The Finance Minister, Syed Naveed Qamar, has said that government borrowings from the State Bank have reached an “unacceptable level” and are a major source of inflationary pressures. These borrowings need to be contained. Partly, it is the result of fewer choices available to attract non-bank resources and relatively under-developed capital market.

“We are taking a number of measures to address this problem,” the minister said. The government borrowings from the State Bank so far made public for the current fiscal year is at a record high of Rs551 billion. Concerned officials concede informally that inflation is running at over 14 per cent and food inflation is at an all time high of 29 per cent. The inflation rate for the next fiscal year is targeted at 12 per cent.

The minister proposes to raise funds by floating bonds in domestic and global markets, through privatisation proceeds and borrowings from public sector organisations. He also intends to raise funds for the budget from National Savings Scheme.

When contacted, Secretary Finance Mr Farruk Qayyum told Dawn that inflation was one of the real issues which has been planned to be effectively targeted during the next financial year. While the government would go for some limited borrowings from the central bank and national savings organisation, some of the state sector corporations having enough liquidity available, were being asked to lend money to the government. This will be far less inflationary.

“In the beginning, the government plans to borrow from Oil and Gas Development Corporation (OGDC), Pakistan Petroleum Limited (PPL), State Life Insurance Corporation (SLIC) and few other state sector entities, the finance secretary added.

Some other public sector corporations have surplus funds for investment. Now when the government has taken a decision to limit its borrowing from the central bank, debts are being arranged from these corporations.

Mr Qayyum denied that subsidies were being withdrawn under the pressure of the international financial institutions, particularly the World Bank.

“Believe me, if we fail to do away with all subsidies, we will face serious problems--- something never experienced before. The government had to take this harsh decision”, he said.

Currently, over Rs400 billion annual subsidies have become unsustainable as the government does not have enough funds to continue paying them. These subsidies were a serious burden which cannot be provided for an indefinite period.

However, he added that highly vulnerable groups would be protected. But he was not sure whether this could be possible beyond 2008-9.

Former Finance Minister Sartaj Aziz felt that unnecessary subsidies could be withdrawn. But he did not believe that it was possible to completely do away with subsidy, specially when oil prices in the international market were posing a serious threat to the economies of the development countries including Pakistan.

He said the government needed to generate enough resources to continue paying subsidies, especially to the vulnerable groups. Over 23 per cent growth in tax revenue could help achieve sizable new resource mobilisation, provided the revenue targets were not revised downward any time during the next financial year.

Mr Aziz lauded the government’s decision of significantly limiting its borrowings from the central bank to contain inflationary pressures. Inflation at 12 per cent was too high and without bringing it down, the new government could not deliver in the coming years. The government should concentrate on improving the overall agricultural productivity. Necessary incentives were required to be offered to the farmers to help increase their per acre yield. Agricultural exports could help generate enough resources to manage the financial affairs of the government.

Vice Chancellor of Pakistan Institute of Development Economists (PIDE), Dr Rashid Amjad when contacted said that government borrowings from the central bank have assumed serious proportions and the time has come to ponder over the issue. Every year, he said, government of the day promises to contain its expenditure and limit its borrowings from the central bank but it hardly fulfils its promises.

However, he said it was a good beginning that the PPP-led coalition government has decided to drastically cut borrowing from the central bank which was heightening inflation. The new government should give public undertaking that it would not violate the Fiscal Responsibility Act. It should assure that it would remain vigilant about its kitty position during the next financial year.

He regretted that the former PML (Q) government which got this law approved from the parliament had itself violated it but no one was held responsible for it.

Former senior official of the Federal Bureau of Revenue (FBR), economist and policy analyst Mr Masood Dahir doubted the government’s ability to limit its borrowings from the central bank and do away with all the subsidies.

He said that government’s borrowings from the State Bank had crossed over Rs550 billion during the outgoing financial year. He would appreciate if the government restricts its borrowing from the central bank to half during the next fiscal year. It was good to know that some profitable state sector corporations were ready to lend money to the government. However, he said the proposal was yet to be seen as materialising.

Mr Dahir said that subsidies could gradually be withdrawn so as to avoid creating problems for the common man. He said cutting these subsidies from Rs407.48 billion to Rs295.20 billion in 2008-09 is a welcoming development. It would not only satisfy the donors but would will also help restoring certain financial discipline However, he was of the view that vulnerable groups must be protected by the government.