State Bank of Pakistan was quite upbeat about the trend in government borrowings from the banking system for budgetary support at the time of release of its Third Quarterly Report in July, 2014. Large inflows into Pakistan Development Fund (PDF) received as a capital grant from a friendly country had helped reduce government borrowings from the SBP quite significantly and the authorities were able to contain fiscal borrowings from SBP within the limit agreed with the IMF for end-March, 2014. On a cash basis, the government had borrowed Rs 436.9 billion for a budgetary support from the banking system, which was almost half the amount borrowed in the corresponding period of FY13. A sharp reduction could also be attributed to other government efforts to contain budgetary deficit and the availability of non-bank funding. A reduction in government borrowings motivated the commercial banks to shift their focus towards private sector, with the result that private sector credit expanded as much as 10 percent during period of July-March, 2014, which was more than double the growth realised during the same period last year.
The situation seems to have changed drastically during the beginning of the current fiscal when Federal and provincial governments borrowed a huge amount of Rs 186.5 billion for budgetary support from the banking system in July, 2014 which was Rs 30.4 billion or some 19 percent higher than the same month last year. Out of this, federal government borrowed Rs 164 billion, including Rs 107 billion from the SBP and Rs 58 billion from the scheduled banks while provincial governments obtained Rs 21.6 billion from the SBP in July, 2014 against retirement of Rs 16 billion in July, 2013. Provincial governments' borrowings from scheduled banks, however, stood at zero in the first four weeks of this fiscal year compared to the borrowings of Rs 6 billion in the corresponding period last year.
A sharp increase in government borrowings from the banking system during July, 2014 could be attributed largely to less than targeted revenue collection, rising expenditures and higher subsidies. Obviously, as revenue resources were grossly inadequate to meet the required expenditures and non-banking sources of finance were unable to fill the huge gap, government had no other option but to rely heavily on the banking system to provide the necessary financial support to bridge the gap. Even the provincial governments, which were supposed to generate surpluses have performed poorly during July, 2014 as Sindh government borrowed Rs 8 billion, KP Rs 5 billion and Punjab Rs 11.7 billion from the SBP during the month. Balochistan was the only province which retired Rs 3 billion during this period. The government may be banking on foreign inflows on account of Sukuk bonds, privatisation proceeds, Coalition Support Fund (CSF) and loans from other sources during the remaining part of the year but all these sources are either only one-off or would increase external indebtedness for the country enormously. As such, it is high time that government must redouble its efforts for fiscal consolidation, which would require an effective and broad-based tax system with no exemptions and a strict control on unproductive expenditures, particularly those related to PSEs and subsidies to the energy sector to contain the rising budgetary borrowings within reasonable limits. Failing this, inflationary pressures could increase enormously, forcing the authorities to depreciate the exchange rate of the rupee and tighten monetary policy further. Also, the current IMF programme could be in jeopardy due to a breach of the conditionalities and investors' confidence may suffer a setback. As part of the efforts to ensure sustainable fiscal position, the FRDL Act was promulgated in 2005 and the SBP Act amended to keep a check on government borrowings but such legal provisions have not been able to restrain the government from overspending and over-borrowing from the banking system. We know the compulsions of the government on the fiscal front when the political atmosphere is so much charged, honeymoon period was over so soon and survival of the present dispensation is at stake but the matter of fiscal mismanagement is so important that it cannot be relegated to the back burner under any circumstances. The fiscal outcome, particularly a sharp rise in government borrowings from the banking system in July, 2014, should at least serve as a warning that the government needs to be much more vigilant in this particular area during the remaining part of the year in order to achieve the prescribed targets and stabilise the economy.
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