Commencing of regulatory changes and impacts.

Byline: Shabbir Kazmi

In its first full year of rule, PTI government lead by Imran Khan introduced a number of regulatory actions in CY19, mostly to comply with the conditions imposed by International Monetary Fund (IMF) to remove macro imbalances and structural issues in the energy chain. Major regulatory actions include:

1) adoption of new flexible market determined exchange rate regime as against managed float previously,

2) withdrawal of tax exemptions to various sectors to improve tax collection,

3) utility rate adjustments both in electricity and gas sectors,

4) injection of Rs200 billion in the energy chain to improve liquidity situation and

5) upward revision in the margins of oil marketing companies (OMCs). Regulatory action to be taken during CY20 will largely be directed at implementation of ongoing structural reforms under the IMF program. However, with the bulk of regulatory adjustments behind us and improved macro situation allowing authorities to shift policy focus from stabilization to growth, the fallout from the regulatory action will be relatively mild as compared to CY19.

Banks

Retrospective application of super tax on CY17 earnings (consequent increased effective tax rate for the sector to 42-45% for CY19), introduction of Treasury Single Account (TSA), delay in IFRS-9 implementation and the government ceasing budgetary borrowing from Central Bank and resultantly shifting dependence on Commercial Banks (particularly at a time of lower financing demand) were the major regulatory changes impacting the sector.

The introduction of TSA, still in preliminary stages and expected to be implemented phase-wise as per understanding, would result in Government deposits being transferred to Central Bank (Government deposits constitute nearly 15% of total industry deposits). However, it had a negative impact on the stock performance of banks in which government still own a significant stake. IFRS-9 is expected to be implemented from CY21 onwards with initial estimates suggesting impacts ranging from rupees one billion to Rs5 billion.

Power

The regulatory actions in Power sector were in line with the IMF directions. The GoP injected Rs200 billion into the energy chain in March 2019 to bring down the overall stock of circular debt, touching Rs800 billion in January 2019). Bulk of payments was directed to EandPs and OMCs financed by Energy Sukuk I. This was followed by an announcement of another Rs200-300 billion of cash injection by...