“Banker’s budget”, remarked the top financial journalist in the country, as news broke over the weekend that the federal government had decided to roll back the 15 percent additional income tax on banking profits from investment in government securities.
To borrow from Bilawal Bhutto, it is as if the budget is designed by a banker, for the bankers. Meanwhile, nearly every Shabbir, Tehseen, and their mothers are expected to pay more in income taxes. After all, a tax-to-GDP ratio under 10 percent is “embarrassing”, even, “shameful”.
The federal government wants Pakistan and its 240 million citizens to reach a new fiscal pact. How is this for a fiscal pact: for every one Rupee in new taxes, the government of Pakistan must first find space to rationalize its expenditure by at least 33 paisas. Any government that fails to cut spending on itself and refuses to tax equitably has no locus standi to ask the public for more taxes.
Take a look at the virtuous bankers, who according to one news report will now benefit by at least Rs60 billion in tax savings, on earnings from lending to the government. A charitable way to look at this arrangement is that banks are only deploying depositors’ funds in safe government securities, receiving guaranteed returns which are eventually passed on to savers – you and me. Why should banks’ earnings be penalized when both – the insatiable demand of the sovereign for more borrowing, and frozen private sector credit are beyond their control? Fair enough.
Except, it is no longer the depositors’ funds that are being invested in government securities, at least not on an incremental basis. Investment in government securities is now at par with total deposits held with commercial banks. In fact, for at least the last three years, the government’s gluttonous demand for budgetary borrowing is being fed by the central bank’ pumping money onto commercial banks’ books.
Of course, this is no news. But context helps. Since the current monetary contraction cycle began in September 2021, the aggregate investment portfolio of scheduled banks has more than doubled in size, from Rs14 trillion to over Rs29 trillion. Of this increase, nearly Rs10 trillion has been financed by additional liquidity injections by the central bank onto commercial banks’ books.
In fact, borrowing from SBP by scheduled banks has increased by a higher quantum than banks’ deposits. Commercial bank’s balance sheets are well on their way to doubling in size between Sep-21 and Jun-24. References to crowding out are now outdated. The emperor knows he is naked, and now instructs his treasury to mint new money (read: monetary assets), and hand it over to Shylocks so he can spend ever more on invisible silk thread rolls.
It is said that one must be careful about what they wish for, and the adage equally applies to commentators. Three years ago, this author lamented the fact that the central bank was creating new money to lend to rich private sector business groups on concessional terms. At the time, it appeared that the SBP was indifferent to concerns of causing inflation and that it might set the house on fire (and, it did).
Today, that concessional lending portfolio is on a drawdown. But even at its peak, concessional lending to the private sector – which generated some commercial activity, remained shy of Rs1.5 trillion. Recall once more that since that time, SBP has injected Rs10 trillion in liquidity for banks for lending to the government. And the federal government – led by an ex-banker finance minister - has determined in its infinite wisdom – that this earning shall not be subjected to any additional taxes.
Context helps, even the commentators. Be careful of criticizing a poorly thought policy design in this country. For it may be replaced by an even worse outcome, soon after.