Recent reports suggest that the State Bank of Pakistan (SBP) extended credit worth Rs 239 billion to the PMLN-led coalition government in January-February. The purpose of this credit is believed to be to manage the ballooning debt servicing requirements of domestic commercial banks.
However, this move is in apparent deviation from the State Bank of Pakistan Act amended in 2022, which prohibits government borrowing from the central bank. The law states that the bank shall not extend any direct credits to or guarantee any obligations of the government, government-owned entities, or any other public entity.
According to the Prime Institute’s latest quarterly report, the government’s borrowing from the SBP has increased as a result of the country’s fiscal deficit overshooting amid excessive debt servicing costs of the domestic debt.
The report noted that an excessive government footprint in the economy and public spending continued to fuel the economic crisis. The fiscal deficit in July-February clocked in at Rs1.87 trillion or 2.3% of GDP, with expenditures standing at Rs5tr and revenues at Rs3tr. As a result, the government borrowed Rs1.39tr in the first two months of the third quarter of FY23, of which Rs239bn was from the State Bank and Rs1.15tr from commercial banks.
As a result, the stock of SBP credit to the government went up from Rs5.260tr in January to Rs5.597tr in February. The report noted that Pakistan’s economic challenges resulting from the deterioration in political stability in the country and the reluctance of the government to carry out reforms.
It highlighted that the pillars of economic prosperity were limited government footprint, spending restraints, low tax rates, reduction of trade barriers, the establishment of sound money, and privatization of loss-making state-owned enterprises.
The report argued that Pakistan’s taxation system was regressive, with more reliance on indirect taxes, as the government had remained unsuccessful in broadening the tax base, and people were reluctant due to exorbitant tax rates