Excessive government borrowing fuelling inflation: Shamshad addresses FPCCI members

Government budgetary borrowing from the State Bank has reached historic level of some Rs 334 billion during the current fiscal year and the government's reliance on bank borrowing is fuelling inflation, said Shamshad Akhtar, Governor, State Bank of Pakistan on Saturday.
SBP governor says although the government has assured that it will retire Rs 334 billion borrowing during the next two to three months, however, the rising trend is a negative sign for the economy:
Addressing members of Federation Pakistan Chamber of Commerce and Industry at Federation House, she said the government is getting more borrowing due to mounting budgetary expenditures. She said although the government has assured the State Bank that it will retire this borrowing during the next two to three months, however, the rising borrowing is a negative sign for the economy.
"Federal government would retire its borrowing in the April or May after the issuance of Global Depository Receipts, as presently the external inflows are not sufficient," she added.
She said rising fiscal and current account deficits along with excessive government borrowing prompted the central bank to raise its key policy rate. "Had we not tightened the monetary policy, inflation would have hit double-digit and all economic indicators slip into negative zone, she observed. However, tight monetary policy will surely help contain inflation levels, she added.
She said the SBP already has realised that some steps of monetary policy could hurt the industry, however the data of economic indicators and inflation for December forced the central bank to take bold steps.
The State Bank recognises the problems being faced by domestic industry. The central bank is taking a number of measures for the benefit of the industry and the introduction of new Long Term Financing Scheme is step towards that direction, she said.
She dispelled the impression that the consumer financing was hurting financing activities vis-à-vis other sectors and said that textile sector has borrowed some Rs 64 billion during the current fiscal year as compared to some Rs 44 billion during the same period last fiscal year. Recent monetary tightening by the State Bank was carried out to contain macroeconomic imbalances which are creating inflationary pressures in the economy, she said.
Loans to exporters under export finance facility (EFS) at 7.5 percent during fiscal year 2008 stood at Rs 140.3 billion as per the latest data available upto January 26, 2008 as against Rs 133.3 billion extended as on January 26, 2007, she said.
She said the instructions regarding the provision of bank financing by the commercial banks for procurement of wheat by the functional flour mills during wheat procurement season 2008 shall be issued in consultation with the Ministry of Food, Agriculture & Livestock. However, borrowers from private sector who availed of bank financing for procurement of wheat during last year, having failed to retire their loan by January 31, 2008 would be penalised.
She said that slow supply is the basic reason behind rising inflation. The supply is insufficient due to negative attitude of wholesalers and distributors. She urged business community to present the real picture of trade scenario and avoid misguiding public regarding monetary policy.
She said current account deficit is increasing due to the rising oil bill, which have been calculated some 930 million dollar per month. She said that increasing oil imports is an indication that the industry is growing at a fast pace. FPCCI President Tanvir Ahmed Sheikh, Zubair Tufail, Shakeel Ahmed Dingra, Engineer M A Jabbar and others also spoke on the occasion.