Aftermath of WHT: SBP injects another Rs 133.3b into market
KARACHI – The State Bank of Pakistan (SBP) on Friday injected further Rs 133 billion in the banking system for eight days against the cut-off yield of 6.53% through the Open Market Operation (OMO).
This is the second OMO of the central bank in the month of September and the practice may continue in the coming days as well. The liquidity demand continued to see a historical rise in recent weeks due to the coming season of Eid-ul-Azha, whereas countrywide switching of traders from banking system to non-banking system has also caused a huge outflow of cash from the banks.
In August, the central bank made a historical contribution in the system by injecting more than Rs 1 trillion in four installments.
According to the market sources, the liquidity shortage was seen due to the lack of money transactions by a large number of banking customers after the imposition of 0.3% withholding tax (WHT) on transaction of above Rs 50,000. The bankers and traders said that the banks transactions declined in the past week as a score of banking consumers stayed away from the banking system to avoid tax, whereas the old system of cash has been used for domestic and commercial purposes.
The commercial banks witnessed significant decline in their profits and revenues in the first half of 2015, subsequently paying huge amount on the account of taxes that also caused paucity in the banking system for meeting the seasonal demand hike.
The traders’ community at large decided to restrict the mandatory transaction of money through the banks and said that they would beef up the security to use cash amount in their business activities. They believed that if traders would not maintain their money in the banking companies, the deposits of the banks would also suffer and banks would ultimately join their protest.
The central bank data stated that deposits of the banking system dropped by Rs 34.215 billion in July 2015, the first month in which WHT tax was imposed, after gradual growth in the banks’ deposits for seven consecutive months.
The traders said that the deposits outflow of July, shown by the central banks, were tip of the iceberg as billion of rupees were not deposited by traders in their banks account.
On the other hand, there is a constant outflow of money from the banks due to domestic needs and demand ahead of Eidul Azha, they added. The traders have intensified their movement against the government as they announced boycott of the banking system on September 4 and strike on September 9. Their demand is to withdraw 0.3% WHT on banks transactions and to introduce simple tax policy so that the medium and small sized traders could also join the taxpayers net countrywide.