IBF PROJECT – MODULE 3

Company = Lucky Cement Limited

Team Members =
1. Muhammad Palize Qazi - 24027
2. Muhammad Hassaan Imran - 24062
3. Muhammad Azlan Tehseen - 24036
4. Muhammad Hassaan - 24802
5. Saifullah Soomro - 24626
6. Wasaiu Ahmed - 24281

Group 6
SLOT = 6611
m

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POLITICAL FACTORS 3

DOMESTIC POLITICAL STABILITY 3

MACRO-ECONOMIC POLICIES 3
INTEREST RATES 4
FOREIGN RESERVES 4
FISCAL DEFICIT 5
INTERNATIONAL POLITICS AND RELATIONS 5

ECONOMIC FACTORS 6

CURRENCY DEVALUATION AND RISING INPUT COSTS 6

INFLATION 7
GROSS DOMESTIC PRODUCT (GDP) 7
CURRENT ACCOUNT 8

FINANCIAL FACTORS 9

INVESTOR SENTIMENTS AND KSE100 9

CEMENT PRICING 10
TAX STRUCTURE 10
DEMAND 11
GOVERNMENT AND PRIVATE (LOCAL) 11
EXPORTS 11

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POLITICAL FACTORS

DOMESTIC POLITICAL STABILITY

PTI formed its first government in the general elections of 2018. This brought a peaceful political
environment due to their friendly relations with the military and judiciary, and improved investor
sentiments. This stability continued in FY19 despite futile attempts of an ‘Azadi March’ by the disjointed
opposition, thanks to the arrests of major opposition leaders. Continued stability and the exit from FATF grey
list in FY20 continued to stimulate market sentiments, albeit with hitches due to the Covid 19 pandemic
which was timely controlled. however, the setup of ‘Pakistan Democratic Movement’ in September 2020
brought a hint of uncertainty in FY21. All this stability shattered in FY22 with the PDM successfully removing
the PTI government, and with the inflationary pressures on the government.

MACRO-ECONOMIC POLICIES

Figure 1 Interest rates

In FY18 the 18th amendment which required the federal government to share resources with the provincial
governments limited the ability of the new government to implement a stable macro-economic policy to
reduce the fiscal deficit

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 INTEREST RATES

Figure 2 Source: tradingeconomics.com

FY17 to FY20 has been met with continuous interest rate hikes, but in FY21 after a decrease in aggregate
demand, SBP relied on a contractionary policy by reducing the policy rate by 625bps and relied on loan and
unemployment schemes to reduce the impacts of the COVID 19 pandemic. Despite supply shocks due to
covid and locust attacks, core inflation was successfully controlled.

FOREIGN RESERVES

Figure 3 Source: SBP

Pakistan foreign exchange reserves were the lowest in FY19. After some recovery, they dropped again in
FY22 due to the payment of external debt and failure to get an IMF bailout.

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 FISCAL DEFICIT

Figure 4 Source: AHL research

Fiscal deficit has been a prevalent issue in Pakistan from FY17 to FY19. Increased tax collections and lower
current spending have been relied on to reduce this deficit since FY19 but all that has done is controlling it.

INTERNATIONAL POLITICS AND RELATIONS

In FY18, the new federal government in unison with the military had a peaceful and dialogue-based
approach towards relations with India, but due to the ongoing elections in India the relations did not see any
improvement. It also had good relations with Donald Trump led US, as the 2 countries came to an
agreement of having peaceful dialogue to solve the issues in Afghanistan. These relations improved the
prospects of a possible IMF bailout. Relations with Saudi Arab were also good, with Pakistan receiving USD
6bn of financial assistance. Lastly, the government signed several MOUs with China and had discussions on
the development of CPEC.
In FY19, relations with US continued to improve, with them offering to mediate between India and Pakistan,
and Pakistan mediating US-Afghan and US-Iran talks. CPEC projects also saw a revival. Relations with India,
however, deteriorated due to the rising nationalist sentiments thanks to the Modi-led government. Relations
with Saudi Arab improved, with the crown prince’s visit and a USD 20bn package given.
In FY20 Joe Biden’s election win in US brought tension to the global landscape, owing to his confrontational
stance towards China and Russia which was exacerbated after the Covid-19 outbreak. Relations with both US
and India worsened as the US signed anti-China military deals with India.
In FY21 and FY22, the Taliban takeover in Afghanistan made Pakistan more important for the US. With a
similar PDM takeover in Pakistan, the previously stalled relations with US improved again. Before the PDM
takeover, relations were also improving with Saudi Arab and Russia with both signing a USD 3bn deal, but
these relations were completely halted by the PDM takeover.

