Pakistan’s government has announced tax exemptions for non-resident banking companies that invest in debt securities, such as Treasury bills and Pakistan Investment Bonds. As a result of this move, foreign investment will be attracted and the State Bank’s foreign currency reserves will be increased.
On Wednesday, the Ministry of Finance and Revenue announced that “profits on debt and capital gains derived from debt and debt instruments approved by the federal government shall not be subject to tax chargeable… derived by any non-resident banking company approved by the federal government.”
Previously, non-resident companies were required to pay a 10% withholding tax on capital gains derived from the disposal of debt instruments and government securities through the SCRA and RDA provided by the central bank.
In 2019, the Imran Khan administration offered tax incentives and loosened regulations to attract over $3.5 billion in T-bills and PIBs from foreign investors. To deal with the COVID-19 pandemic, investors withdrew nearly the entire investment in a short period of time in 2020.
Despite the stable rupee-dollar exchange rate and the high rate of return on T-bills and PIBs, which has reached an all-time high of 20%, experts believe that the government may not be successful in luring significant foreign investment to debt instruments in the current environment.
The downgraded foreign credit rating and the deteriorating state of the economy were cited as significant barriers by Fahad Rauf, Head of Research at Ismail Iqbal Securities. To restore foreign investor confidence in the economy and its investment securities, he suggests that the government should implement strong measures such as economic reforms and structural changes.
Rauf also cautions against the possibility of the rupee depreciating further against the dollar and advises foreign investors to put money into Euro Bond and Sukuk bonds issued by Pakistan rather than rupee-denominated T-bills and PIBs.
The tax exemption provided to foreign banking companies is a symbolic measure and may not be sufficient to attract significant foreign investment. To attract foreign investment and build the foreign currency reserves of the State Bank, the government should focus on comprehensive reforms and establish a stable economic environment.