Jan 28 - Feb 03, 2008

The caretaker government faces multiple problems, all these are interlinked and the result of overall economic slowdown. The situation seems to be getting from bad to worse. Political uncertainty has put Pakistanís economy enjoying resilience for more than five years under extreme pressure. Since the caretakers have limited time at their disposal they are not in a position to take any decision having long-term implications. However, it is becoming evident that they have to take a few difficult decisions, including containing government borrowing.

According to the State Bank of Pakistan figures, the net government sector borrowing from banking system touched Rs 244 billion in January 2008 compared less than Rs 64 billion end December 2006. The SBP statistics shows that the government budgetary borrowing stock on June 30, 2007 stood at Rs 810 billion. After the first half of the current fiscal year, it raised to Rs 244 billion, pushing the overall government budgetary borrowing stocks to Rs 1.054 trillion.

At the beginning of current financial year was anticipated that revenue collection would remain under pressure and expenditures would be high due to general election to be held in January 2008. However, the situation turned extremely volatile due to persistent attacks on the security personnel and also due to assassination of Benazir Bhutto. The ultimate result is that government borrowing has exceeded the target and may go further up as the ground realities remain far from satisfactory.

VOLATILE INTERNATIONAL OIL PRICES: One of the key factors for lower than expected revenue collection is hardly any collection under Petroleum Development Levy (PDL). While international crude oil prices are touching record high the decision not to pass on the full impact to the consumers is upset the equilibrium. The government also claims to be paying billions of rupees price differential to oil marketing companies on POL products.

However, some of the analysts do not agree that the government is paying any subsidy on POL products. They say the government is still collecting billions of rupees sales tax on POL products.

IMPORTS SLOWDOWN: Another factor contributing to slowdown in revenue collection is relatively lower imports. The government collects various taxes at import level i.e. import duty, sales tax, advance income tax etc. Any reduction and/or less than targeted imports affect overall tax collection. For example all sort of economic activities in the country remain suspended for nearly 15 days during month of December 2007 due to Eid and three days mourning after the assassination of Benazir Bhutto. All the government offices, banks and the central bank remained closed for a record number of days in a particular month.

Baring all adversities the biggest blow to the economic activities has come as long hours of electricity load shedding and virtually no supply of gas to industrial units. Since productive activities remain suspended for long hours production of various products also remained low, affecting revenue collection particularly sale tax. The widening gap in demand and supply also provided an opportunity to the traders to hoard and sell products at inflated prices, adding to miseries of masses.

A very important but less talked about factor necessitating higher government borrowing is the massive reduction in the charges received from the US/allied forces operating in Afghanistan for providing logistic support. While the US operation in Afghanistan continues entry of the militants into Pakistan has enhanced attacks on security personnel.

PRIVATE SECTOR BORROWING: According to a report by AKD Securities, the net credit outstanding to the government sector at end November 2007 amounted to Rs 1.05 trillion, compared to the corresponding period 2006 showing over 19% growth. This represents 27.5% of net outstanding credit at end November 2007, which is slightly above the recent historical share of government borrowing. Analysis the central bank credit to the government sector reveals that credit has increased by just 2.5% at November end, however, in five months of the current financial year credit has increased by 47%.

In contrast, private sector credit to the government has actually displayed negative growth 5-month period on YoY basis, private sector credit to the government has increased by 38% at end November 2007. Scheduled banks have displayed keen interest in investing in government securities, raising their share from Rs 610 billion in June 2007 to Rs 906 in November 2007, a rise of 48.5% YoY. The analysts term this a fitting reflection of slower loan growth and rapid deposit accretion experienced by the banking sector in 2007. On a different note, SBP credit to the government has risen in five months which needs to be looked into.

According to some critics part of the rise in government borrowing has been attributed to payment of subsidies on various products. The import of wheat has been notified as one of the reasons part of the reasons. They also say that people will have to pay for bad decisions of the government. Pakistan has never suffered wheat crisis of such a magnitude has the regime not rushed for wheat export to benefit a few. As a result, Pakistani wheat is now available almost all over the world, but in Pakistan. It is†ironic that despite claiming bumper crop last year, the regime has imported near half a billion dollar wheat to meet the local demand. However, wheat flour remains beyond reach of common man else he/she has to stand in queue for hours to get a 10 kilogram bag.


The total liquid foreign reserves held by the country stood at $ 15,208.2 million on 19th January, 2008. The break-up of the foreign reserves position is as under:

i) Foreign reserves held by the State Bank of Pakistan:

$12,965.4 million

ii) Net foreign reserves held by banks (other than SBP):

$2,242.8 million

Total liquid foreign reserves:

$15,208.2 million