The federal government borrowed more than Rs4 trillion from commercial banks in seven months and nine days of this fiscal year (between July 1, 2023, and February 9, 2024), according to the State Bank of Pakistan (SBP). After some adjustments (mainly retirement of State Bank of Pakistan debts and net negative borrowings by provinces), the government sector’s borrowings for budgetary support totalled Rs3tr.

Will the new coalition government (which is in the process of forming after the February 8 elections) add more to this huge borrowing stock? Chances are that it will. In the last fiscal year, the government sector’s budgetary borrowings totaled Rs3.75tr. Even in the best-case scenario, this year’s total borrowings will either exceed this amount or remain close to it.

This means banks will continue to enjoy safe haven investment in Treasury Bills and Bonds and will be least bothered to meet the financial requirements of the private sector.

In seven months and nine days of this fiscal year, the private sector’s net borrowings from banks totalled just Rs66bn. The amount equals a paltry 1.76 per cent of the budgetary borrowings. This trend of crowding out the private sector from banks’ credit market is unsustainable.

Forex inflows are essential not only for enhancing the reserves level to three months of import but also for avoiding an unmanageable pace of rupee depreciation

On the other hand, last week, the caretaker government cut the rates of return on National Saving Schemes (NSS) again in the third downward revision within two months. This means the government is less interested in filling its fiscal gaps with non-bank borrowings and wants to continue its excessive borrowings from banks. Will the new coalition government take a second look at this policy and gradually shift its reliance from bank borrowing to non-bank borrowing?

That depends on how much room the International Monetary Fund (IMF) allows for it to do so and whether the new government can dare annoy banks. Banks have their own problems, including that of “over-taxation”, but the banking lobby is considered the strongest in the country.

If government borrowing from banks continues recklessly, banks make easy money by investing in treasury bills and bonds. They often demand that the returns on NSS be brought down so that deposit mobilisation does not become difficult for them. And surprisingly, their demand almost invariably prevails.

January inflation reading of 28.3pc had already eclipsed all hopes for a downward revision in the SBP’s policy rate, at least in its March 2024 monetary policy meeting. A rising trend seen in treasury bills’ yield in last week’s auction dashed even the slightest possibility of it.

Will the new government be able to work with the central bank more effectively and bring down inflation to the targeted level of 20p-22pc anytime soon? Well, that is not possible before the start of the new fiscal year in July. The reason is the effects of the latest gas and electricity prices on top of the previous hikes will continue to pass through the price lines of all commodities and services in the next few months.

This means inflation cannot come down to the targeted level during this fiscal year ending in June, nor can the SBP lower its key policy rate of 22pc till then. It may become increasingly difficult for businesses and industries to survive in this environment of high-interest rates and ever-growing energy prices. Large scale manufacturing (LSM) grew in December 2023, but overall LSM output for July-December 2023 showed a net decline of 0.4pc.

A quick industrial revival plan cannot be evolved easily (remaining within the confines of the IMF conditions), but the new government will have to work for it honestly and dedicatedly.

No real relief can be provided to them before the beginning of the new fiscal year, and that too will remain subject to two things: One, whether the new government acts wisely and goes to the IMF for a large, balance of payment (BoP) support programme at its earliest and two, how the IMF responds to this request and what conditionalities it ties to its fresh lending.

That, in turn, will depend largely on how the new government can manage the noisy opposition at home and how our powerful establishment positions Pakistan vis-à-vis the dramatically changing needs of geopolitical adjustments.

In seven months of this fiscal year, Pakistan’s overall balance of payments booked a deficit of $2.37bn despite all the roll-overs of foreign currency loans of friendly countries and despite better showing of foreign investment. But going forward, it will become too difficult to manage further growth in the BoP deficit without entering a larger and longer-term IMF support programme (after the end of the ongoing $3bn short-term loan next month.

The SBP’s forex reserves of $8.06bn (as of February 9) are not enough to cover even two months of goods’ imports bill. Bulkier-than-before net forex inflows are essential not only for enhancing the reserves level to three months of import but also for avoiding an unmanageable pace of rupee depreciation.

The new government will have to ensure that the business community is taken on board in all key policy formulation to help revive industrial output and enhance domestic business activity. Seeking some foreign funds in the form of foreign direct investment through the Special Investment Facilitation Council will be important, but that cannot substitute domestic investments.

How the government appeases the protesting business class — protesting everything from high input costs to “unfair elections” — will be even more important. But that depends on whether the new setup gets enough legitimacy amidst noisy allegations of PTI about how unfair the elections were.

Published in Dawn, The Business and Finance Weekly, February 26th, 2024