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Govt plan of retiring Rs 13 bn domestic debt slips

RECORDER REPORT

KARACHI: The government's plan to retire domestic debt worth rather Rs 13 billion has slipped as, in the eight months of the running fiscal year, it rather borrowed Rs 3 billion to support the budgetary deficit.

The government, to maintain the foreign exchange reserves level above the $1.5 billion and to foot the import bill, borrowed funds from local banks. It had aimed to retire nearly Rs 13 billion from domestic debts but in the first eight months of fiscal year 2000, net government borrowing from the financial system exceeded Rs 3 billion.

The trade deficit in the eight months ended on February 29 amounted to $1.107 billion of which nearly $815 million is due to higher oil import bill.

The import bill of oil jumped by 96 percent, to $1.669 billion during July-February, 1999-2000, compared with the same period a year ago. Experts believe that the imports of oil might cross the level of $2.5 billion by the year-end as the prices internationally pegged at $30-$31 per barrel in the past three weeks.

According to an analyst, despite having to foot the bill for petroleum products purchases and foreign withdrawals from the system on account of the pilgrimage season, government foreign exchange reserves remain around $1.5 billion for the last couple of months. A closer look reveals the modus operandi adopted by government's economic managers.

Instead of using up its precious foreign currency reserves, the government is purchasing dollars from open market through the SBP. To pay for these foreign currency purchases the government is printing money, which is seen in SBP's books as government securities and domestic borrowings in Government of Pakistan's accounts.

The same analyst said this strategy might work in the short run, but it can have negative implications as far as the government's plans for achieving and maintaining lower inflation targets. He said printing money increases the local currency in circulation, which leads to inflation as now more money is chasing the same amount of goods in the market.

He pointed out that as the government passes on the oil price increase to the manufacturing sector through furnace oil price increases, and to the common public by increasing prices of other POL products, these measures would lead to cost push inflation in the economy.

Although the latest upward revision in furnace oil prices has not yet been passed on to the final consumer by the power, cement or other sectors, analysts believe that an increase in their prices is likely to follow soon. Any further delay in the raise in electricity and cement prices would make a serious dent in the profitability of these companies, they say.