Govern­ment bor­row­ing adding to fis­cal woes

The Pak Banker - - 2national - Mum­taz Ali

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.

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