Between July 1 and March 21: Govt borrowing 350% higher, central bank data shows

Sharp increase a breach of SBP Act, reason for higher inflation in March.

KARACHI:

Net federal government borrowings from the central bank for budgetary support have reached Rs848.2 billion since the start of the current fiscal year, according to data recently released by the State Bank of Pakistan (SBP).

Net borrowings from the SBP between July 1 and March 21 remained 350.2% higher than Rs188.4 billion, the amount that the federal government borrowed from the central bank in the comparable period of 2012-13.

Speaking to The Express Tribune, Standard Chartered Bank Senior Economist Sayem Ali said the government’s increased borrowing from the SBP is a matter of serious concern, which is also reflected in the latest staff report released by the International Monetary Fund (IMF).

“The sharp increase in government borrowings from the SBP is a breach of the SBP Act,” Ali noted.



The SBP (Amendment) Act 2012 states that the federal government’s borrowing from the central bank must be brought to zero at the end of each quarter. It also says the finance minister must furnish a justification before parliament in case the federal government fails to observe this provision.

“(Increased borrowings) raise questions about the government’s fiscal performance, with the deficit likely to remain higher than the budget target,” Ali said, adding that it is one of the major causes of higher inflation recorded last month.

The year-on-year headline inflation in March clocked up at 8.53% as opposed to 7.93% in February despite the rupee’s newfound strength and lower oil prices.

Borrowings from banks dwindle

While net federal government’s borrowings from the central bank have gone up substantially on a year-on-year basis, its net borrowings from scheduled banks have nosedived in the current fiscal year.

Net federal government borrowings from scheduled banks until March 21 remained a negative Rs91 billion. In contrast, the corresponding figure for 2012-13 was a hefty Rs777.5 billion.

The drastic shift happened after banks started reducing their investments in government securities due to a pick-up in the private-sector demand and lower interest rates, Ali said.

“The SBP has encouraged banks to shift away from securities by fixing the minimum deposit rate at 3% below the discount rate – i.e. 7% in view of the present discount rate of 10% – essentially reducing bank spreads on holding government securities,” he noted.

Indeed, SBP’s data shows banks’ credit to the private sector has increased significantly in recent months. Credit to the private sector during July 1 and March 21 stood at Rs304.5 billion, up a massive 157.4% on a year-on-year basis.

However, the change in the borrowing pattern reflects a nascent recovery in the private sector investment spending, Ali believes, which will reverse if government deficits remain high.

Money supply

Money supply in the economy has increased by 5.48% since the start of the current fiscal year as opposed to the growth of 8.41% recorded in the comparable period of 2012-13.

The expansion in broad money – commonly referred to as M2 – between July 1 and March 21 remained Rs485.3 billion, which is significantly lower than the monetary impact of Rs642.8 billion recorded over the corresponding period of the last fiscal year.

Provisional data on monetary aggregates shows the currency in circulation has increased by Rs239.12 billion since the start of the current fiscal year. The increase in the currency in circulation during the same period of the last fiscal year was Rs273.03 billion.

Total currency in circulation as on March 7 stood at Rs2.17 trillion, SBP’s monetary aggregates show.

Published in The Express Tribune, April 3^rd, 2014.

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