The State Bank on Thursday advised the government to amend the Fiscal Responsibility and Debt Limitation Act, 2005 to incorporate appropriate provisions to restrict the debt monetization. State Bank Governor Dr Shamshad Akhtar expressed serious concern over the rising government budgetary borrowing, which reached Rs 544.9 billion during the current fiscal year.
Addressing a press conference, Shamshad said that most countries have disallowed government to borrow from central banks to allow smooth monetary transmission, while averting the inflationary consequence of debt monetization.
Presently, the government has kept borrowings from the central bank out of the ambit of this legislation, which has eroded the fiscal discipline and diluted the impact of the Fiscal Responsibility Act. It is estimated that up till now the government would have financed around 80 percent of its fiscal deficit for FY08 from SBP borrowings, she added.
However, real economic costs of the central bank borrowings cause enormous inflationary pressures, burdening businesses, industry and public at large. So the government is best advised to launch a programme of scaling the SBP borrowing down over next few years, while not relying anymore on the central bank financing. This will infuse greater fiscal discipline.
She said that budget deficit is projected to be significantly higher as compared to the original budgetary estimates for FY08. It had reached Rs 356 billion by end December 2007 against the full year budgeted estimate of Rs 399 billion and now it has exceeded the budgetary target by a wide margin.
Rather than retiring its borrowings from the central bank, as mutually agreed at the beginning of FY08, the government borrowing during July 1, 2007 to May 19, 2008 reached Rs 544.1 billion.
Stock of outstanding Market Related Treasury Bills (MRTBs), an instrument through which government borrows from SBP, has reached Rs 945.9 billion (almost 9.4 percent of GDP); highest ever in Pakistan's history and more than double of last year's level of Rs 452.1 billion, she added.
She said that the increase in policy rate has been necessitated by the persistent and excessive government borrowing from the SBP to meet the financing requirement of the budget deficit and stock of government borrowing from SBP is more than double the last year level.
In order to offload this huge debt to the scheduled banks, increase in policy rate will act as a critical measure to induce scheduled banks to participate actively in T-bill auctions, which have been mostly unsuccessful in mobilising receipts for the government in recent past.
This step will also help in pushing up the low and declining real lending rates necessary to curb the demand pressures and decelerate the current rapid rise in inflation.
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Percent growth (YoY) 29-Dec-07 10-May-08
Govt. borrowings from SBP 13.6 104.4
As percent of GDP Jul-Dec Jul-Apr
Trade deficit 3.7 7.6
Current account deficit 3.6 7.3
Fiscal deficit 3.6 N.A
Rupee against US dollar (%) Jul-Dec Jan-May 21
Exchange rate depreciation 2.7 10.8
percent growth Jul-Dec Jan-Apr
Import growth 12.9 55.5
Change in int'l commodity prices -
Food index* 16.5 18.7
Metal index$ -17.6 22.4
Energy index No 29.6 23.0
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-- Commodity Food Price Index, 2005 = 100, includes Cereal, Vegetable Oils, Meat, Seafood, Sugar,
BANANAS, AND ORANGES PRICE INDICES: $ Commodity Metals Price Index, 2005 = 100, includes Copper, Aluminium, Iron Ore, Tin, Nickel, Zinc, Lead, and Uranium Price Indices
-- Commodity Fuel (energy) Index, 2005 = 100, includes Crude oil (petroleum), Natural Gas, and Coal Price Indices.
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