Domestic sources to fund US aid cut | Pakistan Today

Domestic sources to fund US aid cut

Any further weakening in ties with the US would compel the State Bank of Pakistan to raise additional funds for monetisation which has been inflationary in nature. Yet, it is certain that policy rates have already peaked and any further upward adjustment in First Half Financial Year 2012 seems unlikely based on a lower inflationary outlook. Secondly, the latest T-bill auction suggests ample liquidity of secondary markets where minor upward adjustments have been witnessed in a 6-month tenor.
This has been projected in the wake of the US government’s suspension of military aid to Pakistan worth $800 million. The timing of the suspension comes at a very crucial time, considering the country is already struggling to meet its financing needs through both domestic and external sources.

Expected impact

The suspended aid of $800 million is a part of US annual military assistance equaling $2 billion (Rs172 billion) in FY12. Out of $800 million (Rs68.8 billion), $300 million (Rs25.8 million) has been reserved for the Coalition Support Fund (CSF). Since CSF is a reimbursement of military spending for war on terror, it directly forms part of government treasury. In terms of FY12, total budgeted tax revenue (Rs2.07 trillion), CSF forms a mere 0.01 per cent.
Henceforth, we do not expect a major hit in the country’s revenue, said Saad Khan at AHL, adding that we might see a shift in utilisation of military resources from external to domestic funds but given the negligible quantum of aid, it will not have major repercussions on domestic sources. In addition, it is believed that the government has already accounted for any shortfalls in external funds through domestic sources which are budgeted at Rs716.5 billion (84 per cent of total deficit) in FY12.

Dealing with shortfalls

Government borrowing for budgetary purposes in FY11 has already propped up significantly registering 27 per cent YoY growth (as of June 25, 2011). With a financing target of Rs851 billion for FY12, any major halt in external funds (Rs64.1 billion) would pass on the financing burden onto domestic sources. The government expects to raise Rs303.5 billion (36 per cent of total deficit) and Rs70.4 billion (eight per cent of total deficit), through the banking sector and privatisation proceeds, respectively.

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