Government borrowing adding to fiscal woes
LAHORE: The government borrowing from SBP at an increasing rate reflects severe fiscal vulnerabilities, the State Bank of Pakistan has revealed in its Monetary Policy Decision.
Given the delays in the introduction of tax reforms and weak industrial production, the task of achieving close to 27 percent enhancement in tax revenues during FY11 is beginning to look quite ambitious. To increase its capacity to raise revenues and contain inflationary borrowings from SBP within an explicit and clearly defined limit, the government has shown its intention to: i)widen the tax net through introduction of the RGST along with other tax measures; ii)-effectively contain the power sector subsidies; and, iii)-amend the SBP Act, including explicit limits on government borrowings from SBP, which is now in the final stage of legislation. Together, these could potentially address the problem in the medium term of stubbornly high inflation expectations, reduce the cost of borrowing, and hence pave the way for long term economic growth. However, it may take some time before the benefits of such important measures, after their implementation, begin to have their impact. In the mean time, pressing flood-related expenditures and shortfalls in external financing of the budget have increased reliance of the government on domestic sources. The seasonal increase in the working capital credit requirements of the private sector during the second quarter is also higher on the margin due to higher input prices. Consequently, pressure on the banking system and interest rates has increased. With low growth in the banking system NFA and deposits, liquidity management has also become challenging. Therefore, to further encourage the private sector, fiscal authorities need to demonstrate greater resolve in implementing their strategy to contain the fiscal deficit through fundamental structural reforms and their commitment to restrict inflationary central bank borrowings. However, the recent rejection of the two PIB auctions in Q1-FY11 and acceptance of Rs50 billion instead of the Rs90 billion offered by the banks in the 16th November 2010 T-bill auction is apparently inconsistent with the stated intentions.