Rs 58 billion purchasing power hike due to fiscal year 2008 first quarter deficit financing

The government sector, comprising Federal Government, Provincial governments and commodity operations of various government departments, generated additional purchasing power in the economy worth Rs 58.7 billion during the first quarter of FY08 (July 1 to September 29) leading to inflationary pressures felt by all segments of population throughout the country.
This was revealed in the monetary data released by the State Bank on its web on October 9, for the week ending the first quarter of FY08 on September 29, 2007. Actual borrowing for budgetary support by the Federal and Provincial governments during this period amounted to a much higher figure of Rs 79 billion.
However, the impact of this huge budgetary borrowing was reduced to net government borrowing of Rs 71 billion as the government departments paid back Rs 8 billion to the banking sector borrowed earlier on account of commodities procurement of which the main commodity presently is wheat.
The good thing, however, was that all budgetary borrowing took place courtesy the scheduled banks as the central bank's accounts showed a net retirement of credit worth about Rs 9 billion during the period under report. In the corresponding period last year, following a reverse trend, net budgetary borrowing of the government from the central bank had amounted to Rs 60 billion, whereas accounts of scheduled banks showed a net retirement of government credit totalling some Rs 20 billion.
The behaviour showed that last year the borrowing element of government more inflationary in nature than in the current year though volume of borrowing was higher and crowded out somewhat private sector.
As against the government sector, bank credit availed by the non-government sector showed only a negligible growth. Still surprising, within it, was the fact that credit availed by private sector proper showed a net retirement of Rs 4 billion which was in sharp contrast with Rs 37 billion worth of borrowing made in the corresponding period of FY07.
Public sector enterprises (PSEs), however, continued borrowing from the banking sector like the government, and ended up borrowing about Rs 4 billion during the period compared with relatively smaller borrowing of Rs 2.7 billion in the corresponding period of last year.
Non-government sector, therefore, exerted nil impact on fresh money during the year so far. Apparently that is symptomatic of much less economic activity in the economy which should be a matter of concern for the managers of the economy.
Since net foreign assets (NFA) of the banking system showed a depletion of foreign assets worth some Rs 23.5 billion (more foreign payments than receipts) and Other Items (net) or OINs of the banking system showed a net growth of Rs 11 billion (more other assets than other liabilities), the two factors together exerted a net contraction impact on money supply of about Rs 12 billion.
When this contraction impact was adjusted to increase in money supply on account of budgetary borrowing of the government, it resulted in net increase in liquidity in the economy of about Rs 58 billion, entirely representing non-productive expenditure, part of which though might have been spent on development projects mostly of infrastructure nature which would have a dampening effect on prices, if any, after these structural facilities favourably impact the production process after some passage of time.
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