Govt borrows Rs1.061 trillion from banks in July-March: SBP

KARACHI: Government borrowing from the commercial banks for budgetary support increased by Rs1.01 trillion during eight and half months of the current fiscal year, central bank data showed on Tuesday, as revenue shortfalls and slowdown in reform process of loss-making state-owned enterprises continued to weigh on public finances.
The federal government borrowed record Rs1.061 trillion — a 21-fold rise from the banks — between July 1, 2014 and March 13, 2015 against Rs50.654 billion during the same period last year.
“The government remains the single largest borrower in the market. The instinct of the political leadership seems to indulge in borrowing to finance fiscal operations rather than to broaden the tax base,” said an economist.
The planned mega infrastructure projects like motorways are expected to push the government borrowing to new highs during the current fiscal, economists said.
“In the foreseeable future, it is unlikely that the government borrowing from the banking system will come down sharply because the fiscal deficit in absolute terms is likely to remain large,” said Sakib Sherani, CEO Macroeconomic Insights. “Privatisation proceeds from strategic transactions like PIA (Pakistan International Airlines) will make a difference, but until tax revenue is mobilised from non-paying sectors, the government borrowing needs are unlikely to remain high.”
The government has formulated a medium-term strategy to implement fiscal reforms, ranging from improving revenue generation to privatise public sector loss-making enterprises like PIA and Paksitan Steel Mills. It is also started the process of selling its stakes in Habib Bank Limited. These divestures would provide budgetary financing to the government.
Economists believe that delay in privitisation proceeds coupled with a slower growth in revenue collection would make it hard for the government to meet its fiscal deficit target of 4.9 percent for FY15.
State Bank on monetary aggregates data showed that the government has reduced its reliance on central bank financing — means the government is no more dependent on the lender — due to improvement in external inflows.
The government retired Rs430 billion to the State Bank during July-March FY15 as against the borrowing of Rs651 billion last year. It is diversifying financing sources of the budget deficit and preferring to build cash buffers through issuance of market treasury bills and Pakistan Investment Bonds.
Former governor SBP, Dr Muhammad Yaqub said that traditionally, and theoretically, government borrowing from commercial banks was considered to be less inflationary than borrowing from a central bank.
“Borrowing from a central bank created high powered money while government borrowing from commercial banks sterilised deposit that could be used to finance the private sector,” Yaqub said. “The government borrowing from commercial banks additionally crowds out the private sector and makes the balance sheets of commercial banks highly vulnerable due to concentration of government paper in its asset portfolio.”
Credit to the private sector fell from Rs151.2 billion during July-March FY15 from Rs292.7 billion in July-March FY14.