"I don't have exact numbers but borrowing from SBP is not zero", Hina Rabbani Khar, State Minister for Finance, naively commented last week on the grave issue of note printing. This depicts the government's hollow efforts to curb inflation and put the economy back on track.
In his maiden budget speech the Finance Minister, Hafiz Shaikh, delivered an Econ-101 lecture to his fellow parliamentarians on direct inflationary pressures of government's borrowing from the central bank - in line with one of the IMF's prime conditionalities to ensure net zero quarterly borrowing from the SBP.
Despite all this, fiscal financing from the SBP increased by Rs328 billion in little less than first half of the current fiscal year. This is more than three times of what was borrowed in the similar period last year. This behaviour is much more threatening for Pakistan's economic stability, in the short to medium term, than the implementation of RGST.
A quick review of past three and a half years augments this argument. High powered money creation quadrupled since July 2008 from mere Rs476 billion to Rs 1,537 billion to-date. This is inflationary in nature as note printing, with its multiplier effect, generates excess demand without corresponding increase in supply. Consumer price index i.e. prices of goods and services, on average, increased by whopping 69 percent in the same period.
Continuous power shortage and government's reliance on commercial banks for financing the fiscal gap and twin circular debt (quasi fiscal operations - commodity financing and energy circular debt) is adding woes to the supply by crowding out private investment. Grim security situation and lack of confidence on government policies are proverbial straws on the camel's back.
One of the other IMF condition, the SBP Act, is under process of legal approval from the parliament and the senate, and is likely to be implemented in a month or so. By virtue of this, the government ought to restrict its borrowing from central bank to 10 percent of its revenues over a span of five years.
This will effectively mean that the government will have to retire, on average, Rs260-270 billion yearly over the next five years. At this juncture, this seems to be a huge challenge both for government and for the SBP.
The former has to find alternate avenues to finance its fiscal gap or curtail deficit by a combination of revenue enhancement and cutting down of expenditures. The latter has to manage liquidity, as huge amount will be taken out of the system, and also have to keep a close eye on fiscal borrowing from commercial banks.
If the act is passed and the government complies with it, the government borrowing will tilt further to commercial banks which will crowd out whatever credit appetite is left with the private sector.
It is pertinent to note that within two months time after SBP submitted the proposed Act for approval to national assembly, government borrowing from the central bank increased by over Rs 150 billion. This clearly depicts the lack of commitment from the fiscal side to adhere to the agenda of economic stabilisation.
There is similar tale to tell on implementation of RGST which is now likely to be tabled in FY11 budget as government sought a nine months extension from IMF in its standby programme. Although, FBR is empowered to remove distortions in existing GST system through cabinet approval, it's a hard political decision given turmoil in the coalition government. The policy inaction, therefore, is likely to continue with no solution to power circular debt crises, tax reforms and note printing in the offing - at least over the next few months.
No money is likely to be received from the IMF, nor from others including World Bank and the ADB, who have pegged their support to IMF's approval. Hence, the fiscal deficit is bound to rise and its financing will remain on central bank. In short, inflation is here to stay.
MONEY AGGREGATES:
To the surprise of many, currency-in-circulation is on rise even few weeks after the cattle shopping spree. It has reached the level of Rs286 billion, highest level ever reached in a yearly flow despite the new products launched by National Savings Organisation to curb the hike in CIC.
Demand and time liabilities marginally increased and overall money supply increased by 0.55 percent or Rs32 billion for the week ending December 11.
The government continued filling its fiscal appetite through note printing, its borrowing toll from central bank increased by Rs26 billion. Slowly but steady credit retirement on commodity operations continued by offloading Rs5 billion in the week under review; it declined by Rs43 billion in the year to date.
Private sector and PSEs both borrowed Rs 10 billion each to show some sign of revival in corporate credit. (Feedback at [email protected])
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KEY MONETARY AGGREGATES AS ON DEC 11
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Rs (mn)
11-Dec 4-Dec Change
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Currency in Circulation 286,413 261,333 25,080
Total Demand & Time Deposits 72,567 65,654 6,913
Broad Money (M2) 360,339 328,438 31,901
NFA 71,200 75,750 (4,550)
NDA 289,140 252,687 36,453
Net Government Borrowing 374,868 354,559 20,309
Borrowing for budgetary support 416,886 391,072 25,814
from SBP 328,631 302,522 26,109
from scheduled banks 88,255 88,550 (295)
Commodity operation (43,391) (37,895) (5,496)
Credit to non-govt sector 55,226 34,185 21,041
to private sector 70,865 60,433 10,432
to PSEs (16,359) (26,983) 10,624
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Source: SBP
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