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ISLAMABAD: The government's massive borrowing of Rs1.940 trillion from the banking sector against budgeted Rs338 billion to finance the fiscal deficit has crowded out credit to the private sector during the fiscal year 2019-2020, according to the experts.

Gallup Pakistan Executive Director Bilal Gilani stated this in a tweet drawing a comparison between those budgeted inflows and actual for the last fiscal year that showed inflows from external resources, privatisation proceeds, and the non-banking sector were not fully materialised.

As a result, the government borrowing from the banking sector to finance the fiscal deficit crowded out lending to the private sector.

Against the budgeted Rs1.829 trillion from the external resources, only Rs895.5 billion were materialised and Rs540 billion from non-banking sector were realised as opposed to Rs819 billion projected in the budget for the last fiscal year, and as a result Rs1.940.6 trillion have been borrowed from the banking sector compared to budgeted Rs339 billion.

According to the monthly economic update of the Finance Ministry's credit to private sector (flows) from July 1st, 2019 to June 12th, 2020, Rs195.2 billion compared to Rs606.9 billion during July 1st, 2018 to June 14th, 2019.

Bilal Gilani stated, while quoting the Finance Ministry's data that as opposed to the budgeted financing requirements of only Rs339 billion from the domestic banking system, the government ended-up borrowing Rs1.9 trillion (on-cash basis) during fiscal year 2020.

When contacted, Former Special Assistant to the Prime Minister/Federal Minister for Revenue Haroon Akhtar Khan stated over the phone that he was a firm believer that the most important element of growth in the country was to ensure liquidity in the banking system provided to the private sector.

He said that in a country where there was a total crowding out of the private sector, there was no way you would get meaningful GDP growth.

This, in fact, is the root cause of an unprecedented dismal GDP growth in Pakistan in the last two years as compared to the other countries in the region.

There is a total crowding out of private sector access to capital from the domestic banking industry and, as such, the GDP growth is down to its lowest ebb.

Haroon Akhtar stated that if the private sector would not get the badly-needed working capital or the capital needed for the balancing, modernisation and rehabilitation (BMR) or the capital needed for new capacity, this economy was not heading anywhere.

The former Special Assistant to the Prime Minister on Revenue stated that there were only a handful of banks left in the country, almost all of them were privately owned with the exception of the National Bank of Pakistan and the Bank of Punjab.

The focus of privately-owned banks is only on profitability, and not, at all on development.

In the absence of developmental financial institutions and no appetite for development financing by the commercial banks, our country will never catch up with the GDP growth in other countries in the region.

This is the reason why the IMF, the World Bank, the ADB are all forecasting GDP growth for fiscal year 2020-21 at 1-2 percent for Pakistan, 6-7 percent for India, and 7-8 percent for Bangladesh.

This is very unfortunate as Pakistan has the best potential in the region for an accelerated growth.

There is an urgent need for a paradigm shift in the banking sector of Pakistan, otherwise, our dream of reaching seven percent GDP growth and to sustain it, will never be fulfilled. This is an emergent situation and there is a dire need for policy change at the highest level of leadership, Haroon Akhtar stressed.

International tax expert Dr Ikramul Haq, however, holds the view that the figure of Rs1.9 trillion borrowing against the budgeted figure could not be taken in isolation.

The legacy, inherited by the present government, was the result of imprudent policies of the past government.

The previous government acted in utter violation of Section 3(b) of the Fiscal Responsibility and Public Debt Limitation Act, 2005, which says: "beginning from the financial year 2016-17, the total public debt shall be reduced to 60 percent of the estimated gross domestic product".

Under the command of Ishaq Dar, the PML-N government increased it by 27 percent.

In fiscal year 2019-20, debt servicing by the federal government was Rs2,620 billion (domestic Rs2,313 billion and foreign Rs307 billion) against net revenues of Rs3,278 billion after transfer to the provinces.

Debt servicing was 79 percent of the total net revenues of the federal government, and 65 percent of the tax collection of the FBR.

This is the real dilemma and challenge on the fiscal front faced by the federal government, for which it has to borrow heavily to pay old domestic loans and meet the fiscal deficit of Rs3.2 trillion, the international tax expert added.

On the external debt front, in fiscal year 2019-2020, the gross foreign loans stood at $13.2 billion and repayments amounted to slightly above $10 billion.

For the Finance Ministry, the report says, "there was no option but to borrow to repay maturing loans and stabilise foreign currency reserves that dipped below $10 billion in May 2020 after the outflow of hot foreign money of over $3 billion," Dr Ikram added.

According to the SBP, in fiscal year 2019-20, the government borrowed a total of Rs2.3 trillion from commercial banks.

It retired bank loans of Rs875 billion and rest to meet the fiscal deficit, Dr Ikramul Haq stated.

The government's total borrowing from commercial banks stood at Rs7.2 trillion as on June 30, 2020, and not Rs1.9 trillion that was one component of borrowing mix to meet fiscal deficit of Rs3.2 billion and pay back old loans, the international tax expert stated.

Copyright Business Recorder, 2020