The federal government has repaid some Rs 1.3 trillion to the State Bank of Pakistan (SBP) in the first month of this fiscal year (FY19) to meet the International Monetary Fund (IMF) condition. While, obtaining a 36-month $6 billion bailout package, Pakistan has agreed with the IMF that financing from SBP for budget deficit will be eliminated to support the new monetary policy framework as the Fund believed that this fiscal dominance has greatly compromised the SBP's operational independence, jeopardizing the achievement of the inflation objective.
During the negotiations with the IMF, Pakistani authorities have committed to refraining from any new direct financing of the budget by the SBP and will gradually reduce the SBP stock of net government budgetary borrowing. Therefore, following the IMF condition, the federal government is re-profiling its debt by heavily borrowing from commercial banks through sale of short-term and long-term investment papers.
Previously, within domestic debt, borrowing from the State Bank increased as banks were reluctant to lend to the government for longer period amid rapidly changing monetary stance due to inflation. The federal government made a record Rs 3.1 trillion borrowing for budgetary support from the State Bank during last fiscal year (FY19).
However, now the federal government has started to retire the SBP's debt and repaid some Rs 1.34 trillion from 1st July to 2nd August 2019. The repayment is some Rs 1.184 trillion higher than previous retirement of Rs 158 billion in the same period of fiscal year, ie, 2018.
During the period under review, the federal government borrowed some Rs 1.366 trillion from scheduled banks against Rs 20 billion repayment. Most of the borrowed amount was utilized for domestic debt re-profiling to reduce SBP's debt. According to State Bank's latest statistics, Balochistan, Khyber Pakhtunkhwa and Punjab governments have also retired a cumulative Rs 37 billion in the first month of this fiscal year. Balochistan government repaid Rs 8.2 billion; Khyber Pakhtunkhwa Rs 3.9 billion and Punjab government retired Rs 25 billion to the State Bank during 1st July to 2nd August 2019.
However, during the period under review, Sindh government obtained a fresh loan of Rs 196 billion from the SBP. Economists said that the SBP and the Ministry of Finance have already agreed to re-profile the stock of mostly short-term government debt held by the SBP into short- and long-term tradable instruments of various maturities at interest rates close to market levels. Therefore, the federal government has made significant borrowing through the sale of short-term and long-term security papers to retire loans obtained from the SBP for budgetary support.