KARACHI: The federal government's borrowing for budgetary support from scheduled banks witnessed a significant growth during this fiscal year (FY20), mainly due to rising current expenditures followed by COVID-19 pandemic and revenue shortfall.
According to the State Bank of Pakistan (SBP), the federal government borrowed some Rs1.936 trillion from banks during July 1, 2019 to May 15, 2020 compared to retirement of Rs 3.698 trillion in the same period of last fiscal year (FY19).
Within the banking system, the massive increase was reflected in borrowings from banks, as the federal government has also made significant retirements to the SBP. As per agreement with the IMF for $6 billion Extended Fund Facility (EFF) program, the SBP's financing for budget deficit will be eliminated gradually. Accordingly, the federal government is following this condition by raising funds from banks to finance the fiscal deficit.
The IMF believes that previous massive government borrowing had greatly compromised the SBP's operational independence, jeopardizing the achievement of the inflation objective.
Economists said that the continued and massive borrowing from banks is clearly reflecting that the government is facing some financial difficulties due to shortfall in revenue and slow foreign inflows.
In addition, the ongoing COVID-19 pandemic has further increased the expenditures of the government. The target of fiscal deficit of this year may also be missed, they added.
During the period under review, federal government's borrowing for budgetary support from the SBP witnessed a massive decline and stood negative. The federal government retired some Rs 221 billion to the SBP during July1, 2019 to May 15, 2020 against Rs 5.3 trillion borrowing in the same period of last fiscal year.
The State Bank's statistics revealed that net federal government's borrowing for budgetary support (including SBP and banks) surged by 15 percent during this fiscal year. The federal government raised some Rs 1.434 trillion for budgetary support during July 2019 to mid of May 2020 as compared Rs 1.244 trillion in corresponding period of last fiscal year, depicting an increase of 190 billion. With current borrowing in this fiscal year, the overall stocks of federal government's borrowing from domestic banking sector reached Rs 13 trillion mark.
On the other hand, provinces' financial health is much better than federal government as all four provinces make repayments instead of borrowing.
During the period under review all four provinces retired some Rs 197 billion to the State Bank. Government of Baluchistan retired Rs 50 billion, Khyber Pakhtunkhwa some Rs 28.4 billion, Punjab government Rs 85.6 billion and government of Sindh has repaid Rs some Rs 32.7 billion to SBP during July 1, 2019 to May 15, 2020.
Borrowing from scheduled banks was mainly through the fortnightly auction of 3, 6 and 12-month Market Treasury Bills (MTBs). The Government of Pakistan also borrows by auctions of 3, 5, 10, 15, 20 and 30 year Pakistan Investment Bonds (PIBs). However, provincial governments are not allowed to borrow from scheduled banks.
On positive note the Independent Monetary Policy Committee has cut the key policy rate by 5.25 percent during the last two months which will reduce the burden of interest payments.
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