Turkish company says it will acquire Dawlance for $258m



Turkish company Arcelik has said it is going to acquire Dawlance, a privately held Pakistani manufacturer of consumer durables, for $258 million.

According to a research note issued by Deutsche Bank to its clients, one of the subsidiaries of the Turkish company, Ardutch BV, has signed an agreement to acquire three companies based in Pakistan and British Virgin Islands that collectively own 100% shares of Dawlance.

The deal is likely to be closed by the end of 2016, as it requires approvals from competition authorities, purchase of minority stakes and transferring of land and buildings to the ownership of the company, it said.

When contacted by The Express Tribune, Dawlance General Manager for Sales and Marketing Hasan Jameel said he could neither confirm nor deny the deal.

Earnings snapshot

Dawlance manufactures white goods – which are consumer durables like refrigerators, freezers, air conditioners, microwave ovens and washing machines – in three factories and sells them in local and foreign markets.

Financial accounts of Dawlance are not public because of its private-limited status. However, according to the earnings details Dawlance has provided to Arcelik, it had revenues of $220.6 million in 2015. Similarly, its (adjusted) earnings before interest, tax, depreciation and amortization (EBITDA) amounted to $45 million (roughly Rs4.5 billion) last year. Its net debt amounted to $30 million at the end of 2015, according to Deutsche Bank.

Reason for sale

Although Jameel refused to entertain any questions with regard to the sale of Dawlance, sources close to the sponsors of Dawlance say the company had been on the auction block for the last five years.

Majority shares of Dawlance are owned by Bashir Dawood. He is a step-brother of Hussain Dawood, a corporate titan who controls majority shareholdings in HUBCO, Engro and Dawood Hercules groups.

Sources say the owner of Dawlance wanted to permanently move abroad. His children have established careers in fine arts and interior designing in Europe and the Middle East and apparently have little interest in managing the family business.

Bashir Dawood and his immediate family members reportedly own 100% shares in Dawlance through Pakistani as well as offshore companies. His name and those of his immediate family members, Farah and Mariyam Dawood, also appear in the recently leaked Panama papers. The leaks show the three family members are shareholders of Golden Lake Ventures Group Inc, a British Virgin Islands-based company.

Market share

There are four major players in Pakistan’s white goods market, namely Dawlance, PEL, Haier and Orient. Waves and Kenwood are relatively smaller players, albeit with significant shares in some segments of the durables market.

The microwaves segment is completely dominated by Dawlance in Pakistan with the company controlling about 70% market share, according to market sources.

Dawlance is also the single largest player in the refrigerator segment with up to 45% market share.

In air conditioners, however, Haier owns the largest market share (40%). Dawlance is a relatively small player in this segment with about one-tenth of the market share.

Dawlance boasts of having one of the widest dealers’ networks and after-sale networks in Pakistan. It has 37 branches in addition to 750-plus franchises across the country – a fact that distinguishes it from most of its competitors.

Web of companies

Dawlance operates through a complex web of subsidiaries in order to minimise its tax expense, inside sources say.

For example, a group company registered by the name of United Refrigeration Industries manufactures goods and then ‘sells’ to another subsidiary that either sells it onwards to local dealers or exports the durables.

Similarly, another company of the group by the name of Dawlance Real Estate owns a number of properties that are eventually rented out to other companies of the Dawlance group.

These roundabout transactions within the group companies help save dealers in terms of taxes, sources say, thus leaving the dealers with wider profit margins to pocket.

According to an internal memo sent out to all Dawlance employees early on Friday morning, Bashir Dawood will continue to “guide” the company in the future. The memo named four companies of the group, saying these would not be part of the proposed partnership “at this stage.”

One of the four group companies is United Sales, which handles the nationwide hire-purchase business for end-customers. Another company is Dawlance Marketing, the tax-registered entity for exports and high-profile key customers. In addition to Dawlance Real Estate, the memo also mentions Electric City, the group entity that carries Dawlance’s own retail outlets for cash-based sales to end-customers.

“We see benefits passing onto these entities as well and intend to… merge these entities and take our retail and hire-purchase setups global, starting with Sri Lanka and Bangladesh as the initially shortlisted markets to launch Dawlance,” it said.

Published in The Express Tribune, July 2nd, 2016.

Bhutto and the history of nationalisation in Pakistan



In his article published in the May edition of Newsline, an independent monthly news magazine, economic journalist Muhammad Ziauddin says “a levelling phase” began in Pakistan with the advent of the Bhutto era, which forced the “22 families to flee the country with their loot.”

He adds that the “phase of levelling inequality” was cut short quickly by General Zia and a new phase of cornering the wealth of the nation by a few hundred was launched.

He and other left-of-centre writers like to glorify the Bhutto regime – why else would anyone call the six years of economic ruin and destruction “a levelling phase”?

I recently spent some time digging 40-year-old data to find out the actual economic performance of the Bhutto regime. I made a point of taking no help whatsoever from the internet. I relied mainly on the central library of the State Bank of Pakistan (SBP), Karachi.

I got all the statistics and economic commentary from annual reports of the SBP, economic surveys, annual plans, official gazettes and other authentic government sources.

Before I note down my key findings, let me share with you a titbit that reflects economic management under the Bhutto regime: in an unprecedented move, the Bhutto government had “withheld” the publication of the annual reports of the SBP for three consecutive years — 1973-74, 1974-75 and 1975-76. That was because the central bank was critical of Bhutto’s economic policies. These reports were later released only for the publication in the official gazette.

Disclaimer: I took the following notes from half a dozen sources (all authentic though). But I have not rephrased each and every sentence and properly cited every detail. That’s because it’s not academic or even journalistic writing: this blog post aims to help people get a gist of Bhutto’s economic management.

A lot of statistics are from the white paper on the state of the economy published by the subsequent military regime. Its commentary is indeed biased, but statistics are from the national accounts and hence undisputed. I have also taken help from Shahid Javed Burki’s book, “Pakistan Under Bhutto”.

