Decline in inflation will open way to policy rate cut: analysts

Minister urges retailers, traders to embrace tax reforms

IN another good news on the economic front, there has been a sharp decline in inflation, which has opened up the possibility that State Bank of Pakistan (SBP) will take the long-awaited step of reducing policy rate by up to 200 basis points, analysts have said. Reduction in the policy rate will enhance ease of doing business in the country.  

The Consumer Price Index (CPI), which measures main inflation, dropped to 9.6pc in August from 11.1 per cent in July, creating an opportunity for the SBP to lower interest rates, reported daily ‘Dawn’ while quoting business analysts.

Samiullah Tariq, head of research and development at the Pakistan Kuwait Investment Company (Pvt) Limited said: “I expect a 150 bps reduction in the upcoming monetary policy, as real interest rates currently stand at 9.9pc.”

During the last monetary policy meeting held on July 29, the SBP reduced the interest rate by 100 bps to 19.5pc. However, many in the trade and industrial sectors were of the opinion that even this rate would be unable to stimulate the economy. Some sectors are calling for a rate of around 14pc, saying the high interest rates act as a major hindrance to private sector borrowing.

Mohammad Sohail, CEO of Topline Research, was even more optimistic, predicting a rate cut of up to 200 bps in the next monetary policy. “Based on current inflationary trends, we expect a 100 to 200 bps cut in the policy rate,” he said, adding that the upcoming T-bills auction would provide further insights into market expectations for the scale of the cut. 

Minister’s presser

Finance Minister Muhammad Aurangzeb.

Finance Minister Muhammad Aurangzeb recently called for “collective efforts” by all sectors so that the country’s tax-to-GDP ratio could be increased sufficiently. Traders and retailers across the nation have gone on multiple strikes against the government’s new tax measures, particularly its Tajir Dost Scheme.

This scheme aims to formalise the retail sector by bringing traders and wholesalers into the tax net. This is the reason why it’s being opposed tooth and nail by them.  

Addressing a press conference, the finance minister said: “Look, we are very clear that we need to take this forward and there is a very basic reason for it … we are still at a tax-to-GDP rate of 8.8pc. This is not sustainable at all. No country is sustainable at this level, so we need to increase it to 15pc.”

According to daily ‘Dawn’, Mr Aurangzeb said there was no room left for avoiding taxes in the country, stressing that the current situation, where the salaried class and the manufacturing industry are already contributing more than their fair share in terms of their GDP contribution, cannot continue. “So my wholesalers, distributors, retailers — my brothers and sisters — I am requesting once again, please take a step forward to contribute to the country’s economy”.

According to some analysts, the community of retailers and shopkeepers has always thrown a spanner in the works whenever a government has tried to bring them into the tax net. They are chronic tax avoiders and tax evaders and should be recognised by everyone, including the media houses, as thugs for this reason.