Govt's domestic borrowing reaches Rs 6 trillion -Pakistan Press Foundation (PPF)

Paksitan Press Foundtion

Govt’s domestic borrowing reaches Rs 6 trillion

By Sajid Chaudhry

ISLAMABAD: State Bank of Pakistan Governor Shahid Hafeez Kardar on Monday informed the donor community that government borrowing from the banking sector has reached 56 percent or Rs 6 trillion, which is putting pressure on the exchange rate and resulting in an increase in inflation. The real challenge before the SBP is high inflation, which is higher than the policy rate.

In his presentation on the SBP reforms before the donor community at the Pakistan Development Forum, the SBP governor said that the Finance Ministry had piloted an amended SBP Act through the National Assembly, which had placed the limit of government borrowing from the SBP to only 10 percent of the previous fiscal revenues, and the government would be bound to retire its current stock of the SBP debt of Rs 1,355 billion or 65 percent of the revenues in the next five years.

He also said that unrestricted government borrowing from the SBP, apart from causing inflation, complicated the impact of monetary policy stance, put pressure on exchange rate and hurt the private sector by affecting availability and cost of credit.

Total government borrowing of the banking sector — 50 percent of NDA (56 percent, if PSEs borrowing included) is high and raised interest rates. The governor said that the SBP is owned by the government, which was paying up to 13 percent interest on its borrowing from the SBP.

Shaikh said that there should be zero interest on government borrowing from the SBP as the interest rate charged from the government became the basis for fixation of policy rate and increased interest rate for the entire private sector. He said that commodity credit now stood at Rs 390 billion, which included Rs 160 billion by the Trading Corporation of Pakistan and Rs 228 billion by the provinces.

Explaining the banking spread and credit concentration, he said that large spreads between interest rates on loans and deposit rates — 700 basis points — was partially due to limited saving avenues and heavy reliance on borrowing by the government, private and public sector.

Presenting the SBP’s reforms agenda before the PDF, he said it aimed at improving financial intermediation that would help narrow banking spreads gradually. Planned reforms in this area are widening access to government paper, creating greater awareness on high return term deposits, developing market for corporate debt and phasing out the role of institutional investors in the National Saving Schemes, he added.

Explaining the challenges due to subsidised credit facilities, the SBP governor hinted at the review of export finance schemes, saying that facilities like Export Finance Scheme, Long-Term Financing Facility complicated monetary management, as their effects were similar to the printing of money, which promoted economic inefficiency. The bank’s efforts to mobilise deposits and raise returns were constrained by easy availability of refinance from the SBP.
Source: Daily Times
Date:11/16/2010