Tundra Fonder CIO Urges Pakistan to Abandon CGT for Foreign Investors

Founder and Chief Investment Officer at Tundra Fonder Mattias Martinsson Friday called the Pakistani government to abandon the Capital Gains Tax (CGT) for foreign investors. In a detailed post on X addressed to Prime Minister Shehbaz Sharif, Martinsson presented his point of view on the rumors that Pakistan will increase its CGT on equities. For years we have repeatedly called for Pakistan to abandon its counterproductive capital gains tax, and replace it with a turnover-based tax like Vietnam has (10bps when selling), he said. Martinsson said it is much simpler to collect, would result in significantly more tax revenue for the Federal Board of Revenue (FBR), and make the administrative hurdles for foreign investors bearable. He highlighted that Vietnam today turns over $500-1000 on a daily basis, while Pakistan turns over $50-100. When we started investing in Vietnam back in 2013 turnover was $100-200, he added. The Tundra CIO further said that it takes about 1-2 months for a new foreign investor to get access to Pakistani equities, and the major hassle is the monthly tax collection where a local tax advisor is required. The latest figure on total collected CGT indicates around $10 million annually. “Is it worth making life hard for foreign investors for that kind of money? Well, in Pakistan it is. Then they wonder why so few foreign investors arrive,” he lamented. Why should the state care about the equity market you might ask, if it is so tiny? “We want BIG projects”. Well, because it is the starting point for the valuation of unlisted investments. If the equity market is trading at P/E 4x, this means implicitly that the minimum required rate of return for equity market investors is 25 percent. That becomes the floor for unlisted investments (which carry a higher risk premium). Why not do what you can to improve valuations before slumping away state assets? Pakistan’s absolute biggest problem is the structural balance of payment deficits. Thus they should do everything they can to increase their export base and make the market more attractive to Foreign Direct Investment. Martinsson said there will come foreign investment but what will the required returns on these investments be? In India, it is below 10 percent, and in Pakistan, it is north of 30 percent. He questioned why Pakistan is not trying to maximize its attractiveness and thereby fetching higher valuations for the big projects. He noted that in 2005 Pakistan regularly turned over $1 billion a day, on par with Singapore at the time. The preconditions for a vibrant equity market are there, including the breadth of a local investor base, historically high earnings growth, etc. What if the focus was to bring back Pakistan to that point? Make the cake bigger, and there will be something to collect for the state, and the people, he said. Tundra Fonder is a Swedish asset manager specializing in frontier markets, the new emerging markets.