Amid economic crisis, cabinet writes Rs20 billion cheque in favour of banks

The federal cabinet has allowed the government to directly borrow from commercial banks by withdrawing a public bidding condition, compromising transparency and 16% income tax that banks pay on lending through a competitive bidding process.

Headed by Prime Minister Shehbaz Sharif, the federal cabinet on Wednesday approved a summary for the provision of direct credit lines for the government by exempting it from the Public Procurement Regulatory Authority (PPRA) rules, confirmed government officials on Thursday.

The cabinet exempted the Ministry of Finance “from following PPRA Rules 2004 for seeking bids directly from banks and financial institutions”, said the summary.

The cabinet’s move appears surprising as it on the one hand compromises transparency and on the other results in a loss of Rs20 billion to Rs25 billion in government revenues.

The tax loss of at least Rs20 billion is against the International Monetary Fund’s (IMF) push for taxing the rich. IMF managing director has recently expressed reservations about Pakistan’s economic policies that favour the rich. The cabinet’s decision will result in direct negotiations between the Ministry of Finance and commercial banks, giving discretionary powers to the ministry in such sensitive matters.

It will also result in avoidance of at least Rs20 billion in annual income tax as direct lending will not fall into the category of loans given to the government through treasury papers and investment bonds.

The normal income tax on a bank is 39% but if a bank’s gross advances-to-deposit ratio (ADR) remains up to 40%, the government charges a 55% income tax. For ADR in the range of 40% to 50%, an income tax of 49% is charged.

In the budget, the government had revised upwards those limits by 11% and because of that the Federal Board of Revenue (FBR) had estimated additional income tax collection of Rs25 billion in the current fiscal year.

“Various banks have raised concerns over the challenges being faced by the banking sector while meeting high ADR requirements as well as the difficulties faced by government in refinancing significant auction maturities,” the cabinet was told.

“We will not let compromise transparency despite exemption from PPRA rules,” said Director General of Debt of the Ministry of Finance, Mohsin Chandna.

The Debt Office would seek bids from all AAA-rated commercial banks and the rates offered by them would be endorsed by the central bank, he said. At present, the central bank issues a public auction calendar and holds competitive bidding aimed at getting the lowest price. However, after exemption, this process may not be followed.

The cabinet allowed to “obtain domestic financing through direct credit line from banking and non-banking financial institutions for the financing needs of the government as and when required”, said the decision.

Earlier, the prime minister approved the exemption with the condition that the Ministry of Finance would route its summary through the PPRA under Section 21 of the PPRA Ordinance 2020. Subsequently, the PPRA gave one-year exemption from advertisements, which is mandatory under Rule 12.

The cabinet was informed that the finance ministry was experiencing significant issues with its cash balances because of increased deficit financing. It was apprised that the debt raised from the auction of government securities depends on the participation of banks.

“Due to recent changes in market dynamics such as an increase in the policy rate by the SBP as well as ADR-related tax, banks have become reluctant in participating through auctions,” the cabinet was told.

This implies that the government was comfortable with the banks avoiding 16% additional income tax.The Ministry of Finance stated that in the current scenario, financing has to be taken on an emergency basis and it becomes extremely difficult to adhere to the PPRA rules.

The current economic and financial conditions, especially the delay in rollover of foreign loans and the need for obtaining new loans and foreign deposits, require that money has to be accessed on an urgent basis, it added. The ministry told the cabinet that in such conditions, normal procurement process could not be followed.

“Issuing of advertisements in local and international press will result in further deterioration in market perception”, the ministry told the cabinet. However, market forces know the government’s actual economic condition and are not dependent on advertisements to gauge the finance ministry’s coffers, which are empty. The federal government already directly negotiates with foreign commercial banks, which has increased discretion of the Ministry of Finance in deciding interest rates. Pakistan’s debt servicing cost is estimated at Rs5.2 trillion in the current fiscal year, which constitutes 55% of its original budget. The government on Wednesday obtained loans at 19.95%, the highest rate in 26 years.

Published in The Express Tribune, February 24^th, 2023.

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