SBP highlights the loopholes

With the country heading into the fifth fiscal year under the tutelage of the current regime, the pessimistic tone in the market on the fiscal front unequivocally suggests the countrys finance managers and policy makers have failed to earn their spurs. The latest report released by SBP - The State of Pakistans Economy - highlights a laundry list of fiscal issues responsible for the poor economic condition. Energy shortages, for the most part, were responsible for slowing down the production wheel of the country, while decline in investments continues to throw a spanner in the works. In the report, a phrase "fiscal deficit" - a root of all financial evils - managed to top the list of grave factors the country is wrestling with suggesting that "the persistently high fiscal deficit remains a major risk to the macro-economy". As the budgetary gap for the full year is expected to exceed the revised target of 4.7 percent, their concerns seem reasonable since a budget deficit above the threshold level of four percent is considered risky by international standards. In a vicious circle, the cash-starved government shifted the burden of borrowing to domestic sources amid poor external inflows. The government borrows from two key domestic sources: financial institutions and the central bank. In either case, government borrowing has negative implications. Borrowing from financial institutions is blamed for bringing down lending to the private sector. While borrowing from the central bank increases inflationary pressures. "Demand for private sector credit is likely to be dampened this year, as loans to private businesses increased by only 1.8 percent in Jul-Mar FY12 - the lowest growth rate in the past 10 years," according to the report. As of 31 May, 2012, scheduled banks are directly holding roughly 70 percent of outstanding sovereign instruments including T-bill, PIBs and Ijara Sukuk on their balance sheets. The report highlighted that the government had failed to adhere to the Fiscal Responsibility and Debt Limitation Act (2005) and the newly amended SBP Act (2012), which provide guidelines on overall debt stocks and borrowing from the central bank, respectively. Moreover, owing to losses in public sector enterprises, circular debt problem, obstacles to CSF and delay in auction of 3G licenses, the cash-starved government will continue to remain on a shoestring.