It is sad to note that the government is borrowing heavily from the central bank to finance its widening fiscal deficit. According to the latest data released by the State Bank of Pakistan (SBP), the Federal government’s borrowings for budgetary support from the banking system have surged by 86 percent to Rs 722 billion during the first half of FY19 compared to Rs 387.7 billion in the corresponding period of last year – an increase of Rs 334.3 billion. More worrying is the fact that borrowings from the SBP have jumped by Rs 1.436 trillion during July-December, 2018 compared to Rs 288 billion in the same period of last year while the government retired Rs 35.8 billion of debt from scheduled banks against borrowings of 356.0 billion in July-December, 2017. Thankfully, however, the four provinces retired some Rs 160 billion of their State Bank debt during the period under review. Balochistan retired Rs 26.58 billion, Khyber Pakhtunkhwa Rs 23.7 billion, Punjab Rs 79.3 billion and Sindh Rs 30.7 billion. As per the latest statistics, money supply or M2 has registered a growth of 3.4 percent during the first half of fiscal year 2019 as compared to 2.6 percent in the corresponding period of last year.
Although the above data may not be of much interest to the common man, it shows broadly that the fiscal position of the government is deteriorating, the reliance of the government on SBP to finance its budget deficit has increased and the flow of funds from other sources of finance like NSS has, more or less, dried up, the government paper has lost much of its attraction for the scheduled banks and overall liquidity in the economy as measured by M2 has increased. The higher fiscal deficit is of course due to a shortfall in revenue collections and a surge in current expenditures while development expenditures have stagnated. As per provisional data, the Federal Board of Revenue is facing a revenue shortfall of about Rs 170 billion and could collect net revenues of only Rs 1,779 billion as against the target of Rs 1,949 billion during the first half of FY19. The shortfall in revenue collection may partly be due to the abolition of tax on the telecom sector on the directives of the Supreme Court and reduction of levies on petroleum products by the government to facilitate masses on political considerations. A substantial increase in current expenditures and slow foreign inflows also contributed to higher fiscal deficit. The massive shift of government borrowings from the scheduled banks to the SBP was due to maturity of a number of Pakistan Investment Bonds (PIBs) and the reluctance of the scheduled banks to reinvest in these bonds due to unattractive rates of interest. With the massive shift of borrowings from the scheduled banks to the SBP, the overall stock of Federal government’s securities with the central bank has reached Rs 5.1 trillion mark.
Most of these trends in fiscal and monetary aggregates are a precursor of a number of unfavourable developments in the economy. Higher fiscal deficit, shift of government’s bank borrowings from the scheduled banks to the SBP and larger increase in money supply during FY19 would ignite inflationary pressures in the economy, force the authorities to tighten the monetary policy and depreciate the currency further thus increasing the debt servicing cost of the government. All of this combined would have a negative impact on the lives of ordinary people and could make the government unpopular. The government is therefore required to change the direction of present policies to reverse the trend in these indicators. First of all, it is very important to redouble the efforts for more revenue collection so that not only the targets in the coming months are met but the shortfall in the earlier half of the year is recouped. The promise of the Prime Minister that his government would ensure utmost austerity and contain the current expenditures to the minimum should also be fulfilled. In the “mini-budget” likely to be announced shortly, care should be taken to contain the budget deficit at 5.1 percent of GDP, as targeted earlier. The growing trend of shifting bank borrowings from the scheduled banks to the SBP must be stopped because such a policy is highly inflationary. In a nutshell, the present fiscal and monetary policies of the government need to be revised urgently because their continuity is not in the long-term interest of either the government of the day or the common man.
(This news/article originally appeared in Business Recorder on January 11th, 2019)