GOVT BORROWING AT THE COST OF PRIVATE SECTOR

KANWAL SALEEM
(feedback@pgeconomist.com)
Jan 3 - 9, 20
11

In the wake of manifold challenges posed to Pakistan's economy, excessive bank borrowing by the government is hitting hard the future investment by private sector, hindering chances for new job creation and also restricting the capacities for future tax generation from the private sector.

The government's bank borrowing for meeting budget deficit has been estimated at Rs2.261 trillion during the last four-and-a-half-year from 2006-7 to end September 2010-11 and the private sector's credit was far less than the government's bank borrowing.

The International Monetary Fund had reportedly issued a stern warning to Pakistan to take steps to cut its spiraling budget deficit and called for immediate fiscal belt-tightening measures. The IMF withheld $3.5 billion in 2010 from its total $11.3 billion loan package for Pakistan in a bid to pressure the country to take action.

Pakistan Muslim League-Nawaz Chief, Nawaz Sharif has already said at his party's function that the country is being run by printing billions of currency notes every month. According to him, people of Pakistan are being crushed under inflation, joblessness, and social unrest due to high inflation and massive gas and electricity load shedding. Miracles can happen if we break the begging bowl.

In the year 2009, the scheduled banks in the country had sanctioned loan worth Rs49.634 billion for the private sector for setting up industrial units, which was far less than the amount Rs68.464 billion sanctioned for the purpose during the year 2008. The cut in borrowing to private sector is reflection of poor investment climate in the country. Foreign investment too is not coming due to security concerns.

Economic experts told PAGE that high mark-up rates and less availability of cheaper credit for the private sector especially for setting up industrial units or reviving sick industrial units is hindering the future investment.

According to them, the tax-to-gross domestic product (GDP) ratio in the country has declined from 14 percent to 9.2 percent and the projections made by economic managers would be difficult to be achieved.

They believe that excessive borrowing by the government is limiting the chances for borrowing by the private sector and negligible borrowing by the private sector is considered as a dangerous trend in the economy.

The need of the hour is to push up the growth rate up to 7 per cent for the next few years to create new job opportunities in the country. In this regard, the shares of industrial and services sectors need to be increased to enable the economy to meet the future job requirements, they said.

The experts are of the firm views that increase in inflation is also due to higher government's borrowing, resulting in an increase in the cost of capital for the private sector. When the policy rate is increased, it increases the capital cost of the private sector.

In their view, hyperinflation would grip the country and the authorities would be left with no option but to print currency notes in hundreds of billions to run the affairs. Deficit would be out of control, forcing the government to print notes to the tune of around Rs1 trillion. The country is going to witness an unprecedented budget deficit of over Rs1.2 trillion during the ongoing fiscal year and to meet this deficit government would be required to print Rs1 trillion currency notes against Rs600 billion printed in 2008 in this regard, they added.

The private sector doesn't find it feasible to borrow from the banking sector on higher mark-up rate for setting up industrial units. The high cost of capital is also limiting the capacity of the private sector to repay their loans obtained from the banking sector and non-performing loan (NPLs) are rapidly increasing due to the losses in the private sector, they pointed out.

It may be noted that the NPLs continue to surge and NPLs, which were Rs240 billion in credit year 2000 and by the end of September 2010 have reached Rs494 billion. The NPLs to total loans sanctioned by banks have reached 14 per cent by the end of September 2010 from 8.3 per cent of the total sanctioned loans in 2005. Due to the provision imposed by the SBP for setting aside equivalent amount of NPLs from profits of banks, the net NPLs to net loans have been recorded at 4.5 per cent by the end of September 2010.

The NPLs of the Public Sector Commercial Banks (PSCBs) have been recorded at Rs123 billion, Local Private Banks (LPBs) Rs331 billion, Foreign Banks (FBs) Rs8 billion, Specialised Banks (SBs) Rs32 billion, making total NPLs of Rs494 billion by the end of September 2010.

In the present situation, the economic managers need to focus on slashing budget deficit by reducing non-developmental expenditures and unnecessary spending in the name of developmental activities. Pakistan is blessed with enormous potential and by paying attention on core issues, desired results could be achieved for putting the economy back on track.