The government plans to borrow about Rs1.172 trillion from banks during 2022-23 starting from July 1, budget documents show. The government has estimated that total borrowing during 2021-22 ending in June rose to about Rs873 billion, up from actual bank borrowings of Rs681.3bn in 2020-21.

       This means next fiscal year’s planned bank borrowing would be 34.2pc more than the estimated borrowings of this fiscal year and 72pc more than the government borrowings a year earlier. The pace of increase in government bank borrowing is mind-boggling. But there are reasons for it — and it entails some implications too.

       The size of the government borrowing has been kept large for the simple reason that the government believes it cannot generate enough tax and non-tax revenue to match its expenses.

       The government has targeted generating Rs9tr in revenue, including tax revenue of Rs7tr and non-tax revenue of Rs2tr. Against this, total current expenditures for the next fiscal year have been estimated at Rs11.4tr.

       The central bank has to juggle money supply instruments to ensure stabilisation under the IMF

       Larger planned bank borrowings mean banks would have an opportunity to make more money by investing in government debt securities. The most obvious implication is that the private sector would be crowded out ie banks would not be able to lend to the private sector as generously in the next fiscal year as they did during this year.

       This, in turn, means the industrial, agricultural and services sectors — the three main components of our economy — will take a double hit, one from high-interest rates and another from lesser availability of bank loans.

       That means economic growth would fall. And that is exactly what the new budget has been premised on. The government has presented the budget with an aim to stabilise the economy on the insistence of the International Monetary Fund (IMF) and stabilising the economy means decelerating its earlier pace of growth.

       Pakistan’s economy is estimated to have grown 6 per cent in this fiscal year and now the government, on the insistence of the IMF, wants to bring down the growth rate to 5pc.

       A slower pace of growth had become inevitable because the high growth of the economy had produced high inflation. Yearly consumer inflation in 11 months of this fiscal year averaged 11.3pc against the full fiscal year target of 9pc.

       Actual inflation could turn out to be much higher than this — close to 12pc or even more due to the recent hike in fuel prices as is evident from the May 2022 annualised inflation of 13.8pc. The government has set the inflation target for the next year at 11.5pc.

       The targeted level of inflation (11.5pc) and targeted GDP growth (5pc) determine the minimum growth in Broad Money or M2 that the central bank keeps an eye on, to keep inflation under check. As such growth in M2 in the next fiscal year would be no less than 16.5pc if both inflation and GDP targets are realised.

       However, monetary hangover or the excess money available in the system at the end of 2021-22 — and the composition of the targeted M2 would influence the level of inflation in the next year as would higher fuel oil, gas and electricity prices. That is where lies the fear of the inflation target being missed again in the next fiscal year.

       Part of the M2 is Reserve Money (RM) and that is expected to grow too fast next year if the government succeeds in filling the external account gap of an estimated $22bn. The rupee counterpart of that amount would become part of RM and have an inflationary impact on the economy.

       The extent the rupee depreciates next year would only compound the challenge of inflation being fueled by growth in RM. The rupee has lost about 10.3pc value against the US dollar in the last two months and 10 days (between April 1 and June 10) and is still far from being stable despite the central bank’s efforts.

       On April 7 the State Bank of Pakistan used ‘moral suasion’ ie it requested banks (making it clear who is requesting) that they help stabilise the rupee even if it means a temporary loss in their forex dealings. It worked for just two days and no more.

       Central banks use the ‘moral suasion’ for exchange rate management sparingly, more so if their countries are under the IMF programme. In the future, the SBP cannot be expected to make repeated requests to banks to bring temporary exchange rate stability to the forex market.

       And we all know that with the trade deficit and current account deficit growing too fast, even after restrictions on imports of luxury goods, the rupee is bound to continue to lose value against the US dollar.

       Published in Dawn, The Business and Finance Weekly, June 13th, 2022