Record borrowing made in 100 days: Rs651bn acquired from SBP

By Shahid Iqbal

KARACHI, June 27: The present government in its first 100 days has borrowed much more than what the previous government borrowed from the State Bank in first eight months of the ongoing fiscal year completely ignoring the frequent warnings issued by the central bank which termed it as catalyst for inflation.

The SBP calculations showed that the total government borrowing from July 1, 2007 to June 14, 2008 was over Rs651 billion.

Surprisingly, since the formation of new cabinet on March 31, 2008 the government geared up its pace of borrowing sharply. It borrowed Rs355 billion during three and half months while the previous and interim governments collectively borrowed Rs296 billion till March 1, 2008.

The continued rising trend of borrowing reflected that the PPP-led government denying the impression that it would adopt different measures to meet the budgetary deficit.

The SBP had been issuing warnings that record government borrowings for budgetary support would further escalate inflation. The central bank held the government responsible for destroying all its effort to control the inflation.

The new government has already announced that it will reduce borrowing burden from the State Bank but it looks that its plan would be implemented from next fiscal 2008-09.

However, analysts said the rampant borrowing would seriously inflict the economy as its adverse impact would continue to hurt it even in next fiscal year if the government stops borrowing from the SBP.

The government has planned to launch securities papers to mobilise deposits from the public and reduce burden on the SBP.

The rate of return on National Savings Scheme has also been increased by two percentage points to muster maximum deposits from the public.

Analysts believe that despite these efforts the government would require more money to meet the ambitious spending plan.

“The slowdown in economic growth will not create much revenue for the government to meet its spending target and it will have to again rely on SBP borrowing,” said research head of a brokerage house.

A total budget outlay of Rs2,010 billion was announced for 2008-09 and revenue collection target was projected at Rs1,250 billion.

On the expenditure side, a record amount of Rs550 billion, 27 per cent of total expenditure, has been allocated for development expenditure.

“The revenue target is highly ambitious and unlikely to be achieved which means more borrowing to meet the expenditure,” said the analyst.

Moreover, in view of the prevalent oil prices, the government has allocated oil subsidy of Rs140bn as against Rs15bn last year.

The government has already set main inflation target at 12 per cent for the next fiscal year. The record borrowing from the State Bank pushed inflation to 11.5 per cent during the current fiscal year.

http://www.dawn.com/2008/06/28/ebr3.htm

Borrowing money by governments is not a bad thing, as long as its from your own bank.

Do you have any idea what you just said?

If you thought inflation was bad now, well ... the above trend won't help a single dime.

You cannot print notes out of inflation or increase buying power with. You need concrete reforms, or in Pakistan's case, a contengency plan in the light of exploding oil prices & the administrative Juggernought called "Hukumat"

Borrowing money by governments is not a bad thing, as long as its from your own bank.

& what do you thing is written in the account receivables of your own bank ? Or I suppose for your taking credit from SBP might be booked under zakat donations !

And how do you expect the SBP to get the money from? Foreign exchange reserves? Printing money like no tomorrow, causing massive inflation? Or the SBP getting loans from IMF which will screw things further?

Well, first of all, Pakistan is facing supply side inflation, this has more to do with global trends than the consumers getting more money in their pockets. SO if the Govt borrows money, it cannot exasterbate supply side inflation, while demand side inflation could rise, but that can be controlled by the Sbp.

SBP, like the ECCB or the Federal reserve lends only to banks, and sells bonds and buys them back, they have, since their inception been creating money out of thin Air! But thats not totally remarkable, whats remarkable is the fact that the govt can actually borrow from the SBP to serive interest and prinicipal payments owed to the SBP. It can do that, because unlike a human, it can't die, atleast we hope it won't.

When the government deficit is financed through printing money, the increase in the money supply will fuel inflation. In this situation the main tool that is used to combat inflation is to raise interest rates.

Once interest rate are increased, this raises the cost of borrowing, which depresses the level of investment and reduces the growth rate.

With lower growth rates, poverty levels will increase.

Unfortunately the PPP/PML-N don't even understand this simple economics. It would be great if you could create money out of 'thin air' but there is always a cost to pay and in this case the cost is paid by the poorest sectors of society

Have you all noticed that these useless socialist have increased tax on phone calls made form oversease. I have stop calling pakistan. i used to call friend and family every now and then. the rates went up thanks to the new government.

less revenue for telecom.

Enjoy the socialism.

Welfare and taxes breed more welfare and taxes.

Don't call this #### Socialism, that is just wrong to do so!

lol there's no welfare nor a real tax base...this isn't socialism, but social exploitation!

GST is way too high.

Only 1.5 million taxpayers out of a population of 160 million. The figure should be atleast 15 million.

Coming back to the topic, the government would be better off freezing interest rates and work on infrastructure projects that atleast reduce the input cost for an average Pakistani. Roads, dams, nuclear powerplants, alternative sources of energy projects, rail etc etc. Interest rate in Pakistan is exceptionally high and the government thinks inflation could be controlled using interest rates.

