Excessive borrowing from banks

A news item in the "Business Recorder" on 6th December, 2011 has confirmed once again that government borrowings from the banking system have touched alarming levels. According to the data released by the State Bank, borrowings for budgetary support by the Federal and provincial governments have registered a jump of Rs 363 billion or 105 percent to Rs 707.8 billion as on November 18, 2011 as compared to the borrowings of Rs 345 billion in the same period last year. However, as a matter of policy, the central bank has been shifting these borrowings to scheduled banks by selling more treasury bills and this policy shift has resulted in reducing borrowings from Rs 265.5 billion to Rs 61.6 billion from the State Bank and a massive surge in borrowings from scheduled banks from Rs 79.3 billion to Rs 646.1 billion during this period. It was also revealed that the Federal government was the major borrower from the banking system during this period. It borrowed Rs 640.3 billion up to November 18, 2011 for budgetary support as compared to Rs 355.3 billion in the comparable period last year. The reasons for such a disturbing situation are not hard to seek. The main factor responsible for the rise in government borrowings from the banking system appears to be an abnormal increase in current expenditures brought about by the worsening security situation and the rise in subsidies including increasing demands from the loss-making PSEs to fund their deficits in order to keep them functioning. We say this because on the revenue side, the government has been able to collect a record level of Rs 640 billion tax, or higher by 28 percent from last year, during the first five months of the current fiscal year but even this higher collection has not been able to enable the government to contain its borrowings from the banking system. In its monetary policy statement released on 30th November, 2011, the State Bank had referred to the issue by saying that "excluding the issuance of government securities of Rs 391 billion to settle the circular debt and commodity loans, the government has borrowed Rs 255 billion from scheduled banks and Rs 62 billion from SBP during 1st July-18th November, 2011 to finance its current year's budget deficit." It had also emphasised that the government needs to ensure that all or a major part of budgeted foreign inflows materialise as soon as possible to contain the rising budget deficit. Another reason for the increase in government borrowings from the banks could be stagnation in non-government borrowings due to the fall in returns on National Saving Schemes offered by the National Saving Centres. Anyhow, whatever the reasons, such an unhealthy development could have serious consequences in terms of price stability, exchange rate of the rupee, interest rates, flight of capital, debt servicing in future, poverty level in the country etc. While the commercial banks are investing in risk-free government paper and earning huge profits without much effort, they are no longer keen to extend credit to the private sector and this could adversely affect the growth rate and employment creation. The SBP is facing a dilemma. Under its present Act, it could prescribe limits on the borrowings of the Federal and provincial governments consistent with certain important macroeconomic objectives but if it strictly adheres to its mandate, the government would be faced with very difficult choices and the Central Board of the State Bank may find itself under severe pressure of complying with the wishes of the Federal Government. As it is, the government does not even seem to be very much bothered by the Fiscal Responsibility and Debt Limitation Act which was passed by the National Assembly in 2005. This is sad and needs to change. In particular, the government has to make major moves to restrain expenditure and sharply increase its revenues in order to lower its fiscal deficit and reduce its dependence on various sources of finance. Continued high reliance on foreign and domestic sources of borrowings would only increase our debt servicing and narrow our options in the future. It is good that tax collections have shown a healthy growth this year, but obviously much more needs to be done in the fiscal area to stabilise the economy and achieve major macroeconomic objectives. Copyright Business Recorder, 2011