Through T-bill

ISLAMABAD: Pakistan’s debt market has so far fetched $1.468 billion and $10 million from abroad through the short-term Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs) respectively at higher markup rates.

Just on the pattern of Egyptian model, $1.468 billion foreign funding has been attracted into short-term T-bills when the policy rates are continuously kept at 13.25 percent. It is feared that when the policy rates will be eased down in the country, then this money will fly out of Pakistan in search of another destination. So it can create a peculiar situation at any point of time.

Independent economists have severely criticised this move for luring hot money at expensive rates that is tantamount to harming domesticinvestment and economic activities by keeping discount rate on the higher side.

“The bulk of foreign money into T-bills has come from the UK and the USA to the tune of $746 million and $663 million respectively,” top official sources said while quoting data from the State Bank of Pakistan (SBP) on Friday.

When this reporter contacted former finance minister and renowned economist Dr Hafeez A Pasha on Friday, he said he said there was no justification to attract hot money at the expense of discouraging private sector investment. He said higher policy rate was also playing havoc with budgetary estimates and increasing debt servicing requirements.

He said instead of luring hot money, the government should launch Eurobond that could be materialized at cheaper rates than the existing rate for attracting money into short-term debt market.

Inflationary expectations have been cited as a major cause for keeping the policy rate on the higher side. However, the inflation stood at 12.63 percent but the core inflation has started receding and now come down from 8 percent to 7.5 percent for December 2019.

“When core inflation (Non Food Non Energy) stands at 7.5 percent, there is no justification to keep overall policy rate at 13.25 percent,” said the official and added that the higher policy rate was only meant to attract hot money from abroad.

The government has now brought amendment through Presidential Ordinance known as Tax Laws (Second Amendment) Ordinance 2019 for streamlining investments from nonresidents into debt market.

On the other hand, the SBP officials do not agree to certain assumptions and argued that the foreign portfolio was friction of overall investment so the central bank could not be held responsible for protecting friction part of over $1 billion as sole reasons for keep policy rates on higher side.

Explaining reasons for amendments through ordinance, the FBR states that the existing foreign exchange framework of the country allows non-residents to invest in debt securities and government securities through Special Convertible Rupee Accounts (SCRA’s) maintained with banks in Pakistan.

There is no restriction on repatriation of funds from SCRA’s which incentivizes investment in the local debt market by non-resident investors. Several amendments for encouraging investment in the local debt market and simplifying the tax regime for non-resident companies have been introduced which are summarized hereunder:-

(i) Capital gains emanating from the disposal of debt instruments and government securities (including treasury bills and Pakistan Investment Bonds) to non-resident companies (not having a permanent establishment in Pakistan) who have made investments in such debt instruments/securities exclusively through a Special Convertible Rupee Account (SCRA) maintained with a bank in Pakistan shall be subject to withholding tax @ 10% by banks/financial institutions which shall constitute final discharge of tax liability.

(ii) Enhanced rate of withholding tax for persons not appearing on the active taxpayers list under the Tenth Schedule to the Ordinance shall not apply to capital gains and profit on debt earned by non-resident companies, not having a permanent establishment in Pakistan, which invest in local debt instruments/securities through SCRA maintained with a bank in Pakistan.

(iii) Special Convertible Rupee Accounts (SCRA) being maintained by non-resident companies having no permanent establishment in Pakistan shall be exempt from collection of advance tax on banking transactions otherwise than through cash under section 236 P of the Ordinance.

(iv) A non-resident company having no permanent establishment in Pakistan investing debt instruments and government securities through SCRA shall not be required to pay advance tax under section 147 of the Income Tax Ordinance, 2001 in respect of capital gains arising to it.

(v) Requirement for filing a statement of final taxation under section 115(4) of the Income Tax Ordinance, 2001 and registration under section 181 of the Ordinance shall not apply to a non-resident company having no permanent establishment in Pakistan solely by reason of Capital Gain or Profit on Debt earned from investments in debt securities and Government securities through Special Convertible Rupee Account maintained with a banking company or financial institution in Pakistan.