Karachi, May 12, 2014 (PPI-OT): Zakaria Usman President Federation of Pakistan Chambers of Commerce and Industry said that as it has been described earlier that the present shadow budget is based on expansionary fiscal policy, however, we are not in favour of excess public borrowing and use of cash balance.
It has become a practice in Pakistan to finance fiscal deficit through excess supply of money by use of cash balance or borrowing from public. The increase in money supply by use of cash balance to finance fiscal deficit is directly linked with inflation in country and pressurize the value of domestic currency.
In past it was a major cause of inflation and depreciation Pakistani rupee in international market. In academic term, this is an indirect regressive tax. In last three years the trend of financing was changed but it was mere a shift from the State Bank of Pakistan to the commercial banks.
He said that the Government has been using public money in commercial bank for financing its deficit. The commercial banks in Pakistan have been encouraged to provide lending facility to the government at attractive and risk free interest rates. This was a good option for commercial banks, but this trend has hampered the investment in business ventures. Consequently industrialization process was further deteriorated in the economy.
Government can offer attractive interest rate to commercial banks because it will be paid by public money in future. To pay the higher cost of interest government can impose further taxes, but private sector cannot borrow money from commercial banks on higher rate of interest. We are against this policy of deficit financing.
Zakaria Usman also said it is notable that despite of significant increasing revenue collection by the FBR, an accelerated increase in the government borrowing from commercial banks and the use of cash balance for budgetary support has been observed.
This huge borrowing increased the money supply and accelerated inflation in the country. Economists agreed that generating money through banking system is a type of indirect tax which is collected by the public in the form of inflation.
President FPCCI further said that to control over the heavy acceleration in money supply which has been creating hyper inflation in the economy, we strongly have recommended the financial discipline in the economy and we suggest the implementation of ‘Fiscal Responsibility and Debt Limitation Act 2005’.
Last year government has suggested Rs.975 billion bank’s borrowing to finance its fiscal deficit. We suggest that government should avoid from domestic borrowing in the form of treasury bills and bonds and floating debts or borrowing from commercial banks in any form.
Similarly there should be some limit in the use of cash balance. The limit of the use of cash balance should be determined by the State Bank of Pakistan according to money market requirements. The State Bank is a guardian of money market and to create stability in money market and the value of Pakistani rupee is its basic responsibility.
The supply of money in terms of the change in volume of currency in circulation should be based on money market equilibrium principles. This year we suggested Rs.386 billion borrowing from the central bank, which is significantly much lower than last year’s target.
We strongly reject the budgetary financing through banking system; it creates several problems for the industry. Liquidity crunch in financial markets, higher rate of interest and higher inflation are the ultimate outcomes of the use of cash balance by the government to finance its fiscal deficit.
We believe that revenue generation by the federal government through bank borrowing is an indirect tax on the industry and general public. This tax is paid by the public and industry in the form of higher spending due to inflation created by the use of cash balance by the government.
He said that borrowing from commercial banks to finance the fiscal deficit has become an easy and common option in Pakistan during the last five years. Commercial banks are encouraged to utilize public deposits for deficit financing of federal government at a higher rate of interest.
In this way they avoid from risk management and evaluating the business plans and feasibility reports for investment activities in private sector. The public money and surplus savings which should be utilized for investment in the country are used for financing public sector activities.
It leads the unusual and irrational higher in the interest rate and shortage of investable funds in capital market. The higher interest cost payable by the government to banking industry is ultimately paid by the public through higher taxes. The multiple adverse effects of this practice are hampering the economy.
We suggest that government should avoid from bank borrowing and use of cash balance. The parliament has passed ‘Fiscal Responsibility and Debt Limitation Act’ in 2005. This act should be implemented in its true spirit, and government, opposition parties and judiciary should be responsible for implementation of this act.
It will create financial discipline in the economy. Several negative externalities of external borrowing create irritants in the economy. They shift the burden of repayment to the forthcoming generations. So these options should also be avoided.
Zakaria Usman President FPCCI added that external receipts of Rs.500 billion have been proposed to finance the fiscal deficit, which is around 5.10 billion dollar. It includes one billion dollar budgetary support from World Bank, 2 billion dollar generated through Euro bonds and the rest from the remaining portions from outgoing committed projects.
For more information, contact:
M. A. Lodhi
Federation of Pakistan Chambers of Commerce and Industry (FPCCI)
B-1, Federation House, Main Clifton Road,
Tel: +92-21-35873691, 93-94