LATEST data for the month of July from the State Bank shows a drop in bank deposits held by private-sector businesses amounting to 5.2pc, leading some to suggest that there is a widespread flight into cash or dollars under way as a response to the withholding tax on bank transactions of non-filers announced in the last budget.

Another data series also shows that money appears to be leaving the banking system, as overall deposits have fallen by 68pc since June, while cash in circulation had increased by 158pc till Aug 22.

Some decline in deposits always occurs in the weeks following the budget, mostly as a correction for inflated June numbers as banks pump up their deposits at the close of their financial year.

Also read: Non-filer blues

But this year’s decline is larger than last year’s by 66pc, suggesting this year might be more than routine. It is still important to be careful when drawing conclusions based on these numbers though.

For example, a closer look reveals that the decline in deposits held by retail and wholesale segments of the business community is not very large, whereas segments like construction and refined petroleum are showing very large declines.

So it’s important to know more about where exactly the decline in deposits is taking place before connecting the phenomenon to the traders’ protest against the withholding tax.

Nevertheless, some amount of flight may well be taking place due to the withholding tax on bank transactions, but it is difficult to see how the trend can persist for very long.

In fact, the moment gives the government an opportunity to examine informal payment mechanisms that are being substituted for banking instruments, in an attempt to further pursue its own documentation priorities. And even that portion of the money that has been withdrawn from the banking system is more likely to return in the near future because carrying on high volume business through cash or other forms of promissory notes is not sustainable.

The government should stand its ground against the traders’ complaints regarding this tax. The myriad complaints coming from the common citizenry — such as pensioners and widows — deserve more attention, although these can be addressed without compromising on the documentation measure.

It would be a shame if a strong documentation measure of this sort were to be rolled back so easily. The government’s energies should now be focused on getting the maximum number of people to file their returns this year.

Published in Dawn, September 7th, 2015

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