KARACHI, May 30: The government sector borrowing from the banking system reached Rs32.9 billion on May 14, one-and-a-half months before the close of the financial year on June 30. The full fiscal year target for the government sector borrowing is Rs60 billion. Chances are that the government would borrow the entire targeted amount, as its borrowing through fixed-income national saving schemes has been on the fall, a source close to the ministry of finance told Dawn from Islamabad.
Between July 1, 2004 and May 14, 2005, the federal government borrowed Rs37.6 billion whereas provincial governments retired Rs4.8 billion bank credit during this period. So, the overall government borrowing totalled Rs32.9 billion, data released by the State Bank show.
A closer look at the data reveals that during the period under review, the federal government borrowed Rs164.8 billion from the central bank and retired Rs127.1 billion credits obtained from the commercial banks. That left its net borrowing from the banking system at Rs37.7 billion.
As the State Bank started a gradual tightening of interest rates since the beginning of the fiscal year in July last year and made its stance on monetary policy aggressively tighter in April, retirement of bank credit by the federal government makes some sense.
As a result of the SBP’s tightening of monetary policy, the weighted average yield on benchmark six-month treasury bills rose from 2.08 per cent at end-June 2004 to 7.82 per cent at end-May 2005 — a sharp increase of 5.74 percentage points in 11 months of this fiscal year. When the yields on treasury bills move up, the government finds it feasible to retire bank credit to avoid a big rise in the cost of borrowing. Naturally, then it has to depend more on borrowing from the central bank which apparently is a bit cheaper than borrowing from commercial banks.
But the government borrowing from the central bank is often, if not always, more inflationary in nature than its borrowing from banks. That explains partly why inflation in 10 months of this fiscal year averaged at 9.27 per cent against the full fiscal year target of five per cent.
Sources close to the ministry of finance say that the government will have to retire more of commercial banks’ credit in the remaining period of the fiscal year to avoid a huge increase in its cost of borrowing. They say that it will have to depend more on borrowing from the central bank in the mean time. That means at least one big factor would remain at work for fuelling inflation and containing inflation below 10pc at the end of the fiscal year would be quite difficult.
The State Bank in its third quarterly report released last week said that full fiscal year inflation might reach 9.4pc. Later on, the Planning Commission estimated 9.7 per cent inflation for the current fiscal year.
