KARACHI: The government’s borrowing requirements from the banking system are likely to increase in the next fiscal year due to an expected surge in the budget deficit amid higher spending to achieve growth of around 5 percent, analysts said on Friday.
Finance Minister Shaukat Tarin will present the federal budget for the fiscal year 2021/22 on June 11, which seeks higher growth with an emphasis on increasing expenditures.
The government may target 4.8 percent GDP (gross domestic product) and 5.5-6 percent budget deficit for FY2022.
“Bank borrowing target of the government from commercial banks [is likely] to increase,” said a Topline Securities report titled “Pakistan Budget FY22 Preview.”
“Given the estimated fiscal deficit of over Rs3 trillion, we expect the government borrowing from commercial banks to be in range Rs1.3-1.8 trillion and rest will be filled through foreign loans,” it added.
“This will be positive for banks’ balance sheet as lending to government reduces risk weighted assets which in turn improves Capital Adequacy Ratio,” the report further said.
The government continued to borrow from banks to feed its fiscal deficit as the mobilisation from non-bank sources remained low. Its adherence of zero deficit monetisation also forced the government to rely on banks to meet its spending requirements.
The government secures financing from commercial banks through the issuance of short-term Market Treasury Bills and long-term Pakistan Investment Bonds to fund its budget deficit following its agreement with the IMF (International Monetary Fund) that curbs borrowing from the central bank for deficit financing.
The government borrowed Rs2.469 trillion from commercial banks during July 01 to May 21, 2021 for budgetary support. That compared with Rs1.988 trillion in the corresponding period of the last fiscal year.
The government aims to raise development expenditures to induce growth.
One of the key areas of focus to achieve a higher growth in FY2022 is likely to be agriculture, which has a 19 percent share in Pakistan’s GDP.
The government is also expected to give shape to earlier announced subsidy on fertilisers, along with few more steps to enhance agriculture productivity.
“With a focus on higher growth, the government is likely to earmark Rs900 billion for PSDP (Public Sector Development Program) for next year. This is likely to be 38 percent higher compared to FY2021 allocation and 60 percent higher compared to FY2021 utilised amount,” said the Topline Securities report.
The government is likely to set markup interest and defence expenditure targets at Rs3.1 trillion and Rs1.4 trillion, up 4 percent and 9 percent from last year’s budget, respectively.
The government may also earmark funds for tackling Covid-19, to procure more vaccine in the upcoming year. The government has paid $250 million for vaccines in FY2021 and is seen spending higher for the same during FY2022.
All this together is likely to keep pressure on the fiscal balance.
“In wake of robust economic indicators, the government is eyeing 6 percent GDP growth over the next two years, which calls for expansionary measures, including continuing support to the industrial sector in the form of subsidies and other incentives,” said a report released by Taurus Securities.
