Government borrowing up by 346 percent

The federal government''s reliance on the banking system for meeting the financing needs is significantly rising as its borrowing from the State Bank of Pakistan (SBP) for budgetary support has registered a massive increase of 346 percent during current fiscal year mainly due to rising expenditure and shortfall in revenue.
Sources in banking sector told Business Recorder on Tuesday that a shortfall in revenue receipts, notwithstanding, rising current expenditure has compelled the federal government to borrow more from the central bank to meet its requirements. "The high borrowing from banking system reflects that the government is still relying on the banking sector for borrowing for budgetary support due to below target revenue collection, besides a slow privatisation process," sources said.
The State Bank on Tuesday said that the federal government''s borrowing for budgetary support from SBP from July 1, 2010 to the week ended on December 11, 2010 had surged by Rs 261 billion to Rs 336.6 billion, or 346 percent, as compared to Rs 75.5 billion in the same period of last fiscal year.
According to central bank statistics, the federal government had also borrowed Rs 82.563 billion from scheduled banks in July-December 11, 2010 period. However, it is Rs 69.779 billion less, or 54 percent, when compared with borrowing during the same period of last fiscal year.
Net government sector borrowing from banking system (including SBP and other banks) to meet budgetary expenditure surged by 50 percent during the period. With current upsurge in net government sector borrowing for budgetary support mounted to Rs 416.886 billion in December this year, as compared to Rs 278.886 billion in same period of last fiscal year.
The State Bank has already been criticising the federal government''s borrowing and believes that government''s heavy reliance on banking system for financing need is a key risk factor in achieving the basic objective of the financial system in Pakistan.
The SBP in its Financial Stability Review 2009-10 has indicated that government''s dependence on commercial banks would increase even more in 2011, and beyond, due to the Stand-By Arrangement (SBA) of International Monetary Fund (IMF) and SBP Amendment Bill 2010.
According to the report, the government in Pakistan has a historically traditional recourse to central bank borrowing for financing the budget deficit, with consequent challenges for monetary management. The report pointed out that borrowing from the central bank is akin to printing money, feeds directly into inflationary pressures, and tends to increase currency in circulation.
In effect, such monetisation of the fiscal deficit weakens the monetary policy stance, as has been the case in Pakistan, it added. Similarly, as per latest statistics, Broad Money (M2) has registered a growth of 6.24 percent during July-December of the current fiscal year as compared to a growth of 4.61 percent in corresponding period of last fiscal year.