Another book, “Public Enterprises in Pakistan” by Robert LaPorte and Muntazar Bashir Ahmed was of great help with regard to understanding the post-Bhutto privatisation process.

Happy reading…

— Although the reported GDP growth rate for the five-year Bhutto rule (1972-77) was 4.16%, the overall growth rate was “puffed up” because of 1972-73 — the first fiscal year of the Bhutto regime that witnessed a rebound in economic activity from the depressed war level of 1971-72.

— Excluding 1972-73, the average growth rate for the Bhutto years comes down to only 3.48% per annum for the four years i.e. 1973-74 to 1976-77. The population increase over the same period is estimated to be 3% per annum. As a result, the growth in per-capita income was less than 1% per annum.

— Even the nominal growth in national income during those years did not originate from productive sectors like industry and agriculture. So-called growth emanated from the services sector because of the large, unproductive expansion of jobs in the public sector.

— The commodity producing sectors – industry and agriculture – grew at 2% and 2.9% per year, respectively. The two sectors contributed only 28.5% of the cumulative increase in the GDP during the five-year period ending June 1977.

— In contrast, the economy had grown at an average rate of 7% per annum for the 1960s, with per-capita income growth clocking up at a healthy 3.8% per year.

— Owing to a rapid increase in prices, export growth in nominal terms for the period following 1972-73 was 7.2% per annum. However, there was a net decline in the real volumes of exports over the Bhutto years. Pakistan’s share in world exports declined from 0.16% in 1972 to 0.12% in 1976.

— Inflation equalled 17.3% per annum during 1972-77. While the government tried to blame it on the global energy crisis in 1973-74, global statistics show Pakistan’s inflation rate was significantly higher than the average for Asian countries (11.6%) for the same period.

— The balance of payments deficit on current account jumped 795% during Bhutto years — from $100.8 million in 1972-73 to $902.5 million in 1976-77.

— Most of the deficit was financed by external borrowing. Outstanding external debt more than doubled to $6.3 billion between December 1971 and June 1977.

— The net external borrowing in five years of the Bhutto regime was equal to the total borrowing in the previous 25 years.


— Bhutto assumed power on Dec 20, 1971. On Jan 1, 1972, the government took over 31 industrial units under 10 categories of industries.

— The nationalised industries included shipping, iron and steel, basic metal, heavy engineering, assembly and manufacturing of motor vehicles, tractor plants, chemicals, petro-chemical, cement, and public utilities, including electric generation, gas and oil enterprises.

— The nationalised companies were put under the management of the Board of Industrial Management (BIM).

— The categories were defined vaguely, so that it was possible to take over some units and leave out others. This was particularly true in the light engineering sector where small units belonging to political opponents were taken over while much larger units were left untouched.

— No assessment was made of the nature of the units which were selected for nationalisation. Some of the units were already making huge losses. Taking over these sick units heavily burdened the public sector and was a drain on its resources from day one.

— Initially, the government order was to “take over the management” only while ownership was left with original owners.

— In August 1973, however, rules were amended to acquire a majority share ownership “on compensation” of the taken-over units. In November 1973, orders were issued for acquiring majority ownership in the public limited companies and the entire equity of the private limited companies. In March 1974, rules were again amended to provide for payment of compensation for the acquired shares at market value instead of the break-up value as envisaged earlier.

— Originally, there was no mention of compensation. Later, a compensation formula was given, but the principle of adequate compensation was never accepted.

— In 1972-73, BIM units employed 40,817 people, but the number went up 64,643 people in 1976-77, up 58%. But production did not increase correspondingly, with labour productivity declined in a majority of units, according to government statistics.

— Salaries, wages and other benefits for the BIM as a whole increased over 322% between 1972-73 and 1976-77.

— Despite the increase recorded in sales numbers (in nominal terms because of price increases), net earnings were negative on large capital invested in these undertakings. Among the industrial units, profits were available only in the cement sector where repeated price increases were introduced.

— A number of industrial units were set up without economic consideration. A notable example is the sugar mill set up by PIDC in Larkana. PIDC had pointed out that a sugar factory in Larkana may not be viable, as Larkana was not a cane-growing area. The cane had to be supplied to the factory from a distance of 150 miles. It was established nonetheless and had incurred a loss of nearly Rs20 million in the first two years of its operation.

— In October 1977, the military government appointed a commission to review the financial position of state-owned enterprises. The commission reported that only 15 out of 54 units were in a position to maintain profitability in 1972-77.

— Reviewing the cumulative position of the entire Bhutto years, the commission report said net accumulated losses for the 54 enterprises taken together was Rs320.9 million.

— The commission report said the labour productivity declined in 39 out of 54 units.

— The commission reported that 30 of these units were operating on an average below-70% of installed capacity. Between 1972 and 1977, capacity utilisation had declined in the case of 21 units.

— At the end of 1977-78, there were 12 BIM units that had a negative net worth compared to only two units in 1970-71.


— Between 1972-73 and 1976-77, the agriculture growth rate was 2% per year as opposed to 6.4% per year recorded throughout the 1960s.

— Although its manifesto did not promise it, small agro-based industries were also privatised for simple processing of agricultural produce in the rural areas. In July 1976, the government announced it had taken over cotton ginning, rice husking and large flour mills throughout the country, with exemption granted to units with foreign participation.

— Initially 2,815 units were nationalised under this policy. These included 578 cotton ginning units, 2,113 rice husking units and 124 flour milling units.

— In May 1977, however, 1,523 small rice husking units were returned to their owners.

— To handle the nationalised units, Cotton Trading Corporation, Rice Milling Corporation and Flour Milling Corporation were set up in addition to the establishment of a separate Ministry of Agrarian Management.

