Govt borrowing up at Rs3.77trln in seven months

KARACHI: Government borrowing from the State Bank of Pakistan (SBP) surged fourfold in the first seven months of the current fiscal year, as it increasingly resorted to the central bank for financing to plug the budget hole.

The SBP’s data showed that the government borrowed Rs3.77 trillion from the SBP during July 1, 2018 to January 18, 2019, compared with Rs870 billion in the same period last year.

However, the government retired Rs3 trillion debts of commercial banks during the period under review.

The government continued to borrow heavily from the central bank, which was against the limit of zero quarterly borrowing prescribed under the SBP Act.

The reliance on the SBP borrowing became more pronounced since the government faced shortfalls in tax collection.

The economy is struggling from severe pressure on its public finances. The budget deficit is set to reach 6.9 percent of gross domestic product in FY19, according to the International Monetary Fund (IMF) estimates.

The budget gap has to be reduced within a range of four to five percent of GDP, the IMF advised.

The other reason behind a rise in the SBP’s borrowing has been the commercial banks’ reluctance to invest in government securities on higher interest rates’ expectations.

A small amount of Rs22.5 billion was accepted in the last Pakistan Investment Bonds auction held on December 26, 2018.

The government has increasingly resorted to the central bank since the end of last IMF programme (in October 2016), and borrowing from the SBP now stands at Rs7 trillion, up Rs5.5 trillion since FY16.

Borrowing from the central bank would be equal to printing of currency, which was inflationary in nature. Borrowing from banks (through PIBs) would result in lengthening of the government’s debt profile. A shorter debt maturity profile has higher re-pricing risk, according to a report published by the Topline Securities last week.

Borrowing from the SBP would have an impact on the rate of inflation with a time lag.

The central bank’s data showed that the private sector’s borrowing during this period rose to Rs506 billion from Rs216 billion a year ago.

The surge in bank lending to the private sector indicated that economic activities were boosting up despite monetary policy tightening.

Increased capacities and activity drop up working capital loans. Moreover, businesses continued to take long-term positions and borrowed considerably from banks to finance their capital expenditures.

The SBP also said that borrowing by the public sector enterprises (PSEs) was sharply higher compared with the same period last year.

The PSEs borrowed Rs152 billion, compared with Rs75 billion in the corresponding period of last year.