KARACHI - Borrowing by the Pakistan
government from the country's banking system this
fiscal year has been so heavy that it broke the
full fiscal year record, set in June last year, in
only seven and half months.
The government
borrowed 674 billion rupees (US$7.4 billion) from
domestic banks in the period from last July 1 to
mid-February this year, exceeding the 616 billion
rupees it borrowed in the 12 months to June 2011,
according to the central bank.
Pakistan's
total domestic borrowing exceeds its total foreign
debt, while total domestic and foreign debt is
more than $130 billion.
Stagnant foreign
inflows left the government with little option other
than inflation-fueling
borrowing from the banking system that forced the
government to print new money. Annual Consumer
Price Index (CPI) inflation rose in February to
11.05% from 10.1% in January, according to the
Pakistan Bureau of Statistics (PBS).
Continued high government borrowing could
drive inflation even higher and push the fiscal
deficit beyond 4.7% of gross domestic product
(GDP) in the 12 months to June. Local analysts
believe that the fiscal deficit, which has been
projected by the International Monetary Fund (IMF)
will reach 7% of GDP.
Government borrowing
from the scheduled banks in the seven and half
months from July 1 last year was 166% higher than
the 263 billion rupees borrowed in the same period
of the previous fiscal year.
Government
borrowing has crowded out the private sector and
upset monetary management, making it difficult for
the central bank to deliver an effective monetary
policy.
Ironically, the government's
efforts to keep the budget deficit at a manageable
level include hefty increases in fuel, electricity
and edible oil prices effective from March 1. This
will push consumer inflation higher, creating more
trouble for ordinary people, already hit by
soaring commodity prices. Food inflation in
February was 10.58% from a year earlier.
In the first half of this fiscal year, the
government spent $8.55 billion on debt servicing,
according to the central bank. During that period,
the government's expenses exceeded its income by
1,047 billion rupees, or 5% of the total size of
the economy. Some banks are lending two-thirds of
their total lending to the government.
At
the same time, the profits of the country's
private banks - led by Habib Bank Ltd, United Bank
Ltd, Allied Bank Ltd and Muslim Commercial Bank -
rose by 27% last year.
The IMF last month
criticized the central bank for financing the
fiscal deficit directly or indirectly through
liquidity injections via open market operations.
Central bank governor Yaseen Anwar argues that any
decision to stop liquidity injection and financing
the government's budget may result in a downgrade
of the country’s credit ratings and the collapse
of financial institutions.
"Yes, we have
been injecting liquidity and financing the budget
deficit because we do not have choices," The
Express Tribune reported Anwar as telling the
Senate Standing Committee on Finance. "Banks need
to give priority to small and medium-sized
enterprises, agriculture and house financing."
"Pakistan has, some time, to manage its
debt problems and there is no immediate risk of
default. However, failure to deal with underlying
structural weakness like low tax revenues, fiscal
slippages and weak governance in this year will
potentially expose the country to debt problems in
the future", Business Recorder reported local
experts (without giving their names) as saying.
Newly appointed Finance Secretary Wajid
Rana has rejected the IMF projection that the
fiscal deficit will increase to 7%, forecasting
instead that it will be less than 5%. Rana told
the Senate Standing Committee on Finance last week
that government income would be boosted by the
auction of 3-G and 4-G telecommunications
licenses, payment of arrears from the coalition
support fund (CSF) paid by the United States and
its allies in compensation for the use of
facilities in Pakistan, export proceeds and
remittances.
Unofficially, the economic
outlook is very bleak, with the hugely indebted
nation near to a default on both its domestic and
its external debt. Moody's sovereign ratings on
Pakistan imply a significant default probability
over the medium-term. US-based Moody's in December
projected the credit and business conditions in
the country to remain fragile due to the
government's weak fiscal position and the poor
investment climate.
"A higher fiscal
deficit of 7% with double digit inflation will not
allow the [central] State Bank to cut the interest
rate after March," Dawn reported analyst Mohammad
Imran as saying.
The IMF in 2010 halted a
$11.3 billion loan program agreed in late 2008,
with only $8 billion disbursed, because of slow
implementation of fiscal reforms.The program ended
still incomplete in September 2011. The country is
scheduled to pay the IMF around $2.28 billion
between February 1 and December 31 this year. The
central bank transferred around $400 million as
the first installment to the IMF on February 24.
Syed Fazl-e-Haider
(http://www.syedfazlehaider.com) is a
development analyst in Pakistan. He is the author
of many books, including The Economic
Development of Balochistan (2004). He can be
contacted at sfazlehaider05@yahoo.com.
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