950824

Accounting adjustments

to cut budgetary

borrowing figures not

a new feature

RECORDER REPORT

KARACHI: The State Bank probe in the unusually large monetary expansion in the last week of June appears to have shown that the government's prescription to reduce its borrowing figure for budgetary support was the same as last year. It shifted the load to the non-government sector and temporarily built up its reserves.

In a single week between June 22 and June 30, 1995, credit to the non-government sector jumped from Rs 49.167 billion to Rs 66.326 billion - an increase of Rs 17.159 billion. In the corresponding week a year earlier the rise was Rs 14.864 billion.

In addition, the big five autonomous corporations outside the ambit of the federal budget, instead of improving their revenue base to retire the debt owed by them to the government, went shopping to raise credit and retire the debt of the government. In the last week of Fiscal 1994-95, the borrowing went up by Rs 2.64 billion. A year earlier, in the corresponding week their bank borrowing was up by Rs 1.457 billion.

Unlike 1993-94 when the government coffers got flushed with PTC privatization proceeds of approximately Rs 29 billion, in 1994-95 the government had to resort to short-term measures to cause an increase in net foreign assets (forex reserves) by Rs 6.043 billion.

Despite all this jugglery, government borrowing from the banking system was recorded at Rs 27.505 billion as against the Rs 20 billion targetted in the credit plan. The bank borrowing figure a week earlier is said to have been Rs 31.934 billion.

The statistical gimickry required to come close to the IMF performance figure of Rs 19 billion caused the balance sheet of the SBP to record a monetary expansion of 16.6 percent as against 15.12 percent a week earlier on June 22, 1995.

Had the achievement of fiscal discipline been in real terms it would have meant that monetary expansion in 1994-95 would have been around 14.5 percent, i.e. less than recorded in 1993-94 at 16.9 percent.

One thing that has clearly emerged from the SBP probe is that its open market operation (OMO) has been successful as an instrument of control of credit to private sector.

Incremental increase in credit to private sector proper was within the targetted figure of Rs 42 billion. The extra-ordinary expansion of Rs 17 billion recorded in the last week of June was due to:

(a) Window dressing by banks to the tune of Rs 3 billion;

(b) Crediting of interest to accounts of borrowers - Rs 6 billion;

(c) Unusally high lending by commercial banks to the tune of Rs 3 billion to public-sector enterprises; and

(d) Capitalization of interest by the Agricultural Development Bank resulting in its advance portfolio showing a jump of Rs 4,607 billion.

With the SBP's OMO on track, there is still hope among bankers that the Central Bank would do away with the compartmentalization of credit through the Credit Deposit Ratio (i.e. credit ceilings imposed on loans to private sector) and run the financial system on market-based instruments such as reserve ratio and a two-way auction of approved government securities.