Suboptimal use of bank borrowings

Functioning as financial intermediaries, banks collect deposits from all categories of savers throughout the country and place them at the disposal of entrepreneurs to run and promote their businesses. The level of their efficiency to perform this crucial job is, therefore, very important to create jobs and spur growth in an economy. However, while this was their mainstream business, governments also occasionally joined the field to exploit their potential for funding their fiscal needs. With the passage of time, it became a regular feature for the governments to borrow from the banks whenever they were unable to mobilise enough resources for their expenditure requirements and other sources of finance were not available to bridge the gap. Such a practice, though not very desirable, is now, more or less, largely acceptable if the level of government borrowings from the banking system was contained within reasonable limits and the private sector is not starved of its genuine credit requirements. This background was necessary to demonstrate that banking system in Pakistan has, to a large extent, deviated from its traditional function and more or less, relegated its main role as a facilitator and financier of private sector to the background to provide the required resources to the government in the recent past and such a policy shift, if continued over a longer period, could have highly negative consequences for the economy. It must, however, be mentioned that outwardly the status quo or continuing with the present arrangement is beneficial both for the banks and the government. For instance, banks now have the opportunity to invest more in risk-free, high yielding government securities and earn excessive profits, without undertaking feasibility studies, monitoring the private sector projects, etc, for their equity holders who reward the bankers with high salaries and increasing perks and privileges to manage the show. Governments also do not have to make extra efforts to mobilise tax resources and cut expenditures and if the fiscal gap is not filled through normal domestic and external flows, there was no need to worry. Instead of belt tightening or undertaking of harsh measures, the profligacy could be continued with the help of bank borrowings or printing of more currency. In the budget for 2011-12, for instance, aggregate resources were estimated at Rs 2463 billion and overall expenditures were projected at Rs 2767 billion. The deficit of Rs 304 billion was to be financed from bank borrowings. With a sharp increase in expenditures and lower availability of resources including a steep fall in external resources, bank borrowings for budgetary support are now estimated at Rs 939 billion or more than three times higher than the original projections. Most of the analysts are of the view that even this excessively high level of bank borrowings was underestimated due to the likely adverse fiscal outcome in the next two months. So far as the recently released budget document for the year 2012-13 was concerned, it is generally agreed that resource availability has again been overblown and expenditures underestimated to show a better picture of the fiscal position in an election year. Bank borrowings for budgetary requirements have been projected at Rs 484 billion which again seem to be grossly underestimated due to the reluctance of federal and provincial governments to levy more taxes, lack of proper control on expenditures and projected over-reliance on external resources. In all probability, these will exceed one trillion rupees in FY13. It seems that with the excessive involvement of advancing credit to the government sector, the banks in Pakistan have largely ceased functioning as financial intermediaries (also stated as such by the State Bank in its documents) between savers and private investors and are largely happy to compete with the National Saving Centres to mobilise deposits to be placed at the disposal of the government to finance its budget deficit. This situation, to say the least, is very harmful for the economy of the country. Not only does such a practice provide a luxury or a licence to the government to continue with the fiscal mismanagement of the country, it also deprives the private sector of its credit needs, retards the growth process, and depresses business activity, leading to higher unemployment and poverty level in the country. Although, there were a number of factors responsible for the recent dismal economic growth, scarcity of bank credit to the private sector could be one of the main reasons for sluggish growth. Also, such a distorted policy would continue to fuel inflationary pressures by adversely affecting the level of availabilities in the economy and, at the same time, force the State Bank to continue with its tight monetary stance. The negative effects could also spill over to the foreign sector. Those who argue that the State Bank could refuse to accommodate the government's financial requirements under its revised Act also need to realise the limitations of the monetary policymaking authority of the country. Everybody will be able to see these limitations if ever a central bank Governor dares to bounce a cheque of the government in an act of sheer desperation.