Government borrowing crowding out private sector

The borrowing of government from the State Bank of Pakistan (SBP) and commercial banks is rising significantly to meet its swelling expenses and thus providing less room for the economic managers to ease the monetary stance to provide stimulus to the private sector of the country, which is facing stringent business environment amid several hurdles.

The broad money supply in the country grew by 5.3 percent from the July 2011 to date, where money supply continues to remain tilted towards domestic liquidity.

The previous fiscal year remained sound for the Pakistan economy comparatively as the money supply was in much more control and external account pressure was not as firm as it is currently in an absolute terms.

The major victim of this government’s rising expenditure financing remains the private sector as crowding out effect is resisting them to grow as the financing options are not easily available for them. The commercial banks also prefer to shift their advances to cash strapped government to yield risk free return which is attractive amid high policy rate stance.

Under the present circumstances, the government borrowing now occupies 61 percent of total domestic money supply as borrowing from the SBP lately crossed Rs 189 billion.

The circular debt issue is also getting frightening as the days progress and government’s intension to resolve it by issuing TFC could ruin the private sector further as the country’s budget deficit has risen to 4.5 percent or Rs 932 billion in the first half of the financial year.

Moreover, the persistent depreciation of Pakistan currency, slow exports growth, rising oil prices, weak foreign inflow could further aggravate the liquidity shortages being faced by the government.

Persistent government borrowings will certainly put pressure on interest rates in the long run. Hence, it is imperative that government now should look to improve tax collection and increase tax base to solve budget deficit problem. Persistent borrowing from central bank would fuel inflation and disable the central bank to keep policy rate low for a longer period and this could have negative implications to the already sluggish economy.

http://www.halaltamweel.com/2012/01/23/News/Government-borrowing-crowding-out-private-sector/3449/Story.aspx