The State Bank of Pakistan has urged for broadening of tax net and strict implementation of the principles of the Fiscal Responsibility and Debt Limitation Act (2005) in letter and spirit to restrict government borrowing from the SBP. The SBP has also indicated that failure to do so would only increase the economy's reliance on foreign borrowings, with its own complications and risks.
According to SBP Monetary Policy Statement (MPS), the government has increased its reliance on the SBP to finance the budget deficit, and had borrowed Rs 220 billion during the period from July 1 to September 24, 2010 (FY11), according to provisional figures, compared to Rs 126 billion during the corresponding period of last year.
"This is against the spirit of macroeconomic stabilisation, since the elimination of government borrowing from the SBP was one of the main commitments of such a program," the central bank said. Moreover, given the heavy borrowings from the scheduled banks over the last couple of years through short-term Treasury Bills (T-bills) there is a significant 'rollover risk' during FY11.
Fresh borrowings from the banking system during FY11 will increase these borrowings even further, especially if the spending requirements increase, and there is no commensurate increase in tax revenues. The year-on-year growth of 7.5 percent in the Federal Board of Revenue's (FBR) tax revenues during the first two months of FY11 compared to the budget target of 25.6 percent for the full year does not instil much confidence, the SBP said.
In these circumstances, the State Bank said, most of the expansion in broad money in FY11 is expected to be driven by a considerable growth in the Net Domestic Assets (NDA) of the banking system, accompanied by a possible decline in the Net Foreign Assets (NFA), which does not bode well for the inflation outlook. Thus, there may be possible liquidity pressures in the market.
The SBP said it stands ready to manage the system-wide liquidity and maintain the short-term interest rates, consistent with its monetary policy stance. However, more is expected from the fiscal authority to articulate and implement a coherent strategy, and the market continues to look to government for greater fiscal discipline to allay expectations of rising inflation.
The key features to reduce government borrowing will have to include broadening of the tax base, adhering to the principles of the Fiscal Responsibility and Debt Limitation Act (2005) in letter and spirit and restriction of government borrowing from the SBP, the MPS said.