Glance at the economy of Pakistan - the unabated monetary growth; CPI picking up a notch; rising yields on government papers coupled, investors disinterest of the longer term deals, and so on and so forth. The current economic backdrop provides a vigilant individual with countless reasons to believe that the interest rate has bottomed out its downward journey, at least for the current fiscal year. And that the economy is set to ride another thorny course.
According to the latest figures released by SBP, M2 grew by 29 percent YoY during 8MFY13 reaching over Rs653 billion on March 15, 2013, as against Rs505.911 billion in the corresponding period of last year. Needless to say, extensive government borrowing is the devil in the room taking its toll on the money roll.
While net government borrowings from SBP took a breather during the period, the borrowings from commercial banks continued to grow incessantly, encouraging the bankers to smartly chuck out the private sector.
In the wake of SBPs FOREX reserves depleting, with huge current deficit and waning capital account, huge government borrowings from the banking system kept widening the parity between NDA and NFA. As of March 15, 2013, net domestic assets stood at Rs787 billion against the net foreign liabilities of Rs134 billion.
Albeit, credit to non-government sector also grew by 65 percent YoY during 8MFY13, the growth was mainly triggered by rising debt streams to public sector enterprises to rescue them from their inherent circular debt crisis. On the flip side credit to private sector witnessed a massive drop of 142 percent - an apologetic yet frequent tale.
With pitiable savings culture in the country, the monetary expansion hugely impacted the currency in circulation which grew by over 41 percent during 8MFY13 hovering at Rs300.48 billion as on March 15, 2013. Resultantly, the subdued inflationary pressure couldn keep itself from bouncing back.
According to informed sources, inept tax collection mechanism, coupled with exorbitant government expenses - wasteful subsidies, exuberant perks and benefits of our leaders, are the chief reasons for inflation, regardless of its financing pattern.
The colossal fiscal deficit hovering at over eight percent of GDP without any foreign flows touching down triggered the government to borrow over Rs900 billion from the banking system during 8MFY13.
Earlier this fiscal year, FBR made an ambitious revenue collection target of over Rs2,381 billion. Later, it reduced the target to Rs2,190 billion.
With eight months of the current fiscal year already passed, the revenue collection stands just above Rs1,000 billion, almost half of its abridged target. Such a huge deficit will definitely put the new government to its toes, as it will kick off its tenure just a month before the end of the current fiscal year.
Amid numerous depressing factors embroiling the economy, IMF loan seems a lifeguard. Love it or hate it, we must have it to improve the macro economic backdrop.
However, the IMF aid would not come as a benediction. It requires a great deal of ground work to meet the criteria. Pakistan will have to implement countless austerity measures - abolishment of tax exemptions, containment of losses incurred by PSEs, widening of tax base, cutting subsidies etc - hence a tough time for the economy henceforth.
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