The government should pursue at least market based land reform...it should set a limit on land holdings by locals and foreigners, buy off the excess land at a 5% profit rate and essentially nationalize the food based agriculture industry. To accomplish the acquisitions...stop textile subsidies; secure long-term credit from GCC & SCO - also use U.S. & E.U. aid/assistance. For a country like Pakistan, a government controlled food market will definitely tap into a good chunk of every Pakistani's income while also exporting surplus to Africa, Arabian Gulf and India. Also nationalize the energy, fuel, public transport (roads, mass transit), mineral, water and merchant trade corporations. The private sector should be pushed into manufacturing consumer goods such as cell-phones, cars, televisions, computers, etc, in a Malaysian or Mexican-oriented export to regional neighbours.

I am in favour of completely nationalizing the energy sector with minimal shares being owned by local Pakistanis.

Agricultural industry is too huge to be nationalized. I think the current system of buying produce from farmers is a good system, if run in a professional manner. Once food and energy inflation can be controlled, everything else will be comparatively easy.

Anyways, this government's policy of borrowing from every avenue possible to finance deficit is not a good one. They are shooting both foot.

Nationalization leads to ineffiency, look at the Mexican national oil company, or our Railways !!

Sufi:

OGDCL, PSO, OGDCN are owned by the Pakistani government, and yet they are earning alot of profits for Pakistan. I still stick by the notion that energy related companies should be owned by the government. With regards to financial regulation, the past government has done well.

As for Railways, it has been a huge burden on the economy. I'd like the government to privatize it, but I dont think now is the moment, considering how poor the government has been in terms of a regulatory body. Maybe outsourcing the management to another company would be a short to medium term goal.

Well there is a rule, rather a time tested observation in economics that Inflation is accompanied with job growth, I am ofcourse referring to making it cheaper to borrow money, when the govt buys back bonds etc, which means money for banks, and then for buisnesses, creating oppurtunities for growth, and JOBS. Secondly there is rather large disconnet between thoery and practice in economics, National bank chairmans are not so cut throat, they are always willing to risk some inflation for job growth. In Pakistan's case, a balanced budget will only take fuel out of a growing economy, while borrowing could be used to increase growth, Japan's balanced budgets only created more problems for it's suffering economy, because the banks never wanted to lend money, due to some large bank failures in the past, which could have been avioded.

Well not being fully aware of the energy sector in Pakistan, i would veture to say that if infact those companies have made money as you seem to suggest, then we don't have enough competition in Pakistan, oligopolies, markets controlled by few big players, are not in the consumer's best interest, so while these companies are making money, it is more so of their market positions as price setters, and not as price takers, which would be the case in more competitive markets. This means that, ineffiecency could be masked by simply raising prices, or if you have terrible management, ie railways etc, then you don't mask ineffiencency by raising prices.

Bottomline: the govt won't be able to privatize some industries like railways, simply because of huge upfront investments required by the buyer, instead it should streamline operations, break even if it can, or simply subsidize this service for the consumer.

A little bit of knowledge can be dangerous

Sufi it is good to see that you have heard of some economic theories but it seem that you lack a full understanding of these theories



What you are referring is the Phillips curve which was a emphirical observation rather than a rule. Generally economist agree that MILD inflation might be good for growth. For higher rates of inflation the apparent relationship between inflation and unemployment breaks down.
The rate of inflation in Pakistan has now went over 10%, this is not mild inflation so there is no benefit in the government encouraging inflation by maintain a large government deficit. If high inflation was a good thing then Zimbabwe would have the strongest economy in the world.



Next you seem to be refering to Keynisian economic policies to stimulate the economy. The government might run a temporary deficit to increase demand in the economy so as to smooth through the downturn in the economic cycle BUT crucial this deficit has to be sustainable. Ideally the government will run a deficit during the downturn and repay this debt during upturn of the economic cycle.

The current budget deficit for Pakistan is over 6.5%, this is NOT sustainable. With a unsustainable deficit the government debt will increase out of control and eventually the majority of government revenue will be diverted to servicing the government debt rather than paying for education and healthcare. This is exactly the situation Pakistan faced in the 1990's.

So Sufi you need to realise that how dire the situation will become if borrow is allowed to continue at this level, Pakistan will once again head toward bankruptcy.

Ok, I am not asserting that hyper inflation is a good thing, but that most of Pakistan's inflation is supply side inflation, and not demand side inflation.Total inflation stands at ten percent, how much of that is demad sided, I don't know, but most analysts agree that many of Pakistan's inflationary issues have arisen out of supply issues, rather than demand.

So we can still work with demand, and still risk small demand sided inflation, as purposed before.

Secondly Pakisan is borrowing money from its own bank, The State Bank of Pakistan, this means that the balance of payments will be transferred from one generation to another, infact the govt can borrow more to service the impending debt payments from the same bank. This ofcourse will have adverse effects on investment etc. But the point is, in the situation Pakistan is in, where supply side inflation can adversly effect demand, the govt can risk borrowing to induce greater demand. The PPPP have also promised to bring the deficit below 6.5% for the follwing fisical year.

