Rs98bn from PSDP and Rs125bn from the Supreme Court Fund. According to Pearl Securities, this entails that the demand of steel is likely to evolve in the Southern region, therefore, steel companies located in the South would ultimately reap the benefits out of it.

With respect to the raw material, government has proposed reduction and exemption of custom duties (CD), additional custom duty (ACD) and regulatory duty (RD) on the import of flat rolled products including Hot Rolled Coil (HRC) and stainless in order to accelerate the production process.

Further it will likely improve margins of listed steel industry such as International Steels (ISL), Crescent Steel and Allied Products Limited (CSAP), International Industries (INIL) and Aisha Steels (ASL). To note, ISL & ASL are being charged 5% CD and exempted from RD.

As per the estimates ,made by Topline Securities, ISL and Aisha Steels (ASL) will have a positive impact of Rs3.46 and Rs1.32/share, respectively if assumed 50% benefit passed on to consumers.

The report further stated that INIL also has 50k tons capacity of CR mill which is not in operation since the beginning of FY21 due to unfavorable duty economics. INIL is currently subject to duty of 13% on import of HRC (shared by management in a conference call).

It is expected that INIL to benefit to the tune of Rs2.12/share on unconsolidated basis (assuming 50k tons) and Rs8.56/share on consolidated basis assuming 50% pass-on.

According to the report by Next Capital, the manufacturers will not fully pass-on the impact of this development in light of strong demand projections for the upcoming FY22 and relying on the recent new-found capacity of consumers to absorb price hikes.

A combination of partial pass-on (by absorbing new price hikes) and improvement of gross margins from 1QFY22 onwards is expected, the report added.

Speaking to Mettis Global over phone, Mairaj Khuwaja, Chief Executive, National Steel Advisory Council said that the proposed reduction in turnover taxes and reduction in CD will have a positive impact. However, manufacturers are still awaiting the release of final SRO as  more clarity is required on duty structure is in terms of incentives given to raw material.

Government has also proposed the reduction in turnover taxes from 1.50% to 1.25% which will support the Steel industry further and pave a way towards generating more revenue stream for the government.

It is pertinent to note that in previous years, high turnover taxation discouraged dealers from entering into tax net.

On the other hand, government has also imposed 17% General Sales Tax on the import of steel billets, ingots, ship plates, bars and other long re-rolled profiles to compensate for the removal of 17% FED on the afore-mentioned products.

The report further added that this development is done to increase the revenue allocation for provincial governments as GST is distributable between the provinces and the federal state. On the corporate sector, these developments would largely offset each other.

Imposition of GST on imported products will make it costlier for commercial importers thereby improving pricing power of local players. It is expected that MUGHAL, AGHA, ITTEFAQ & ASTL to be major beneficiaries of this development, a report by BMA Capital said.

The overall impact of the proposed incentives and tax slashes by government will likely be positive and help to expedite the growth momentum in the coming fiscal year.

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June 15, 2021: The Competition Commission of Pakistan (CCP) has concluded an enquiry in the dairy sector which has found the prima facia involvement of three leading dairy associations in cartelisation and price-fixing of milk in the country’s largest metropolitan, Karachi.

The CCP initiated the enquiry after taking notice of the media reports and concerns raised in a letter received from a leading Consumer Association against the rise announced in the price of milk in Karachi and its adjacent areas by the dairy associations at farm, wholesale and retail levels. Media reports also highlighted the involvement of several other dairy associations in the price-fixing of milk. It was specifically mentioned that the Dairy Farmers Association (DFA) Karachi had raised the price of milk from Rs. 110 per litre to Rs. 120 per litre with immediate effect, whereas, the official government rate was Rs. 94 per litre.

Since the milk price set by the government was Rs 94 per litre while the association collusively/collectively sold it at Rs 120 per litre, it resulted in daily liability passed on to consumers to the tune of approximately Rs 130 Million and an annual impact of approximately Rs 47 billion to the consumer of Karachi and its adjacent areas. On the other hand, the market was distorted as there was no competition on prices and consumers were made to pay unfair prices irrespective of the quality of milk.

Milk is an essential commodity and a key ingredient in desi ghee, butter, cheese, a variety of confectionaries, and several cosmetics. Therefore, a change in the price of milk affects the prices of all these and other products throughout the country.

Analysis of Karachi’s milk sector reveals that fresh milk in Karachi is supplied by five cattle colonies located on the outskirts of the city. The supply chain of milk consists of dairy farmers, wholesalers, and retailers, where milk is sold to retailers through an annual contract called ‘bandhi’ in which the rate and quantity for purchase of milk is fixed by various dairy and retailer associations. Karachi is also unique in the sense that there milk can also be purchased from the mandi located at Lee (Bolton) market.

As per the enquiry committee, the Commissioner Karachi Division notifies the prices at all tiers of the milk supply chain and the last such notification was issued on 14th March 2018 fixing the prices per litre as Rs. 85 per litre for the dairy farmer, Rs. 88.75 for wholesalers, and Rs. 94 per litre for retailers. However, the official data shows that the notified prices are not adhered to mainly due to the role of various associations involved in the milk supply chain.

There are three dairy farmers associations in Karachi namely: (i) Dairy & Cattle Farmers Association Karachi (DCFAK); (ii). Dairy Farmers Association Karachi (DFAK) and (iii) Karachi Dairy Farmers Association (KDFA). In February 2021, an informant shared some video footages of representatives of DCFAK announcing the revised prices of milk in Karachi. This was followed by the President of DCFAK appearing on various TV programmes stating that milk in Karachi would not be available to consumers at the old rate of Rs. 120 and that his association will not take back the increase in milk prices. Similarly, the TV appearances of President DCFAK is presented in the enquiry report where he announces new rates of milk in July 2020.

Statements from various retailers’ representatives and a dairy farmer’s representative revealed that all the three dairy associations in Karachi had formed a cartel and were announcing the rates of bandhi. If a retailer refused to abide by the association’s set rates his supply of milk would be stopped.

The enquiry committee after taking into account: (i) statements of retailers’ representatives, dairy farmers and (ii) the abovementioned video footages reached the conclusion that in July 2020 and February 2021, decisions to fix the prices of fresh milk in Karachi were primarily taken by DCFAK. It also appears that the other two dairy farmers associations-DFAK and KDFA followed suit as the prices of milk in the relevant market rose immediately after the announcement of new rates by DCFAK. It is observed that the rate rise could not have been possible without the collusion of all three dairy associations.

Price data shows that prices of milk in Karachi rose immediately after the rate announcement by the DCFAK. In July 2020 prices rose from an average of Rs.110 per litre to Rs. 120 per litre and in March 2021 prices rose from Rs. 120 to Rs. 130 per litre. Once the rate of bandhi was increased by the dairy farmers it would have an impact on prices at all other levels of the supply chain including wholesalers and retailers.

A city-wise comparison among Karachi, Lahore and Islamabad-Rawalpindi shows that only Karachi has a uniform milk price, whereas the prices vary in all other cities. Such uniformity in prices also points towards rate fixation by the various dairy associations.

Therefore, these decisions to fix the rate of bandhi in the relevant market is prima facie, violation of Section 4 of the Competition Act 2010.

Rate announcements or even recommendations by associations to fix the price of milk are decisions by an association in prima facie violation of Section 4(1) read with Section 4(2)(a) of the Competition Act, 2010. This rate acts as a benchmark and the product would be priced at or near this level.

In light of the findings, the enquiry committee recommended the Commission to consider initiating proceedings under Section 30 of the Act against DCFAK, DFAK and KDFA.

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