Govt borrowing reaches record level of Rs 2.9 trillion in FY11
August 05, 2011
The government excessive and unabated borrowing from central and commercial banks has touched a new height with Rs 2.999 trillion recorded on this account by end of fiscal year 2010-11.
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. The credit lending of central and commercial banks led to tight loans’ opportunity for private sector, which impacted negatively on economic activities which has already hit by bad law and order situation, and unavailability of utilities particularly gas, electricity and petroleum products. State Bank of Pakistan (SBP) provincial statistics showed 23 percent or Rs 573 billion growth in government borrowing collectively from central and commercial banks compared with Rs 2.426 trillion years-on-year basis since June 2010.
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.
The credit lending of central and commercial banks led to tight loans’ opportunity for private sector, which impacted negatively on economic activities which has already hit by bad law and order situation, and unavailability of utilities particularly gas, electricity and petroleum products
State Bank of Pakistan (SBP) provincial statistics showed 23 percent or Rs 573 billion growth in government borrowing collectively from central and commercial banks compared with Rs 2.426 trillion years-on-year basis since June 2010.
The government has borrowed Rs 1.185 trillion from SBP whereas the amount on the same account was quite higher from scheduled banks to stand at Rs 1.814 trillion by June 2011.
Demonstrating its commitment the government retired its borrowings from the SBP by end-March 2011, as it borrowing the stock had come down to Rs1.155 trillion on cash basis. The government broadly contained borrowings from the central bank at end-September 2010 levels as it retired Rs 107.3 billion to SBP in third quarter of 2010-11.
This containment, along with significant improvement in external account, is the key reason for an unchanged policy rate during H2-FY11.
Later, the increase in these borrowings is temporary and a reflection of the government’s efforts to internalize the growing quasi-fiscal expense related to the circular debt of the energy sector.
The size of the fiscal deficit cannot be reduced unless the government controls excessive borrowing from the central bank, along with fully implementing fiscal reforms, SBP stated in its recent report.
The government borrowing for budgetary support can be viewed in three distinct phases. In the first phase that runs till mid-December 2010, the government relied primarily on SBP borrowings. The government borrowed Rs 413.5 billion from the banking system; of which Rs 328.6 billion was from SBP from July to mid-December 2010.
The second phase starts from mid-December 2010 till end-March 2011. During this period, the government was able to contain its borrowings from the banking system. More importantly, the government even replaced some SBP debt by borrowings from commercial banks. This helped the government contain its borrowings from SBP at end-September 2010 levels. Hence, in net terms, the government retired Rs 286.1 billion to SBP.
The containment of government borrowings from SBP was facilitated by two developments such as The National Saving Scheme (NSS) net inflows of Rs 87.2 billion in Q3-FY11, which was substantially higher compared to the first two quarters.
The third phase starts from April 2011 onwards, as the government borrowed Rs 207.9 billion from SBP from April 2nd till mid-May 2011.
A large part of this borrowing was meant to pay-off the growing circular debt in the energy sector. This borrowing is actually financing the carry-over of quasi-fiscal deficits from previous years.
The borrowing for budgetary support accounts for 89.7 percent of the expansion in broad money.
The SBP shifted a portion of this borrowing, Rs61 billion, to the market through an outright Open Market Operation (OMO) with the hope that government borrowing will soon converge to the end-September 2010 level, Rs1,290 billion, SBP report said.
The credit to public sector entities (PSEs) increased slightly despite the government increased electricity tariff and passed on impact of high petroleum product prices to masses. The credit to this sector stand at Rs 424 billion by June 2011 compared with Rs 419 billion June 2010.
The heavy government growing borrowing impacted negatively the credit to private sector credit that showed little growth by the end of current fiscal year 2010-11.
The credit to private sector reached Rs 2.915 trillion by June 2011 as compared with Rs 2.749 trillion, posting 6 percent year-on-year increase.
The private sector business continued to utilize bank credit, there is hardly any credit demand for new investment activities in the economy. Specifically, the growth of credit to private sector was slightly lower at 3.4 percent in the closing fiscal year.
The surge in exports increased the demand for trade loans. The sector-wise distribution of trade loans reflects the dominance of the textile sector, which holds major share followed by sugar and edible oil sector.
The credit growth for businesses, consumer loans witnessed slow growth. The share of consumer financing in private sector loans has declined to more than 7.7 percent. Therefore, banks are reluctant to provide fresh loans because of slowdown in net retirement is largely, while outstanding loans continue to be paid-off the.
Economic experts are of the view that the economy was not hit badly as result of the government heavy borrowing as a matter of fact the strengthening of external accounts owing to record exports value and remittances. Otherwise, the situation could have worst as high inflation, increase in discount rates and ensuing impacts on economy.