Government borrows Rs68 billion ($795 million) a month leads to higher inflation
Dilutes effects of State Bank’s tight monetary policy and discourages private investors
Calls for early passage of “SBP Act” from Senate to put restrictions on the government borrowing from SBP
ISLAMABAD: The Pakistan Economy Watch (PEW) expressed concern on the PPP-led federal government’s excessive budgetary borrowing, as on the average it taking Rs68 billion (or US$795 million) a month from the banking system to fill its income-expenditure gap while ignoring its ‘negative fallouts’ in shape of rising inflation that hitting hard the poor the most.
Only from the State Bank of Pakistan (SBP), the federal government is borrowing about 28 billion a month. The President of PEW, Dr. Murtaza Mughal said,
“The excessive borrowing from the central bank is diluting the effects of the SBP tight monetary policy and causing ‘inflation’ to go up further”.
He added it also signaling towards the slower pace of the economy. Currently, the State Bank of Pakistan discount rate is highest in the region at 14 per cent. The bank tight its monetary policy to rein in the skyrocketing inflation, but on the other hand the government borrowing from SBP is ‘nullifying’ possible positive effects of the bank policy.
Despite tight monetary policy, inflation is in double digit and above expectation. During 2010 CPI inflation rose to 15.68 per cent against 10.52 per cent in corresponding month of the last year and first half (July-December 2010-11), average inflation stood at 14.65 per cent.
He said as the public spending helps in developing right infrastructure for encouraging private investment; however, as the government spending is huge and not accompanying by increase in government revenue and proportionate increase in GDP, so it created public debt and inflation to go up. The higher government spending is also putting upward pressure on the interest rates and discouraging private investors borrow and invest in the economy and flourish their businesses.
He said, “the government should control its lavish spending and rein in the leakages from its state-run enterprises, as ultimately, it is the poor masses that finance it through their hard-earn ‘tax money’ and in shape of higher inflation”
Elaborating, Dr. Mughal said, as these issues are causing budget deficit to widen, and for its financing it borrow from the banks, the bank print the money and there become a situation when “too much money chases too few goods” and the inflation shoots up.
While referring to the latest data of the State Bank, he said, “The central government during last six- month (from July to end December, 2010) has borrowed huge Rs408 billion from the banking system, which makes per month average borrowing to Rs68 billion”. He added that out of this amount, about Rs168 billion were been borrowed from the state bank, while Rs240 billion from scheduled banks.
Dr. Mughal also said, the federal government’s this year borrowing was three-and-a-half-time more than what it borrowed Rs116 billion during same period of the last year. While, the provincial governments instead of borrowing have retired 76 billion debt of the State Bank of Pakistan and borrowed Rs6.15 billion from scheduled banks during the period.
He proposed the government to do legislation as soon as possible on “SBP Act” which envisages restrictions on the government borrowing from the central bank and which is still pending with the Senate. The National Assembly has already approved it. However, some officials of the ministry of finance say that the government was dillydallying in getting through the Act from the Upper House as to avoid restrictions in the existing economic situation where revenue shortfall and expenditure overrun were forcing the government to pursue the SBP for providing money for budgetary support without any limit.
Pakistan Economy Watch