Electricity supply: Finance ministry asked to clear Rs72b unpaid subsidy bills

The Ministry of Water and Power has asked the Finance Division to take over the payment responsibility of Rs72 billion worth of unpaid subsidy bills which have been pending for the last two years.

The matter was taken up in a meeting of the Economic Coordination Committee (ECC) held on August 12, officials say.

“These are chronic bills pending for the last two years; the Finance Division should meet its commitment and retire the bills on account of various heads of power subsidy,” the water and power ministry said.

The ministry admitted that state-owned power companies were suffering high distribution losses caused mainly by electricity theft and low bill recovery.

Factors like thin subsidy budget, lower applicable tariff, unsatisfactory revenue collection and higher thermal generation were adding to the cost of electricity production, hurting the ability of distribution companies to settle their liability against the Central Power Purchasing Agency (CPPA).

As a result, the CPPA cannot pay the cost of power purchase to the independent power producers (IPPs) and electricity generation companies.

In this situation, the distribution companies had to resort to borrowing from banks to clear the CPPA bills.

Power Holding (Private) Limited arranged a loan through a syndicated term finance facility on behalf of the distribution companies. The facility was for 15 months with no renewal or rollover provision.

The water and power ministry told the ECC that the Finance Division had agreed to bear the cost of servicing the financing facility as an amount of Rs72 billion had been unpaid under various subsidy heads during 2013-14 and 2014-15.

The Finance Division also approved the terms and conditions of the facility, paving the way for its release.

The water and power ministry said the Ministry of Finance would provide government guarantees for loan repayment as well as interest expenses for the financing facility amounting to Rs7.487 billion.

The servicing of mark-up, principal amount, its repayment and all other costs becoming due and payable in respect of the facility would be the responsibility of the Finance Division, it said and sought ex-post facto approval of the proposal.

The ECC reviewed a summary in this regard and approved the issuance of sovereign guarantees by the finance ministry in respect of the syndicated term finance facility for the power sector.

State-owned power companies have not performed well over the years, though the new government came to power in mid-2013 with the slogan that it would end the crippling outages across the country.

On the other hand, consumers have been forced to pay hefty bills with the imposition of power surcharges in order to clear debts of inefficient electricity distribution companies. This shows that honest consumers are also bearing the losses caused by the defaulters that have not paid bills for several years.

Even the government has announced an amnesty scheme for the defaulters to encourage them to start paying their bills, but still honest consumers are being penalised with the levy of different surcharges.

Demand buffet: Exporters want rebate on energy bills, rupee devaluation

Leading manufacturers of textiles and economists have asked the government to let the rupee fall against the dollar and give factory owners rebate on energy bills or be prepared to face an economic crisis.

While there is no broad consensus at the moment, some experts say that rupee should be devalued by at least 6%.  According to the Pakistan Bureau of Statistics, exports plunged 17% across the board in July 2015 over the same month of the previous year. The textile group, which is the largest contributor to country’s exports, saw a decline of 12%.

The drop has come at a time when Pakistan’s competitors in international markets have devalued their currencies, completely eroding margins of domestic manufacturers, industry people say.

“It’s no longer a question of if; the government would have to come up with some solutions immediately. It’s do or die for us,” said Shabbir Ahmed, chairman of Pakistan Bedwear Exporters’ Association.

Bedwear exports have taken a hard hit, going down 20% to $157 million in July 2015 compared to exports of $199 million in July 2014.

Mounting pressure has at least forced Commerce Minister Khurram Dastgir to call a meeting of the Federal Textile Board, which had been redundant for the past few years. Bed wear exporter Ahmed did not specify what incentives they want and if rupee devaluation was a priority.

“What we are going to do is present our case including the rising costs of fuel and labour. Obviously, the impact of currency devaluation in the region is a matter of concern.”

For years, Pakistan has relied on foreign aid, external borrowing and remittances to shore up its foreign exchange reserves with little focus on exports to do the same job.  Former finance minister Hafeez Pasha, who now heads an independent think-tank, says perpetual reliance on external borrowing cannot go on forever.

“The government doesn’t realise that there is a low-intensity trade war going on in the world. China, Japan, India and others have all devalued their currencies. We must act now,” he said.

He believes that the rupee would have to shed 6% in value or the government would have to give 4% rebate on the value of exported goods to compensate for the rise in cost.

“The market has already started giving a signal to the government that the Pakistani rupee is overvalued,” he said, referring to decline of rupee to Rs104 against the US dollar in the open market. “The scary thing is that textile exports are down despite the concessional GSP Plus status we enjoy in the EU market. That tells us there is a slowdown in global economy.”