— In 1976-77, the Rice Milling Corporation operated units that constituted only two-thirds of the nationalised rice-husking units. In both quantity and quality the corporation did not achieve any major objective. Thus the loss suffered by the corporation amounted to Rs200 million in 1976-77.

— As for Cotton Trading Corporation, it managed to operate less than half of the nationalised ginning units. It was largely used as a source of unproductive employment, as its number of workers almost doubled in just one year.

— Uncertainty prevailed for the whole of 1976-77 about the exact number of units nationalised. The list included pieces of land that displayed a signboard of “under-construction”.  Residential houses were also nationalised if the owner had found it convenient to install machinery in one part of his large rural compound. Cattle, poultry and fish pounds were also nationalised if they were on the premises of the factory.

— In one case, a primary schoolteacher was appointed a factory manager, as the government had to quickly mobilise personnel without due scrutiny. In another case, an Inspector in Market Committee of Thari (Tehsil Mirwah, District Khairpur) was appointed deputy manager on the orders of a minister.


— The government took over the vegetable ghee industry in September 1973, although it was a small consumer goods industry with a total capital investment of Rs200 million at the time of the takeover.

— In the three years following the nationalisation of this industry, number of workers employed increased by one-thirds. Mismanagement resulted in aggregate losses of Rs24.3 million and Rs29.4 million in 1974-75 and 1975-76, respectively.


— One of the rationales for nationalisation, according to the government, was to ensure stability in the prices of everyday use. However, history shows prices rose faster than they increased in the preceding decade.

— The retail price of Zeal Pak Cement increased from Rs151.5 per ton in February 1972 to Rs443 per ton in June 1977, an increase of 192.7% over five years.

— The retail price of sugar increased from Rs1.60 per seer in 1972-73 to Rs4 per seer in 1976-77, signifying an increase of 775% in four years.

— The price of vegetable ghee increased from Rs6 per seer in 1973 before nationalisation to Rs9 per seer by 1977, up 50% in four years.

— Big price increases took place in industrial items as well. The price of rolled material increased from Rs2,000 per ton in 1972-73 to Rs5,025 per ton in 1976-77, up 151.25% in four years.


— After the nationalisation of 31 concerns in January, 1972, the government declared an end to the nationalisation process. However, in September 1973, it took over vegetable ghee industry. This was followed by the nationalisation of banks and shipping industry in January 1974.

— Banks’ nationalisation on January 1, 1974, occurred within 24 hours of a meeting (held on Dec 31, 1973) in which Prime Minister Bhutto told private-sector representatives in Karachi that nationalisation would not take place anymore. The government nationalised the banking sector except foreign banks, without consulting the SBP.

— Then the government took over the marketing and distribution of petroleum products.

— In 1976, cotton ginning, rice husking and flour mills were also nationalised.

— Prime Minister Bhutto had openly vilified entrepreneurs and businessmen in these words: “The business community is continuing to take part in activities prejudicial to the government. We must put an end to these so-called businessmen’s moots. Each of the individuals who participated in this meeting should be watched carefully and we should have a complete dossier on every one of them to be able to put them on right track.”


— According to 1975-76 Annual Plan released by the Planning Commission, the (private) industrial investment at Rs576 million in 1973-74 was less than half the level in 1969-70 even in money terms.

— As a result, large industrial families started moving out of Pakistan with whatever they were left with. The Dawoods moved to Texas, United States, the Saigols started investing in the Middle East and the Habibs focused on Europe for growth opportunities.


— Between 1972-73 and 1976-77, the export volume of both yarn and cloth declined. One of the reasons was frequent revisions in export duties of these items. Between May 1972 and June 1974, the duty on yarn was changed as many as eight times. The duty on cloth increased on seven different occasions over the same period.

— At the end of 1976-77, about 0.9 million spindles out of a total 3.507 million were out of operation, with about 12,000 looms also closed.

— The productivity of labourers in the textile industry in Pakistan between 1971 and 1975 kept declining at an annual rate of 4%, according to a survey by the Cotton Textile Industry Research and Development Centre, Karachi.


— Upon taking over the government, General Ziaul Haq immediately reversed the nationalisation process initiated by the Bhutto regime. Zia denationalised around two thousand ginning mills that Bhutto had nationalised.

— He tried to denationalise other state-owned enterprises as well but remained largely unsuccessful for a variety of reasons listed below.

— In the book titled Public Enterprises in Pakistan by Robert LaPorte and Muntazar Bashir Ahmed, the writers state that the government became fed up with the private sector because it had not acted “in good faith” with regard to denationalisation.

— The law required that previous owners enjoyed first priority in terms of purchase from the government. However, the previous owners of the nationalised firms offered for sale wanted several conditions that the government was unwilling to grant. Such conditions included purchases prices below market rates partly because the companies were now overstaffed and the labour was unionised.

— Another condition demanded by the previous owners was the continuation of the “privileges” that the nationalised units had as public enterprises, such as credit on concessional terms, subsidised inputs (gas/oil/electricity), and continuation of price controls.

— The previous owners of the nationalised enterprises also demanded changes in labour policy that would allow them to get rid of surplus labour.

— In addition, the private sector was not particularly interested in acquiring the old public enterprises because private investors would rather develop new concerns that would not be fettered by debt, overstaffing and out-dated equipment.

— Here’s a snapshot of Pakistan’s growth in terms of GDP and GDP per capita under the Bhutto regime. It’s evident that Pakistan recorded the slowest growth in each category compared to Indonesia, Malaysia, India and South Korea during the period under review. If the following two charts don’t convince you how disastrous Bhutto’s economic policies were for Pakistan, then I don’t know what will.


