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Express Tribune
3 days ago
- Business
- Express Tribune
Govt urged to end bank subsidies
Listen to article An independent think tank has urged the government to choose between subsidising already-profitable banks or diverting limited fiscal resources toward productive sectors by ending the policy of banks guaranteed returns on government borrowing. The Economic Policy and Business Development (EPBD), a new policy research institute, released the statement the same day a federal cabinet body criticised excessive subsidies to banks in the name of attracting remittances. The Economic Coordination Committee (ECC) of the Cabinet was informed Friday that banks had claimed Rs200 billion under the Pakistan Remittances Initiative during the current fiscal year — Rs115 billion more than the budgeted subsidy. The EPBD stated that the current fiscal structure forces a choice between supporting economic growth and subsidising banking profits through guaranteed government payments. It argued that Pakistani businesses face structural disadvantages compared to regional peers who enjoy policies that enhance rather than restrict productive economic activity. The think tank stressed that economic growth requires policy alignment with development objectives — not bank profit maximisation. The current approach of keeping policy rates at 11% while allocating Rs7.2 trillion for domestic debt servicing ensures stagnation, while regional competitors grow their industrial and export capacity. The government has allocated Rs8.2 trillion for total debt servicing — equal to 46% of the 2024-25 budget. Of this, Rs7.2 trillion will go to domestic banks holding government securities. With 59% of public debt held in floating-rate instruments, the think tank argued that reducing policy rates from 11% to 6% would yield immediate savings. The government worsened this burden by issuing Rs2 trillion in fixed-rate Pakistan Investment Bonds (PIBs) at peak interest rates of 22% over the past two years, locking in excessive costs to the benefit of banks, it added. By cutting interest rates to 6%, in line with falling inflation, the government could save Rs3 trillion on debt servicing. Even a portion of this amount, the think tank said, could lower business costs and stimulate employment. A 6% rate would still offer banks real returns while easing debt burdens. The savings could support manufacturing revival, industrial expansion, SME financing, technology upgrades, and export growth. The statement added that Pakistan's future depends on diverting resources from guaranteed banking profits to investments that create jobs, enhance productivity, and ensure long-term growth. Pakistani businesses cannot expand or generate employment while banks earn risk-free profits from public funds. In contrast, regional economies maintain 5.5% policy rates, allocate only 25% of budgets to debt servicing, and still achieve 6% GDP growth by prioritising business development. The EPBD challenged the claim that lower interest rates fuel current account deficits. It cited the $19 billion deficit in 2021-22, which it attributed to exceptional, non-interest-sensitive imports such as $3.2 billion in COVID-19 vaccines, $15.6 billion in fuel, and $1.7 billion in smartphones. It said high interest rates did nothing to limit those imports and instead suppressed domestic activity. The think tank added that guaranteed profits have led banks to retreat from commercial lending, opting instead for risk-free government bonds. With 97.3% of bank investments tied up in government debt, virtually no capital remains for working capital, expansion, or technology adoption. Manufacturers struggle to finance inventory, exporters lose global competitiveness, and small businesses are excluded from credit. Pakistan's banks have effectively become bond traders, contributing no value to the real economy while earning from taxpayer-backed securities. The think tank also criticised the remittance structure, noting that Rs87 billion went to banks for basic transfersfunds that could instead support small businesses and entrepreneurship. Its statement came as the ECC met to deliberate the future of remittance-linked subsidies. The finance ministry has decided to end the subsidies in 2024-25 due to pressure from banks and International Monetary Fund (IMF) constraints. The State Bank of Pakistan told the ECC it could no longer offer implicit support under IMF rules. Although the ECC requested a transition plan, the finance ministry said no study has determined any positive impact of these subsidies. Officials noted that funds largely benefit banks and exchange companies, not overseas Pakistanis sending remittances. The central bank informed the ECC that remittance promotion schemes have existed since 1985, but their effectiveness remains unverified. Without reform, the remittance subsidy bill could swell to Rs500 billion in coming years, warned a finance ministry official. The think tank reiterated that businesses do not need subsidies or special treatment — just a level playing field. Reducing interest rates to 6% would bring Pakistan in line with regional rivals, restore manufacturing competitiveness, and improve global market access for exporters. Such a move would also accelerate technology adoption and job creation across sectors, the EPBD argued. Although manufacturing capacity exists, it remains underutilised due to lack of financing. With 97% of banks' balance sheets locked in public debt, there is little scope to support private sector growth. Regional countries have demonstrated that supporting businesses through growth-oriented credit policies can deliver 6% growth while maintaining fiscal stability, it added.