Utility prices, including cost of gas and electricity tariff, has been on the rise in Pakistan despite a decline in international oil rates.

That’s primarily because the cash-strived government has used gas and power bills as the easiest tools to raise funds by levying innovative taxes.

Zubair Motiwala, a bed linen exporter, says erratic expenses in the shape of ever rising utility charges have made it difficult for manufacturers to plan future investments.

“I fail to understand how is it that we are talking about raising the gas tariff when crude oil has come down to $40 a barrel? Please ask someone to explain this to me.”

The flip side

But rupee devaluation won’t be an easy proposition to get from Finance Minister Ishaq Dar who looks on the stability in currency as a benchmark for his ministry’s economic performance.

Forex Association of Pakistan President Malik Bostan concurs. “It would compromise the government’s credibility if it let the rupee fall willingly. I don’t agree with this step either. It would push up the cost of imported raw material the same exporters use.”

Lahore airport: Air navigation to be upgraded

The Civil Aviation Authority (CAA) has started upgrading the air navigation infrastructure at Allama Iqbal International Airport. 

Under the new aviation policy 2015, the up-gradation of Instrument landing System (ILS) CAT-IIIB, will help aircraft land at the visibility of up to 50 metres, currently under ILS CAT-II, which is functional since 1999. The runway visual range is 350 meters or more, which causes several delays in flight operations especially during the fog season.

“AIIA would be the second airport in the Asia Pacific region to have this state of the art facility, Delhi’s Indra Gandhi International Airport already is operating with this system”, said Mirza Akhtar, manager AIIAP and team lead of the project while briefing media on Saturday.

“Once installed, the system will help us to streamline the airport operations especially in winters, will help in saving the fuel thus portray a good image in the global aviation industry,” he added.

An ILS is a ground-based instrument approach system that provides precision guidance to an aircraft approaching and landing on a runway, using a combination of radio signals and in many cases, high-intensity lighting arrays to enable safe landing on runway.

The new system is supplemented by advances airfield lighting system and surface movement radar. Combination of these systems will facilitate precision approach and landing guidance to the aircraft in extreme weather conditions.

The cost of CAT-IIIB is $25 million, however, the system was gifted to Pakistan by Qatar.

Corporate results: HBL’s profit surges 24.9% to Rs16.9b

Habib Bank (HBL) earned a profit of Rs16.9 billion in the first six months of 2015, up 24.9% from the same period of last year.

According to the bank’s unconsolidated financial accounts released on Friday, HBL reported earnings of Rs7.4 billion in the second quarter (Apr-Jun) of 2015, which translates into a year-on-year decline of 7.3%.

The decrease in earnings in annual terms is reflective of the higher effective tax rate in Apr-Jun, said Topline Securities in a research note. The federal government changed tax rates on banks and imposed a one-time ‘super tax’ of 4%. It also notified a uniform tax rate of 35% on all sources of banks’ income, such as dividends and capital gains. According to Topline Securities, the effective tax rate in the second quarter of 2015 for HBL was 55% as opposed to 34% recorded in the same quarter of 2014.

Three banks in race to handle $1b bond float

The government has received three bids from prospective financial advisers and one of them will be hired to put in place a structure for floating a $1-billion Eurobond, which will prove to be a test case of the country’s claim of international recognition of its improved economic conditions.

In response to an advertisement placed by the Ministry of Finance, three bidders submitted technical and financial offers, say officials. These were Citibank, Deutsche Bank and Standard Chartered Bank and their bids would be technically evaluated early next week.

Citibank and Deutsche Bank were also financial advisers for the last two bond offers.

The country is expected to raise at least $1 billion through the upcoming Eurobond offer, however, officials believe the actual size will depend on the government’s external financing needs.

Factors like realisation of privatisation proceeds and disbursement of the Coalition Support Fund (CSF) by the United States will determine the actual size of the bond.

The US has expressed doubt about the willingness of Pakistan taking military action against the Haqqani network, which is blamed for many deadly attacks in Afghanistan, and that may create problems in the disbursement of CSF.

The government is estimated to receive $1.5 billion in CSF in the current fiscal year 2015-16, of which it got $337 million in the first month.

The bond issue will reflect whether the claim that the country’s macroeconomic indicators have improved, which is also recognised by international financial institutions, is true.

Finance Minister Ishaq Dar often argues that the government’s efforts to turn around the economy gain more recognition from the international community including the world media than the local press.

