The State Bank of Pakistan (SBP) reduced its policy rate by 200 basis points to 17.5% on Thursday, as headline and core inflation saw a sharper-than-expected decline over the last two months.

The rate cut will be effective from September 13, 2024.

The Monetary Policy Committee (MPC) of the SBP attributed this decision to falling global oil and food prices and a delay in the anticipated increase in administered energy prices.

The central bank, however, warned of potential risks tied to global economic volatility and domestic energy adjustments, urging a cautious approach to future monetary policies.

Inflation fell to 9.6% year-on-year in August, down from 12.6% in June.

Core inflation also dropped to 11.9%, reflecting improved supplies of food commodities and a reduction in domestic demand.

The MPC expects inflation to continue its downward trend but noted that risks remain, particularly related to the timing and scale of adjustments in energy tariffs and the course of global commodity prices.

The SBP’s foreign exchange reserves stood at $9.5 billion as of September 6, despite weak inflows and continued debt repayments.

Remittance inflows and a rebound in exports helped keep the current account deficit contained at $0.2 billion in July 2024.

While the industrial and services sectors are expected to benefit from this policy easing, the agriculture sector faces challenges due to an expected shortfall in cotton production.

Nonetheless, the SBP maintains its projection for GDP growth between 2.5% and 3.5% for FY25.

The central bank also reported that tax collection in July and August 2024 fell short of the Federal Board of Revenue’s (FBR) target, adding pressure on fiscal policy measures to meet revenue goals for the remainder of the year.

This will be critical for maintaining macroeconomic stability, the SBP noted.

The MPC reiterated that its cautious stance on monetary policy remains necessary to control inflation while supporting sustainable economic growth over the medium term.

LAHORE:

The government of Pakistan is facing significant challenges in widening its tax base while simultaneously combating the rise of smuggling and illicit trade, both of which could generate crucial revenue for the national economy. Efforts to bring more traders into the tax net have shown limited success, highlighting the complexity of the issue.

Earlier this year, the Federal Board of Revenue (FBR) launched the Tajir Dost Scheme (TDS) to integrate more traders into the formal tax system. The initiative, which began on April 1st, targets 3.2 million traders across 42 cities, including major urban centres such as Karachi, Lahore, and Islamabad. However, since its inception, only 64,000 retailers have registered, underscoring the difficulties the government faces in achieving compliance among traders.

Despite the retail and wholesale sectors contributing approximately 20% to Pakistan’s Gross Domestic Product (GDP), their tax contributions remain alarmingly low, accounting for just 4% of total tax revenue. Income tax collections from traders participating in the TDS have been disappointingly minimal, with only Rs503,363 collected from 207 registered traders. This disparity highlights a critical issue: registration alone does not ensure tax compliance.

Illicit trade and tax evasion are exacerbating the country’s economic woes. Research indicates that these activities lead to annual losses exceeding Rs956 billion across vital sectors. The real estate sector is particularly hard hit, with an estimated Rs500 billion lost each year due to tax evasion. The illicit tobacco trade is another major contributor, costing the government Rs310 billion annually. Other industries, such as tires and lubricants, pharmaceuticals, and tea, also play a significant role in the country’s substantial tax losses. Furthermore, smuggling activities, particularly through the Afghan Transit Trade (ATT), are believed to cost the government around Rs1,000 billion annually in lost tax revenue.

Macroeconomic analyst Osama Siddiqui emphasised the urgent need for the government to implement comprehensive strategies aimed at expanding the tax net and curbing illicit trade. “A multifaceted approach that includes stringent enforcement measures, public awareness campaigns, and incentives for tax compliance could significantly enhance revenue collection and bolster economic stability,” Siddiqui stated.

Siddiqui further stressed the importance of addressing tax evasion and the flow of illegal goods to foster fair competition among businesses and contribute to overall economic growth. “It is imperative for the government to prioritise sustainable policies that secure revenue for the national treasury while promoting an environment of compliance and accountability,” he added.