Govt fails to tap budgeted foreign inflows, may end up borrowing from SBP

The State Bank of Pakistan (SBP) is faced with a dilemma due to the government’s failure to tap budgeted foreign inflows and half-baked efforts at broadening the tax base may end in the government settling its obligations by borrowing from the central bank, again.
An official source said the government needed to ensure that all major budgeted foreign inflows for the current fiscal year should materialise to retain the fiscal deficit to the projected budgetary level of 4 percent of the GDP. He said the government had made efforts to reduce the expenditures, but most of the budgetary allocations were against fixed expenditures and they could not be further cut. He said additional steps were required for tax reforms to broaden the tax base, as it would help reduce the budget deficit as against the borrowing from the commercial banks. The source said, under the scheduled repayments of outstanding loans during the current fiscal year, realisation of substantial foreign flows, especially the proceeds of assumed privatisation receipts, Euro Bond, Coalition Support Fund (CSF), and 3G licence fees, becomes important for strengthening the external position. The external inflows are not materialising due to the international debt crisis and strain in the relations with the US.
Pakistan wanted to sell $500 exchangeable bonds of its most profitable oil and gas entity OGDCL, but the debt crisis has withheld its launch for the last several months. The US is withholding CSF dues of over $3.5 billion of which Pakistan considers $1.8 billion were mature for release on June 30, 2011. However, the US administration has not released $500 million dues which it promised to released before the end of last fiscal year. The government had plans to sell three 3G licenses, one GSM licence and a couple of wireless local loop licences which are expected to generate close to $2 billion during the current fiscal year. However, there remain issues to be resolved as the government has an agreement with the UAE- based Etisalat, which owns PTCL, under which no new licences could be awarded until March 2012. Currently, the government is mainly benefiting form the system’s liquidity and banks remain hesitant to extend credit to the private sector. The government has recently used commercial banks to settle Rs 391 billion circular debt and commodity loans of previous fiscal years. It borrowed Rs 255 billion from banks and Rs 62 billion from SBP in the July 1 to November 18 period to finance current fiscal year’s budget deficit. The growth in private sector credit has remained muted even though the policy rate was reduced by 200 basis points to 12 percent.
The government is supposed to finance its expenditure through taxation and not by borrowing from the commercial banks. Excessive bank borrowing by the government during the last three fiscal years has already crowded out the private sector and led to excessive expansion in money supply. The government has so far refrained from borrowing from the central bank, as this is inflationary, but reliance on commercial banks had also affected economic growth and financial stability. The government’s assumption that exports proceeds would continue to increase during the current fiscal year remain unfulfilled. The windfall gains in export receipts due to abnormally high commodity prices in last fiscal year have not continued, as is evident from less than $2 billion per month export receipts in September and October 2011.