GDP (current US $) 1970 1977 %age change
Indonesia $9.65b $48.39b 401.4%
Malaysia $3.86b $13.13b 240.1%
Pakistan $10b $15.1b 51%
India $63b $123.6b 96.2%
South Korea $9.4b $40.2b 327.6%


GDP per capita (current US $) 1970 1977 %age change
Indonesia $84 $352.42 319.5%
Malaysia $354.2 $1,019.2 187.7%
Pakistan $172.6 $213.18 23.5%
India $114.6 $189.9 65.7%
South Korea $291.8 $1,105.5 278.8%


Conventional wisdom is still wisdom



There’s an interesting article in today’s Tribune about monetary policy.

My colleague and friend, Saljooq Altaf, argues in the piece that a low benchmark interest rate is not going to fuel inflation in Pakistan.

The argument is counter-intuitive. In fact, it negates the whole point of having a monetary policy.

His writing style is a little opaque here and there — he’s a philosophy major from LUMS, after all. But he builds his argument neatly and concludes that:

“… (The) policy rate is inversely proportional to money flow, but if local caveats are taken into consideration, inflationary pressures either cease in effect or are highly diluted.”

Here’s why I disagree with him.

He implies that making credit cheaper by lowering the benchmark interest rate will not increase inflation because of two reasons: one, the government itself is the largest borrower in Pakistan. (Supporting fact: its share in the outstanding credit is more than 60%.)

Two, banks don’t lend to the private sector eagerly. (Supporting fact: banks own almost 80% of outstanding government papers, which constitutes an amount far greater than their exposure to the private sector.)

If I was to explain Saljooq’s argument to my mother, who didn’t study economics in college, I’d do it like that:

  • Pakistani banks love to lend money to the government because it’s got sovereign guarantee.
  • Their love for government securities results in crowding out the private sector.
  • Therefore, credit to the private sector remains restrained in spite of a cut in the policy rate.
  • Resultantly, money supply doesn’t increase as envisioned by central bankers, although credit may be cheaper than before.
  • As a consequence, inflation doesn’t pick up.

Now the problem with this argument is the writer’s assumption that money supply increases (only) when banks jack up their lending to the private sector.

Since banks aren’t lending to the private sector, he says money supply will stay relatively unchanged, and so will inflation.

Is his assumption right? I don’t think so.

The writer seems to have ignored that government borrowing also results in an increase in money supply.

What’s deficit financing? The government ends up with a deficit by committing to doing things that it can’t afford to do. It finances that deficit by borrowing money from the banking sector. It creates public-sector jobs, builds roads and bridges, commissions water and sanitation schemes, approves gas and electricity connections, and widens social safety nets.

In doing so, the government spends money. The same money it had borrowed from the banking sector. The government pumps cash into the economy when it pays employees, contractors, consultants, suppliers and businesses, thus increasing the overall money supply. People start chasing the same basket of goods and services with more money in their pockets.

This is precisely the reason deficit financing is considered inflationary.

A more wonkish explanation 

Research shows inflation in Pakistan is not solely a function of private-sector credit uptake.

In a research paper published by the Munich Personal Research Papers in Economics Archive in December 2014, SBP Senior Economist Muhammad Nadim Hanif has detailed the monetary policy experience of Pakistan during the last six decades.

“Based on past research studies on determinants of inflation, we can say that budget deficit, money supply, prices of imported goods, wheat procurement price, and expected inflation play an important role in generating inflation, while real income growth and openness play a significant role in dampening it,” he stated.

Contrary to Saljooq’s argument against the existence of a typical relationship between the policy rate, money supply and inflation in the country, the research paper says “inflation in Pakistan has been roughly equal to rate of broad money growth minus the real output growth” based on the average of the last six decades.

A theory doesn’t stand discredited just because it’s well-worn. Conventional wisdom is still wisdom.

Post-Brexit: What it means for the Pakistani economy



In another sign that Pakistan’s exports will continue to tumble, some analysts as well as stakeholders are fretting over UK’s decision to exit the European Union, saying that the development is more negative than it is neutral for the economy.

Pakistan’s stock market tumbled over 1,400 points in the aftermath of UK’s historical referendum, with textile and auto sectors bearing the brunt of the decision.

The plunge came amid expectations that Pakistan’s exports, majority of which are textile-related, will plummet to the European Union (EU) after UK exits the 28-nation trading bloc.

However, at a time when world’s markets are reeling with uncertainty, some analysts say the negative impact emanating from Brexit will be comparatively less for Pakistan’s economy as it is relatively insulated from global markets. The reason is that Pakistan’s exports are only 7% of the country’s total Gross Domestic product (GDP).

However, since the EU is the largest trading partner of Pakistan, exporters are concerned that political uncertainty in Europe, depreciation of the euro and the pound sterling may slow down their exports even further in the coming months. A weaker euro and pound sterling makes Pakistan’s exports relatively expensive, causing demand to drop, while a slowdown in foreign economies is also likely to result in declining imports.


Meanwhile, the Pakistani textile community is looking to pause, take a deep breath before jumping on conclusions for the long term.

“I don’t know what to say at this moment, pound sterling and the euro have taken a big hit and this will certainly hurt my exports in the short term as well as long term,” said Multinational Export CEO M Babar Khan, whose company exports most of its knitwear to the EU.

Khan, who has two textile factories in Karachi, said that a lot will depend up on how the UK and Pakistan negotiate over duties once the UK leaves the EU.

The EU awarded the Generalised System of Preferences (GSP) Plus status to Pakistan in December 2013 for the next 10 years, which has already helped the country in adding over $1 billion per year in its exports since January 2014. Exporters are worried whether Pakistan will receive the same benefits once Britain exits the EU.

However, since Pakistan has good political relations with the UK and the country also supported Pakistan’s case within the EU in gaining GSP Plus status, some exporters believe Pakistan will succeed in getting the same duty concessions from the UK.

The textile sector will be affected as a weaker pound sterling and the euro (down 2.3% in a single day) will render Pakistan’s exports more expensive, Topline Securities reported on Friday.

