September 7, 2023
Economy Pakistan

Pakistani Cabinet Approves Direct Borrowing from Banks, Compromising Transparency and Tax Revenues

The Pakistani federal cabinet has recently approved a summary that permits the government to obtain direct credit lines from commercial banks without adhering to the Public Procurement Regulatory Authority (PPRA) rules. This move by the cabinet compromises transparency, as it permits direct negotiations between the Ministry of Finance and commercial banks, thereby providing the ministry with discretionary powers in sensitive matters.

The PPRA rules mandated a competitive bidding process that ensured transparency and a 16% income tax on lending to the government. However, the cabinet’s decision to withdraw the public bidding condition will result in a loss of at least Rs20 billion in government revenues and will enable banks to avoid paying income tax, which could amount to at least Rs20 billion annually.

The cabinet’s move appears surprising as it 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 government’s decision to exempt itself from the PPRA rules, thereby resulting in a loss of revenue and transparency, does not align with IMF’s recommendations.

Director General of Debt of the Ministry of Finance, Mohsin Chandna, assured the public that transparency will not be compromised despite the exemption from the PPRA rules. The Debt Office will seek bids from all AAA-rated commercial banks, and the rates offered by them will be endorsed by the central bank. Currently, the central bank holds competitive bidding aimed at getting the lowest price, but after exemption, this process may not be followed.

The finance ministry is experiencing significant issues with its cash balances due to increased deficit financing. The debt raised from the auction of government securities depends on the participation of banks. However, recent changes in market dynamics, such as an increase in the policy rate by the SBP as well as ADR-related tax, have caused banks to become reluctant in participating through auctions.

The cabinet’s decision to exempt itself from the PPRA rules appears to be counterproductive and may result in a loss of government revenues and transparency. The government should take steps to ensure transparency and accountability while obtaining direct credit lines from commercial banks.

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