ISLAMABAD: Pakistan’s domestic debt is estimated to have shot up by more than Rs7 trillion since January last year just because of an increase in the State Bank’s policy rate from less than 10 per cent to 22pc, a Senate panel was told on Wednesday.

The Senate Standing Committee on Finance also sought separate reports from the State Bank of Pakistan (SBP) and the Federal Board of Revenue (FBR) over Rs69bn worth of trade-based money laundering through the import of solar panels by some companies.

At the committee’s meeting, presided over by Senator Saleem Mandviwalla, some senators criticised the SBP for high interest rates in the country, insisting that they were fuelling inflation and failing businesses. On its part, the central bank defended the interest rate hike as a tool to curb inflation. The Senate panel finally directed the SBP to submit a detailed report in this regard.

Discussing the high interest rate and its impact on business people, Senator Zeeshan Khanzada said the unreasonable increase in interest had made it difficult for businesses to sustain, let alone contribute to growth.

Senate panel asks FBR, SBP to submit reports on Rs69bn laundered via solar panel imports

Responding to a question from a senator, a senior official said that as a rule of thumb, a 1pc hike in interest rates translated into Rs600bn addition to debt.

The SBP’s policy rate increased from 9.75pc in January 2022 to 12.25pc in April of that year and then to 22pc by the end of June this year. Meanwhile, domestic debt has increased by Rs7.35tr since January 2022 and by almost Rs6tr since April 2022.

SBP’s Deputy Governor Dr Inayat Hussain said the interest rate had been increased to control the rising inflation and it had produced significant results in the past few months.

However, Senator Mandviwalla, a former PPP finance minister, wondered how the interest could have effectively controlled the growing inflation and directed the SBP to provide a comprehensive report in this regard.

Deliberating on massive money laundering by solar panel importers, FBR’s Customs head told the Senate panel that seven companies were found to have been involved in trade-based money laundering and six FIRs had been registered against them.

The FBR has already reported these companies’ misuse of solar panels for “massive money laundering”, apparently with the connivance or negligence of banks, which failed to comply with SBP’s regulations on money laundering and even the central bank’s role was found wanting.

The FBR said the solar panels had emerged as a high-risk item for over-invoicing and trade-based money laundering due to their duty-free import status and the absence of sales tax on local supply.

Between 2017 and 2022, there has been a massive increase in solar panel imports, accompanied by the emergence of dummy companies exploiting duty- and tax-free imports to conduct illicit financial activities.

About Rs75bn worth of solar panels were allegedly imported from China, but payments were routed to the United Arab Emirates (UAE) or Singapore and all these panels were sold in the domestic market at almost half the price they were imported.

For instance, sales tax declarations revealed that solar panels initially imported at Rs72.83bn were sold locally for a significantly lower value of Rs45.61bn.

Senator Mandviwalla noted that solar panel importers succeeded in laundering Rs69bn in the last five years and more than Rs25bn was deposited in two different accounts without attracting FBR’s suspicion and facing any queries.

He suggested that the case should be sent to the Federal Investigation Agency (FIA) for a comprehensive probe, but some senators wanted first to let the SBP and FBR come up with their respective conclusions. The committee then directed the two institutions to conduct separate investigations into the matter and submit reports.

The meeting also discussed difficulties being faced by politically exposed persons (PEPs) in availing the financial services. The SBP deputy governor insisted that the central bank had put in place a system in which focal persons had been deputed at every branch to sort such issues, but the system had failed to provide desirable results due to unknown reasons.

The Senate committee asked the SBP to direct all banks to make these PEP officers functional in all commercial banks, designated on the direction of this committee earlier.

The Senate panel also discussed an alleged Rs5bn fraud case in a Faisalabad branch of Bank AL Habib. SBP’s Dr Hussain said the incident resulted from uncertain mutual trust between bank officials and the aggrieved party, which forced the aggrieved party to perform their transactions outside the place of business.

The SBP had intervened in the matter and was coordinating with both the parties, and the matter would be resolved soon, he said. The committee directed the SBP to launch an awareness campaign to advise account holders not to transact with banks outside banks to avoid such incidents in future.

The Senate panel was also briefed on deposit protection management. The SBP deputy governor mentioned that an account holder’s deposit of up to Rs500,000 was protected by the Deposit Protection Corporation and around 94pc of the depositors fell under this category.

On a question by Senator Mandviwalla about whether the SBP was itself protecting the deposits, Dr Inayat Hussain responded that the deposits were being protected by the Deposit Protection Corporation, which is a wholly owned subsidiary of the central bank. He also noted that no depositor had ever lost their money in the country’s financial history.

Published in Dawn, October 5th, 2023