Out of total Pakistan’s textile exports of $11.6 billion during the first 11 months (Jul-May) of current fiscal year 2015-16, textile exports’ share to the UK was $1.2 billion (10%).


Over 10% of Pakistan’s total exports to the EU come from its leather sector. There are some concerns of slowdown in the EU markets, but there is no panic.

“We have some concerns because we believe political upheaval in Europe may hit Pakistan’s leather exports in the EU. But it may not be that severe because there is already a slowdown in EU’s leading markets,” Pakistan Tanners Association (PTA) Chairman Gulzar Feroz told The Express Tribune.

“Now that Pakistan will have to negotiate duty concessions with the UK, we would urge the UK authorities to consider Pakistan’s interests and allow it to export its products comparable to the GSP Plus arrangements,” said Feroz.


The Brexit resulted in global markets coming crashing down with pound sterling and the euro taking a massive hit. On the other hand, safe havens like the yen and gold appreciated significantly. The appreciated yen was trading at 101.9 against the dollar, up by 3% as of yesterday. The yen also appreciated about 3% against the Pakistan rupee on Friday.

In this photograph taken on July 25, 2015, people gather around vehicles parked in a car showroom in Quetta. PHOTO: AFP

“This will be negative for local auto sector as portion of their costs are denominated in the yen,” according to the Topline Securities report.

Invest & Finance Securities CEO Muzammil Aslam commented that Pakistan will face some impact of the Brexit in terms of imports and exports.

“There is uncertainty everywhere and this is expected to continue. The very fact that the pound sterling and the euro are depreciating is enough to know that Pakistani exports to the UK and the EU will take a hit in coming months,” he added.

Gold price increases 3%, will continue to rise

The price of the precious metal increased 3% overnight in the local market, as Britain decided to leave the European Union.

With the sterling undergoing the biggest one-day drop of over 10% against the dollar, international investors turned to safe-haven assets, thus increasing the gold price 5.3% to over $1,326 per ounce in one day.

As a result, the local price of gold surged Rs1,500 to Rs50,200 per tola (11.6 grams) in just 24 hours, according to All Sindh Saraf and Jewellers Association (ASSJA).

Speaking to The Express Tribune, ASSJA President Haroon Rashid Chand said gold prices are expected to keep rising in the next few weeks. “The sterling is losing value … people want to avoid volatility in the currency market. Gold prices will gain strength in the near future,” he said.

Gold’s consumer demand in Pakistan in the first three months of 2016 recorded a major increase on a year-on-year basis, according to statistics on global gold demand released by the World Gold Council (WGC).

It clocked up at 9.4 tonnes in Jan-Mar, showing an increase of 12% from consumer demand of 8.4 tonnes in the same quarter of the preceding year.

Consumer demand of gold consists of two major categories: jewellery demand and total bar and coin demand. The year-on-year increase in the country’s consumer demand for the Jan-Mar quarter in each category was 13.2% and 9.6%, respectively, according to WGC.

Pakistan’s share in the global consumer demand of gold is miniscule. With world consumer demand at 735.8 tonnes in the first quarter of 2016, Pakistan’s share was less than 1.3%. Given the small size of the Pakistani gold market, local prices are determined largely in line with global trends.

“I expect the gold price to hover around $1,400 per ounce by the end of 2016,” Chand said.

Stocks tumble as textile, auto, oil take beating

In a sign of increasing interconnectedness with the rest of the global economy, the Pakistan Stock Exchange (PSX) took a hit on Friday following Britain’s decision to leave the European Union (EU).

Stockbrokers look on during a trading session at the Pakistan Stock Exchange (PSE) in Karachi on June 24, 2016. PHOTO: AFP

Brexit-induced panic selling on the Karachi bourse resulted in the benchmark index shedding 848 points, down 2.2% from a day earlier. After losing over 1,400 points in early trading, the KSE-100 Index recovered some losses to close at 37,389.88.

The decision of the United Kingdom (UK), which constitutes about one-sixth of the economic output of the EU, to quit the economic bloc will have a direct impact on at least two sectors of the Pakistan economy: automobile and textiles.

As a consequence of Brexit, the sterling lost its value against major currencies, including the Japanese yen. A stronger yen will hurt the earnings of auto companies listed on the Pakistani bourse because they import some of their auto parts from Japan.

Similarly, publicly traded textile companies will also take a hit as a result of Brexit. Textiles constitute more than half of Pakistan’s exports, with the EU being one of the major destinations of Pakistani products. Investors expect export-oriented listed companies in the textile sector to take a hit going forward, as a cheaper sterling will make Pakistani exports less competitive in the UK.

According to Intermarket Securities, Friday was the worst day of 2016 underpinned by broad-based selling in oil and exploration, auto, cement, banking, fertiliser, multi-utility, steel, textile, glass, power and pharma sectors. “Major contribution to downside came from MCB, OGDC, PPL, HBL, UBL, Engro and PSO,” it said in a research note.

However, it noted that the effects of Brexit will only be at the micro level. “We don’t think Brexit changes the Pakistan story. MSCI rerating has yet to take place,” it said while referring to the recent upgrade of Pakistan from the frontier to emerging market status by global index provider.

According to AKD Securities, concerns in the form of a potential pull-out by foreign investors remain. However, it said favourable local macros relative to other emerging markets are going to restrict the downside.

Elixir Securities also believes that Brexit does not have any major implications for Pakistan’s fundamentals. “Despite minimal bearings on Pakistan’s fundamentals, concerns of liquidity flows are likely to drive the index in the short term… redemptions and realignment of global funds could likely result in foreign outflows,” it said.

Trade volumes increased 108.4% to 236.8 million shares compared with Thursday’s tally of 113.6 million shares.

Shares of 341 companies were traded. At the end of the day, 44 stocks closed higher, 276 declined while 21 remained unchanged. The value of shares traded during the day was Rs15.3 billion, up 131.5% from Thursday.

