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Government’s excessive borrowing could disrupt growth projections | MG Opinion

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January 16, 2019 (MLN): In Pakistan, fiscal authorities face the dilemma of minimal resources to achieve their objectives, due to which, the government keeps falling back on the cushion of borrowing for macroeconomic operations within the country.

As a result of this, policy makers consistently find themselves dealing with the repercussions of government borrowing, as over the years the government has been financing its budget and development projects by incurring such debts.

Excessive borrowing translates into moving towards the center of the whirlpool of debt where economic and political independence becomes a dream.

According to data released by central bank, during the week ending December 28, 2018 total borrowing for the fiscal year stood at Rs.722 billion. However, as of January 4, the total amount has risen to Rs. 835.7 billion, demonstrating an increase of Rs.113 billion in just one week. Compared to the same period last year when it was Rs.353.4 billion, this marks a jump of 136 percent during the ongoing fiscal year.

The constant need for borrowing to finance the budget deficit has resulted in progressive deterioration of the country’s debt position. As per the latest statistics, the federal government’s debt has increased at a pace close to double digit, reaching Rs26.5 trillion – a net addition of Rs2.24 trillion in just five months due to shortfall in revenues and steep currency depreciation.

Moreover, it is worth noting that the government is heavily dependent on the State Bank of Pakistan (SBP) for its borrowing to finance its widening fiscal deficit. More distressing is the fact that borrowings from the SBP have jumped by Rs.1.44 trillion during July-December, 2018 compared to Rs.288 billion in the same period of last year while the government retired Rs.35.8 billion of debt from scheduled banks against borrowings of 356.0 billion in July-December, 2017.

In addition to this, money supply or M2 has registered a growth of 3.4 percent during the first half of fiscal year 2019 as compared to 2.6 percent in the corresponding period of last year. It seems that the government is left with no other choice but to borrow from the central bank as almost all revenue departments have failed to meet the revenue targets.

Without keeping money supply in check, larger increase in money supply during FY19 will ignite inflationary pressures in the economy, force the authorities to tighten the monetary policy and depreciate the currency further, thus increasing the debt servicing cost of the government.

On the external front, despite support from Saudi Arabia and assurances from UAE and China for a plausible financial assistance, the government still continues to engage with donors for a deal in order to contain the balance of payment crisis.

Since, for the layman, the facts and figures may not be of much interest, it shows roughly that the fiscal position of the government is deteriorating, the reliance of the government on SBP to finance its budget deficit has increased and the flow of funds from other sources of finance like NSS has, more or less, dried up, and the overall domestic and external debt burden has continued to follow an upward trend.

The noteworthy fact is that if the government continues to borrow at its current pace, the amount would not only rupture the limit of 5.1 percent set for the budget deficit in the ongoing fiscal year but could also disrupt the growth projections, as the government has to repay the debt afterwards.

The rate at which the government is borrowing to finance the fiscal deficit has implication for boosting productivity growth, but the caution comes at a time when total debt stock of a country like Pakistan soared at an alarming pace.  The ongoing borrowing trend of the government suggests that in FY19, the high debt servicing given the higher interest rate and funding gaps is expected to keep fiscal deficit at elevated levels.

Furthermore, the government is currently negotiating with the International Monetary Fund (IMF) for a bailout assistance, however, the jump in borrowing is likely to irk IMF authorities.

Moreover, the government is expected to announce third budget in the ongoing fiscal year in order to increase its revenue.

In order to ensure that the government is living within its means, the government should reduce its borrowing and tap private investments that will yield multiplier effects on many sectors of the economy.

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Posted on: 2019-01-16T13:43:00+05:00

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