The week in focus

The IMF programme is coming to an end this month and the government has decided not to seek further assistance.


Ghazanfar Ali September 19, 2011

The shift in government’s focus for borrowing, to meet its expenses, from the central bank to other banks will meet a condition of the International Monetary Fund (IMF) but it may not have a significant effect on the economy.

According to State Bank of Pakistan (SBP) data, the government has reduced its borrowing for budgetary support from the SBP to Rs22.33 billion so far this year compared to Rs206.20 billion last year, easing pressure on the bank to print excessive currency, which fuels inflation, already in double digits at around 13.8 per cent.

The SBP has mentioned in its monetary policy many a time that the government should restrict its borrowing from the central bank to lessen pressure on inflation and increased interest rate by 150 basis points in the previous fiscal year, ended June 2011.

Banks, too, seem to be quite eager to pour money in government paper including treasury bills and investment bonds which provide a risk-free avenue for investment where chances of default are almost zero. In its schedule for treasury bill auction in the first quarter (July to September) of the current fiscal year, the government is targeting to borrow Rs750 billion from banks.

Though investment in government papers is secure, but a cut in the State Bank’s policy rate brings down the return for banks. In the last monetary policy announced at the end of July, the State Bank reduced the policy rate by 50 basis points, which cut yields on treasury bills by almost the same margin.

The IMF had also asked the government in its $11.3 billion loan programme to curtail borrowing from the SBP and give more autonomy to the central bank.“Though inflation has dropped below 14 per cent from more than 15 per cent few months ago, higher budget deficit because of high expenditures and low tax revenues may continue to put pressure on inflation in coming months,” said an economist.

Increased government borrowing from banks has left little for the private sector to borrow, which is necessary for giving a boost to industrial and economic growth. “This has caused ‘crowding out effect’, meaning that funds which can be lent to the private sector are being utilised by the government for non-development expenditures like payment of salaries to employees and supporting loss-making state enterprises,” said Faisal Shaji, Head of Research at Standard Capital Securities.

He said the real economic situation was facing further stress as rains and floods affected standing crops and energy shortages stemmed the growth of industries. Foreign direct investment also could not lend any support with investment falling sharply in the face of volatile law and order situation in the country and economic weaknesses in the US and Europe.

According to Shaji, the government would have to continue to rely on domestic resources due to slowdown in external fund flows after IMF suspended its loan programme in May 2010 as the country could not meet the condition of reforms in the power and tax areas.

The IMF programme is coming to an end this month and the government has decided not to seek further assistance as it has a comfortable balance of payments position following a strong growth in exports and continuous heavy inflow of remittances from overseas Pakistanis.

To lessen dependence on borrowing, there is a need for significant resource mobilisation efforts on the part of the government, which seem to be lacking because of its extensive engagements with political and law and order issues.

The writer is incharge Business desk for the Express tribune and can be contacted at [email protected]

Published in The Express Tribune, September 19th,  2011.

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