Government borrowing from SBP increases sixfold to Rs786bln in July

KARACHI:  Government borrowing from the central bank shot up almost sixfold in July, indicating a major shift in public sector debt pattern after the country successfully completed the International Monetary Fund’s Extended Fund Facility programme.

The State Bank of Pakistan’s data showed that the government borrowing swell 598 to Rs786 billion from July 1 to July 29, 2016 against Rs113 billion in the same month of the last fiscal year.

However, the government repaid Rs524 billion in debt to the commercial banks in July 2016, compared with Rs69 billion in the corresponding month of the last fiscal year.   

The government borrowed Rs1.364 trillion from the banks in the last fiscal year ended on June 30 as the SBP was running large and frequent open market operations, which are now expected to taper off.

Bankers said the government has restarted borrowing directly from the central bank even before the end of IMF programme.

 “The IMF was against the central bank lending to the government as it feared that such type of borrowing would be harmful and more inflationary,” said Dr Hafiz A. Pasha, former finance minister. “The ministry of finance has restarted borrowing directly from the SBP even when the last IMF review on Pakistan economic under three-year EFF facility was on course.”  

The government ensured the IMF many times in past that it would use non-SBP domestic sources to meet its financing needs.

The central bank has also raised concerns on raising inflation following uncertain global oil prices, better economic activity and any expected increase in gas tariff.  The consumer price index inflation for the month of July increased to 4.1 percent from 3.2 percent in previous month.  

“Apparently the government has planned to finance its deficit through the banking sources, including the central bank,” Pasha said. It will give room to the central bank to continue expansionary monetary policy.”   

Some economists say high public borrowing from the central bank would bridge the fiscal gap on temporally basis.

“I presume that the government borrowed a heavy amount from the SBP to meet its budget related expenditures because of short-term liquidity issues,” said Dr Salman Shah, the former caretaker finance minster.  “It’s a short-lived phenomenon and the amount lent by the SBP is expected to be refinanced by the banks.”  

Shah said the government is presently short of external funding to finance its spending after the US has hold back $300 million worth of Coalition Support Fund.

Government borrowing from the banking system has been estimated at Rs453 billion for the current fiscal, which is significantly higher than revised estimates of Rs199 billion for the last fiscal year.

The government is also budgeted to raise Rs820 billion from external loans and grants to bridge the gap between the receipts and expenditure.