KARACHI: The fall in tax receipts and increased public spending forced the government to borrow a record Rs804 billion from the State Bank of Pakistan (SBP) from July to the middle of September, aggregate statistics released by the central bank showed on Tuesday.
However, the government retired Rs127 billion debt of the State Bank during the same period last fiscal year.
Analysts said that with rampant borrowing from the central bank on a frequent basis, the government has not only ignored the quantitative and continuous criteria, including the elimination of the SBP’s lending to government fixed by the International Monetary Fund (IMF) but also breached its commitment to keep its quarterly borrowing from the central bank at zero level.
The central bank also felt the government pressure, as the external financing gap is widening day-by-day, they said. Similarly, the country’s exchequer raised less in taxes and spent more, adding fuel to inflationary borrowing from the State Bank, the analysts said.
“Such fiscal borrowings are the major source of monetary expansion. Though, broad money growth stands at 0.16 percent, it is likely to rise near 17 percent to 18 percent during the entire FY14, driving in part by the SBP’s continued financing of the large fiscal deficit.
Unveiling the latest figures, the central bank said that net government borrowing from the banking system increased to Rs313 billion between July 1 and September 14 from Rs179 billion over the corresponding period last fiscal year.
The borrowing mix of the government revealed that the government borrowed Rs337 billion from the banking system for budgetary support. Of total Rs804 budgetary borrowing from the central bank, the federal government borrowed Rs796 billion.
Contrary to the borrowing, the government retired Rs471 billion in debt to commercial banks as compared to the borrowing of Rs288 billion in the last fiscal year.
The elevated level of borrowings from the central bank in the second half of FY13 is the reflection of the government’s shortfall in raising funds from the government securities.
According to the SBP report, the inability to raise the tax-to-GDP ratio is the fundamental source of large fiscal deficits, high borrowing and rising debt.
Although there has been a consistent gap between the Federal Board of Revenue’s (FBR) budget targets and actual outcomes in the last few years, the gap of Rs445 billion in FY13 was exceptionally high. In fact, this is more than the cumulative shortfall of Rs349 billion during the last five years.
Not surprisingly, the estimated fiscal deficit of eight percent of GDP in FY13 was considerably higher than the budgeted target of 4.7 percent of GDP.
The target for consolidated fiscal deficit in FY14 has been set at 6.3 percent of GDP. With swift settlement of the outstanding stock of energy sector circular debt, reduction in electricity tariff-related subsidies and introduction of some taxation measures, the government has shown intentions to address deeper issues afflicting the fiscal accounts.
However, meeting Rs2,475 billion target will require an extraordinary effort by the FBR.
Moreover, substantial interest payments, on account of rising stock of domestic debt, are likely to keep the fiscal accounts under stress, despite fiscal consolidation efforts of the government.
The SBP has already expressed concerns over the accelerated government borrowing and termed it worrisome for the debt and inflation outlook.
A considerable increase in public debt to revenue ratio reflects weak repayment capacity of the government. Since no government defaults on its domestic debt, this indicates that the fiscal borrowing from the SBP could continue, which carries inflation risks in the medium-term.
Limiting fiscal borrowing from the central bank is critical for building its credibility, which is of paramount importance for the conduct of an effective monetary policy geared towards anchoring inflation expectations.
Source: The NEWS