ISLAMABAD: The hiked interest rates will lead to the enhanced revenue collection in the coming months. The private sector will yield higher revenue for the government and will reduce the rate of economic growth and inflationary pressures.
It will also increase the cost of borrowing, reduce disposable income and therefore limit the growth in consumer spending. This has the effect of reducing aggregate demand in the economy as higher interest rates increase the cost of government interest payments. This could lead to higher taxes in the future.
The State Bank of Pakistan (SBP) increased its policy rate by 50 basis points to 6.5 per cent on Friday, saying that balance of risks to the sustainability of growth has shifted while current account deficits and fiscal deficits have exceeded the earlier estimates.
The central bank announced the Monetary Policy Statement with details to justify second increase in the interest rate during the current fiscal year. In January, the key rate was raised by 25 basis points to 6pc after keeping it steady for 20 months.
However, a source at FBR told Customs Today that the government policymakers were following a growth-led strategy for higher revenue with higher interest rate therefore the private sector was expected to produce extra potential for growth with cheaper money ultimately revenue collection would improve.
“Tax is source of income to government and also sometime used to promote or demote business depending on nature of business; however, increased interest rate leads enhanced revenue collection from corporate sector,” the source maintained.
The source further elaborated that interest rates were hiked because economy was growing; therefore it just made the most sense that higher interest rates were more likely to lead to higher tax collection.
