KARACHI, Dec 24: Federal and provincial governments jointly borrowed Rs95 billion from the banking system for budgetary support in less than six months, against the full fiscal year target of Rs45 billion.

The federal government borrowed Rs77 billion whereas the provincial governments borrowed Rs18 billion between July 1 and December 11, 2004, data released by the State Bank show.

This breach of the full year borrowing target -- and that too by more than 100 per cent and in the first half of the year-indicates how badly the government needs money to fill in the gap between its income and expenses.

Since the government keeps borrowing and retiring bank credit throughout the year, this huge stock of bank credit might decline at the end of the fiscal year in June 2005. But even then, the actual borrowing seems set to exceed the target by a very wide margin.

The federal government's appetite for bank credit has remained high so far during this fiscal year primarily because it did not collect petroleum development levy for the first five months i.e. between July-November.

In fact, it had stopped collecting this levy a bit earlier, from May 2004 to freeze local prices of imported fuel oil at May 1 level in the face of rising global prices.

A higher than targeted collection of taxes and profits on government's shares in state-run organizations like PTCL did compensate part of the financial loss of Rs29 billion the government had to suffer for not collecting PDL in July-November 2004. But this was not enough and it had to resort to extra borrowing from the banking system as well to fill in the gap between income and expenses. What else made the government borrow excessively from the banking system was that its non-bank borrowing remained very low.

Between July-October 2004, the period for which latest data are available, the government's net borrowing through national saving schemes totalled less than a billion rupees.

Besides, the government also could not raise non-bank debt through long term Pakistan Investment Bonds as the market was not ready to accept low returns on them and the government was unwilling to raise the yields.

A particularly disturbing feature of the federal government's bank borrowing is that it borrowed Rs201 billion from the State Bank between July 1 and December 11, 2004 and used the bulk of it to retire Rs124 billion credit obtained from the banking system.

Senior bankers say that as the treasury bills rates started rising with the start of this fiscal year, obtaining credit from the central bank and using the same to retire banking system credit suited the government as its borrowing from the central bank became cheaper than that from the banking system. The central bank had started increasing T-bills rates to rein in soaring inflation.

But the government's excessive borrowing from the central bank had a potential impact on inflation that averaged at 9.1 per cent in July-November 2004 over July-November 2003 against the target of 5 per cent for the entire fiscal year.

There are indications that full year inflation would reach 7 per cent after more than five years. Meanwhile, the private sector obtained Rs190 billion credit from the banking system between July 1 and December 11, 2004.

The tentative target for the private sector credit disbursement during this fiscal year is Rs200 billion but indications are that the target would be met within the first half of the year.

This huge private sector credit off-take was also partly responsible for fuelling inflation. Bankers say the pace with which the private sector credit is rising suggests that the full fiscal year disbursement would surpass the last year's record off-take of Rs325 billion.