Research Analyst
June 18 - 24, 2012

Over the past few decades, countries around the world have gradually moved towards the greater decentralization of fiscal revenue and spending responsibilities. National economic policies have taken an increasingly important role in ensuring macroeconomic stability. Governments have adopted different institutional responses to the difficulties of decentralized decision-making, especially addressing the need to improve policy coordination across levels of governments and contain national borrowings.

Moreover, the government borrowing has some potential advantages as a means for financing part of development spending needs.

Pakistan's federal government borrowings from the banking system (including SBP and scheduled banks) for budgetary support were increased to a record level of Rs1.058 trillion, swelling by 58 per cent during the current fiscal year. The government had borrowed Rs667.283 billion in the corresponding period last fiscal year, showing a healthy growth of 58 per cent or Rs390.782 billion. The unprecedented increase was attributed to rising current expenditures, billions of rupees subsidies being paid on commodities, and slow foreign inflows. The shortfall in foreign inflows, slow privatization process, rising government expenditures, and billions of rupee subsidies on commodities make the government borrow for budgetary support. Low revenue collection and losses of public sector enterprises also lead to high government's borrowings. The power crisis and the precarious law and order situation are still an impediment to business-friendly environment. Hence, there is a need for a cautious approach to keep the inflation expectations around the medium term targets of 9.5 per cent for fiscal 2012-13 and eight per cent for fiscal 2013-14.

Increasing government borrowing is adversely affecting the inflation outlook. Keeping the overall macroeconomic situation in view, the SBP has decided to keep the policy rate unchanged at 12 per cent since October last.

This year the government is unable to receive foreign funding as per expectation, while on domestic side expenditures continue to scale up. So far, the government borrowings for budgetary support include Rs445.144 billion from the state bank of Pakistan (SBP) and nearly Rs613 billion from other scheduled banks in July to May, 2012 compared to Rs382 billion in the corresponding period of last fiscal, depicting an increase of Rs230.648 billion.

The borrowings from SBP posted a surge of 56 per cent or Rs160.154 billion to Rs445.144 billion in May 2012, against Rs285 billion in July 2011 to May 2012. In addition, borrowing from scheduled banks witnessed a massive increase of 60 per cent during the period under review.

Cumulatively, federal and provincial governments borrowing for budgetary support stood at Rs1.059 billion between July to May, 2012 against Rs608.543 billion, showing a surge of 74 per cent or Rs450.573 billion in the corresponding period last fiscal year.

Unlike the federal government, all four provinces retired heavy amounts borrowed from the state bank and elsewhere during the period under review. During the period under review, provinces retired a total of Rs5,687 billion they owed to the central bank. Governments of Balochistan and Khyber Pakhtunkhwa retired Rs15.62 billion and Rs12 billion, respectively, while Sindh and Punjab governments borrowed Rs12.24 billion and Rs9.6 billion, respectively.


Pakistan is still confronting with widening fiscal deficit and unabated debt service charges on account of both external and internal challenges including electricity and gas outages that have restricted the overall growth of the economy. Similarly, insufficient external inflows have resulted in increased reliance of government on domestic resources. It is, therefore, important to revamp the strategies of domestic and external financial resource mobilization through tax and non-tax instruments. Pakistan has witnessed a sharp deterioration in fiscal indicators during the past few years due to the revenue-expenditure gap. The fiscal situation was further aggravated by the domestic and external imbalances together with the deteriorating security environment, persistent inflationary pressures, unprecedented floods in 2010, and massive rains in 2011.


No doubt, Pakistan's monetary policy aims at stabilizing economic growth through a number of channels. It influences the future expectations of economic activity and inflation. A sound fiscal position is important for achieving macroeconomic stability. This occurs through efficient resource allocation and the mobilization of domestic savings. Because of this, the central bank through its monetary policy and strategies plays an influential role.


1. Net Government Sector Borrowing 506.5 1,003.3
a. Borrowing for Budgetary Support 603.3 1,084.4
b. Commodity Operations -101.1 -81.6
c. Others 4.2 0.5
2. Credit to Non- Government Sector 118.7 92.9
d. Credit to Private Sector 107.8 234.8
e. Credit to Public Sector Enterprises (PSEs) 10.6 -142.6
f. PSEs Special Account Debt Repayment with SBP -0.2 0.0
g. Other Financial Institutions (SBP Credit to NBFIs) 0.5 0.7
3. Other Items (net) -143.6 -215.3
4. Net Domestic Assets (NDA) 481.6 880.9
5. Net Foreign Assets 181.1 -272.2
6. Monetary Assets(M2) 662.6 608.7