ISLAMABAD, Feb 24: With the country’s debt hovering around Rs16 trillion, the government is considering a proposal to abolish withholding tax on cash withdrawals from banks and launch insurance-wrapped dollar-denominated bonds in the international market to limit money circulation, spur economic growth and provide support to balance of payments position.

This is part of a debt management strategy prepared by the Debt Policy Coordination Office (DPCO) of the finance ministry and submitted to the government for a policy decision.

The DPCO believed that withholding tax on cash withdrawals from banks was contributing to an increase in currency circulation. Currently, 0.2 per cent withholding tax is charged on cash withdrawal exceeding Rs50,000. “The government may consider abolishing this tax, as the net contribution of this tax is negligible when compared with the potential benefits of reduction in currency in circulation,” said the DPCO.

The government has also been asked to market domestic debt instruments to non-resident Pakistanis and other institutional investors in the Gulf, European and US markets, given the interest rate differential that may attract overseas investors. Likewise, the government may consider launching insurance-wrapped US dollar-denominated bonds in the international market or a partial credit guarantees instrument by an internationally reputable institution to raise sizable flows.

The government will soon strengthen the Pakistan Remittance Initiative which, with better policy coordination between the Ministry of Finance and the State Bank of Pakistan, could increase flow of remittances from the current average of about $1.1 billion per month.

The SBP has already been asked to strengthen its marketing of treasury bills, Pakistan Investment Bonds and Sukuk bonds to retail investors through commercial banks across the country, especially in sub-urban areas to reduce government borrowing from the wholesale market.

Likewise, the relevant government agencies have been directed to improve project monitoring mechanism and ensure timely completion of development projects and remove bottlenecks for release of loan tranches.

The DPCO said divergent trends between growth in foreign exchange earnings and government revenues on one hand and foreign exchange repayments and expenditure on the other pointed towards underlying structural issues and hence the government should focus on increasing export receipts and other foreign currency non-debt creating flows above and beyond the growth of foreign exchange payments and external debts and liabilities.

It said the debt reduction to sustainable levels could only be achieved with persistent economic growth. The slowdown in growth results in rising debt burden and reducing debt-servicing capacity of the country.

“It is, therefore, important for the government to adopt an integrated approach for economic revival and debt reduction strategy, which will require some difficult trade-offs in the short term, thus implementing structural reforms that boost potential growth is the key to ensure debt sustainability.”

The recommendations have come following an admission by the Finance Ministry early this month in parliament that the government had breached during the previous financial year major limits imposed under the Fiscal Responsibility and Debt Limitation Act of 2005 to bring down increasing debt levels.

The ministry had reported that the requirement of the law to reduce revenue deficit to nil by 2008 and then maintain it at zero was never met in the past five years. Likewise, the requirement for keeping debt at 60pc of GDP also could not be met which, according to the central bank, had crossed 67pc of GDP. The government had also conceded to have failed to reduce public debt by 2.5pc a year.