Business Recorder
3 days ago
- Business
- Business Recorder
Bright economic future: EPBD for shifting resources away from banking returns to productive investments
ISLAMABAD: The Economic Policy and Business Development (EPBD) think tank has emphasised that Pakistan's economic future hinges on shifting financial resources away from guaranteed banking returns and towards productive investments. The group warns that commercial banks have effectively abandoned business lending in favour of risk-free government securities, creating a credit-starved economy. Established primarily by former caretaker Prime Minister Anwaar ul Haq Kakar and former caretaker Commerce Minister Gohar Ejaz, the EPBD in its comments on federal budget 2025-26, criticised the banking sector's overwhelming reliance on government debt. With the industry's Investment-to-Deposit Ratio (IDR) at 97.3 per cent, the think tank argued, almost no capital is left for working capital, industrial expansion, or technology upgrades. 'Pakistani businesses cannot compete, expand, or create jobs while banks earn guaranteed returns from government debt,' the EPBD said in a statement issued Friday. 'Meanwhile, regional economies with policy rates around 5.5 per cent and debt servicing burdens of 25 per cent are achieving 6 per cent growth through business-focused financial policies.' The think tank challenged the government's rationale for maintaining high interest rates—namely, to curb Current Account Deficits (CAD). The EPBD said that recent data disproves this assumption, citing the 2021–22 CAD spike, which was largely driven by non-interest-sensitive imports such as COVID-19 vaccines ($3.2 billion), energy products ($15.6 billion), and smartphones ($1.7 billion). 'High interest rates had no impact on controlling these imports but significantly damaged domestic economic activity,' the statement added. Pakistan currently allocates Rs7.197 trillion annually—46 per cent of federal expenditure—for debt servicing, much of which flows to banks as guaranteed returns. EPBD highlighted that 59 per cent of government debt (Rs25,758 billion) is in floating-rate instruments. A reduction in the policy rate from 11 per cent to six per cent would generate immediate savings on the majority of the debt stock. The think tank criticized the government's decision to issue Rs 2 trillion in fixed Pakistan Investment Bonds (PIBs) at peak interest rates of 22 per cent during FY23–FY24, saying it unnecessarily locked in high returns for banks. Nonetheless, the EPBD estimates that Rs 3 trillion in annual savings remain possible by lowering the policy rate on floating debt. With inflation now down to 4.5 per cent, the group argues that a 6 per cent policy rate would still offer positive real returns, while freeing up fiscal space to stimulate economic growth. 'This money could transform Pakistan's economy—reviving manufacturing, expanding industry, enabling technology investments, creating jobs, and developing SMEs,' the statement said. 'Instead, it guarantees banking sector profits while depriving businesses of financing.' The EPBD also criticised banks for operating more as bond traders than business lenders. 'They contribute nothing to productive economic activity,' it said. 'Even Pakistan's remittance system channels Rs87 billion to banks for simple money transfers—funds that could otherwise support SME growth.' The think tank stressed that businesses are not asking for subsidies but for a level playing field. Affordable financing would restore competitiveness with regional rivals, improve export potential, and enable widespread technology adoption. 'Manufacturing capacity exists but cannot grow. Exporters have potential but are shackled by high borrowing costs. SMEs could create jobs — if only they had access to credit.' According to the EPBD, regional economies demonstrate that supportive financial policies lead to six per cent growth while maintaining fiscal balance. 'These countries prioritise productive investment over rent-seeking by financial institutions. Their policies fuel broad-based development rather than concentrated profits.' In contrast, Pakistan's current fiscal model forces a binary choice: support economic growth or continue subsidising banking profits. 'The 11 per cent policy rate, coupled with Rs7.2 trillion in debt servicing, guarantees economic stagnation while our competitors build industrial strength,' it warned. The EPBD concluded by urging the government to realign its fiscal and monetary policies with business development objectives. 'Pakistan's economic future depends on redirecting public resources from guaranteed returns for banks to productive investments that create employment, enhance competitiveness, and drive sustainable growth.' Copyright Business Recorder, 2025
Business Recorder
14-06-2025
- Business
- Business Recorder
EPBD's BoG rejects granting FBR excessive powers
