FISCAL DISCIPLINE VITAL FOR ECONOMY

MOHAMMED ARIFEEN
(feedback@pgeconomist.com)

July 16 - 22, 20
12

The special performance audit report on Fiscal Responsibility and Debt Limitation Act 2005 disclosed that the government has missed all core objectives enclosed in the Act, resulting in a situation where people have started losing confidence in the economy.

According to the summary issued by the State Bank of Pakistan, the government's total borrowing from both the SBP and commercial banks rose to Rs2.999 trillion - higher than the loans to the private sector i.e. Rs2.760 trillion.

The State Bank of Pakistan has reported that the federal government borrowed Rs1.28 trillion to finance the budget deficit during the fiscal year 2011-12. In 2008, when the new government came to power, its borrowing stood at Rs519.9 billion.

The State Bank reported that the government borrowing from the scheduled banks in first seven and half months of the fiscal year 2012 crossed even the borrowing it made during the entire fiscal year 2011.

The provincial governments have been borrowing heavily from the State Bank despite the fact that they are receiving over 57 per cent revenue from the federal government. Political observers believe that the provincial governments are borrowing from the SBP to complete past projects or launch new ones to attract voters in the next elections.

As compared with the high borrowing from State Bank, all four provinces have borrowed Rs 42 billion from SBP and Rs 10.25 billion from other scheduled banks during July 2011 to June 8, 2012. Out of four provinces, two provinces have retired their lending, while two have got new borrowing to meet their financial requirements.

Massive borrowing total debt and liabilities crossed Rs12 trillion a year ago compared to Rs6.5 trillion when the government led coalition government took over. Domestic debt, which was at Rs3.9 trillion, rose to Rs7.5 trillion up to May this year.

The government's failure to increase revenue generation and reduce expenses created a fiscal gap of 5.7 per cent of the GDP.

Pakistan government debt to GDP Pakistan recorded a government debt to GDP of 60 percent of the country's Gross Domestic Product in 2011.

From 1994 until 2011, Pakistan government debt to GDP averaged 70.6 percent reaching an all time high of 87.9 percent in December of 2001 and a recorded a low of 54.9 percent in December of 2007.

Broadly, Government debt as a percent of GDP is used by investors to measure a country ability to make future payments on its debt, thus affecting the country borrowing costs and government bond yields.

Analysts are of the view that besides throwing out private sector the borrowing from commercial banks would increase the cost of the government despite cut in discount rate by the State Bank of Pakistan. They say that the government's borrowing from the banking sector would be much higher in the current fiscal year if planned foreign inflow did not take place.

Some bankers state that in the present unfavorable economic and political condition the government has no alternative but to continue borrowing either from State Bank directly or indirectly. It is believed that as long as the government remains in the money market as the largest borrower, the private sector will never be able to get money at cheaper rates.

The commercial banks are unlikely to change their lending policy in the near future as the government would need more finance for budgetary support, they added.

The SBP has been warning that heavy government borrowing from commercial banks would make it difficult for the private sector to avail cheaper credit to perform.

The private sector has been a victim of government's borrowing from the banking system providing easy and risk free profits to the banks depriving the private sector to use the funds for growth of the economy.

It was observed that banks found it easy to lend money to large corporate sector, while the medium and small size business entities have been paying much higher interest on borrowing.

Bankers said the non-performing loans have reached all time high and could hit even half a trillion rupees by end of this fiscal, which compels them to adopt cautious approach towards advancing of loans.

Government borrowing from banking system has exceeded the estimates for the current fiscal year largely because of non-materialization of budgeted inflows on account of 3-G licenses, Coalition Support Fund (CSF) and remaining payment from Etisalat.

The fiscal deficit for the current fiscal year has been revised upward to 5.5 per cent from budgetary projection of 4 per cent (excluding 1.9 per cent of the GDP on account of consolidation of arrears for electricity and commodities)

Both the IMF and the State Bank have been calling for drastic cut in expenses to bring down the rising fiscal deficit but the government seems to have failed mainly on account of extremely low revenue and poor economic growth.

The IMF cautioned that the policy mix adopted by the economic managers was leading the economy down an unsustainable and risky path and high fiscal deficits were sidelining the private sector while hurting growth.

In current economic scenario, when the country is facing shortfall in tax revenue and foreign inflows, besides higher expenditures, there is only one way for the federal government and that is to borrow from domestic resources to fulfill its financial needs.

The government has set a record by printing billion of notes from the State Bank of Pakistan (SBP) during the last few years, resulting in intolerable inflation.

State Bank of Pakistan Governor Yaseen Anwar said printing of currency by the government to meet expenditures besides heavy borrowing amounting to Rs 442 billion from central bank till May 2012 has also affected the country's economic condition.

He however, said that the central bank was capable to make payments of IMF installments, but downward trend in forex receipts would make the repayment of loans installments difficult.

Pakistan is likely to go to the International Monetary Fund (IMF) in fresh fiscal year 2012-13 to seek loan for the retirement of IMF's Stand-by Arrangement (SBA) facility, sources in the Ministry of Finance said. Pakistan will have to pay more than $7.82 billion in four different installments from 2011-12 to 2014-15, sources said.

The government non-stop borrowing from banking sector for budgetary support, circular-debt in energy sector and public sector institutions is termed as worst financial management by the experts that translate into inflation and fiscal deficit at the end of the day

Government must find the other way out. It must generate enough funds from capital market instead of high borrowing from banks and the State Bank of Pakistan. Government can generate required funds by floating short-term finance certificates.