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‘Hot Money’: lower tax on higher yield!

Dr. Ikramul Haq

It is unfortunate that contrary to all tall claims of getting rid of loans, especially the costly ones, the coalition Government of Pakistan Tehreek-i-Insaf (PTI) in pursuit of ‘hot money’ from foreign entities is not only increasing the quantum of already monstrous debt and its servicing, but also causing loss to national exchequer by extending tax benefits to them. Why extraordinary tax concessions for these investors? According to a Press report, Reza Baqir, ex-IMF employee, now Governor of State Bank of Pakistan (SBP), initiated “relief” package for attracting more ‘hot money’. Hammad Azhar, Minister for Economic Affairs, and Dr. Abdul Hafeez Shaikh, Advisor to the Prime Minister on Finance, Revenue and Economic Affairs, are among others defending “hot money”.

Why is facility of reduced rate not offered to all for bringing “hot money”? If an individual, say Pakistan expat, through Special Convertible Rupee Accounts (SCRA), remit dollars from abroad why should he not get the same benefit? Why is a resident Pakistani investing from his local foreign currency account with the condition to keep yields/gains in Pakistan excluded? We could prevent outflows in foreign currency that happen when foreign companies repatriate interest and/or gain. Are Concessions granted exclusively to foreign companies justified, meaning lower taxes on high yields? How much will be loss of revenue for giving relief to foreign companies? Will Opposition in Parliament raise this point? Many valid questions raised in ‘The burn of hot money [The News, January 1, 2020]

According to a report, “in its pursuit for risky hot foreign money to inflate foreign currency reserves”, Economic Coordination Committee (ECC) of the Cabinet On September 4, 2019, “approved sweeping tax concessions for non-resident companies to attract their investments in the government debt”. The report claiming that it was “on the recommendation of the SBP” also alleged that changes were made “to facilitate some foreign commercial banks…”—the same that invested in the Egyptian debt instruments when Reza Baqir was IMF’s country head there.

For implementing ECC’s decision, many provisions were inserted in various sections of the Income Tax Ordinance, 2001 vide Tax Laws (Second Amendment) Ordinance, 2019, promulgated on December 26, 2019 that include among other, reduced rate of 10% on gain and making it final liability (interest is already enjoys the same benefit), waiver from double withholding tax rate for non-filing of returns by these non-resident companies as they have been exempted from any such obligation, exemption from 0.6% withholding tax on banking transactions and no liability to pay advance income tax! More details are available in ‘Through T-bill’[The News, January 4, 2020]. Will Chairman FBR ask for corresponding reduction in tax target due to impact of these tax concessions? Has the negative impact calculated? What is figure and will it be revealed to Parliament when they pass/reject provisions related to “hot money” in Tax Laws (Second Amendment) Ordinance? In fact, the public at large has a fundamental right to know about the impact and names of all beneficiaries (foreign companies) under Article 19A of the Constitution, but who cares!  

Tax Laws (Second Amendment) Ordinance, 2019 should have been placed as Money Bill in the National Assembly so that extraordinary benefits meant for some chosen ones could have first been debated, rather than making them effective immediately. What was the urgency in extending instant benefits to these foreign companies? Whenever the interests of rich and mighty are involved, our rulers resort to Presidential Ordinances, an undesirable way of legislation (though not against the Constitution) unless there is some emergency. What was the emergency in this case causing loss of revenues when FBR is already facing a huge shortfall? The beneficiaries are only foreign companies getting special and generous allowances on investments in treasury bills (T-Bills) and Pakistan Investment Bonds (PIBs) through SCRA, whereas local businessmen are harassed/snubbed even asking for genuine demands. In their case, cost of doing business is increased multifold and their long-overdue refunds remain unpaid—do we want foreign exchange through exports or debts is the main issue?  

The government borrowing recklessly but not inclined to drastically reduce wasteful expenses and get rid of loss-bearing public sector enterprises. Borrowing through “hot money” will increase debt servicing to over Rs. 3200 billion against budget allocation of Rs. 2891 billion. However, the government justifies the step in the name of building foreign exchange reserves—the ‘hot money’ already crossed the mark of $1.5 billion. The PTI Government like its predecessors is inflating foreign currency reserves through expensive debts—so what is the difference? ‘Hot money’ is coming due to high return rate for which local businesses are suffering. The SBP knows that “hot money” will start vanishing if the interest rate of 13.25% is reduced—keep on blaming cost-push double-digit inflation as the main culprit for high rate. According to a report, SBP data shows that hot money “is predominantly invested in three-month T-Bills, suggesting that foreign investors are still not ready to take long-term risks associated with exchange rate fluctuations”.

A report says that Chairman/CEO of Institute of Policy Reforms, Humayun Akhtar Khan, former Federal Minister for Trade and Commerce [2002–2007] and Chairman Board of Investment [1997–1999] who joined PTI now, has warned that “the external debt incurred to build foreign currency reserves…sow seeds of macroeconomic instability…”  The report says: “…his words of caution is likely to fall on deaf ears as the SBP was jubilant over “inflows in the government’s debt, commonly known as hot foreign money”. Humayun Akhtar is of the view that “such short-term portfolio inflows should not be celebrated as these create problems instead of providing solutions”. Ex-IMF employee, Reza Baqir, is obviously not convinced and there is a little chance of reduction in interest rate for fear of losing/attracting “hot money”.

Humayun Akhtar has raised a pertinent point: “Pakistan must stop incurring foreign debt for budget financing and balance of payments and review its strategy to build foreign exchange reserves through portfolio investment”. He has rightly pointed out that since 2000, only 38% of the total foreign loans were obtained in the project mode and rest meant for budget financing and balance of payments support.

Since the issue of ‘hot money’ is really getting hotter and hotter, it is desirable that Hammad Azhar debate the issue with Humayun Akhtar—both are important members of PTI, known businessmen, who understand our mundane realities whereas Reza Baqir and Hafeez Shaikh are following IMF’s failed recipes pushing Pakistan into further debt trap. On the issue of “hot money”, Hammad-Humayun debate at any TV channel or at PIDE with Asad Umar, former Finance Minister and now Minister for Planning and Development as moderator, would be an interesting dual creating a healthy tradition with PTI of educating the masses and to develop indigenous/realistic solutions, rather than blindly following the IMF-imposed agenda! Hammad-Humayun debate will also help the Prime Minster to devise a workable plan to put Pakistan back on the path of prosperity in 2020 for which, coming out of debt enslavement is a prerequisite.


The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS)    

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