State Bank has been extremely concerned and raising its voice at various forums about the tendency of the government to borrow excessively from the banking system in the last few years, which in turn, results in contraction of credit to the private sector. During a recent presentation to the Senate's Standing Committee on Finance, the SBP has given ample evidence to prove its case and also indicated the difficulties it faces in implementing a proper monetary policy.
The relevant data show that net government borrowing was 56.9 percent of total credit during 2008, which increased to 75.6 percent during 2009. After declining somewhat to 67.3 percent in 2010, it again went up to 78.6 percent in 2011 and reached an alarming level of 92 percent in the fiscal year 2012. As a result of surging government borrowing, private sector credit as a percentage of total credit was squeezed to 17.5 percent in 2012 from 39.8 percent in FY08. In absolute terms, government financing requirements had increased to Rs 1,237 billion, excluding Rs 391 billion for power sector and procurement of commodities, in FY12, up from Rs 584 billion in 2008 while private sector credit was squeezed to Rs 235 billion from Rs 408 billion during the same period. According to the SBP, fiscal gap averaging about 6 percent of GDP in the recent years was largely financed from domestic sources including from the central bank, which was hampering monetary policy formulation. The Senate Standing Committee was also told that scheduled large foreign debt repayments, rising burden of oil imports because of high oil prices in the international market and constrained foreign financial inflows had weakened external sector account of the country.
The above trend in public and private sector borrowings from the banking system over the last five years or so is highly disturbing for a number of reasons. Banks, overall, perform a highly useful role in the economy by mobilising deposits from ordinary households throughout the country and place them at the disposal of investors for productive use. Such a function is known as intermediary process between the savers and investors and sharpens the skills of entrepreneurs and enhances the productivity of the economy. However, if the resources of banks are pre-empted by government sector to finance its budget deficit and the private sector is deprived of its due share from bank credit, productive agents of the economy do not get the needed financial support and the economy suffers as a consequence.
In Pakistan, the intermediary role of the banking sector has also been further blunted by repeated injections of liquidity by the SBP into the system to indirectly finance the fiscal deficit and keep the payment systems functioning. The designing and implementation of monetary policy has also become hostage to fiscal policy imperatives because credit to the government sector does not usually respond to the monetary policy signals. For instance, while the behaviour of private sector would be guided by the interest rate changes, no such relationship is likely to exist in the case of government borrowings and the money supply continues to increase despite tightening of monetary policy. Another worrying aspect is that the current trend in government and private sector borrowings is not likely to change in the foreseeable future as the ratio of fiscal deficit to GDP this year is not likely to be much different than last year's 8.5 percent and the government, in the absence of other sources of financing, is all set to rely on bank borrowings again for budgetary support. Obviously, if this unhealthy trend is to be arrested or reversed, government has to make extra efforts to consolidate its fiscal position and diversify its sources of financing. In the meantime, the State Bank also needs to be more assertive and tell the government in clear words that the central bank had the necessary powers under the existing SBP Act to regulate the flow of credit to the government sector. All said and done, the present trends in credit disbursements are damaging for the economy and need to be changed in favour of the private sector through bold moves both by the government and the SBP.
Monday, March 4, 2013
Pakistan: Government borrowings from banks
State Bank has been extremely concerned and raising its voice at various forums about the tendency of the government to borrow excessively from the banking system in the last few years, which in turn, results in contraction of credit to the private sector. During a recent presentation to the Senate's Standing Committee on Finance, the SBP has given ample evidence to prove its case and also indicated the difficulties it faces in implementing a proper monetary policy.
The relevant data show that net government borrowing was 56.9 percent of total credit during 2008, which increased to 75.6 percent during 2009. After declining somewhat to 67.3 percent in 2010, it again went up to 78.6 percent in 2011 and reached an alarming level of 92 percent in the fiscal year 2012. As a result of surging government borrowing, private sector credit as a percentage of total credit was squeezed to 17.5 percent in 2012 from 39.8 percent in FY08. In absolute terms, government financing requirements had increased to Rs 1,237 billion, excluding Rs 391 billion for power sector and procurement of commodities, in FY12, up from Rs 584 billion in 2008 while private sector credit was squeezed to Rs 235 billion from Rs 408 billion during the same period. According to the SBP, fiscal gap averaging about 6 percent of GDP in the recent years was largely financed from domestic sources including from the central bank, which was hampering monetary policy formulation. The Senate Standing Committee was also told that scheduled large foreign debt repayments, rising burden of oil imports because of high oil prices in the international market and constrained foreign financial inflows had weakened external sector account of the country.
The above trend in public and private sector borrowings from the banking system over the last five years or so is highly disturbing for a number of reasons. Banks, overall, perform a highly useful role in the economy by mobilising deposits from ordinary households throughout the country and place them at the disposal of investors for productive use. Such a function is known as intermediary process between the savers and investors and sharpens the skills of entrepreneurs and enhances the productivity of the economy. However, if the resources of banks are pre-empted by government sector to finance its budget deficit and the private sector is deprived of its due share from bank credit, productive agents of the economy do not get the needed financial support and the economy suffers as a consequence.
In Pakistan, the intermediary role of the banking sector has also been further blunted by repeated injections of liquidity by the SBP into the system to indirectly finance the fiscal deficit and keep the payment systems functioning. The designing and implementation of monetary policy has also become hostage to fiscal policy imperatives because credit to the government sector does not usually respond to the monetary policy signals. For instance, while the behaviour of private sector would be guided by the interest rate changes, no such relationship is likely to exist in the case of government borrowings and the money supply continues to increase despite tightening of monetary policy. Another worrying aspect is that the current trend in government and private sector borrowings is not likely to change in the foreseeable future as the ratio of fiscal deficit to GDP this year is not likely to be much different than last year's 8.5 percent and the government, in the absence of other sources of financing, is all set to rely on bank borrowings again for budgetary support. Obviously, if this unhealthy trend is to be arrested or reversed, government has to make extra efforts to consolidate its fiscal position and diversify its sources of financing. In the meantime, the State Bank also needs to be more assertive and tell the government in clear words that the central bank had the necessary powers under the existing SBP Act to regulate the flow of credit to the government sector. All said and done, the present trends in credit disbursements are damaging for the economy and need to be changed in favour of the private sector through bold moves both by the government and the SBP.
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