People should brace more addition to their monthly food bill, as commercial banks are refusing to issue letters of credit (LCs) for edible oil imports at the official exchange rate despite the exclusion of the sector from the condition of prior permission from the central bank.
It means there would be shortage – both genuine and artificial – and more price hike in the market as the masses are the ones to whom all the burden.
Meanwhile, this “banking” practice may accelerate the process of imposing windfall/ gain tax on banks as they are already accused of currency manipulation.
But here comes the crux of the matter. The importers and local oil/ ghee manufacturers have been informed unofficially that their letters of credit cannot be opened at the interbank exchange rates. However, the commercial banks are very much willing to do business if they open credit letters at Rs250 and above the exchange rate against a dollar.
That’s why Pakistan Vanaspati Manufacturers Association (PVMA) Chairman Sheikh Abdul Razzaq in a letter to the State Bank of Pakistan (SBP) governor said commercial banks were conveying to the importers-cum-manufacturers that with immediate effect the edible oil had been excluded from the list of ‘Essential Items’ and hence turning down the requests for opening of LCs and retirement of documents.
He further mentioned that the unhindered opening of letters of credit/retirement of documents was inevitable.
Pakistan imports 90 percent of its edible oil demand to meet the national requirement of over 4.5 million metric tonnes per annum. The existing domestic stocks are sufficient to meet the demand for only three to four weeks. However, the interruption in opening letters of credit could disrupt the smooth supply line and result in market disruption.
PVMA chairman requested the SBP to address the issue immediately and set aside the likely panic in the market, which might translate into a price hike, hoarding or retarded imports resulting in shortages.
“The industry is experiencing a unique and unprecedented kind of challenge wherein despite of sufficient stocks discharged in custom bonded warehouses at Karachi, it is unable to lift them due to refusal by banks to retire the documents,” he said.
Razzaq urged the SBP to direct the commercial banks to honour the edible oil importers requests for credit letters and further inform the general public through media campaigns.
Gain tax on banks
Earlier this week, Finance Minister Ishaq Dar announced that the government would be shortly imposing a significant gain tax on banks’ foreign exchange earnings.
“We are in any case planning to beef up revenues and considering a flood levy and a substantial recovery on account of unprecedented foreign exchange windfalls” earned by the banking sector, but there would be no measure that adds up to the burden on common people already suffering a lot of hardship, he said.
This announcement has a solid reasoning. Actually, it is a windfall tax which will only cover their foreign exchange income, to punish them for currency manipulation. Reports suggest it could be in the range of 50 percent to 70 percent similar to the one used in the West, which imposed the same tax on energy companies.
Initially, the FBR could not decide about the windfall income tax on the commercial banks in the absence of accurate data.
An inquiry by the State Bank of Pakistan has stablished currency manipulation during April-June 2022 quarter, sources say. However, the central bank may not be able to impose hefty penalties and whatever amount it will collect would go to the SBP’s coffers.
It is estimated that the total income from the foreign exchange earnings by all the commercial banks during the year 2022 could be around Rs100 billion to Rs110 billion.
The FBR has to determine how much of it was because of currency manipulation. The windfall tax rate could be as high as 40 percent of the foreign exchange earning component of the banks.
Without the windfall tax, the banks will be paying 49 percent income tax in the year 2023, including 10 percent super tax.
The banking sector witnessed a phenomenal growth despite overall meagre economic growth of 3.5 percent in 2021.