Fiscal policies board concerned over rising deficit, high debt

Umar says govt will improve fundamentals of economy, achieve sustainable growth


Shahbaz Rana November 30, 2018
Commercial banks’ reluctance to commit funds to longer tenor security papers due to expectations of interest rate hike was also the reason for high borrowings. PHOTO: FILE

ISLAMABAD: The Monetary and Fiscal Policies Coordination Board expressed concern on Thursday over weakening fiscal position and rising federal government borrowings from the central bank, highlighting two key issues that require urgent action.

The board meeting took place a day before the Monetary Policy Coordination Committee meeting, which is anticipated to raise the key interest rate by 1% to 9.5% due to the shrinking gap between core inflation and interest rates. Finance Minister Asad Umar, who chaired the fiscal and monetary board meeting, reviewed the overall economic situation.

“Fiscal consolidation remained a challenge during the first quarter as fiscal deficit increased to 1.4% as compared to 1.2% in the comparable period last year,” stated a handout issued by the finance ministry following the end of the meeting. It added that the Federal Board of Revenue’s (FBR) revenue collection continued to increase by 6.4% and if it gains traction it may bridge the fiscal deficit going forward.

The fiscal deficit being 1.4% or Rs541 billion was the highest in the past seven years.

Low revenue collection remains the root cause behind the widening budget deficit after the FBR missed its first quarter tax collection target by a huge margin.

The finance minister said the government was committed to improving the fundamentals of the economy and achieving sustainable and balanced economic growth, stated the finance ministry.

Monetary and Fiscal Policies Coordination Board is tasked with setting the direction of economic policies. It is chaired by the finance minister, with other members being the commerce minister responsible for trade sector, deputy chairman of the Planning Commission, the State Bank of Pakistan (SBP) governor, finance secretary and two eminent economists from the private sector.

The meeting also underlined that the federal government’s reliance on borrowings from the SBP was increasing significantly. The commercial banks’ reluctance to commit funds in longer tenor security papers due to their expectations for interest rate hike was also the reason for high borrowings.

The SBP governor informed the board that as of November 16, the federal government borrowed Rs2.9 trillion from the SBP but on the other hand it retired Rs2.62 trillion to scheduled banks. On the other hand, net government borrowing from the banking system curbed to Rs186.5 billion compared to Rs383.5 billion over the previous year.

The governor discussed the monetary aggregates along with views on the economy. Broad money (M2) witnessed a rise of Rs35 billion from July 2018 till November 16, 2018 as compared to a decrease of Rs67 billion in the same period last year which is entirely contributed by Net Domestic Assets (NDA) of the banking system as Net Foreign Assets (NFA) continued to contract.

The SBP governor further told the participants that despite rising interest rates, overall private sector credit remained higher than last year. The private sector credit increased to Rs304 billion during the period as compared to Rs69 billion in the last year. Expansion is seen largely in working capital followed by fixed investment.

The finance minister stressed the need to study the decline in large scale manufacturing sector that contracted 1.7% in the first quarter. He emphasised that appropriate measures should be taken to address the issue and directed the Finance Division to earnestly complete integrated policy paper focusing on economic strategy over the medium term.

Secretary finance presented a detailed report to the meeting on the economic and fiscal situation. The meeting was told that external balance has improved in the first four months of current fiscal year as current account contracted by 4.6% due to significant increase in workers’ remittances, containment of imports and increase in export growth.

The headline inflation is increasing on the back of non-food inflation above 8%, whereas, food inflation is rising moderately by 2.7% on account of smooth supply of commodities in the market and better price monitoring system.The meeting also discussed the export credit facility offered by Saudi Arabia envisaging the purchase of crude oil and other petroleum products of up to $3.24 billion per annum on a 12 month deferred payment basis.

The meeting noted that the pace of inflation rate may slowdown in coming months due to decreasing crude oil prices. New York’s West Texas Intermediate (WTI) crude, one of the world’s major oil contracts, slumped in morning deals to strike a near 14-month low at $49.41 per barrel. European benchmark London Brent North Sea oil dived to $57.50.

Published in The Express Tribune, November 30th, 2018.

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