Similar to the cash-strapped federal government, provinces are also catering to their budgetary needs through heavy bank borrowings. Though the provincial governments of Punjab, Sindh, Khyber Pakhtunkhwa, Balochistan and Azad Jammu and Kashmir (AJK) have showed a remarkable restraint in seeking ‘inflationary’ loans from the State Bank of Pakistan (SBP), they were more dependent on scheduled banks for budgetary financing during the first 11 months of the outgoing fiscal year.
The FY2010-11 saw the funds-starved central and provincial governments borrow extensively, summing up to Rs700 billion, from the central and commercial banks despite repeated warnings from official and unofficial quarters fearing crowding out of the private sector, that is globally considered to be the engine of growth.
Throughout FY11 a widening budget deficit kept economic managers in the center and provinces on the run, primarily due to, what most analysts believe, their failure to strike a balance between their soaring expenditures, particularly the non-development ones, and depleting revenues.
The resource-constrained governments then deemed it easy to finance their fiscal gap through borrowing billions of rupees from the State Bank, which the economic observers warned was highly inflationary in nature.
The rulers in center and provinces then shifted their budgetary borrowing focus from the central to scheduled banks whose heavily-weighted and risk-free lending to the federal and provincial governments accumulated to Rs489.560 billion during July-May 28 of this financial year. This constitutes 79 per cent of governments’ total Rs622.128 billion budgetary borrowings from the banking system during the first 11 months of FY11.
Perhaps fearing inflation, which already stands high at 15 per cent, the provincial governments started seeking more and more money from the risk-averse commercial banks who welcomed the fascinating opportunity to increase their capital through heavily investing in the risk-free government papers. Consequently, the SBP data for July-May 28 FY11 shows that the scheduled banks lending to the central and provincial governments stands at Rs489.560 billion against the State Bank’s Rs132.568 billion.
On the contrary, banks’ credit to the growth-oriented private sector is shrinking fast and during the period under review contracted to Rs102.474 billion against Rs103.503 billion of last corresponding months. The central bank figures reveal that the cash-strapped provinces were also following the center in terms of borrowings and were seeking financing from the scheduled banks more than the State Bank.
The SBP counted the commercial banks’ accumulative credit to the governments of Punjab, Sindh, Khyber Pakhtunkhwa, Balochistan and AJK at Rs8.859 billion during July-May 28. This depicts a more than 100 percent increase, as the same period in FY10 had seen a credit balance of over Rs 14.81 billion in these governments’ deposits.
On the other hand, the four provinces, except AJK, were able to markedly lessen their budgetary dependence on the SBP that held a credit balance of over Rs74.24 billion in the former’s accounts. The governments of Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan have a respective credit balance of Rs11.231 billion, Rs19.708 billion, Rs18.239 billion and Rs25.070 billion.
The borrowing of AJK government, however, stood slightly lower at Rs1.355 billion than Rs1.396 billion which it had received last year. Given this borrowing-centric approach of the governments, economic observers expect inflationary pressures in the poverty-stricken country to persist at least in the foreseeable future as they see all indicators of money aggregates, including money supply, growing at a rapid pace.
According to State Bank’s provisional data, the monetary expansion in Pakistan marked an alarming double-digit growth of 11.73 per cent or Rs677.845 billion during July-May FY11 against 9.02 percent or Rs463.600 billion in FY10. The said period saw currency in circulation amounting to Rs231.394 billion, compared to last year’s Rs165.789 billion.
The analysts cite the cash-strapped governments’ heavy budgetary borrowings from the banking system as a major reason for the present double-digit monetary expansion in the country.
