The government of Pakistan is aiming at reducing circular debt and boosting the underperforming stock market. The government is deliberating overpaying maximum dividends to shareholders out of the profit earned by state-owned companies listed at the Pakistan Stock Exchange (PSX).
While speaking at an event in Karachi, adviser to Prime Minister on finance and revenue Shaukat Tarin said, “If the liquidity crunch (due to circular debt) is not allowing energy firms to pay a dividend to shareholders, then they can declare a dividend and clear circular debt”.
He added, “The government does not need money (dividend) and companies can use dividend income to reduce the circular debt.”
The government is the biggest beneficiary of dividend income of state-owned companies as it is the biggest shareholder in a number of companies listed at the PSX.
The circular debt and liquidity crunch have driven them to announce low dividends over a period of time. This has made the shares unattractive, causing a reduction in stock prices and denting the market valuation.
A market expert citing an example said that on average Pakistan Petroleum Limited (PPL) used to give 55% of its profit in dividend a few years ago, however, “the payout has now dropped to 18%”.
He added, “The government will remain a beneficiary of high dividend payments regardless of whether it receives dividend income from the companies or use the money to reduce the circular debt,”
Tarin remarked that he had been working with energy companies consistently for the past two weeks to develop a strategy to pay off the circular debt.
Currently, the circular debt stands close to Rs2.5 trillion. The adviser noted, “If the strategy (paying higher dividend) helps to pay off the circular debt of around Rs300-400 billion, then it will be a positive development. This (higher dividend payment) will increase the valuation of companies, which are heavyweights in the stock market”.
The higher dividend is expected to encourage investors to intensify shareholding in the state-owned heavyweights and will assist the companies to discover their true share values, which are at lower levels these days. The adviser added, “The discovery of true valuation may later allow us (the government and state-owned companies) to issue GDRs (global depository receipts).
GDRs are like shares and are issued to global investors to increase equity financing in foreign currency. They are listed and available for trade in the global stock markets. The government has issued GDRs of Oil and Gas Development Company (OGDC) while Lucky Cement in the private sector has also issued GDRs.
Arif Habib Limited (AHL) Chairman Arif Habib discussed the issue of state-owned companies paying a low dividend and added that the surge in dividend payments to historically high levels might help ease the circular debt.
He added that the low dividend payment had led to a reduction in the market valuation of many companies including OGDC, Pakistan State Oil (PSO), and the National Bank of Pakistan. “The share price of OGDC has gone down to 0.4% of its book value. Similarly, the share price of PSO has declined to 0.4-0.5% of its book value,” he noted.
“The share price of NBP has shrunk to 0.2% of the book value.” He emphasized that energy firms should not add surcharges like late payment surcharges to their receivables as they raise the volume of circular debt.