The banks’ budgetary lending to the resource-constrained government has exceeded the rare Rs700 billion mark due to, what the economic observers believe, mass distortions in the economy and the latter’s failure to curb its non-development expenditures.
Analysts also cite as a major attributing factor, the costly US-led War on Terror which, the economic survey for 2010-11 revealed has inflicted losses to the tune of Rs1.5 trillion during the outgoing FY11 which has significantly added to burgeoning bank borrowings.
The data released by the State Bank of Pakistan (SBP) reveals that the government’s aggregate borrowings from the banking system accumulated to Rs729.382 billion during first 11 months of the outgoing financial year, July-June 4, FY2010-11.
This depicts marked growth of 75 percent or Rs312.716 billion when compared with the banks lending to the resource-constrained government during the corresponding period last year.
During the period, the cash-strapped government borrowed over Rs220.51 billion from the State Bank and Rs508.864 billion from the scheduled banks. This was against Rs202.018 and Rs214.648 billion in July-June FY10, respectively.
Given the government’s growing reliance on the heavily-weighted bank financing, the economic observers are skeptical about the achievement of Rs825 billion or four percent (of the GDP) budget deficit target set by the federal government for FY2011-12.
“Distortions are increasing in the (already ailing) economy with ratios of tax-to-GDP and investment-to-GDP staggering at lowest level in the region and declining too,” Dr Shahid Hasan Siddiqui quipped.
The economist said the country’s economy was breathing hard under the soaring ‘unproductive’ expenditures with an unfavorable tax and investment climate. “In Pakistan the tax and investment (to-GDP) ratios are the lowest, while the unproductive security expenditures are on the rise,” Dr Siddiqui noted.
Referring to Economic Survey for 2010-11, he pointed out that the country had incurred losses of Rs1.5 trillion due to the US-led war against terrorism with the finance minister saying expenses would rise further during FY12. He questioned how the economy would be kept afloat.
He was also critical of the government’s failure to curtail its non-development expenditures that, he thinks, had piled up the bank debts to this level. Asked if the heavy government loans from banks were crowding out the private sector, the analyst replied in the negative. “The private sector is not even keen to invest in Pakistan. They are going abroad and mostly getting citizenship in Bangladesh,” the analyst claimed.
The risk-averse banks’ credit to the private sector, which actually generates economic activity thus growth in a country, during the period under review stood at a meager Rs98.499 billion against RS82.844 billion in the last corresponding period.
Inflationary pressures in terrorism-hit Pakistan, the analysts believe, will remain persistent with indicators of money aggregates, including money supply, keeping its northward journey on. The SBP data show that monetary expansion in the country climbed to 13.66 percent or Rs788.926 billion during July-June 4 of this fiscal year.
The period under review saw over Rs257.58 billion of banknotes circulating in the money market that when compared with Rs187.897 billion of FY10 exhibit an increase of Rs69.6 billion.
The total demand and time deposits, including the Residents Foreign Currency Deposits, ballooned to Rs527.785 billion against Rs313.612 billion of FY10. “The State Bank is sucking out the liquidity market to finance the government debts which are not contracting at all,” said Asfar Bin Shahid, a senior analyst. The State Bank, in its Second Quarterly Economic Performance Report for FY11, conceded that it had been catering the government’
