MPC to raise rates this week
design: mohsin alam
The State Bank of Pakistan (SBP) has convened a special meeting on Thursday to increase the interest rates, conceding to a major demand from the International Monetary Fund (IMF) that may also remove one of the hurdles encountered in reaching staff level agreement.
The decision to convene the special meeting of the Monetary Policy Committee (MPC) was taken on Monday, at least two officials privy to the development told The Express Tribune.
The Express Tribune had earlier reported that the IMF had demanded a significant increase in the interest rate during its recently concluded staff-level visit aimed at adopting an aggressive approach to curb inflation.
In deciding when to meet, the central bank faced the conundrum of either convening the MPC meeting two weeks ahead of schedule or risk the auction scheduled for March 8th for the borrowing of Rs1.8 trillion – a sum that the finance ministry requires to remain afloat. Consequently, the MPC will now meet on Thursday – 14 days before of its scheduled meeting.
The market is anticipating a big increase in the interest rates and a delay in its increase may result in low participation in the upcoming auction of the treasury bills.
The current policy rate is 17% whilst inflation in January stood at 27.6%. The IMF has asked for the interest rate to be increased keeping in mind future headline inflation rate.
At the beginning of the IMF programme in 2019, the policy rate stood at 10.75%, which might have almost doubled if Pakistan had taken an aggressive policy stance, sources said.
Finance Minister Ishaq Dar said on Monday that his government remained committed to the IMF programme and will implement its all international commitments.
The IMF is also asking for complete liberalisation of the exchange rate, as it still remains one of the thorny issues between the two sides, sources report.
In a related development, the government is set to slap 25% General Sales Tax (GST) on dozens of consumer goods to collect additional revenues – many of which do not fall in the category of luxury goods – amid questions about delegating the Parliament’s power to the executive to alter tax rates.
A summary will be moved to the federal cabinet to secure its nod for the decision that “sales tax shall be charged, levied and paid at the rate of 25% of the value of the goods imported and their subsequent supply or the retail price, as the case may be,” sources told The Express Tribune on Monday.
The government has resorted to taking these measures via Statutory Regulatory Orders (SROs), which is not considered a good form of imposing taxes, although the government managed to acquire these powers through the recently approved supplementary Finance Act.
The taxation measures are being taken as part of a host of steps that Pakistan is implementing to reach staff level agreement with the IMF.
Sources say that the Federal Board of Revenue (FBR) has drafted a proposal to increase the GST rate to 25% against hundreds of tariff lines as part of a move to collect at least Rs7 billion in the next four months. The summary will be sent to the federal cabinet for its endorsement. As part of the mini-budget, the government has already increased the standard GST rate from 17% to 18%.
Earlier, Dar had said that the tax on luxury goods would be further increased to 25%. The list seen by The Express Tribune, however, showed that many of the goods, like small cars, do not fall in the category of luxury goods. The parts and components of the vehicles of as low an engine capacity as the 850cc might also be targeted with the 25% GST rate.
Local car assemblers have been exploiting consumers by selling low quality cars at exorbitant rates but the government remained a silent spectator.
The documents showed that the government was again invoking section 3 of the Sales Tax Act to increase the rates. The National Assembly had recently given powers to the federal government to increase the GST rate as it deemed appropriate.
Constitutional experts, however, describe such powers to be in violation of constitutional clauses.
“Article 77 of the Constitution of Pakistan categorically says that no tax shall be levied for the purposes of the federation, except by or under the authority of the Act of Parliament,” according to Dr Ikramul Haq, a constitutional and tax law expert.
“Levying taxes through SROs is a naked and blatant violation of Article 77 of the 1973 constitution,” said Haq, adding that, “Unfortunately, Ishaq Dar has always violated the command of the supreme law of the land and dictums of the Supreme Court with impunity by levying taxes and varying tax rates through SROs.”
Article 73 of the constitution talks about the procedure with respect to the Money Bills. Its sub clause 2 (a) says that a bill or amendment shall be deemed to be a Money Bill if it is the “imposition, abolition, remission, alteration or regulation of any tax”.
The government is now altering the tax rate through the SRO, which may not be in line with the spirit of Article 73 of the constitution.
Goods targeted with the 25% rate include imported mineral water, aerated water, juices, chewing gums, white chocolates, crispy bread, ginger bread, sweet biscuits, wafers, rusks, leather goods, cosmetics, furniture and home appliances.
Similarly, mini vans and all imported cars in completely built unit form will be charged 25% GST as well – providing undue protection to local car assemblers.
Additionally, vehicles of all cylinder capacity above 850cc and sport utility vehicles will be taxed at 25%, including their components and parts.
All-terrain vehicles, other vehicles, with both spark-ignition internal combustion reciprocating piston engine, and electric motor as motors for propulsion – other than those capable of being charged by plugging to an external source of electric power – will also be taxed 25% GST.
Published in The Express Tribune, February 28th, 2023.
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