The State Bank of Pakistan has expressed concern over the increasing budgetary borrowing by the federal government and demanded retirement of Rs84 billion during the current fiscal year 2008 and amendment in the Fiscal Responsibility and Debt Limitation Act, 2005.
The federal government is continuously borrowing to meet its budgetary deficit. During the last fiscal year overall as is evident, during the first twenty-five days of current fiscal year the government has already borrowed additional Rs32.9 billion from the State Bank of Pakistan (SBP) and that this pattern is not in line with SBP's recommendation.
The rising government borrowing from the banking system in general and from the central bank in particular, has compelled the SBP to take some bold steps for reducing the borrowing.
Therefore, the SBP has strongly stressed the federal government to retire Rs84 billion during the current fiscal year 2009, as the federal government borrowing has already reached a historic level and rising borrowing is creating fiscal and macroeconomic imbalances. In addition, the SBP once again has demanded amendment in the Fiscal Responsibility and Debt Limitation Act, 2005, under which the federal government would be bound to limit borrowing.
Government's heavy reliance on SBP's borrowings has continued unabated with additional new borrowing of Rs149.8 billion during May 25 to June 30, 2008.
While, during the first month of the current fiscal year government has borrowed some Rs32.9 billion for budgetary support, which is a negative indicator and is creating inflationary problems, besides hurting the central bank's tight monetary stances.
Announcing the monetary policy for the next six months Dr Shamshad Akhtar, governor SBP said that considering the adverse impact of continued borrowing by the government from SBP the SBP Central Board of Directors had resolved that the government should retire Rs21 billion in each quarter of FY09.
She said that very soon a delegation of central bank would also meet government officials to convince them for retirement of Rs84 billion during this fiscal year and amendment in the Fiscal Responsibility and Debt Limitation Act, 2005.
She said that efforts should be launched to raise additional resources including Pakistan Investment Bonds (PIBs) and National Saving Scheme (NSS) for the government financing, otherwise it risks the monetary policy stance.
Budget for fiscal year 2008-09 estimates put it at 7 per cent of the GDP, while financing data available to SBP for the full FY08 shows this could be around 8.3 per cent of the GDP, she added.
Within two months of May and June 2008, trade and external current account deficits as per cent of GDP widened further by 1.5 percentage points each and exchange rate remained under pressure. In the same period, CPI inflation (YoY), on the back of high International commodity prices and high inflationary borrowing, intensified by 4.3 percentage points.  Above all, second-round impact of high food inflation has become embedded in the inflation expectations, she added. 
Dr Akhtar said recognising this, the government and the central bank have taken pre-emptive policy actions together. Budget for FY09 has been rolled back to 4.7 per cent of the GDP and the government had committed itself to achieve net zero borrowing, during the course of the year, while enhancing its reliance on other nonbank sources.
Therefore, the Central Board of Directors of SBP has recommend that government should net retirement of Rs84 billion for FY09 with quarterly retirement of Rs21 billion, she said.  Adding, "these limits have been worked out keeping in perspective need for consistency with a coherent macroeconomic framework."
Support to these commitments and targets will be vital to arrest the drift in macroeconomic imbalances, she said.
"Imposing hard budgetary constraints further requires that the government amends the Fiscal Responsibility and Debt Limitation Act, 2005 to include provisions for recognising the need to phase out the government's dependence on SBP borrowings over the period," she added.
This involves adherence to limits imposed on SBP borrowings henceforth, while lowering the stock of SBP borrowings," she stressed.
Dr Akhtar underscored the need for a dynamic fiscal framework for FY09 that will incorporate necessary adjustments as economic developments evolve. She said that early indications were that the budget deficit target for FY09 of 4.7 per cent of GDP is already coming under stress.
The governor stressed that these optimistic expenditure and revenue assumptions carry the risk of fiscal slippages beyond target again. "Even a one percentage point increase in fiscal deficit above the target level would require additional borrowings in the order of over Rs100 billion," she added.
 "There are severe external and domestic constraints, which make it difficult for raising the required financing on a timely basis for the projected fiscal deficit for FY09," she said.
Generating the same amount domestically from sources other than the central bank would result in crowding out of credit availability to the private sector.
Replying to a question she said that government had some other tolls like Pakistan Investment Bonds and national saving schemes to meet their financing demand and in the budget government also had raised the profit on the national saving to attract further investment.
She said that India and China's central banks are nor providing financing to their governments therefore, inflation and discount rates are lower I these countries.
Based on financing availed from SBP, it is estimated that fiscal deficit for FY08 is more than double the targeted level and even above the reported outcome in budget for FY09.
She said that Consequently, the year has ended with the SBP's financing of Rs689 billion, around 80 per cent of the fiscal deficit.  The stock of government debt to SBP - Market Related Treasury Bills (MRTBs) has now reached to Rs1,053 billion, almost 10 per cent of the GDP.
Rise in fiscal deficit and inability of the government to tap non-bank and external resources over and above the projected levels resulted in excessive recourse to central bank's borrowings. During the course of H2-FY08, the government borrowed Rs204.2 billion during January-March 2008 and Rs283.9 billion during April - June 2008, of which Rs55 billion were borrowed on the last day of the fiscal year alone.
Moreover, substantially large borrowings requirements have inhibited Government ability to meet the additional financing requirements from commercial banks and off loading the existing stock of MRTBs to the market, she said.
Efforts to offload these government borrowings to the market are already exerting further pressure on Karachi Inter-Bank Offer rate and other market interest rates.