KARACHI: Banks deposits fell by Rs121 billion in the first two months of this fiscal year, apparently as a result of the withholding tax imposed on banking transactions.
The State Bank reported on Monday that banks deposits were Rs9.141 trillion in June 2015 which fell by Rs33bn to Rs9.108tr in July. In August the deposits fell by Rs88bn to Rs9.020tr.
Banks have been facing shortage of liquidity for more than six months. However, the State Bank has been regularly injecting liquidity to keep the banks eligible to perform regular working.
The government levied withholding tax on banking transactions for non-tax filers but the decision proved counterproductive. The business community reacted strongly against the tax levied in this fiscal year.
While the government maintains that the tax was levied for documentation, the business community has expressed its mistrust in the government.
Last week, a country-wide strike was observed by the business community and agitation still continues.
However, the government has not shown any flexibility on the issue of withholding tax and seems determined to continue with it.
Since the agitation started, the business community stopped relying on banks and is either paying dollars or cash to make payments.
The impact of this move is visible from the latest report of the State Bank which shows falling bank deposits.
During the same two monthsprevious fiscal year the deposits of the banks had increased by Rs50bn, reflecting a different trend during this fiscal year.
Banks shortage of liquidity widened during this fiscal year.
The State Bank injected Rs1.027tr in the banking system on September 4. This huge injection enabled the banks to keep investing into the government papers.
The protest has not only affected the banks but also the exchange rate.
The business community bought dollars to avoid depositing local currency in banks and started keeping dollars into banks’ lockers instead.
During these two months, the dollar price went up to Rs105 in the open market from Rs102.
The dollar is still hovering around Rs104.80 to Rs105 in the open market.
Bankers believe that the business community can’t survive for long without using banks while banks could do business with the help of State Bank.
It may cut the bank profits to some extent but the overall situation would be under their control.