ISLAMABAD: The government has been advised by its top economic managers to immediately stop borrowing from the State Bank of Pakistan (SBP), else inflation might soar and further thin chances of additional revenue generation in the coming years.
Per official sources, Prime Minister Yousaf Raza Gilani on Friday met the finance minister, SBP governor, Planning Commission deputy chairman and others.
The meeting was informed that the tax to GDP ratio would further decline with the rise in inflation and the extra pressure on economy would reduce additional revenue generation, as the economy would not be growing in the same manner as inflation. Core inflation increased to 13.4 percent in November, a 1.2 percent increase over the same period last year.
The meeting was informed that diesel prices were expected to shoot up from January next year, as Saudi Arabia would be switching over to the use of imported diesel for power generation. The meeting was told that due to the borrowing from SBP, Rs 1,600 billion was free-floating in the local market, which was being utilised by hoarders.
If the trend was not reversed and fiscal deficit increased to 6 percent, then an additional cash of Rs 1,000 billion would enter the market, raising inflation further.
The economic team said the federal and provincial government departments had to repay Rs 382 billion to commercial banks for commodity operations, while public sector enterprises owed Rs 400 billion to the banking sector. And with such borrowing by the public sector, the banking system had nothing to offer to the private borrowers. The economic advisers said the exchange rate had remained stable so far, but a rise in inflation was putting pressure on the currency.
Sources said the economic managers urged the federal and provincial governments to end their reliance on SBP, as it would help meet one of the key conditions of the International Monetary Fund (IMF). Under the IMF programme, the government had committed to borrow nothing from the SBP, while it borrowed over Rs 327 billion in the current fiscal year after the suspension of the programme.
The meeting was informed that the monetary policy alone could not control inflation, until the fiscal policy was in sync with it.
The sources added that the advisers said the IMF was likely to award extend the standby arrangement programme for nine months and this period should be utilised to rectify the government’s fiscal policy and generating additional revenues.
