Fiscal policy on collision course with monetary policy

Karachi, March 08, 2019 (PPI-OT): SAI strongly supports the positive approach of the government of creating policies in consultation with the business community. This constructive approach has culminated in the issuance of promissory notes to release exporters’ blocked funds, reduction of duties on raw materials for exporters and auto industry, removal of WHT on cash withdrawal by filers, tax exemptions for special zones and green field projects, continuation of reduction in corporate tax rate, abolition of tax on undistributed profits and removal of super tax on non-banking sector among other effective measures.

However, some of these expansionary fiscal steps are in complete conflict with the contractionary monetary policy adopted by SBP. Expansionary actions that support domestic consumption led GDP growth such as reduction in income tax rate or reduction of duties to curb smuggling would counter the positive impact of monetary tightening.

Current account deficit remains our biggest challenge therefore tax relief or any other measure that could lead to domestic demand led GDP growth should only be undertaken when current account deficit is at least below USD 500mn per month for three consecutive months. Currently, the deficit figure is close to one billion dollars therefore growth could lead to an indirect form of taxation in the shape of rupee depreciation and higher interest rates.

In another unreasonable move, government has allowed non-filers to purchase vehicles at a time when broadening the tax base is a matter of national security. Compromises facilitating non-filers reflect weakness on part of the government when a no nonsense approach is the need of the hour. SAI strongly supports all steps to boost exports as only export led growth is sustainable. Till the positive steps already taken to boost exports do not start bearing dividends by way of lower current account deficit, any expansionary fiscal move is counter intuitive.

For more information, contact:
Secretary General,
S.I.T.E. Association of Industry
H-16, Textile Avenue, SITE, Karachi, Pakistan
Tel: +92-21-32562883, +92-21-32560705
Fax: +92-21-32560704

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