K-Electric Limited was the volume leader with 24.1 million shares, losing Rs0.14 to finish at Rs7.76. It was followed by WorldCall Telecom with 15.2 million shares, gaining Rs0.37 to close at Rs1.96 and Dewan Cement with 13.1 million shares, gaining Rs0.42 to close at Rs14.84.

Foreign institutional investors were net sellers of Rs506.1 million during the trading session, according to data maintained by the National Clearing Company of Pakistan Limited.

Published in The Express Tribune on June 25, 2016 

New Civic: Honda Atlas generates Rs5b in first week of pre-booking



Pakistan is a low middle-income country with the per-capita GDP of $1,513. But that doesn’t mean expensive cars won’t sell here. In fact, unequal prosperity seems to have resulted in increased sales of expensive goods – and higher earnings per share for companies that make such goods.

Take the case of Honda Civic – the most expensive, locally assembled vehicle in Pakistan.

The company announced ‘pre-booking’ for the upcoming Honda Civic (10th Generation) model about 10 days ago. What happened next? Rich people with lots of money stepped forward and deposited Rs1 million (non-refundable) for either of the two variants of the new model.

According to a research report by Topline Securities, the two variants and prices of the new Honda Civic are 1.8L Oriel Prosmatec (Rs2.53 million) and 1.5L Turbo (Rs2.9million), subject to government taxes.

In just one week, Topline Securities says, the company has received around 5,000 orders for the new model cars, with “more buyers supposedly opting for the higher priced Turbo variant.”

The company is likely to release the new model next month. Pre-booked orders will be delivered in two months of the official launch.

The CEO of Adam Motors – the doomed made-in-Pakistan car manufacturer – once told me during a factory visit that it takes about $50 million for a car company to come up with a new model.

Going by the word of Topline Securities, Honda Atlas Cars has already collected Rs5 billion in the first week of the pre-booking phase.

This means that the company has generated cash flows in just one week that are enough to finance the development of its new model!

Such is the demand for expensive cars in Pakistan.

Based on the higher-than-expected response to the new Civic, the brokerage house now believes the earnings per share of Honda Atlas Cars for fiscal 2017 (ending in March) is going to be Rs31 as opposed to the earlier estimate of Rs26.

To get an overall picture of the auto sales in Pakistan and know the exact market share of each of the three auto assemblers, please click here. You’ll enjoy reading it if you’re interested in the auto sector.

Meat One shops to open at Shell petrol pumps



Halal meat seller Al Shaheer Corporation and oil marketer Shell have signed a memorandum of understanding (MoU) to set up branded meat shops at petrol pumps across the country, according to a securities filing on Friday.

Al Shaheer and Shell will jointly assess the opportunities for having Meat One branded shops, chillers and products across the 700-plus Shell retail sites across Pakistan over the coming years, it said.

Meat One is the premium retail brand of Al Shaheer Corporation, which deals in different kinds of Halal meat, including goat, cow, chicken and fish, for both export and local markets through a chain of retail stores.

Speaking to The Express Tribune, Al Shaheer Corporation CEO Kamran Ahmed Khalili said the outlets will be established only at ‘viable’ Shell petrol pumps. “New outlets will be set up at pumps where they make a commercial sense for both parties,” he said.

Khalili added that he expects Punjab-based new outlets to contribute more towards revenue generation as a result of the collaboration with Shell. As many as 18 of the total 32 Meat One outlets operate out of Sindh while the remainder 14 shops are in Punjab. The company has yet to enter K-P and Balochistan markets.

He shied away from stating a ballpark figure for the expected growth in revenues originating from the company’s collaboration with Shell. “Overall, we are expecting 40% growth in our revenues this year,” Khalili said. His estimate of annual growth does not take into account expected inflows from its collaboration with Shell because the company’s financial year ends on June 30 and no meat shop at any Shell retail site will be operational in June.

The first Meat One shop at a Shell retail site will commence operations in July in Karachi at the Askari petrol station on Rashid Minhas Road.

According to Al Shaheer Corporation Chief Operating Officer Khan Kashif Khan, the company will try to open Meat One outlets at petrol pumps that are in or near residential areas. “People tend to buy meat from neighbourhood stores,” he said.

Khan said he expects that up to 12 new outlets at Shell pumps will be operational by the end of 2016. “There’s a big opportunity. It’ll take up to two years to establish our presence at all those Shell pumps that we believe are commercially viable for both parties,” he said.

Besides Meat One, Al Shaheer Corporation also operates another retail meat brand by the name of Khaas Meat. Although the securities filing did not mention it, Khan said the company may set up Khaas Meat outlets at Shell pumps in the second phase of the retail expansion plan.

The Khaas Meat network currently consists of 18 stores that are equally divided between Sindh and Punjab, he added.

Pakistan is among the top-three goat meat consumer markets of the world, the company says on its website. It is ranked as ninth and 20th largest global consumer of beef and poultry, respectively, it says.

Al Shaheer Corporation went public last year. Its net profit amounted to Rs266.5 million in the nine-month period ending on March 31, up 48.5% from a year ago. According to the latest financial accounts of the company, its domestic-to-export sales ratio is gradually improving, with 29% of volumes now originating from within Pakistan.

As many as 298,500 shares of Al Shaheer Corporation changed hands on Friday, with its stock price rising 1.2% to close at Rs52.98 per share.

Published in The Express Tribune, June 18th, 2016.

Insurance premium: ‘Proposed tax will hurt insurance sector’



The imposition of a withholding tax on insurance premiums in the proposed federal budget for 2016-17 will hurt the industry, which is already suffering from a low level of penetration, according to Jubilee Life Insurance CEO Javed Ahmed.

Speaking to The Express Tribune in an interview, Ahmed said the proposed withholding tax at a “relatively high rate” will negatively impact the savings-to-GDP ratio.

