Shafaqna Pakistan:The demand for cash has increased in Pakistan as people do not want to come in the tax net, says State Bank of Pakistan (SBP) Governor Dr Reza Baqir.
“People are withdrawing money from banks and they do not want to come in the tax net,” said Baqir in a meeting of the Public Accounts Committee (PAC) on Tuesday. He refused to divulge the names of people and institutions that were bringing in hot foreign money, terming the information “confidential”.
It was Baqir’s maiden appearance at any parliamentary forum.
The parliament’s accountability arm had called him to appear and explain the reasons behind high interest rates and growing size of hot foreign money.
The demand for cash was increasing and it was pushing the printing cost high, said Baqir, while responding to a question whether the central bank was printing new notes. He said that withholding tax on banking transactions was also another reason for the increasing demand for cash.
The central bank’s data showed that as of February 21 this year, money in circulation stood at Rs524 billion, higher by 47% or Rs167 billion as compared to the same period of last year.
In the last fiscal year, the total flow of money in circulation was Rs562 billion – a threshold that is likely to be exceeded in the current fiscal year. The income tax base has shrunk 12% in the current fiscal year as only 2.5 million individuals and companies have filed tax returns.
The governor also spoke at length about inflation, hot foreign money, high interest rates and exchange rate policy.
Interest rates
A few committee members inquired about the implications of high interest rates for businesses.
The governor said high interest rates were not the reason for low private-sector investment as there could be other reasons like ease of doing business and blocking of taxpayers’ refunds.
The manufacturing sector had shown signs of revival and inflation would start coming down gradually, said the governor. “High interest rates are adversely affecting manufacturing in Pakistan,” remarked Pakistan Peoples Party Senator Sherry Rehman.
The governor reiterated that inflation would come down gradually, which would give the SBP Monetary Policy Committee a reason to reconsider the 13.25% key policy rate. Average inflation in the current fiscal year would remain within the SBP’s range of 11-12%, he stressed.
“If the hot foreign money flows out due to reduction in interest rates, it will not be an issue for Pakistan,” he added. “It is a mistaken view that interest rates have been kept at this level (13.25%) to attract so-called hot money,” said Baqir, while insisting that hot money inflows were not something new happening in Pakistan. “There is de-dollarisation of economy due to high interest rates.”
The high interest rates had contributed to the de-dollarisation of economy and people had sold the greenback to deposit money in rupee accounts, said the SBP governor.
The Federal Reserve of the United States on Tuesday cut interest rates by half a percentage point to 1.25% to avoid potential economic impact of coronavirus.
Despite inflation increasing from 8% to 14.6%, the central bank kept its policy rate unchanged as price rise had been fuelled by supply shocks, said Baqir. Inflation remained high due to supply disruptions and exchange rate depreciation.
Hot foreign money
Pakistan Muslim League-Nawaz’s (PML-N) Khawaja Asif sought details of hot money investors that the governor termed “confidential”. Transactions were between international investors and local banks, which were confidential, said the governor.
Asif apprehended that there could be conflict of interest in hot money inflows as some people might have advised foreign investors to invest in government debt securities.
PTI’s Leader of the House in Senate Senator Shibli Faraz recalled that the PML-N government too had refused to share the names of investors who invested in Eurobonds at 8.25% interest rate.
The governor also ruled out the possibility of introducing capital controls to manage orderly withdrawal of hot foreign money. There might be volatility in portfolio investment but its current level was manageable, said the governor. He ruled out the possibility of risks to economic stability from any sudden outflow of hot foreign money.
“We have three times more buffers than $3.3 billion worth of hot foreign money,” said Baqir. Over $3 billion worth of investment in government debt securities was less than 5% of the marketable treasury bills, said the governor. “The SBP can take measures if the level of hot money increases beyond a certain threshold,” said Baqir without mentioning the threshold.
Responding to a question, he said Pakistan was an open economy and the central bank could not stop anybody from investing in bonds and treasury bills.
The central bank introduced interest rate and exchange rate reforms to build foreign exchange reserves, which had significantly increased since July last year, said the governor. Net foreign currency buffers increased by $9.5 billion and the increase did not come from new loans, said Baqir.