Govt relies less on bank borrowing amid Covid-19

Government's borrowing from commercial banks to overcome the shortfall in budgetary expenditures significantly dropped by 86% to Rs205 billion in the first month (July) of current fiscal year 2020-21 apparently due to a notable surge in foreign financing to better fight the coronavirus pandemic.

The government had borrowed a huge Rs1.45 trillion from commercial banks in the same month of previous fiscal year, according to the State Bank of Pakistan (SBP).

BMA Capital Executive Director Saad Hashmi noted that the government continued to borrow around Rs200 billion per month in the past three to four months from domestic commercial banks compared to Rs400-500 billion per month prior to the Covid-19 outbreak in February in Pakistan.

"The drop in borrowing in local currency is most probably due to a significant surge in financing from global and regional financial institutions during the challenging times under Covid-19," Hashmi said while talking to The Express Tribune.

Foreign financial institutions, including the International Monetary Fund (IMF), World Bank, Asian Development Bank (ADB), Asian Infrastructure Investment Bank (AIIB), Chinese commercial banks and China itself have provided soft loans of around $4.5-5 billion in the wake of the pandemic, it has been learnt.

The financial institutions have extended the loans primarily to overcome the shortfall in budgetary expenditures, mainly on the health and socioeconomic fronts, and to better fight the coronavirus disease. Also, the government had completely shifted budgetary borrowing from the central bank to commercial banks with effect from July 1, 2019 under the ongoing IMF loan programme worth $6 billion, Hashmi said.

The government had agreed with the IMF that it would stop borrowing from the central bank because such borrowing was a major cause of inflation in the economy. Besides, it has paid back many previous loans to the central bank by making borrowing from the commercial banks.

"Government borrowing from the central bank stood at Rs6.6 trillion on June 30, 2019. This dropped to Rs5.2 trillion in July 2019," he said.

Also, the borrowing from local commercial banks has remained low as tax collection has gone up. Tax receipts surpassed the target in July 2020 despite the Covid-19 challenges, Hashmi noted.

Government expenditures on development and other projects stood low during the pandemic with the lockdown halting almost all economic activities in the country. It, however, announced a relief package of Rs1.2 trillion for the daily-wage earners, unemployed people and industries to help them cope with the pandemic.

"Going forward, government borrowing from commercial banks may increase as almost all economic activities have returned to normal now," he said. Moreover, state borrowing for budgetary expenditure stands low in initial months of a fiscal year and gradually increases towards the end of the year, according to Hashmi.

In the previous fiscal year 201920, the government borrowed a total of Rs2.3 trillion from commercial banks. It retired bank loans of Rs875 billion in the prior fiscal year. Government's total borrowing from commercial banks stood at Rs7.2 trillion as on June 30, 2020, the SBP reported.

The private sector continued to retire loans owed to commercial banks in July 2020 with conditions not supportive for businesses during the month.

It paid off Rs110.29 billion in July 2020 while it had retired Rs122.36 billion in July 2019, when the conditions were also not conducive for businesses.