The SBP issues a weekly statistical statement of the monetary aggregates based on the consolidation of the balance sheets of the SBP and of all the commercial banks. It capsules the state of the public finances, the foreign exchange reserve position of the SBP and credit utilisation by the private sector.
The latest such statement, pertaining to the period up to March 23 of FY12, provides an overview of the fiscal, monetary and balance of payments trends in the economy and the likely outcome in the FY12.
The main trends are:
-- During the period up to March 23 of FY12, credit to the private constituted merely 33 percent of the net domestic assets of the banking system; the rest having been created by public sector borrowing. The relative weight of the public and private sector in the production of goods and services is in reverse proportion of that of the utilisation of bank credit.
-- During the same period, the net domestic assets of the banking system rose by 13 percent as compared with 6 percent in the corresponding period last year. The last fiscal year ended up with an expansion of 13 percent in the net domestic assets. If the time ratio of FY11 is applied to project the outcome in the current year, the net domestic assets will expand by about 26 percent in full FY12. If the government borrows another Rs 1 trillion from the banking system in the remainder of the fiscal year, as announced by the SBP recently, the net domestic assets may go up even more. This will be the fastest rate of expansion in the net domestic assets in a year and about seven times higher than the projected rate of output growth.
-- The net domestic assets would have risen even more if "other items" in the balance sheets of the SBP and commercial banks had not exerted a contractionary impact to the extent of Rs 252 billion.
-- The main factor for a fast expansion in the net domestic assets has been reckless government borrowing. The net government borrowing for budgetary support from the SBP and commercial banks together up to March 23, in FY12 was of the order of Rs 1,000 billion as compared to Rs375 billion in the same period last year. If the projected bank borrowing of the government in the remainder of the year materialises, FY12 will become record-holder for absolute amount of government bank borrowing in a single year.
-- The breakdown of government borrowing reveals that, in addition to substantial borrowing from the SBP, the government has pre-empted bulk of commercial bank credit as well. Up to March 23 in FY12, the federal government borrowed an amount of Rs293 billion from the SBP as compared with Rs113 billion in the same period last year. The provincial governments also borrowed from the SBP an amount of Rs 3 billion so far as compared to retirement of Rs 71 billion in the same period last year.
-- The federal government also borrowed an amount of 691 billion from the commercial banks during July 1, 2011-March 23, 2012 as compared with Rs 327 billion in the corresponding period last year. The provincial governments borrowed an amount of Rs14 billion from the commercial banks.
-- The impact on money supply (M2) of massive government bank borrowing was partly offset by a sharp decline in foreign exchange reserves of the SBP. The net foreign assets of the banking system declined by Rs238 billion in the period July 1, 2011-March 23, 2012 as compared with a rise of Rs 184 billion in the corresponding period last year.
-- As a result, money supply increased by8 percent so far in FY12 as compared with 9 percent in the same period last year. Even with sharply declining foreign exchange reserves, the year is likely to end up with a growth in money supply of the same order as in the last year, and will be four times larger than the expected expansion in the supply of goods and services.
The above statistics lead to the following conclusions:
-- The government is running the affairs of the state largely by borrowing from the banking system. If the government provides any help to the people by spending on their welfare, it is taking away more than it gives by taxing the same people through inflation. It is a politically convenient but fiscally irresponsible course of action and its consequences are being borne by the people in one way or the other.
-- The official price and fiscal statistics do not tell the real story of financial affairs because those are window-dressed. The balance sheets of the SBP and of commercial banks describe the situation more accurately, and the fiscal and monetary situation is very grim indeed. The people should be prepared to face more hardship due to rising inflation, exchange rate depreciation and shrinking employment opportunities.
-- The government has only a limited amount of foreign exchange reserves at its disposal with which it can cushion the impact of its fiscal recklessness before it fully reflects itself in prices. But a continuous depletion of foreign exchange reserves will bring with it its own misery for the people. There will soon be a threat of external debt default and the exchange rate will depreciate fast. Both will carry serious consequences. The government may try to cover its lost ground by temporary steps of begging and borrowing from abroad but it will only intensify the underlying problems. This time, it may not be easy to persuade the IMF to come to the rescue of the government both because of past broken promises and cooling off of political relations with the USA.
-- The only institution that had the power and the statutory responsibility to halt the financial slide engineered by the reckless fiscal policy of the government was the SBP; the central bank of the country, which enjoys a fair degree of statutory autonomy since 1997 to "limit and enforce" government bank borrowing. However, it seems to have decided not to exercise its statutory power and go along with the government. More stressfully, the SBP is willingly providing liquidity to banks through its open market operations to expand money supply through government deficit financing. By making the monetary policy subservient to the fiscal policy, the SBP is abdicating its responsibilities as the central bank of the country whose main task is to ensure relative monetary stability and not merely announce the level of its policy rate every second month.
-- Any political party that hopes to win the next elections, and take over the reins of government, should devote time ahead of time to develop a policy package to save the sinking economy after coming to power. Time will not be on its side nor will be the state of the economy, which is likely to get worse in an election season due to even poorer economic management than before and more reckless government borrowing from the banking system in FY13.
(The writer is a former governor of the State Bank of Pakistan)