KARACHI, June 26: The federal government's borrowing from the banking system shot up to Rs84 billion between July 1, 2003 and June 12, 2004, more than three times the original target of Rs27.9 billion set for this fiscal year, and higher than the revised estimate of Rs74 billion.

In the comparable period of the last fiscal year, the government had rather retired Rs50 billion loans obtained from the banking system, according to a data released by the State Bank.

The government sets an initial target for its borrowing from the banking system at the time of presenting the budget for new fiscal year. Then the target is revised, if needed, at the time of drawing the annual credit plan in consultation with the State Bank. Finally, the government presents a revised estimate of its borrowing from the banking system in the outgoing fiscal year, at the time of presenting the budget for the next year.

The initial target for government borrowing from the banking system was set at Rs27.9 billion for the fiscal year 2003-04. This was revised downward to Rs15 billion in the credit plan. Finally, at the time of presenting the budget for 2004-05, the government revised the estimate in the outgoing fiscal year to Rs74 billion. Simultaneously, it set the initial target for 2004-05 at Rs45.1 billion.

The government used Rs84 billion, which it borrowed up to June 12 during this fiscal year, to fill in the gap between its income and expenses. This huge borrowing, three times the original target of Rs27.9 billion, shows that the government expenses exceeded targets in this fiscal year.

Senior bankers say that low interest rates encouraged the government to finance higher-than-targeted expenses through bank borrowing. They say the government could not finance its increased expenses through non-bank borrowing because mobilizing resources through non-bank sources had become difficult due to lower interest rates. The National Saving Schemes (NSS) failed to attract enough investment during the current fiscal year primarily because of the slashing in their rates of return. The NSS is a known source of non-bank borrowing. Similarly, corporates also did not show the desired interest in the long-term Pakistan Investment Bonds (PIBs), thus reducing the government borrowing from non-bank sources.

As Rs84 billion government bank borrowing up to June 12 is much higher than even the revised budgetary estimate of Rs74 billion, and as the government appetite for funds does not seem to be over, this estimate may remain exceeded till the end of this fiscal year on June 30.

The break-up of Rs84 billion government bank borrowing shows that Rs80.7 billion of this amount was borrowed from the SBP. Theoretically, the government borrowing from the central bank fuels inflation more than its borrowing from the commercial banks does.

The SBP data shows that unlike the federal government, provincial governments did not make any sizable borrowing from banks during this fiscal year. Between July 1, 2003 and June 12, 2004, the cumulative bank borrowing of all the four provincial governments totalled Rs131 million only.