Fiscal tightening: SBP opposes debt swap with commercial banks

ISLAMABAD: State Bank of Pakistan on Thursday opposed the debt swap deal with commercial banks, warning the federal government to stop ruining the private sector as the country’s budget deficit widened to 4.5 per cent or Rs932 billion in the first half of the financial year.

The same day, despite the comments by the SBP, Prime Minister Yousaf Raza Gilani presented the proposed debt swap deal as a solution to the circular debt while giving a policy statement on the economy in the Parliament.

Sources said the SBP raised its concerns in a meeting of Monetary and Fiscal Coordination Board – the statutory body framed to align monetary and fiscal policies that so far have been moving in opposite directions.

The meeting was chaired by the Finance Minister Dr Abdul Hafeez Shaikh and attended by Governor SBP Yaseen Anwar, Commerce Minister Makhdoom Amin Fahim and Deputy Chairman Planning Commission Nadeemul Haque.

Sources privy to the meeting revealed to FTNews that the Governor State Bank Yaseen Anwar said that due to reckless borrowings the monetary policy has become neutral and private sector risks being left with no credit.

They added the governor also conveyed his reservations about the government’s move to strike a deal with commercial banks to swap Rs163 billion debt with them at rates even higher than the Karachi Interbank Offered Rate.

The sources also said that the Finance Ministry briefed the Board that according to provisional estimates from July through December the current fiscal the budget deficit – gap between income and expenses – soared to Rs932 billion or 4.5 per cent of Gross Domestic Product. This also includes Rs390 billion electricity and commodity debt arrears of the last fiscal year. Excluding the arrears the deficit remained at approximately 2.7 per cent.

The Finance Ministry officials were not available for comments.

In the first 6 months, the borrowing from the SBP amounted to Rs123 billion, Rs43 billion higher than the borrowing in the same period last year. The federal government not only failed to retire the entire borrowing at the end of the second quarter but also breached the overall debt stock limit that increased to Rs 1,277 billion. From the commercial banks the government borrowed Rs 315 billion in the first half.

The Finance Ministry admitted that risks to the budget are many. They include a delay in disbursements of Coalition Support Fund, delay in 3G license auction, impending receipts from Etisalat, the level of success in achieving the Rs1,952 tax target, increasing subsidies on electricity and provinces’ inability to generate budget surpluses, said the sources.

The sources said the governor SBP further said that the government’s targets of current account deficit, budget deficit and revenues (both tax and non tax) “are very ambitious”. They added, both the Governor SBP and the Commerce Minister Makhdoom Amin Fahim agree that this year the exports will shown negative growth – a view the Finance Ministry is not ready to accept.

As the exports are dwindling the Finance Ministry has come with novel solution. As against shipments-based date of Pakistan Bureau of Statistics, it has presented the receipts-based data that is projecting higher exports. On shipment based data exports in the first half grew 3.9 per cent while the growth is 9.4 per cent on basis of receipts. It fed the same figures to the premier for projecting rosy picture of the economy on the floor of the National Assembly on Thursday.

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Pakistan’s fiscal deficit for H1 FY11/12 at 2.6 pct of GDP

KARACHI: Pakistan’s fiscal deficit for the first six months of the fiscal year 2011/12 (July-June) was 2.6 per cent of gross domestic product (GDP), a Finance Ministry official told Reuters on Friday.

This compared with a deficit of 2.9 per cent of GDP in the same period the previous year.

“The full-year fiscal deficit target has also been revised upwards to 4.7 per cent, from the earlier estimate of four per cent,” said the official, who declined to be identified.

The fiscal deficit widened to 6.6 per cent of GDP in the 2010/11 fiscal year.

“Containing fiscal deficit to 4.7 per cent in this fiscal year looks like an extremely difficult task, especially as it is election year,” said Asif Qureshi, director at Optimus Capital Management Ltd.

“International oil prices are also rising which means energy subsidies will increase, therefore increasing the government’s expenditure.”

Subsidies and slow implementation of reforms as demanded by the International Monetary Fund (IMF) have been one of the main reasons for a high fiscal deficit.

In 2008, Pakistan and the IMF agreed on a three-year package loan for $11 billion. But the programme was halted in 2010 because of slow implementation of fiscal reforms, and only $8 billion has been disbursed so far.

Islamabad opted not to seek a new IMF programme or an extension. It has to start repaying the loan in early 2012 and that is when the pressure on foreign exchange reserves will increase, analysts say.

“The probability is that we will not be going to the Fund right now and are in fact expecting a few inflows,” the Finance Ministry official said.

The current account recorded a provisional deficit of $2.154 billion in the first six months of the 2011/12 fiscal year, compared with a surplus of $8 million in the same period last year, according to data from the State Bank of Pakistan.

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