However, the rate of return at which global lenders will subscribe the Eurobond will be a determining factor in this regard.

In March last year, the government raised $2 billion by floating five and 10-year dollar-denominated bonds at interest rates ranging from 7.25% to 8.25%. In the second offer, five-year $1-billion Ijara Sukuk were issued at 6.75% return.

A successful offer this time around too will be instrumental in boosting the country’s foreign currency reserves to meet the International Monetary Fund (IMF)’s requirement.

In the sixth review of the $6.2 billion loan programme, the IMF had projected the gross official reserves at $20.1 billion for the current fiscal year, but reduced it to $17.1 billion in the seventh review.

Plunging crude oil prices and a slowing domestic economy were the main reasons behind the scaling down of foreign currency reserves target.

In the sixth review, the country’s gross external financing requirements for the current fiscal year had been assessed at $8.6 billion, which were also lowered to $6.3 billion in the seventh review.

The IMF has not yet released a report on the eighth review, which will be unveiled by mid-September after the lender’s executive board meeting.

The plan to borrow $1 billion through Eurobond, the third such issue in two years, suggests that the government will continue its policy of tapping global capital markets in a bid to build the foreign currency reserves.

This dollar-denominated bond is part of the $9 billion foreign economic assistance projected for the current fiscal year.

In this period, the country will also borrow $1 billion from the Jeddah-based Islamic Development Bank and ask China to roll over a previous $1-billion loan. Funds from these sources will help avert pressure on the rupee, which has come under strain in the past one week.

While the government’s reliance on dollar-denominated bonds continues, there is growing criticism of the strategy to build reserves through what many analysts call unsustainable and expensive means.

Market watch: Tracking regional peers, index sheds 700 points

week ended on a sour note for the Karachi Stock Exchange (KSE) as the benchmark-100 tumbled 700 points on Friday.

Led by regional activity and declining prices of global crude, panic investors took the index down almost 1,000 points intra-day before some relief occurred in the second half. At one point, the KSE-100 touched 34,275 points.

However, at close on Friday, the index lost 699.8 points or 1.99% to end at 34,519.77.

Elixir Securities Analyst Faisal Bilwani said Pakistan equities tumbled as stocks rout in the region led to panic with benchmark breaching key support at 35,000.

“Mood that was already sour from foreign selling in the last few sessions darkened further as regional markets along with commodities tested new lows with KSE-100 index dipping near 1000 points intraday,” said Bilwani. “Reports of foreign selling and institutions struggling to find buyers led to panic selling while retail investors were also taken for a ride as volatility and sharp dips tested nerves.

“Understandably, value buyers at lows were not so aggressive, however, late buying did help market close with trimmed losses.”

Bilwani said next week was crucial. “Day’s trade data will be crucial to setting the tone early next week as a large outflow from foreigners would dent already bruised confidence. Moreover, investors will closely track regional markets and are expected to cherry pick value plays on further weakness.

Apple narrows gap with Samsung in global smartphone sales

Apple gained ground on smartphone leader Samsung Electronics in global sales during the second quarter. But the market recorded its slowest growth in two years, according to market researcher Gartner.

The iPhone maker sold 48 million smartphones in the second quarter, up 36%. Samsung sales dipped 5.3%. Apple market share increased from 12% during the same time period last year to 14.6%, while Samsung share dipped to 21.9% from more than 26%.

"Apple's double-digit growth in the high-end segment continued to negatively impact its rivals' premium phone sales and profit margins," Gartner said in a statement accompanying the report. "Many vendors had to realign their portfolios to remain competitive in the midrange and low-end smartphone segments."

Apple's gains came largely at the expense of Samsung. The electronics giant continues to get squeezed after Apple matched the larger screen sizes of Samsung's Galaxy line, with the iPhone 6 and 6 Plus. At the same time, Chinese companies like Huawei and Xiaomi are eating into Samsung's share with the growing popularity of budget smartphones.

Worldwide sales of smartphones jumped 13% to 330 million during the second quarter, but it was the slowest rate of growth since 2013. Gartner research director Anshul Gupta says growth continues to soar in emerging markets, but sales were "mixed" in other regions, citing a slowdown in China — the biggest country for smartphone sales.

"China has reached saturation. Its phone market is essentially driven by replacement, with fewer first-time buyers," Gupta says. "Beyond the lower-end phone segment, the appeal of premium smartphones will be key for vendors to attract upgrades and to maintain or grow their market share in China."