Sufi it seems your post are going from bad to worse



The Pakistani poor are suffering from the pain of inflation, rather than try to reduce this you think the government should not bother to try to stop this inflation.

You logic does not make sense.

Although the government does not have much control over supply side inflation (as this is linked to the price of oil and food), it does have a influence over demand side inflation, so in this situation any responsible government would try to reduce the problem where it can, and that is by trying to reduce its spending. Only a irresponsible government which does not care about the poor would think, we have have a big problem so it doen't matter whether we make it worse



Do you understand what you are saying here. So the government should borrow as much as it can because this debt can then be transferred to the next generation.

So the next generation of Pakistan children rather than inheriting a prosperour country full of oppurtunity, should instead inherit a massive debt which they will spend the rest of their lives paying off. Sufi is this how you plan to treat your own children, you might aswell sell them to a sweatshop now or make them bonded labour.

If we don't care about the debt our children inherit we might aswell close down all school because there is no point in wasting our money on them, Sufi would you not agree?



Again I'm flabbergasted, you are suggesting it is okay for the government to borrow as much as it want because it can then borrow more to service this debt. So how will it pay for the money it has borrowed to service the money it borrowed to service the debt it had borrowed before.

Im sure your answer would be it could just borrow some more.

This is the road to ruin if you borrow money to service the money you borrowed before, eventually your debt will skyrocket and you will become backrupt.

This is exactly what happened to Pakistan in the 1990's, once Pakistan's economy was bankrupt the foreign curriency accounts of hard working Pakistani's were seized(stolen) by the government. Sufi do you think this was a good thing to do?



Borrowing by the government can be good, if this borrowing is used to invest in the economy and the economy grows, but the current deficit is not being used productively so it is not a good thing



Is this the same PPPP which promised that the price of flour would be halved, I wouldn't hold my breath that the PPPP will deliver a single promise that it made

Probably the best post on this thread so far.

You need to stop assuming I am wrong from the get go. Fact of the matter is, the government like me is aware of the fact that Pakistan like the rest of the world is experiencing supply side inflation, and it is simply trying to provide for the people through increasing demand from its end. Here is an example :





http://in.reuters.com/article/domesticNews...M26560020080704
Now while Pakistan has definite problems, and if we stop helping the poor through borrowing money, for subsidies and development projects then we are limiting the multiplier effect which could affect revenue generation from taxes. This borrowing is intended to help the mases by maintaining demand which is being ruined, slowing down the economy, due to supply side inflation.

When you said that the excessive borrowing by the government was NOT bad because
1- borrowing is good so long as it is from Pakistan banks
2- this debt could just be passed on to the next generation
3- the government can just borrow more to service this debt.

I did not assume that you were wrong, I KNEW that you were wrong. For some unknown reason it seems that you assume that there is infinate supply of borrowing that the government can call upon (or that the SBP can create money out of 'thin air')
This is not true, when the government borrows beyond it means quickily the banks will realise that the government is no longer able to pay back it loans.
In this situation the government will have to pay higher and higher interest rates on any debt it takes out (just in the same way that a poor person is only able to get a loan from a loan shark)

During the debt crisis at the end of the 1990's as Pakistan headed towards bankruptcy the interest rate it had to pay on some loans from the ADB went up to 8-11%
http://www.pakistan.gov.pk/divisions/econo...CHAP-2-BOOK.pdf

Luckily under Musharraf these expensive loans were repaid early.
If the present Pakistani government continues to borrow at the current rate it will once again head toward another debt crisis.

Sufi please read the follow document which explain how the debt cris was overcome
http://www.finance.gov.pk/admin/images/pub...20Statement.pdf



Sufi you have totally shot yourself in the foot here, you try to show the PPPP is doing good by providing subsidies through "Benazir Income Support Program" without even realising the government has just annouched that it will be drastically cutting subsidies on food and oil which will hit the poorest the hardest (what will be the multiplier effect of this?)

I can see how you mistakenly think that that the excessive borrow by the government is done to help the poor but eventually if the borrowing is unsustainable and the country faces a debt crisis there will have to be DRAMATICALLY cut backs in expenditure. The first area to get cut are almost always subsidies and the development budget which hit the poorest the most.

This is exactly what is happening in Pakistan now,

http://www.ft.com/cms/s/0/5706e02c-46ca-11...00779fd2ac.html

Pakistan’s government plans to phase out politically-sensitive fuel subsidies during the new financial year that starts on Tuesday as it tries to bring a ballooning budget deficit under control, according to senior Pakistani officials.

The government spent $2.4bn during the fiscal year that ended on Monday to subsidise domestic fuel prices and protect consumers from a sharp rise in global oil prices.

this has resulted in a sharp increase in the budget deficit, which is expected to reach about 6.5 per cent of gross domestic product, leading to a rethink by government ministers.

”The deficit is unsustainable,” one government minister told the Financial Times. “We have to pass on all the increase in fuel prices to our consumers. By December 2008, there [will] be no fuel-related subsidies in Pakistan.”