Governor State Bank of Pakistan Shahid H. Kardar has said that 6 percent budget deficit for the current fiscal year would mean government has to borrow Rs 1 trillion from the banking sector, which could hurt the private sector and increase the cost of credit.
Briefing the Senate Standing Committee on Finance here on Tuesday on the state of economy, he said that "at the current rate based on first quarter, the fiscal deficit could reach to 6 percent of the GDP." The financing of fiscal deficit through the SBP would push up inflation, he added.
He said that the subsidies on wheat, urea and sugar were not reflected in the current expenditure, as these were being extended at the import stage. "There is a subsidy of Rs 32 billion on the urea import while the government borrowing for commodity credit is Rs 366 billion and for power sector Rs 368 billion. The government direct borrowing for budget may touch Rs 1.2 trillion which could increase to Rs 2 trillion if the above subsidies are added," he added.
The government borrowing for budgetary support reached Rs 416.98 billion by December 11 with Rs 328.6 billion from SBP and Rs 88.3 billion from scheduled banks. However, he informed the committee that SBP borrowings had significantly declined to Rs 180 billion by December 31 after the government deposits of Rs 127 billion with the central bank.
The governor SBP said that financing through the banks would be at the cost of growth in private sector credit and the external financing may jeopardise if timely reforms were not undertaken. Kardar said that fiscal sector continues to overshadow money sector and continued deficit financing made interest rate increase unavoidable, which could have been higher if all the borrowing was directly from the commercial banks.
Kardar said that during a recent meeting with Prime Minister, it was decided that government dependence on borrowing from SBP would be reduced. According to the new plan, the government would borrow from Islamic banking system and treasury bills would also be taken to the common man. Under the plan, any person can go on the website to buy T-bills while sitting at home. The government would provide security to the purchaser of T-bill.
"The government fiscal position has weakened and monetization of the fiscal deficit has increased inflationary pressure," he said adding that broadening of tax base is imperative in the current economic scenario. He said that the higher remittances and exports have minimised external current account deficit, but financing position without support of IMF and donors could become an area of concern.
The governor SBP said that debt is rising and so is interest rate and total debt has risen to Rs 9685.9 billion, 66 percent of the GDP, in fiscal year 2010 from Rs 8306.7 billion, 65.2 percent of the GDP, in fiscal year 2009. Government domestic borrowing has reached to Rs 4652.7 billion, 31.7 percent in fiscal year 2010 from Rs 3861 billion, 30.3 percent, in fiscal year 2009.
Public Sector Enterprises (PSEs) domestic debt has gone up from Rs 290 billion in fiscal year 2009 to Rs 374.9 billion in fiscal year 2010, showing an increase of 2.6 percent of the GDP against 2.3 percent for the previous year. Kardar said that external debt has increased from Rs 4155.7 billion in fiscal year 2009 to Rs 4658.3 billion in fiscal year 2010. The total public liabilities stood at 69.5 percent of the GDP in fiscal year 2010.
The governor SBP said that current account deficit has been in surplus for the last three consecutive months and remittances are performing well, however, financial account remains a source of concern specially if reforms program ie deficit, RGST, energy sector and subsidies is not put on track.
Efforts on to contain fiscal deficit below six percent: Waqar
ISLAMABAD (January 05, 2011) : Secretary Finance Dr Waqar Masood on Tuesday said serious efforts are under way to contain fiscal deficit below 6 percent against 4.7 percent of the GDP agreed with the International Monetary Fund (IMF) for the current fiscal year.
Briefing the Senate Standing Committee on Finance here on the state of the economy, Waqar said the planning is under way to contain fiscal deficit for July-December 2010, which is expected to remain between 2.8 to 2.9 percent, 0.15 percent higher than the target.
"The government is contemplating serious measures to bring the fiscal deficit back on track," he said, adding that two important issues, accumulates subsidy and security related expenditure are creating problems of fiscal deficit. He said Rs 301 billion have been injected into power companies to clear the arrears on account of circular debt and despite that an amount of Rs 145 billion is yet to be paid.
In addition a significant amount is also struck on account of commodity circular debt because wheat was procured by the government more than the requirement of the country. Now, the government is trying to export the additional wheat through private sector. The Secretary Finance said the government has decided not to involve Trading Corporation of Pakistan (TCP) in export of commodities.
Waqar said another reason for fiscal deficit is lower tax to GDP ratio and as the International Monetary Fund (IMF) programme is off-track the support from other developing partners is also not coming. He said foreign inflows during the last two quarters were very low and the government is expecting some improvement in coming quarters, as the efforts are under way to resolve issues with the IMF.
He said the government will try to remove the IMF concerns that led to suspension of the programme. Secretary Finance was optimistic that inflows from Friends of Democratic Pakistan (FoDP) and $300 million of the Word Bank support would also come in the current fiscal year.
"We are trying to minimise government borrowings from the State Bank of Pakistan as it is adding to inflation, he said. Waqar said borrowing from the central bank has reduced substantially from Rs 307 billion after the inflows of Rs 60 billion on account of Coalition Support Fund (CSF) and Rs 40 billion profit of the bank at the end of December.
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