Perspective of Syed Asad Ali Shah on ADR tax
The tax imposed on Advance-to-Deposit Ratio, intended to boost private sector lending, is instead distorting Pakistan’s financial ecosystem, creating more harm than good. Here’s why this policy ‘must be withdrawn immediately’ in the public interest:
1) Distortion in banking operations: Banks are being forced to lend short-term at below-market rates, not to spur real economic activity but to meet the 50% ADR threshold to avoid punitive taxation. This “forced lending”, instead of creating productive investments is harmful to the economy.
2) Discouraging savings: Banks are actively discouraging deposits, imposing fees on high-balance deposits. This directly erodes public confidence in the banking system and runs counter to the national objective of increasing bank deposits — an important element of savings.
3) Flawed legal basis: The ADR tax penalises balance sheet items, not income which is clearly unconstitutional and not legally sustainable. Already, many banks have obtained injunctions, and related provisions are likely to be struck down by courts without yielding any additional tax, but will cause huge waste of time & resources in litigation.
4) No impact on private credit: Despite its intention, the tax has failed to boost private sector lending. Banks are using workarounds like lending to large public-sector borrowers, financial institutions & corporates against govt securities to artificially meet the ADR requirements, only distorting banking system.
5) Threat to economic stability: By pushing banks to engage in unsustainable practices, the ADR tax destabilizes the financial system, hampers
formal sector, as bank deposits are shrinking and such money may be diverted to the informal sector/cash economy.
The way forward:
Withdraw the ADR tax immediately to restore stability and confidence in the banking system.
Engage with stakeholders, including banks and regulators, to develop policies that genuinely encourage sustainable private sector growth without distorting the market.
Focus on addressing systemic issues like documentation of the economy and better credit assessment tools to foster responsible lending.
Band-aid solutions won’t work! Policies like the ADR tax harm more than they help. It’s time for the government to rethink this approach and prioritize long-term economic stability over short-term fixes.
Let’s raise our voices for policies that truly strengthen our financial ecosystem.