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ECONOMIC FACTORS
CURRENCY DEVALUATION AND RISING INPUT COSTS

PKR has been severely devaluing against the USD because of the incessant current account deficits and
decreasing foreign exchange reserves, resulting in lower purchasing power and decreased consumption. For
the cement industry, this brings both good and bad news. On one hand, exports become a viable option due
to higher margins. On the other hand, prices for inputs such as coal continuously rise. However, the overall
slowing of the economy offsets any benefits the sector has.
Another factor for the rise in coal prices in FY22 was an increased demand by China and India, resulting in
the cement sector relying on the cheaper local and Afghanistan imported coal.
The recent decrease in coal costs brought on using other coals, from Mozambique and Indonesia instead of
South Africa, along with upcoming expansions, should exert some pressure on pricing, while the rupee's
depreciation and weak demand dynamics may keep cement prices low.

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INFLATION

Figure 5 Inflation rate. Source: tradingeconomics.com

Inflation remained under control 2017-2019 but saw a rapid increase in 2020 due to the COVID 19 pandemic
halting several sectors, the increased policy rate by SBP, reduced demand, and increasing import prices.
SBP’s policies to curtail this inflation worked till the end of 2021, but a massive uptrend was seen afterwards.
Food inflation is the largest contributor to this rise. The currency devaluation-led increase in costs of
production, increase in oil prices after removal of subsidies, and the recent flooding in several rural areas
ruining most of the production of the agricultural sector are the key causes of it.

GROSS DOMESTIC PRODUCT (GDP)

Figure 6 Per Capita GDP (in USD). Source: Pakistan Economic Survey

GDP grew substantially in 2017 and the growth continued in 2018. Despite a major fall in FY19 and FY20,
there was a recovery in FY21. The construction sector saw a boom thanks to reduced import duties on raw
materials such as coal and followed a V-shaped recovery pattern.

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CURRENT ACCOUNT

Figure 7 Source: tradingeconomics.com

Pakistan had a high current account deficit in FY17 and FY18. After a move to the upside and a positive
account in FY2021, FY2022 faced a downtrend again reaching a deficit of nearly 6000 USD Million before
recovering again due to a temporary ban of imports. Surprisingly, despite the COVID 19 pandemic in FY20
and FY21, the current account saw massive improvements due to remittances supported by the Roshan
Digital initiative, and due to lower imports. Imports decreased as a result of the crude oil price crash, PKR
depreciating and the introduction of new import duties.

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FINANCIAL FACTORS

INVESTOR SENTIMENTS AND KSE100

The best way to gauge the sentiments of investors in Pakistan is to have a look at the KSE100 index.
The stock market was at an all-time high in FY17 because Pakistan was facing a short-lived economic boom,
with rapid rise in GDP and the stable and strong value of the currency. Lower policy rates can also be
attributed to the shift of investors from fixed-income certificates and bonds to the stock market. This
bullishness was soon discontinued as investor sentiments started off on a bad foot in FY18, with PTI’s win
bringing a hint of uncertainty but improved due to the newly elected government bringing political stability
and continued economic growth. Bearish sentiments however carried on into FY19, with KSE100 dropping
below 29,000, as a result of the US-China trade war, sharp declines in foreign markets, and foreign offloading
of stocks. The cement and oil sectors were at the forefront of this fall. Early FY20 saw some recovery but
COVID 19 brought the market back to the 2019 lows. FY21 had minor recovery but the market has been
going sideways since then due to the re-emergence of political instability.

Figure 8 Foreign Direct Investments (FDI)

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CEMENT PRICING

Figure 9 Source: www.brecorder.com

The current cement industry in Pakistan relies mostly on the local market for sales. As such, prices of cement
bags directly determine their profitability. Inflation/policy rate and government subsidies are some factors
that determine cement prices. Having remained fairly stable from FY17 – FY21, cement prices have been
soaring in FY22 due to the construction price hyperinflation and the increased demand but limited capacity.

TAX STRUCTURE

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Federal tax rates can also directly determine the profitability of the industry. The tax rate applied to the
cement sector companies has been decreasing since FY17, reaching a low of 12% in 2020 amid the COVID
crisis and lower demand. However, tax rates started rising thereafter as the industry continued to
experience a higher demand and higher cement prices as a result of housing projects and construction of 4
major dams.

DEMAND
GOVERNMENT AND PRIVATE (LOCAL)
The cement sector saw an increasing demand in 2017 and 2018, driven by higher private demand due to
housing schemes, governmental strategic projects, and CPEC.
FY20 and early FY21 saw a decreased demand owing to the consolidation policy by SBP however, demand
slightly recovered in late FY21 and FY22 owing to several housing schemes receiving amnesty, tax
exemptions, subsidies, and increased loans to the construction sector, as well as construction of several
dams (4 major dams, 6 minor dams) such as Daimer Bhasha. However, the devastating floods from early
FY23 will likely result in economic slowdown and lower demands for cement. The increased demand brought
on by the floods won't be noticeable in FY23 because numerous roads and rail links have been damaged, and
repairs will likely take many years to complete.

EXPORTS
Exports decreased in 2017 due to several factors, such as Iran taking over exports to Afghanistan, anti-
dumping duty for exports to South Africa, and a general preference of the companies to sell in the local
market due to higher prices.
FY22 – exports to Afghanistan decreased after the US exit, and the same applies to the western and
southern region.

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