KARACHI – Analysts have warned of an imminent ‘fiscal bankruptcy’ and ‘hyperinflation’ as the supply of money in the inflation-hit country has almost doubled during the first half of the current fiscal year. According to analytical accounts of the State Bank of Pakistan (SBP), during July-January 1, 2010, currency in circulation in the country has surged by 47.2 percent or over Rs 70.4 billion. The central bank’s accounts reveal that money supply in the country aggregated to Rs 219.490 billion against Rs 149.08 billion during the last corresponding period.
In accumulative terms, currency supply in the country up to December 2010 stood at Rs 1.595 trillion, up Rs 226.978 billion or 16.5 percent compared to Rs 1.368 trillion at the end of same month last year (2009). Some unconfirmed reports have shown that the SBP is currently printing at least Rs 2.0 billion daily to cater government’s borrowing demands and was desperately looking for a legal cover like the long-pending State Bank Act 2010 to put an effective check on the inflationary practice.
The excessive money supply, which analysts are concerned about because of its disproportionate nature towards the GDP growth, is primarily because of the funds-starved government’s ever-increasing reliance on the banking system for its budgetary needs. However, despite such warnings, government loans from the central bank remained unabated and rose 350.4 percent or Rs 203.324 billion during first half of the current financial year to Rs 261.337 billion as compared to July-Dec 2009-10. Analysts view that the current rising trend in the money supply is not only inflationary in nature but also likely to increase ‘deposit volatility’ for the banking sector which, they believe, is already reluctant to invest in the private sector.
“The current money supply that roughly amounts to Rs 1.53 trillion is colossal and is not proportionate to the GDP growth,” Azfar Bin Shahid told Pakistan Today. The analyst said that nowhere across the globe, pubic sector was considered to be the engine of growth. It was actually the private sector which was ensuring an ‘optimal return’ of the rupee.
Therefore, the analyst said, bank lending must prioritise the growth-oriented private sector. The situation on ground, however, seems to be dismal as, according to SBP statistics, the government continued to crowd out the private sector through borrowing around Rs 177.923 billion from the scheduled banks during July-Dec 2010-11, Rs 20 billion more than last year’s Rs 157 billion.
Shahid warned that the present borrowing prone tendency of the economic managers in Islamabad, if not arrested now, would lead the country to fiscal bankruptcy.
Other analysts like Dr Hafeez Pasha, have already issued warnings to the government against increasing its budgetary support reliance on the banks, which was certainly being catered to through printing excessive currency notes, a trend the economist said, if not reversed, could over time lead to hyperinflation, defined as a triple-digit inflation. As the government appears unwary of the repeated warnings and continues to fill its fiscal appetite through bank borrowings, the economists see the central bank left with no option but to oil its machinery to print more notes. “This over-supplied money to cater the government’s make-believe expenses must be printing somewhere and is highly inflationary in nature,” A.B Shahid said.
Money supply swells by 47.2pc during 1HFY11