ISLAMABAD: The Economic Policy and Business Development (EPBD) Board of Governors categorically rejected the draconian amendments introduced in the Budget that grant the Federal Board of Revenue (FBR) unprecedented and excessive powers over the business community. These measures represent a fundamental assault on business rights and economic freedom that no business organisation can tolerate. It also goes fundamentally against the government's policy of promoting Ease of Doing Business in Pakistan, the board observed. The budget transforms the FBR into an enforcement agency, with powers that threaten the foundation of Pakistan's business environment. Under the Anti-Money Laundering Act, 2010, FBR's Directorate General of Intelligence and Risk Management-Customs now operates with police-like authority, treating every businessman as a potential criminal rather than a contributor to the national economy. The mandatory e-bilty system under Section 83C imposes comprehensive digital surveillance on all business transactions. With penalties reaching Rs1 million, goods confiscation, and six-month imprisonment for non-compliance, this system creates a climate of fear that will cripple legitimate business operations. Most alarmingly, the Finance Bill 2025 grants FBR officers dangerous and excessive powers that have no place in a modern democracy: Section 37AA authorises arrest without warrant based on mere suspicion of tax fraud—a power that invites abuse and harassment; Section 14AE allows arbitrary seizure of business premises and property without adequate safeguards; Section 37B permits 14-day detention of businesspersons, extendable through magistrates; Section 11E enables tax assessment and recovery based on suspicion alone, without proper investigation; Section 33 (13 and 13A) introduces 10-year prison terms and Rs10 million fines for broadly defined "tax fraud" that could criminalise routine business errors; Section 32B empowers private auditors with quasi-legal authority over businesses. These provisions create a surveillance state where businesses operate under the constant threat of arbitrary action. This is not tax policy—this is systematic harassment institutionalised by law. While burdening businesses with these oppressive measures, the budget offers absolutely zero incentives for industrial growth or investment. With interest rates at 11 per cent - the highest in the region - businesses are already fighting for survival. Industrial closures, flight of capital, and unprecedented unemployment. This demands urgent relief to the business community, not additional persecution. The effective tax burden on Pakistani businesses has reached a breaking point. Corporate income tax at 25 per cent, combined with 25 per cent dividend tax, creates a 50 per cent burden before accounting for super tax, minimum turnover tax, withholding taxes, sales tax, and import duties. The total effective tax rate of 50-60 per cent makes Pakistan one of the most punitive business environments regionally, driving away investment and destroying job creation. The EPBT also expressed its resolve that with the inflations having been brought down to 4.5 per cent, the policy rate must not exceed six per cent. This will not only make the struggling businesses viable, but also create enough fiscal space to double the vital expenditures, as compared to last year on education and health, rather than reducing them, as has been proposed in this budget. The government is advised to use the monetary policy as a tool to kick-start the economy and not to throttle it. The EPBD issues ultimatum: If these provisions remain in the Finance Bill 2025, the business community will, unfortunately, have no choice but to cease operations in Pakistan. It is not difficult to appreciate that the tax-paying business community will find it difficult to participate in an economy that criminalises business activity and treats entrepreneurs as suspects. Pakistan's economy cannot survive without its business community. The proposed policy measures will make it impossible for law abiding businesses to survive in Pakistan. If the government believes it can collect taxes without taxpayers, it can try. If FBR thinks it can run the economy without businesses, let them do so. The EPBT demanded immediate actions by the government including; complete withdrawal of all arbitrary enforcement powers granted to FBR, reduction of interest rates to six per cent to provide relief to struggling businesses, elimination of the punitive tax structure that penalises compliant businesses, introduction of genuine pro-business policies that encourage investment and growth. Copyright Business Recorder, 2025
Business Recorder
20-05-2025
- Business
- Business Recorder
Pakistan's tax-to-GDP ratio declines in FY2024–25, says think tank
