THE INFLATION-FUELING GOVERNMENT BORROWINGS
July 16 - 22, 2012
The Pakistani government has borrowed Rs1280 billion from banks in the fiscal year which ended on June 30 as compared to Rs645 billion during the previous year, while it printed Rs1.5 billion daily in new currency notes during the June 1, 2011 and July 25, 2012. The uninterrupted borrowing from the central bank and scheduled banks caused an expansionist monetary growth and increased currency in circulation, which has accelerated inflation making it difficult for the economic managers to control the fiscal deficit. The analysts warn that the government's persistent reliance on costlier domestic resources for financing its fiscal deficit may push the country into a debt trap. The federal government borrowed Rs591 billion from the central bank, Rs548 billion from commercial banks and the remaining amount was borrowed from different banking sources, according to the State Bank of Pakistan (SBP).
The total amount in new currency printed by the government during the June 1, 2011 and July 25, 2012 was Rs592 billion, according to the Finance Ministry. Prior to this, on average the government would print Rs150 to Rs200 billion in new currency notes annually. The government betrayed its commitment to keep borrowing from the central bank at zero level on a quarterly basis as its borrowing increased from the central bank by the end of the third quarter of the last fiscal year. The frequent money injections by the central bank to settle liquidity issues of the banking system are an indirect borrowing from the central bank, which has the same inflationary effect as borrowing from the central bank.
"The total expansion of currency is higher than ever, so it is already reaching dangerous levels. It has to be arrested by drastic remedial measures," AFP reported Sartaj Aziz, the former finance minister.
The analysts believe that excessive borrowing by the government from banking sources and the central bank to finance budget deficit is the main reason for the persistence of higher inflation. The inflation remained in double-digits for the consecutive fifth year. The Consumer Price Index (CPI) inflation rose by 11.26% in June from a year earlier, according to the Pakistan Bureau of Statistics (PBS). The CPI rose 0.04% from May on a month-to-month basis. Core inflation, the non-food and non-energy inflation, remained at 11.4% over the last fiscal year.
The double digit inflation has not only hit the poor hardest but it has also affected all segments of the economy. The analysts point out that high inflation reduces the value of money, resulting in uncertainty of the value of gains and losses of borrowers, lenders, and buyers and sellers.
Finance Minister Hafeez Shaikh, while announcing the budget 2012-13 on June 1, projected that the budget deficit for the last fiscal year will be 7.4% of GDP. This projection was made on the presumption that tax authorities will achieve the original target set for the year ended on June 30. The government however for the fourth consecutive year missed the revenue target of Rs1,952 billion set for the last fiscal year by a margin of about Rs50 billion. Budget deficit also widened due to a slowdown in aid flows and foreign investment in the last fiscal year. The foreign direct investment (FDI) fell 48.3% to $765.4 million in 11 months of the last financial year, as against $1,463 million in the same period of previous financial year. The decline in foreign investment is attributed to political uncertainty, energy crisis and prevailing law and order situation in the country.
The country will get about $1.1 billion under coalition support fund (CSF) from the United States because of its decision to reopen Nato supply lines into Afghanistan. The US Secretary of State Hillary Clinton on July 3 apologized for the killing of 24 Pakistani soldiers in a Nato airstrike in November last year. The non-materialization of CSF from the US till June 30 has been a major cause behind widening of budget deficit in the last fiscal year 2011-12.
The new prime minister Raja Pervez Ashraf is following the same approach and policy to deal with an economic mess created by his predecessor Yousuf Raza Gilani, who was disqualified on June 19 in contempt of court case by the country's apex court. The government plans to borrow a huge amount of Rs 1.6 trillion in the first quarter of current fiscal year, which has started from July 1, from the banking sector to meet the rising fiscal deficit, which is feared to reach 8.5 % of Gross Domestic Product (GDP), against the original target of 4% set for the last fiscal year 2011-12 ended on June 30. The large fiscal deficit has resulted in a sharp increase in the government's domestic debt, which recorded an increase of Rs1.2 trillion during July-March 2012 to reach Rs7.2 trillion.
President Asif Ali Zardari issued an ordinance on June 24 to provide a legal blanket to all legislative and administrative actions taken by Gilani between the time of his conviction in contempt of court case on April 26 and his disqualification on June 19 by the country's apex court. During the period between April 26 and June 19, Gilani approved financial matters worth billions of rupees including a summary for the federal budget for the fiscal year 2012-13, which was unveiled on June 1. New Prime Minister has just to follow the economic policy and implement the financial proposals of his predecessor.
The government increased its direct borrowing from the central bank, printing money to cover the budget deficit, instead of raising taxes. The country's central bank seems unable to check the inflation-fueling government borrowings, though it has issued several warnings that fell deaf on the government's ears.
The central bank in its third quarterly (January-March) report issued last month warned that persistent high inflation and pressure on fiscal and current accounts would remain key challenges for economy, which grew by 3.7% during fiscal year 2011-12.
"The persistently high fiscal deficit remains a major risk to the macro-economy," said the SBP report. "There is greater reliance on short-term borrowing, which is creating liquidity management problems for the central bank, and rollover and interest rate risks for the government."