KARACHI – The State Bank of Pakistan (SBP) has said that the domestic borrowings financed 79.4 percent of the budgetary deficit that amounted to Rs 276 billion in the first quarter of FY11. Given the lack of adequate external assistance, domestic sources contributed a hefty 79.4 percent share in deficit financing during the July-September period of FY11.
Specifically, a little less than half of total financing requirements were met through deficit monetisation during the first quarter, while a greater share of the remaining deficit was financed by non-bank sources, SBP said in its First Quarter Report for FY11. In the period, the government borrowed Rs 276.20 billion for deficit financing.
The government borrowed Rs 219.30 billion from domestic sources while external financing contributed only Rs 57 billion for deficit financing. Out of domestic borrowings of Rs 219.3 billion, the State Bank provided Rs 118.3 billion, Rs 33.80 billion were obtained from the national saving schemes while Rs 64.60 billion were raised from other domestic sources.
SBP said this pattern was sharply in contrast to events transpiring in the first quarter of FY10, when borrowing from the scheduled banks contributed 54.6 percent share in meeting the deficit. During the first quarter of FY11, the government raised 106 percent of the target amount in the T-bill auctions and this quantity was apparently insufficient to meeting the deficit and the government was compelled to borrow from the central bank to meet financing requirements.
Furthermore, the share of financing from non-bank institutions also recorded a fall during first quarter of FY11, because of relatively low investment in national saving schemes (NSS) instruments. Despite a visible contraction in expenditure growth, the size of consolidated fiscal deficit increased to 1.6 percent of GDP in Q1-FY11 compared to 1.5 percent in Q1-FY10. Being conscious of the spending requirements entailed by reconstruction and rehabilitation activities, the government scaled down and reprioritised spending introducing steep cuts in development spending.
However, potential gains from these measures could only be partially realised due to a sharp fall in non-tax revenues during Q1-FY11. However, the weak performance of revenues resulted in deterioration of all fiscal performance indicators during Q1-FY11. Additionally, financing difficulties witnessed during Q1-FY11 also exposed the fragility of government’s fiscal stance given the lack of adequate alternate resources available to the government which relied heavily on deficit monetisation.
The fiscal deficit recorded during Q1-FY11 also obscured the aggregate 0.5 percent of GDP budget surplus recorded by provinces during this period. This situation highlights the structural rigidities in federal government’s spending requirements. During Q1-FY11 while a part of spending pressure was fuelled by flood relief and rehabilitation activities, the disbursement of subsidies, defense and security related spending were some of the major claimants on fiscal resources.
In this context, while the gradual removal of power tariff subsidies, which comprised six percent share of country’s total fiscal spending during Q1-FY11, will provide some respite to the government, the increase in current expenditures especially increased relief and rehabilitation tasks likely to offset some of these gains.