The federal government plans to impose 1% withholding tax on life insurance premiums of non-filers in case they are in excess of Rs200,000 per annum. This will make life insurance costlier for people who do not file their annual income tax returns.

With the penetration of life insurance equalling only 0.51% of the GDP, Ahmed says the withholding tax will further discourage long-term savings in Pakistan. The savings-to-GDP ratio decreased from 14.7% in the preceding fiscal year to 14.5% in 2015-16, according to the latest economic survey.

The proposal to impose a withholding tax on insurance premiums is part of the government’s drive to force people into filing their income tax returns by making financial transactions costlier for non-filers.

For example, non-filers have to pay a withholding tax of 0.6% in case they withdraw or transact over Rs50,000 in a single day. Ahmed says life insurance policyholders who are non-filers already pay the withholding tax on banking transactions whenever they pay a premium exceeding Rs50,000.

Under the directives of the Securities and Exchange Commission of Pakistan (SECP), life insurance premiums in excess of Rs50,000 can only be paid through bank instruments. “This additional tax of 1% is not justified. We are taking up this matter with the Federal Board of Revenue through the Insurance Association of Pakistan,” Ahmed said.

Jubilee Life is the most profitable of the five private-sector life insurance companies operating in Pakistan, with total gross premiums amounting to Rs29.9 billion in 2015.

Super tax

The government has proposed that the “one-time” super tax of 3% on the income of insurance companies – first imposed in the last federal budget – should continue for another year. Every insurance company earning more than Rs500 million will have to pay the tax to help rehabilitate internally displaced people in the wake of Operation Zarb-e-Azb.

According to Ahmed, the impact of super tax for 2015 was around 3.7% on his company’s profit after tax, which clocked up at Rs1.6 billion last year. “The impact for 2016 will be more or less the same, with a proportionate increase being attributed to business growth,” he added.

Uniform tax rate

The government is going to implement a uniform tax rate of 31% on all sources of income for insurance companies July onwards.

Typical income avenues for the shareholders of an insurance company are underwriting profit and investment/other income. In contrast with underwriting income that is usually taxed at the corporate income tax rate, different tax rates apply to investment income that originates from dividends, profit on debt and capital gains.

Dividend income is currently taxed at 12.5%. Capital gains arising out of the investment portfolio are taxed at anywhere between zero and 15%, depending on the holding period of the security concerned. As a result, a lower tax rate on investment income would lead to an overall reduced effective tax rate for insurance companies until now.

Many smaller insurance companies in both life and non-life segments thrive on the basis of their investment income. However, Ahmed says the contribution of investment income to his company’s profit before tax has remained within 10% in the past five years.

“Business income was already taxed at full corporate tax rate. Hence, we do not expect a significant impact from the proposed change,” he said.

Published in The Express Tribune, June 17th, 2016.

Index jumps over 1,000 points as PSX gears up for massive inflows



Thanks to the overnight announcement by MSCI about the country’s upgrade from the frontier to emerging markets status, the benchmark-100 index of the Pakistan Stock Exchange (PSX) surged 2.78% or 1,042.12 points on Wednesday to finish at its all-time high of 38,559.9.

In the early hours of Wednesday, global index provider MSCI announced that its Pakistan Index will be reclassified to the emerging markets status, coinciding with the May 2017 Semi-Annual Index Review.

MSCI is a leading provider of international investment decision support tools. Its decision to upgrade the country from the frontier markets status is expected to generate inflow of millions of dollars from passive international funds that track MSCI indices.

Many global institutional investors use different MSCI indices – such as frontier, emerging, China and US markets – to create balanced portfolios to generate maximum returns while keeping in view their overall risk appetite.

Pakistan was part of the MSCI Emerging Markets Index between 1994 and 2008. However, the temporary closure of the PSX in 2008 led MSCI to remove it from the index and classify it as a “standalone country index”. MSCI made Pakistan a part of the Frontier Markets Index in May 2009 and it has remained as such since then.

Although the actual reclassification of the index will follow next year, global investors tend to start factoring in the reclassification ahead of the actual change, which prompts massive inflows of global funds in the case of a favourable decision.

Analysts have come up with varying estimates for inflows to the PSX expected in the medium term, such as JPMorgan Chase ($220 million), BMA Capital Management ($300-$400 million), EFG Hermes Holding SAE ($475 million), Intermarket Securities ($300 million), AKD Securities ($500 million), Elixir Securities ($250-$500 million), Taurus Securities ($300-$400 million), Topline Securities ($600 million) and KASB Securities ($700-$800 million).

Analysts estimate the size of the inflows based on the expected weight of Pakistani stocks in the MSCI Emerging Markets Index. A passive fund that is benchmarked against an MSCI index invests money into the constituent stocks according to their respective weight in the index.

For example, a country would receive roughly $1 billion in portfolio inflows in case its companies enjoy the collective weight of 1% in an index passively tracked by global funds of $100 billion.

The weight of Pakistani companies in the MSCI Emerging Markets Index will be anywhere between 0.14% and 2%, according to different analysts’ reports. This means Pakistan’s weight in the MSCI Emerging Markets Index will be smaller in percentage terms compared with its current weight in the MSCI Frontier Markets Index (9%).

However, the reclassification will bring in bigger foreign inflows in absolute terms, as emerging markets attract far more funds than frontier markets.

According to AKD Securities, active and passive funds of around $1.5-$1.6 trillion are benchmarked against the MSCI Emerging Markets Index. Assuming Pakistan’s weight of 0.19% in the index and the share of passive investments to be 15%, its analysts believe that gross inflows should amount to roughly $500 million as a result of the MSCI upgrade.

Referring to a webinar conducted by MSCI officials on Wednesday, Topline Securities analyst Saad Hashemy said as many as nine Pakistani companies are going to be included in the MSCI Emerging Markets Index.

