Reduce borrowing by one-fourth, SBP tells govt

Central bank calls for shifting budget financing to foreign financial institutions.

ISLAMABAD:

The State Bank of Pakistan (SBP) pressed the government on Tuesday to reduce borrowings by almost 25 per cent and shift budget financing to external sources in the next fiscal year in a bid to control persisting inflation and spare funds for the private sector.

In a meeting of the Monetary and Fiscal Coordination Board (MFCB), held after almost four years, SBP Governor Shahid Hafiz Kardar cautioned the federal government to reprioritise its swelling budget financing requirements which could badly hurt the economy.

MFCB was constituted to align fiscal and monetary policies but the central bank had been announcing monetary policy independently for the last four years. Commerce Minister Makhdoom Amin Fahim being a member did not participate in the meeting.

“Together with rising international commodity and oil prices, the inflationary pressure is persisting and government borrowing has been a factor,” said Kardar in a statement. He urged the federal government to reduce borrowing by at least 23 per cent next year.

Ironically, the governor has recently let the government approve a toothless bill pertaining to operational independence including denying credit beyond a certain limit.

Kardar cautioned that going forward the deficit should be brought down and reliance on SBP borrowing be further reduced. More importantly, the share of private sector in credit expansion needs to be increased to support investment requirements of the country.

The private sector in the outgoing fiscal year borrowed over Rs200 billion but net borrowing was only Rs6 billion. The remaining amount was meant to meet liabilities stemming from earlier borrowed money, and finance the increasing cost of ongoing businesses in the wake of persisting inflation.

The governor urged the federal government to shift budget financing to foreign financial institutions so that domestic resources can be freed for the private sector. The federal government for the next fiscal year is anticipating a budget deficit of five per cent of total national income or Rs1,003 billion.

The central bank governor told the board that growth in money in circulation was recorded at 9.3 per cent as compared to 5.5 per cent last year.

Finance Minister Abdul Hafeez Shaikh said that the Coordination Board was an important institution for bringing consistencies in monetary, fiscal and exchange rate policies and its meetings were required to be held regularly to ensure that all economic managers worked on a shared set of objectives. He expressed some concern that the meetings of the board were not being held as frequently as required and urged that in future these meetings must be held regularly. Under the SBP Act, the board meeting has to be convened every quarter.

Finance Secretary Dr Waqar Masood presented an overview of the economy and said next year’s growth has to be accelerated to make up for the lost growth due to floods and consequent slowdown in economic activities this year.

He said the external sector had rendered extraordinary performance both on account of export growth of 27 per cent and remittance growth of 22 per cent so far during the fiscal year. Besides, strengthening the current account and the level of reserves, these developments had a positive effect on the exchange rate that remained stable throughout the year.

On the budgetary outlook, it was pointed out that the fiscal position has improved considerably from the first half of the fiscal year and significant adjustment will take place relative to last year.

Published in The Express Tribune, May 11^th, 2011.