ISLAMABAD: An economic thinktank has claimed that the tax-to-gross domestic product (GDP) ratio of the Federal Board of Revenue (FBR) has declined from 11.6 percent in 2019–20 to 10.4 percent in 2024–25. According to a report - Decoding Pakistan's Budget Dynamics - issued by Economic Policy and Business Development on Monday, the 15–year period shows a significant increase in nominal GDP, with the most dramatic acceleration occurring in the 2019-20 to 2024–25 period. The tax-to-GDP ratio shows a modest improvement through 2019–20 but declined by 2020–25, highlighting persistent challenges in revenue mobilisation despite repeated reform efforts. In 2019–20, the tax-to-GDP ratio remained 13.2 percent, the report said. The revenue composition shows differential growth rates across the 15-year period. Tax revenues grew steadily through fiscal year 2009–10 to 2019–20 and accelerated in the 2019–20 to 2024–25 period. Direct taxes grew faster than indirect taxes over the full period, indicating a gradual shift toward income–based taxation. Non-tax revenue grew modestly from 2019–20 to 2024–25 but surged dramatically in the following five years, growing at an implied annual rate of over 40 per cent between2019–20 to 2024–25 period. Tax component analysis revealed that all major tax heads grew significantly over the 15-year period. Customs duties saw particularly rapid growth from 2014–15 to 2019–20, growing from Rs281 billion to Rs1,000 billion. The petroleum levy, while growing modestly in the earlier periods, accelerated extraordinarily in the 2019–20 to 2024–25 period, becoming a major revenue source by 2024–25. Income tax is the largest contributor to tax revenues, amounting to Rs5,454 billion in 2024–25. Provincial share in federal revenues increased substantially over the 15-year period, growing at an average annual rate of 17.7 per cent, exceeding the growth rate of the overall budget. As a percentage of gross revenue, provincial share increased from 32.6 per cent in 2009–10 to a peak of 48.5 per cent in 2019–20, before moderating to 41.8 per cent by 2024–25. The increase from 2009–10 to 2014–15 reflects the impact of the 7th NFC Award, which raised the provincial share of the divisible pool from 43.75 per cent to 57.5 per cent. The report concluded that despite tax revenues growing by 768 percent, the tax-to-GDP ratio remained largely stagnant around 10–11 per cent. The increasing reliance on SBP profits (1,567 per cent growth) indicates dangerous dependence on central bank financing rather than sustainable tax measures, it added. Copyright Business Recorder, 2025
Business Recorder
20-05-2025
- Business
- Business Recorder
Tax-to-GDP ratio declines in FY2024–25, says think tank
ISLAMABAD: An economic thinktank has claimed that the tax-to-gross domestic product (GDP) ratio of the Federal Board of Revenue (FBR) has declined from 11.6 percent in 2019–20 to 10.4 percent in 2024–25. According to a report - Decoding Pakistan's Budget Dynamics - issued by Economic Policy and Business Development on Monday, the 15–year period shows a significant increase in nominal GDP, with the most dramatic acceleration occurring in the 2019-20 to 2024–25 period. The tax-to-GDP ratio shows a modest improvement through 2019–20 but declined by 2020–25, highlighting persistent challenges in revenue mobilisation despite repeated reform efforts. In 2019–20, the tax-to-GDP ratio remained 13.2 percent, the report said. The revenue composition shows differential growth rates across the 15-year period. Tax revenues grew steadily through fiscal year 2009–10 to 2019–20 and accelerated in the 2019–20 to 2024–25 period. Direct taxes grew faster than indirect taxes over the full period, indicating a gradual shift toward income–based taxation. Non-tax revenue grew modestly from 2019–20 to 2024–25 but surged dramatically in the following five years, growing at an implied annual rate of over 40 per cent between2019–20 to 2024–25 period. Tax component analysis revealed that all major tax heads grew significantly over the 15-year period. Customs duties saw particularly rapid growth from 2014–15 to 2019–20, growing from Rs281 billion to Rs1,000 billion. The petroleum levy, while growing modestly in the earlier periods, accelerated extraordinarily in the 2019–20 to 2024–25 period, becoming a major revenue source by 2024–25. Income tax is the largest contributor to tax revenues, amounting to Rs5,454 billion in 2024–25. Provincial share in federal revenues increased substantially over the 15-year period, growing at an average annual rate of 17.7 per cent, exceeding the growth rate of the overall budget. As a percentage of gross revenue, provincial share increased from 32.6 per cent in 2009–10 to a peak of 48.5 per cent in 2019–20, before moderating to 41.8 per cent by 2024–25. The increase from 2009–10 to 2014–15 reflects the impact of the 7th NFC Award, which raised the provincial share of the divisible pool from 43.75 per cent to 57.5 per cent. The report concluded that despite tax revenues growing by 768 percent, the tax-to-GDP ratio remained largely stagnant around 10–11 per cent. The increasing reliance on SBP profits (1,567 per cent growth) indicates dangerous dependence on central bank financing rather than sustainable tax measures, it added. Copyright Business Recorder, 2025
