KARACHI: The government made zero borrowing from the State Bank in the first month of this fiscal year, but from commercial banks its borrowings exceeded even the last year's figure in the same month.

The government had started reducing borrowing from the State Bank in the last two months of the previous fiscal year but largely increased its dependence on commercial banks. In 2010-11, it borrowed just Rs98 billion from the SBP.

The latest report issued by the State Bank for July 2011 reveals that the government has retired Rs44 billion instead of borrowing any fresh amount unlike the previous year when a sum of Rs37 billion had been borrowed from the SBP.

The central bank in its monetary policy review for August-September expressed satisfaction over borrowing trend and reduced its policy rate by 50 basis points to 13.5 per cent.

However, the State Bank pointed out that the high growth in government borrowing from the scheduled banks and huge fiscal (estimated) gap of 6.2 per cent in FY11 may hurt the financial system.

The massive fiscal gap is an indication that it may prevail in FY12 if the economy does not perform as per expectations and revenue remains stagnant.

Te cut in policy rate is a good indication for the private sector but it will work only if the government limits its borrowing from the scheduled banks, analysts said.

In FY11 the record government borrowing of Rs616 billion did speak about the massive fiscal gap and influence of the government in financial system. This heavy government borrowing deprived the private sector, while the banks remained profitable.

The State Bank reported on Tuesday that the government borrowed Rs28.645 billion from commercial banks in July which was absolutely opposite to retirement of Rs6.69 billion in the same month last year.

State Bank reported that private sector debt retirement during the month under review was much higher over the corresponding month last year.

The private sector retired Rs66 billion in July compared to Rs49 billion the previous year. This indicates that the private sector is not ready to invest in the economy.

Most of the money borrowed by the private sector was for working capital which means money could not be used for expansion of business.

The State Bank reported that for the last two years the private sector borrowed much lower than government. In FY-10 the private sector borrowed Rs112 billion while in FY11 it borrowed Rs121 billion.

Analysts didn't see any significant change in private sector borrowing after the cut in discount rate as many other factors including political uncertainty, terrorism and killings were still affecting the business environment.