From fiscal year 2008, the State Bank, in consultation with the Ministry of Finance, would start imposing a cap on the government borrowings from the central bank. It would also set monthly and quarterly limits on such borrowings. Observing of these borrowings limits by the government would make fighting inflation easier for the SBP.

SBP Governor Dr Shamshad Akhtar told a pre-budget seminar in Karachi that the State Bank and the ministry would also work together to reduce the stock of government borrowings from the central bank. And the government would continue to change its mix of borrowings, gradually increasing the share of borrowing from commercial banks and reducing that from the central bank.

“Ideally, we want the government to phase out its borrowings from the SBP, which is most inflationary. That would enable us to fight inflation more effectively,” said a senior central banker.

From the next fiscal year, the government and the SBP would work more closely also to improve the mix and the sequence of domestic and foreign borrowings. This would result in timely creation of resources for financing development programmes and help the government keep fiscal and external accounts in shape. After showing decent economic growth in recent past, Pakistan’s economy is poised to grow further. The above understandings reached between the government and the SBP should provide the impetus for sustainable future growth, hopefully with not too-high inflation.

In ten months of this fiscal year, inflation rose at an average rate of 7.9 per cent against the full year target of 6.5 per cent. In addition to high food and fuel prices, heavy government borrowing from the central bank was also responsible for keeping inflation at this level, despite monetary tightening.

Between July 1, 2006-April 14, 2007, government borrowing from SBP stood at Rs180 billion compared with only Rs37 billion in a year-ago period.

For the next fiscal year, the target for inflation is again 6.5 per cent. To meet this target, the State Bank would continue its tight monetary policy and the government is committed to keep its fiscal deficit within check. In nine months of the current fiscal year, the fiscal deficit stood at Rs272.8 billion or 3.1 per cent of GDP. (Details of full year fiscal account would be available after two months of the close of the year i.e. in August 2008).

“We are witnessing an increase in administrative expenses in the last quarter (ahead of elections),” confided a source close to the Ministry of Finance. “But a slowdown in development expenses in this quarter might offset it,” he said. So, meeting the full-year fiscal deficit target of 4.2 per cent of GDP is difficult but not impossible.

The government financed the fiscal deficit during July-March FY07 by borrowing Rs179 billion through domestic resources and Rs93.8 billion through external resources.

“From the next fiscal year onwards, this borrowing mix would be made most efficient from the macro economic point of view,” said a senior official of the Ministry of Finance. The government would raise the bulk of domestic debt through non-bank sources and “borrowing from the central bank would be kept at very low levels.” He said that the government would try to keep external borrowings in the next fiscal year lower than in the current year.

The government borrowings from the central bank that was Rs180 billion on April 14 fell to Rs37 billion on May 19. This shows that the government really wants to cut its borrowings from SBP. But a drastic reduction in the borrowing from the central bank at a given time does not offset its impact on inflation. SBP finds it easier to curb inflation only when this borrowing does not exceed a certain limit at any time during a fiscal year.

That is why the government has agreed to adhere to the monthly and quarterly targets of such borrowings.

The outstanding stock of the government borrowings from the central bank is too huge. At end-March 2007 it was Rs530 billion, close to Rs556 billion worth of government borrowing from commercial banks. So, even if the government minimises its fresh borrowing from SBP in the next fiscal year, it would require many more years to reduce the stock of such borrowings, to ward off the inflationary pressures.

For that the government needs to ensure that the bulk of its borrowings from commercial banks is used in retiring the debt of the central bank. The government is also required to depend more on its borrowing from non-bank sources. That would lead to development of a secondary debt market, so vital for sustainable growth.

Realising all this, the government has begun to generate more debts through non-bank sources. The lifting of the ban on institutional investment in National Saving Schemes and resuming periodical auctions of long-term Pakistan Investment Bonds have proved helpful in this regard.

In nine months of this fiscal year, the government obtained Rs44.6 billion through NSS against only Rs6 billion in the entire last fiscal year. Since banks are not allowed to invest in NSS, this amount represents the government borrowing through non-bank sources. The government also raised a net amount of Rs36 billion through PIBs in the current fiscal year, against net withdrawal of Rs3.7 billion in the last year. A major portion of the Rs36 billion raised through PIBs represents borrowing from non-bank sources.

From the next fiscal year, the government is willing to borrow more through NSS and PIBs. But borrowing through NSS would pose a problem. If the government raises their yields to attract more funds that would add to it’s cost of borrowing. This would become all the more problematic because a large volume of 10-year Defence Saving Certificates has matured making it difficult for the government to arrange funds for final payment on DSCs.

To cut the cost of debt servicing, the government is ready to change the mix and the sequence of domestic and external borrowings. A build up in external debt volumes and consequent increase in debt servicing has perturbed the government and it is likely to borrow less from external sources in the next fiscal year.

In nine months of this fiscal year, total external debt rose by $1.707 billion or 4.8 per cent to $35.655 billion. During the same period, the government spent a little over $2 billion on external debt servicing.

As the trade and current account deficits continue to soar, any build up in external debt and consequent increase in its servicing would upset the balance of payments and weaken the rupee. That is why keeping external debt in check and relying more on less-inflationary domestic borrowing i.e. borrowing through non-bank sources assume greater importance in fiscal management in the next year.

And for that to happen, the government is looking for ways to increase revenue collection. But instead of burdening the public with additional taxes ahead of elections, it is trying to maximise tax collection through tax reforms with incentives to taxpayers.

The Central Board of Revenue is anticipating not only to meet tax collection target of Rs835 billion, set for this fiscal year, but also surpass it by a significant margin. In eleven months, it has already collected Rs720 billion.