Federal Budget FY21 impacts positively on the cement industry in Pakistan

Hammad Azhar, Pakistan's Federal Minister for Industries and Production, on June 12 unveiled a tax-free federal budget for FY20-21 in Parliament with a total outlay of PKR7.136trn (US$43.2m), to spur economic recovery following the economy's contraction in the outgoing fiscal year for the first time since 1952, due to COVID-19.
 
He proposed no increase in salaries of its employees and pensioners, a rise in levies on luxury products, and tax relief for the cement sector, sanitary-ware and locally-manufactured mobile phones.
 
Arif Habib Ltd (AHL) has reported that the budget proposes to reduce the federal excise duty (FED) on cement by PKR12.50/bag to PKR1.75/kg, translating to a post-sales tax impact of PKR14.63/bag. However, this appears trivial against expectations of a drop of PKR50-100/bag. Nevertheless, retention will help improve the profitability of local players (+0.5-1.0 per cent for FY21), the analyst believes.
 
However, the country's Federal Public Sector Development Program (PSDP) has been cut from PKR701bn in FY19-20 (budget) to PKR650bn in FY20-21 (budget), up by 15 per cent compared to FY19-20 (revised) estimate of PKR564bn, while further analysis revealed that allocation for the National Highway Authority (NHA) has also been slashed by 24 per cent to PKR119bn vs PKR156bn in FY19-20 (budget), suggesting curtailment in cement demand ensuing from the public sector.
 
The share of provinces in PSDP has also been compressed to PKR674bn in FY21 vis-à-vis PKR912bn in FY1920 (budget). Meanwhile, the development expenditure outside the PSDP has been left unchanged. Although a subsidy of PKR30bn has been earmarked for the Naya Pakistan Housing Authority and given the government's focus on low-cost housing, this might trigger construction demand.
 
The government also proposed discontinuation of two per cent additional custom duty on coal import. Total duties on coal are now three per cent versus five per cent previously, and is expected to benefit industry profitability.
 
However, before the announcement of the budget, the cement industry was also expecting a reduction of sales tax from 17 per cent to 15 per cent for megaprojects such as dam construction, CPEC and the Housing programme. In addition, it will raise customs duty on imports of clinker and cement to 35 per cent.

The leading research houses termed the budget positive for cement, steel, pharmaceuticals, consumer staples, and chemicals.