After demands from the cement industry to remove the federal excise duty (FED) on cement, the federal budget FY21 has lowered it from Rs2 per kg to Rs1.75 per kg. Compromises! This means, FED collected on a 50-kg bag sold used to be Rs100, which will now be Rs 87.5. A differential of Rs12.5. That together with the savings on GST will have incremental impact of Rs14.63 per bag. This should bring prices down—incrementally.
Cement is the biggest contributor to federal excise duty (FED) in the country, second only to tobacco and since 2016, every budget has raised the FED on cement. The decrease in FED comes on the heels of the construction package that the PM announced a few weeks ago. It was vowed that construction sector will be boosted through supply side measures such as tax cuts, and ensuring builders and developers they won’t be questioned on the source of their funds. This is all in the hopes that the Naya Pakistan Housing Program (NPHP) would have some success in a time where it seems housing is far from everyone’s minds.
The decrease in price of cement will bring construction costs down ever so slightly but it is likelier that greater market demand will drive up prices. But this is also assuming that there will be cement demand over the next few months as the country miserably fights the deadline coronavirus and in fact, folks will be buying houses once the dust starts to settles.
There is also development expenditure. For the budget exercise, Public Sector Development Program (PSDP) has been slashed while a significant cut has been budgeted under the National Highway Authority (NHA) projects which will affect cement demand coming from public development projects. There is also the low utilization level at the moment in PSDP—where PTI in the first two years has utilized only 71 percent of its budgets despite lower allocations. Actual expenditure in fact it seems will be much lower than the budget which is already lower than last year.
The budget has given a subsidy of Rs30 billion as was promised by the PM for the NPHP but this bare-bones if it is actually going to have an impact on supply. The current calculations cautions that if the government’s target of 400,000 houses in urban Pakistan are to be met, the subsidy required every single year (since mortgage is involved) is Rs47 billion (read more: “Naya Pakistan Housing: The lies we tell”, May 21, 2020).
There is also the problem that there is dead silence on what kind of subsidy this is and how/who it will benefit. It is rather a mystery as to the subsidy’s mechanism: how many houses will it cater to, who will be the beneficiaries, is it a one-time subsidy (it cannot be) and if it is not, how will it be funded for the long term? Whether this subsidy will trigger (any) construction demand will depend on a number of things that the market is still in the dark on. On the other hand, the construction of the Diamer dam will certainly add to construction demand as soon as it begins.
Evidently, FY21 is not going to be a very good year for construction materials manufacturers despite a few tax cuts here and there.