Maybe economic/financial gurus here can help, but isn’t state bank a govt institution? If so, how can it refuse to lend money to the govt?
http://nation.com.pk/daily/dec-2007/6/index6.php
SBP refuses more loaning to govt
SHAHBAZ RANA
ISLAMABAD- Advising the government to search for other means to finance soaring budget deficit, the Central Bank has shown its inability to extend more monetary financing because of excessive borrowing during first five months of the financial year 2007-08.
The government has already borrowed Rs 122.1 billion from July to November 24, 2007 against the cap of Rs 43 billion for the whole fiscal year. The State Bank of Pakistan through a letter has recommended the federal government to opt long term financing from other sources including the external, privatization and commercial banks instead of heavily relying on short-term borrowing from the Central Bank.The Nation learnt.
During the same period of the last financial year, the government had got Rs 62 billion. The total borrowing from the SBP during the last financial year for budget support stood at Rs 140 billion.
The SBP is worried owing to inflationary nature of the monetization of the financing. During July-November 2007, the government has borrowed Rs 23.1 billion from the scheduled banks.
The government is facing a grave problem of soaring budget deficit that has shot up to 1.6 per cent of GDP during first quarter (July-September) of the current fiscal year. The government has spent Rs 471.5 billion against the total revenue of Rs 312.6 billion, showing a deficit of Rs 158.9 billion.
The economic managers at the time of Federal Budget 2007-08 had estimated the budget deficit at one per cent of GDP for the first quarter. However, it went beyond the projections because of debt servicing. The government has estimated budget deficit at four per cent of GDP for the current fiscal year. The present tendency of towering fiscal deficithas made it difficult to remain within the confinement.
The swelling budget deficit was also creating problem for financing of the deficit. The International Monetary Fund (IMF) has also advised Pakistan to go for long-term financing instead of relying on the Central Bank, the sources added.
The SBP in its Monetary Policy Statement July-December 2007 has recommended the government to retire previous borrowing of Rs 62.3 billion of it. Moreover, it advised the federal government to adopt quarterly ceiling on budget borrowing, which according to the sources, the government has not taken on yet.
In addition, the Central Bank also recommended a more balanced domestic debt strategy whereby the budget deficit is financed from long-term financing sources that are relatively less inflationary.