Pakistan PE, PP trades stalled by rupee plunge, economic woes
Polyolefin trades in Pakistan are being stalled by a myriad of economic challenges, with demand staying weak since the Pakistani rupee (PRs) plunged to all-time lows against the US dollar in June.
The rupee’s latest devaluation occurred after the country finalised a $6bn three-year bailout program with the International Monetary Fund (IMF) in May, to address its balance of payments (BOP) crisis. In 2018, Pakistan’s central bank had devalued the currency five times. BOP measures an economy’s foreign exchange transactions with the rest of the world.
Conditions accompanying the IMF bailout package include tighter monetary and fiscal policies, which are expected to further hamper polymer trades in the country.
“A bulk of polyethylene (PE) and polypropylene (PP) trade is undertaken by traders who have suffered as a direct result of this [rupee plunge],” an international trader said.
Traders, which booked cargoes in April and May, took a heavy hit when the rupee plunged in June. In the first half of 2019, the rupee had shed 17% of its value against the US dollar.
A weaker currency makes imports more expensive.
“Payments due in June hit bottomlines sharply, as these were due at a time when the rupee was at a historic low to the [US] dollar and it left us trying to get rid of stocks to generate cash to pay banks,” the trader said.
LC (letter of credit) limits have also been affected.
Even though the rupee has eased off the lows hit in June, the near-term picture on the exchange rate front remains unclear, curbing appetite for large-volume PE and PP imports despite recent recovery in demand and prices in China.
Pakistan imports all its PE and PP requirements, and traditionally looks at the Chinese futures and domestic polymer markets for price direction.
Polyolefin prices in China recently gained following a temporary truce on its trade war with the US, but this has failed to fuel momentum in the largely cautious Pakistani market.
On the domestic front, the decision of the Pakistani government to impose new taxes and attempts to document all commercial activity have caused much uproar within the country’s trading community.
Traders in Pakistan are currently observing a countrywide shutter-down strike to protest against the federal government’s proposed increase in sales taxes.
They were also resisting the government’s plans to bring in more businesses within the tax net with a mandatory declaration of national identity cards for sale and purchase activities.
All these have stalled July activity, as local trading bodies have yet to reach a consensus amid ongoing protests, affecting day-to-day sales of finished goods.
Even if the government and trading bodies do come to an agreement in the near term and attempt to resolve issues, a slowdown on polymer trade in the rest of 2019 is imminent.
For one, the government remains under pressure to boost tax revenues to plug its ballooning fiscal deficit.
These are likely to result in higher tax rates for businesses, slowing trade in the short-term, as companies get adjusted to new workflows and payments surrounding these.
“The increase in taxable income brackets would mean that more companies would have to declare and pay taxes affecting cash availability for purchases,” a Pakistani packaging manufacturer said.
The government has also agreed to close gaps and preferential rates in sales tax on sugar, steel, edible oils and medium and large retailers, hitting many businesses.
This is expected to have both a direct and indirect impact on packaging demand within the country, as market players operating within these sectors adjust to the new tax rates.