Few renowned economists have been lately lamenting the abnormal growth in government borrowing from SBP in this fiscal year, terming it a big cause of concern. Either the basic knowledge of financial accounting is missing or it is a deliberate effort to read things out of context.

On the face of it, government borrowing from SBP stood at Rs3.86 trillion in year to date (1st Jul18- 1st Feb19) which is more than five times the number (Rs708 bn) in the same period last year. The argument being presented is that central bank borrowing is inflationary and unsustainable. In isolation, the argument is correct, but it should be based on effective increase in borrowing from the central bank.

In the last IMF programme, there was a condition of net zero SBP borrowing on quarterly basis; in order to meet it, the government in 2014-15 shifted from central bank to commercial banks for deficit financing. However, the system liquidity is limited and to fill in the gap, for excess demand by government, commercial banks started borrowing from central bank (reverse OMO). Banks, after having a margin (around 0.5%) on SBP borrowing, kept on lending to the government.

Banks in the process made easy money while government had to pay excess cost. The IMF kept a blind eye on this accounting gimmick, as on paper, the target was met. In essence, the adverse effect of central borrowing was on the economy, but the window was well dressed.

The PTI government, right after coming into power started correcting this anomaly, by shifting the central bank borrowing routed through commercial banks to the SBP directly, and in the process saved extra 0.5 percent cost to the fiscal debt servicing. The OMO injection was Rs1,460 billion as of 29th Jun 2018 which changed to OMO mop up of Rs1,500 billion on 1st Feb 19 - on net basis, Rs2,960 billion borrowing shifted back to SBP.

Thus, subtracting this amount from Rs3.86 trillion, the incremental SBP borrowing between Jul18 to Feb19 stood at Rs903 billion. The number was Rs354 billion and Rs1,029 billion in the corresponding period of FY18 and FY17 respectively. This clearly shows that borrowing from SBP this year is less than in the similar period in FY17. Yes, it was a bit low in FY18, but that was due to higher fiscal borrowing from external sources.

Now, with the IMF programme zeroing in, the government perhaps is reverting to previous years’ trend. In latest T-bill auction, government fetched Rs2.1 trillion from commercial banks. And to meet that excess liquidity required by commercial banks for lending to government, SBP injected Rs830 billion yesterday through reverse OMO. The OMO mop up was Rs1,198 billion on 13th February which will be changed to OMO injection of Rs830 billion on 15th February - a net effect Rs2,028 billion. Thus, the government borrowing from SBP, in weekly M2 release (to be published on 22nd Feb) will be down from Rs3.86 trillion to around Rs1.8-1.9 trillion.

The point is to give numbers the right perspective. The problem of excess government borrowing from domestic banking system (commercial plus central bank) is same today as it was two years back. The solution is to lower the fiscal deficit and till that time, by shifting to external borrowing. Rest, there is no need to pay any heed to abnormal accounting numbers.