KARACHI: Withholding tax (WHT) on financial transactions is acting against the goal of achieving financial depth, a State Bank of Pakistan’s (SBP) report said on Friday, highlighting that for the first time since 2009-10 the monetary expansion came more from currency in circulation than the bank deposit growth.

The tax has also been bitterly criticised by the business community which not only has campaigned against it but has also tried to find other modes of payment to avoid it.

The campaign could not sustain despite the fact that the business community, particularly retailers and medium-sized businesses, started using dollars to make payments while they kept dollars in their bank lockers.

However, all these moves resulted in the slowdown of bank deposit growth, and forced medium- and small-sized banks to offer returns above the market rates to raise deposits.

In its third-quarterly report the SBP said, “Private sector deposits increased by Rs149.4 billion during July-March FY16 — less than half of the rise recorded during the corresponding period of FY15.”

This trend of gradual decline in deposits rates and imposition of withholding tax on financial transactions dif not bode well for financial deepening, the report said.

It said some challenges still existed for the economy. Investment rate continues to remain low, whereas foreign direct investment apart from the China-Pakistan Economic Corridor has not picked up the pace.

The tax base stays narrow, despite stop-gap measures by the government to increase tax revenues. Furthermore, low commodity prices and continued slowdown in the global economy have also had an adverse impact on some sectors of the economy, the report said.

For example, exports have continued to show weakness, and remittance growth is also slowing down. Nonetheless, current foreign exchange reserves have reached their historic highs, which would help the country in achieving high and sustained growth going forward, it added.

“But this needs to be supplemented by deep-rooted structural reforms so that the recent improvement in macro fundamentals can be sustained.”

The report said that despite global economic slowdown, gross domestic product (GDP) growth in Pakistan maintained its modest pace, reaching an eight-year high of 4.7 per cent in FY16 from 4pc in the previous year.

A strong performance from the industry and services sector led this growth in GDP. Agriculture, on the other hand, suffered particularly from significant losses to the cotton crop, which recorded a massive 27.8pc decline over the last year.

“As a result, FY16 was the first time in 15 years when value addition in the agriculture sector recorded a decline,” said the SBP report.

The cotton harvest could reach only 10.1 million bales, against last year’s crop of 14m and the target of 15.5m bales. “Against this backdrop, acceleration in the industrial growth from 4.8pc last year to 6.8pc in FY16 is a positive sign,” the report said.

More encouragingly, this growth was achieved despite sluggish external demand as evident from a persistent decline in exports since May 2015. In fact, it was the robust domestic demand that helped the industry to post strong growth in FY16, said the report.

Published in Dawn, July 2nd, 2016