With almost three quarters of this fiscal year already behind us; foreign flows in any form have remained elusive. According to SBP weekly data up to March 16, 2012; net foreign outflows stand at a staggering Rs225 billion versus an inflow of Rs177 million in the similar period last year.
This is not only squeezing liquidity within the system but is also building inflationary pressures for coming months. With little or no foreign budgetary flows, the onus of budgetary management is falling more and more on the domestic banking system.
Net government borrowing is thrice as high as it was in the first three quarters of the last fiscal. What is left for the private borrowers is a no brainer. Unlike the start of the year when the government was able to limit note printing and was just knocking the doors of commercial banks; lately it has also kept the Security Press of Pakistan busy in printing pictures of Mr Jinnah in abundance, while its value keeps on diminishing.
Government borrowing from SBP stood at Rs235 billion year-to-date, while it was under Rs100 billion in the corresponding period, last year. Isn it inflationary? I (not so vaguely) remember reading that in school. Incidentally my teacher also mentioned that such practices would translate into high inflation, but heck thats just theory isn it?
The picture becomes gloomier by a cursory look at the budgetary borrowing from scheduled banks. To put it simply, its going through the roof - Rs739 billion in just nine months (last year: Rs340 billion).
Aren banks supposed to be financial intermediaries that route money from savers to private borrowers and entrepreneurs? Not in Pakistan, at least not in recent history.
Two choices appear ahead of us; either we can rewrite economic theory from scratch to fit our performance, or we should be sending the nations economic managers back to school!
But not all the blame for past few months is on the banks. There is some accounting treatment to it as well: the conversion of circular debt; both power sector TFCs and quasi fiscal wheat borrowing, into government treasury papers. This is evident from around Rs250 billions fall in commodity operations and credit to public sector entities.
Yet despite all the hunger from the government, the private sector marginally managed to get more loans in the first nine months of FY12 relative to last year - private credit stood at Rs258 billion. The notion that economy is picking up is not a myth. But to gain more from it, the banks have to get their minds of lending to the government long enough to comprehend economic dynamics.
And foreign flows have to materialize, as the overall money growth stood at 7.5 percent (Rs506 billion) compared to 9.4 percent in the same period last year.
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