Beefing up Reserves

Spearhead Analysis – 27.09.2016

By Farrukh Karamat
Senior Research Coordinator, Spearhead Research

pakistan-reservesThe Express Tribune in a recent write-up disclosed the Government’s resolve to raise $750 Million to over $1 Billion, depending on the investor response, through issuance of International Sukuk Bonds. For this the Government is planning to pledge the Islamabad-Lahore Motorway. There is clear evidence that the continual decline in Exports and a downward trend in Remittances has worsened the balance of payments position. The Government, rather than focusing on improving and strengthening these critical economic areas, has opted for the relatively easier route by raising funds through offering Islamic Bonds.

The Economic Coordination Committee (ECC) has purportedly provided massive tax exemptions on the proposed bonds, perhaps indicating the desperation for raising funds and the government’s acceptance of the dismal balance of payments situation. Tax exemptions, apparently under Section 53(2) of the Income Tax Ordinance (though there is a difference of opinion whether the ordinance covers Sukuk), include the following and are aimed to make the Bonds attractive for investors and reduce the transaction costs:

  • Up to 15% of income tax on the profit from the Bonds.
  • Waiver of 17% alternate corporate tax, the advance income tax and the tax on dividend income.
  • Waiver of 15% tax on gross payments to non-residents on account of royalty and technical services.
  • Waiver of up to 12% tax on payments for goods and services.
  • Waiver of 0.3% tax on cash withdrawals on these transactions.
  • Waiver of 0.4% tax on banking transactions related to the issuance of Sukuk.

The Government has admitted that the Sukuk would help beef up the country’s Foreign Exchange Reserves. All out efforts are being made to make the Sukuk offering as saleable as possible, including offering a prime asset and attractive tax incentives. As in the past, the Government is opting for the easy way out by pledging national assets at low prices to meet its needs. The foreign exchange reserves continue to be bolstered through external borrowings, and this is yet another example of the same strategy. While the country needs to focus on increasing exports and remittances, that being a long-term issue is being pushed into the background and this is likely to have serious long-term ramifications for the economy of Pakistan.