Pakistan govt borrows PKR 239 billion from State Bank of Pakistan in breach of law: Report

The State Bank of Pakistan allegedly provided a credit of PKR 239 billion to the government led by Shehbaz Sharif in January-February, in violation of the law. This credit was intended to address the growing debt servicing needs of domestic commercial banks, the Karachi-based Dawn media outlet reported.

As per a report, it is stated that the State Bank of Pakistan Act was amended in 2022 based on the guidance of the International Monetary Fund (IMF), and it now prohibits the government from borrowing from the central bank.

Section 9C of the law reads, “Prohibition on the Government borrowing–(1) The Bank shall not extend any direct credits to or guarantee any obligations of the Government, or any government-owned entity or any other public entity.”

PKR 239 billion from SBP in January & February: Report

The Prime Institute (PI), an economic think tank based in Islamabad, stated in its quarterly report that the Pakistani government borrowed PKR 239 billion from the State Bank of Pakistan (SBP) in January and February of this year. The report also mentioned that this borrowing took place as Pakistan's fiscal deficit exceeded the expected amount due to the high cost of servicing the domestic debt.

The think tank stated that the economic crisis in Pakistan is still being impacted by excessive government involvement in the economy and continued public spending. The fiscal deficit has reportedly reached PKR 1.87 trillion, which is equivalent to 2.3% of the GDP, during the July-February period. The report further states that the government's expenditures reached PKR 5 trillion, while its revenues were PKR 3 trillion during this time period.

Total credit reaches PKR 5.597 trillion

As of February, the amount of credit extended by the State Bank of Pakistan (SBP) to the Pakistani government reached PKR 5.597 trillion. This is a significant increase from the PKR 4.877 trillion reported in February of the previous year, which translates to a PKR 720 billion rise in one year. The borrowing for budgetary needs has resulted in the accumulation of public debt exceeding PKR 54.9 trillion.

The report highlights that Pakistan's economic challenges have resulted from the deterioration of political stability in the country and the government's reluctance to implement necessary reforms. The report further notes that the government's imposition of restrictions on imports has led to a reduction in the current account deficit (CAD), which decreased from USD 12 billion in 2022 to USD 3.8 billion during the July-February period.

The decline in large-scale manufacturing (LSM) by 5.56% in the eight months of this year, compared to the previous year, was due to the halt caused by the government's restrictions on imports. This slowdown has contributed to the rise in inflation and the expectation of further hikes in the coming months.

Furthermore, the decline in large-scale manufacturing (LSM) is also attributed to the decrease in private-sector borrowing, which dropped by PKR 219 billion during the first two months of the third quarter of FY23. As of now, the total borrowing of the private sector stands at PKR 7.4 trillion.

The report also highlights that borrowing by the private sector under the export processing scheme decreased by PKR 7 billion. Furthermore, it noted that Pakistan's taxation system is regressive, with greater reliance on indirect taxes due to the government's inability to broaden the tax base.

The Dawn report stated that political instability and reluctance have hindered the government's ability to implement necessary reforms in Pakistan. The current political divide in the country has further deepened, resulting in significant fragmentation among the people. This has made it difficult to reach a consensus on key policy reforms.