IN 2020-21, the government plans to borrow Rs979 billion from banks for budgetary support. And it hopes to close the ongoing fiscal year’s borrowing at Rs1.724 trillion. Actual government borrowing for budgetary support until May 29 stood at Rs1.93tr. It will be interesting to see if this amount really comes down to the projected level when the year ends on June 30.

Governments often end the year with greater-than-projected borrowing from banks. This PTI-led coalition government is no exception. But the slippage in targeted borrowing in 2019-20 is going to be too big even if the government contains it at Rs1.72tr. While presenting the 2019-20 budget, it had projected borrowing of only Rs339 billion.

When the government borrows too heavily from banks, it crowds out the private sector. Banks become lethargic in lending to the private sector. They hide this lethargy behind perceived low credit demand. Private-sector businesses get too little from banks. Banks continue to earn enough interest income on investment in risk-free government debt instruments. When the government’s need to borrow exceeds the budgetary limits several times over — as it did in 2019-20 — the yields on government bills and bonds keep rising.

Had our central bank started monetary easing a bit earlier, the cost-push element of inflation could have been minimised

That also helps it in attracting foreign investment into these bills and bonds, particularly short-term treasury bills. This hot money is actually the government’s external borrowing, but gives a false notion that foreign investment is pouring into the country.

How quickly this hot money evaporates is evident from the fact that foreigners have so far divested $3bn of their investment in treasury bills that had shot up to $3.6bn at one point in 2019-20 after a cumulative 5.25-percentage-point cut in the policy rate that caused a massive decline in yields.

Meanwhile, the private sector when crowded out is often forced into reducing outputs. That creates cost-push inflation. High inflation in Pakistan for the most part of 2018-19 and 2019-20, before it started falling after somewhat delayed monetary easing, was partly cost-push. Average July-May inflation was still 10.9pc.

Had our central bank started monetary easing a bit earlier, the private sector would not have suffered the pains of crowding out and the cost-push element of inflation could have been minimised. But the State Bank of Pakistan (SBP) believed — on the basis of its own reading of inflation dynamics — that inflation was mostly demand-induced in nature and could be addressed by interest rate tightening. That’s why a tight monetary policy remained in place despite repeated pleas of the private sector for its easing throughout 2018-19 and in about three quarters of 2019-20. Monetary easing started in mid-March when the economy had already started shrinking.

During the first 11 months of 2019-20 (until May 29), banks’ net fresh lending to the private sector totalled only Rs289bn, less than half of Rs628bn they had lent a year ago.

The government says the economy shrank only 0.4pc in 2019-20 and has set 2.1pc growth for 2020-21. Meeting that growth target is possible only if the engine of growth — i.e. the private sector — is reenergised by enough and cheaper bank credit. Whereas the interest rate has fallen, will banks really start making enough credit available to private-sector businesses?

That depends on several things, but most notably on whether the government sticks to its bank borrowing programme this time around and how diligently the SBP ensures that banks do not turn down worthy credit proposals from the private sector.

In all likelihood, the government will exceed its targeted bank borrowing because meeting targets of resource mobilisation, including the generation of tax and non-tax revenue, seems too difficult amidst the ongoing fight against Covid-19 and growing political polarisation. As the country remains within the International Monetary Fund (IMF) programme, the government cannot go back on its promise of keeping its net borrowing from the SBP at zero. Besides, raising funds via National Savings Schemes would be difficult with their returns falling. So the government will have to rely chiefly on commercial bank borrowing.

It is the SBP that will have to play a proactive role in 2020-21 in ensuring the channelling of enough bank credit towards the private sector. Banks, meanwhile, will need to revamp their credit approval procedures and strengthen their systems and resources to assess the creditworthiness of their borrowers.

Some concessional loaning schemes recently rolled out by the government and the SBP could go a long way in meeting the private sector’s credit requirements. But transparency in the implementation of such schemes and accountability at all levels would matter most in meeting the objectives of these schemes i.e. mitigating the effects of Covid-19 on businesses and minimising layoffs. Karachi Chamber of Commerce and Industry President Agha Shahab has urged the SBP to publicise details of those who have got financing under concessional loaning schemes. The SBP says it has so far disbursed Rs96bn under such schemes since April. — MA

Published in Dawn, The Business and Finance Weekly, June 15th, 2020

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