Unsurprisingly, each of these companies recorded an increase in their share prices on Wednesday: OGDC (3.7%), Habib Bank (3.8%), MCB Bank (4.7%), United Bank (4.9%), Lucky Cement (4.91%), Fauji Fertilizer (2%), Engro Corporation (4.7%), Hub Power Company (4.9%) and PSO (4.9%).

Published in The Express Tribune, June 16th, 2016.

Pakistan upgraded to emerging markets status



In a positive development, MSCI said its Pakistan Index will be reclassified to the Emerging Markets status, coinciding with the May 2017 Semi-Annual Index Review.

MSCI is a leading provider of international investment decision support tools. Its decision is to upgrade the country from the Frontier Markets status is expected to generate inflows of global portfolio investment amounting to $475 million by the middle of 2017, according to EFG Hermes, an Egypt-based investment bank.

Global institutional investors use different MSCI indices – such as frontier, emerging, China and US markets – to create balanced portfolios to generate maximum returns while keeping in view their overall risk appetite.

MSCI communicates its conclusions, based on discussions with the international investment community, on a list of markets under review every June. MSCI announced last year that Pakistan was on its list for possible reclassification in view of improvements in transparency and liquidity.

Pakistan was part of the MSCI EM Index between 1994 and 2008. However, the temporary closure of the Pakistan Stock Exchange in 2008 led MSCI to remove it from the index and classify it as a “standalone country index”. MSCI made Pakistan a part of the Frontier Markets Index in May 2009 and it has remained as such since then.

Although the actual reclassification of the index will follow next year, global investors tend to start factoring in the reclassification ahead of the actual change, which prompts massive inflows of global funds in the case of a favourable decision.

Pakistan’s weight in MSCI Frontier Markets Index is about 9% with as many as 16 companies. Its weight in the MSCI Emerging Markets Index will be smaller in percentage terms though. But the reclassification will bring in bigger foreign inflows in absolute terms, as emerging markets attract far more funds than frontier markets.

Assets of more than $9.5 trillion are estimated to be benchmarked to MSCI indices worldwide. According to Next Capital CEO Najam Ali, most frontier market funds will continue their investment in Pakistan even after its reclassification as an emerging market as long as the improving macro theme remains intact.

According to Bloomberg News, the benchmark index of the Pakistan Stock Exchange has gained already 15% this year, making it the best performer in Asia. “The gauge has climbed 4.2% this month, compared with a 0.4% fall in the MSCI Emerging Markets Index,” it said on Tuesday.

Uploaded on the website of The Express Tribune in the early hours of Wednesday, June 14, 2016

Past empty promises cast dark cloud over Sindh’s allocations



“What’s the point of creating a budget if it is not possible to follow through?” said Alexa Von Tobel, American author and personal finance expert.

Her question was obviously rhetorical. But she would get a rational answer had she put it to Syed Murad Ali Shah, the long-serving finance minister of Sindh. After all, Stanford-educated Shah has presented too many budgets that have been impossible to follow through.

Take the example of his budget speech on June 11 in which he announced “a significant increase in the allocations for some of the smaller departments.”

Specifically mentioning five provincial departments, namely special education, social welfare, sports and youth affairs, women development and minorities’ affair, Shah said they perform important social welfare functions, “but generally get (a) smaller share in resource allocation.”

Shah has been leading Sindh’s annual resource allocation exercise for more or less eight years now. But let us not hold it against him in the spirit of better-late-than-never. He announced that the year-on-year increases in the current and development budgets for these departments for 2016-17 range from 35% to 433%.

His announcement received a round of applause from the treasury benches and earned him favourable newspaper headlines next day. But if the past is any guide, massive hikes in the allocation for these departments are unlikely to materialise.

Special education

Shah announced that the non-salary budget for the special education department will increase 433% year-on-year for 2016-17. “These interventions amply suggest that improving special education is one of the higher priorities of the government,” he said.

But a quick look at the “released position” of the provincial public-sector development programme for 2015-16 as on June 11 reveals that the Sindh government failed to spend even a single rupee out of the allocated development funds for the department. This means the Sindh government neither released nor spent any money out of the reserved Rs200 million development funds on special education during 11 and a half months of 2015-16.

Social welfare

The development budget for 2016-17 for the social welfare department is going to increase 45% to Rs290 million, Shah said.

Interestingly, he calculated the year-on-year increase in the development allocation to the social welfare department with the base figure of Rs200 million – the allocation he had made at the beginning of the preceding fiscal year.

As per the government’s own statistics, however, it released just a fraction of the pledged amount in the 11 and a half months of 2015-16. The social welfare department spent only Rs20.7 million, or 10.3% of the allocated Rs200 million development budget, between July 1 and June 11, official data shows.

Sports and youth affairs

The finance minister boasted that the development budget for sports and youth affairs is going to increase 100% to Rs2 billion for 2016-17.

Once again, his claim of a 100% increase in the development budget for the department is deceptive: it spent Rs590 million, or 59% of the allocated Rs1 billion, during the 11 and a half months of the outgoing fiscal year. More than Rs200 million was not even released by the government until June 11, official data shows.

Women development

The development budget for the women development department for 2016-17 is Rs426 million. In addition, funds for its current revenue expenditure have been increased 149% to Rs229 million for the next fiscal year.

However, development budget data for the outgoing fiscal year shows the department actually spent only Rs169.2 million until June 11. This means the department could use just 42.3% of the allocated development funds in 2015-16.

Minorities’ affairs

Shah increased development funds for the minorities’ affairs department by 6.5% to Rs604 million for the upcoming fiscal year. This increase is in addition to the rise of 134% in the non-development funds for the department for 2016-17.

But the development spending data for the outgoing fiscal year shows the department spent only Rs140.3 million until June 11. This means the minorities’ affairs department utilised less than one-fourth of the allocated development funds of Rs567 million in 2015-16.

Published in The Express Tribune, June 14th, 2016.