Finance Minister Miftah Ismail Tuesday said that with increased hydel power, lower energy demand, and lower oil prices, Pakistan may even have a balance of payments surplus in the coming months.
The minister expressed these views during a meeting hosted by Pakistan Stock Exchange (PSX). Speaking on the occasion the minister said that macroeconomic stability was forthcoming with the International Monetary Fund (IMF) programme resuming before the end of August as all conditionalities have been met.
PSX Chairperson Dr. Shamshad Akhtar, SECP Chairman Aamir Khan, PSX MD & CEO Farrukh H. Khan, FBR, Chairman Asim Ahmad, SBP Deputy Governor Dr. Inayat Hussain, Special Secretary Finance Awais Manzoor, and key stakeholders including Arif Habib Group Chairman Arif Habib, Pakistan Stock Brokers Association (PSBA) & AKD Group Chairman Aqeel Karim Dhedhi, Bank Alfalah Limited CEO Atif Bajwa, NBP Funds CEO Dr. Amjad Waheed, Arif Habib Corporation Director Nasim Beg, and Pakistan Business Council (PBC) CEO Ehsan Malik participated in the meeting.
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The meeting involved a discussion on proposals presented by PSX to the finance minister for the sustainable development of the capital markets. This follow-up meeting came on the heels of the visit of the finance minister to PSX last Friday. The PSX MD re-emphasized that the situation in the capital markets needs to be addressed on a war-footing.
The participants urged that the payout ratios of profitable state-owned enterprises (SOEs) should be raised to 50 percent. Given the imminent board meetings, there was an urgency for guidance for SOEs to declare healthy dividends, which would result in dividend income and tax revenue for the government, giving it fiscal space for reducing circular debt as well. The finance minister agreed and directed that a meeting be held immediately with the relevant ministry and all relevant stakeholders to consider this matter.
The participants also pointed out that the market valuations presented compelling opportunities for entities like State Life Corporation and Employees’ Old-Age Benefits Institution (EOBI) to invest in listed equities for the benefit of their policyholders and pensioners.
In terms of the macroeconomic situation prevailing in the country, the participants emphasized that the government’s funding should be strong and taxation measures should be equitable. Movements in PKR/USD exchange rate have been too volatile and changes to this effect should be gradual. With regard to the interest rates, it was pointed out that interest rates in almost all countries of the world are negative and this must be taken into account in the context of interest rates in Pakistan.
With respect to the capital markets, it was discussed that urgent actions are needed to mitigate the impact of macro developments for sustained and secular growth of the capital markets. As perhaps the largest stakeholder in the market, the government will benefit directly by developing better funding alternatives, improved documentation, and higher tax revenue, as well as avail the broader benefits that accrue to an economy on account of having developed capital markets. It was emphasized that the two biggest obstacles to capital markets growth are tax incentives given to other asset classes and KYC requirements in the stock market, which are not consistently applied to other asset classes.
These obstacles are resulting in an AML and tax-driven distortion amongst asset classes which is detrimental to the efficient allocation of scarce resources in Pakistan; hence creating challenges on both demand and supply sides for the capital markets.
In terms of taxation, the participants of the meeting pointed out that even though the stock market is undoubtedly one of the most documented sectors of the economy, however, the income of listed companies is subject to double tax, at the company level and later on dividends distribution level as well, whereas unincorporated businesses are subject to substantially lower taxes. It was emphasized that this inequity in taxation is discouraging corporatization and documentation.
The points made to encourage corporatization and documentation included tax rate for unlisted companies and AOPs be logically higher than for listed companies, restoration of tax credit for newly listed companies as the immediate revenue impact is very small.
In the medium term, this will be a revenue positive measure since the Federal Board of Revenue (FBR) will collect both Capital Gains Tax (CGT) and higher income tax from both the listed companies and other companies in the supply chain of the listed companies, provide a small tax rebate to any listed company that pays more than 50 percent of profits as dividends, reinstate exemption on inter-corporate dividend under clause 103c for group relief which will significantly improve capital formation and investments, and grandfather tax position of companies at the time of new listing on PSX, particularly for smaller companies listing on the GEM Board of PSX.
A key concern expressed at the meeting was the treatment of CGT. The Finance Bill 2022 addressed this issue through the introduction of reduced rates based on the holding period. However, the final Amended Finance Bill 2022 has again created a tax disparity between securities and immovable properties. This was termed unfair and against the stated policy of the government.
In terms of non-tax measures, it was emphasized that SOEs like State Life, DFIs like Pak Kuwait, PPP, and CPEC projects be encouraged to list and raise debt from the capital market.
Additionally, it was pointed out that the Direct Listing procedure developed by the Securities & Exchange Commission of Pakistan (SECP) and PSX can be used to achieve this without any significant sale of shares by the government. The participants emphasized that all schemes introduced by the government, finance ministry, FBR, and State Bank of Pakistan (SBP) should be available on better terms for listed companies such as concessional financing schemes for SMEs, and that the government use the capital markets for further Sukuk and debt issues for itself and other government-controlled entities, that the term ‘Advances’ for the purpose of calculating ADR under the Income Tax Ordinance, 2001 must include investment in all kinds of Corporate Sukuks/ TFCs, that investment limit for small retail investors, with easier AML requirements in Sahulat Accounts, be increased to Rs. 2.5 million with SECP fully clarifying AML requirements for Sahulat Accounts, that reforms in National Savings Schemes (NSS) are extremely important to eliminate distortions in the financial sector and to create significant savings for the government.
The finance minister was highly receptive to all the points discussed. He asked the FBR to immediately review any discrepancies in the CGT regime and the issue of tax credit for newly listed companies. He also asked SECP to review the investment limit and AML requirements for Sahulat Accounts.
He also directed the finance ministry to review the listing of DFIs, the procedure for issuance of debt/ Sukuks in the capital markets, and the interest rate setting of NSS instruments.
The minister also set up three committees. The first committee was set up to share the perspective of the private sector with SBP and the Monetary Policy Committee (MPC) on interest rates, the second one was set up to coordinate with PBC and PSX on all the tax issues and the third committee was set up to coordinate the review of listing of DFIs, debt and Sukuk issuance, reform of NSS and explore the development of a market for exchange rate forward dealing which all market participants can access.
The minister committed to review progress and meet with the stakeholders again within two weeks.
