Sunday, November 21, 2010

Govt sets new record of borrowing

KARACHI: The government has geared up its efforts to borrow from both the State Bank and scheduled banks accumulating the domestic debt to record new peaks as it added over Rs800 billion in a year.

It looks that the government is in a fix as higher borrowing from the State Bank attracts stern warning from the International Monetary Fund (IMF) while borrowing from schedule banks catches the attention of State Bank.

The IMF restricts government borrowing from the Central Bank as it is inflationary while borrowing from scheduled banks is criticised by the SBP which is issuing cautions that borrowing leaves little room for private sector credit growth.

The serious shortage of revenue compelled the government to borrow from the banking system which resulted in a new record last year. The situation during the first four months of the current fiscal year looks more compelling for the government to borrow from all possible resources.

The government made drastic cut in the allocated funds for development programmes during the last fiscal year while the officially available indictors show that the situation is grimmer this year.
The latest report shows that the government has so far borrowed about Rs200 billion from the State Bank while it has collected Rs71 billion from the scheduled banks.

If government continues to borrow at this pace, another Rs1 trillion would be added into the domestic debt.
Economists believe that the government could hardly generate Rs1.7 trillion as revenue during this fiscal year primarily due to expected poor economic growth.

The domestic debt rose to Rs4.863 trillion by August 2010 while it was Rs4.050 trillion in August 2009.
In 12 months, Rs813 billion were added to domestic debt.
While the government is busy to raise its revenue and imposed flood surcharge, the heavy borrowing seems to have already set new records.
Last year the government set new record of borrowing from scheduled banks which attracted wide criticism by the SBP and independent economists and blamed the government for poor performance of the private sector.
The borrowing from the State Bank during the first four months was much higher than the same period of last year indicating that a new record has already been set. Last year, in the first four months the government borrowing from SBP was minus 17 billion while this year it has reached Rs200 billion.
However, borrowing from scheduled banks was lower. It was Rs71 billion in first four months while it was Rs131 billion during the same period of last year.The heavy borrowing accelerated the growth of broad money which is double than the last year.

The SBP reported the monetary growth was 2.74 per cent from July to Nov 5 against 1.48 per cent during the same period of last year.
The high monetary growth is an indication that inflation is on higher side and that the State Bank’s tight monetary policy is not working as it has been designed to work.

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