The government faces a fiscal deficit, necessitating substantial borrowing from banks to bridge the gap between its expenditures and revenues. This deficit arises from hefty interest payments, employee salaries, and pension expenses, causing government spending to surpass its income. Despite surpassing revenue targets set by the International Monetary Fund (IMF) in the initial four months of fiscal year 2024, the government persists in relying heavily on domestic commercial borrowing.
This persistent trend has pushed government borrowing beyond Rs 60 trillion, with a significant portion originating from domestic sources. To meet financial needs, the government has increasingly turned to short-term securities in the domestic market, leading to a skewed maturity profile and heightened debt servicing costs. The strategy of doubling down on domestic borrowing raises concerns about the long-term sustainability of the government’s fiscal policies, as it contributes to an accumulation of high debt levels and exposes the economy to potential risks associated with managing and servicing this substantial debt burden.
Thus it also lead to domestic banks running out of the money to lend to SBP, which actually let SBP inject more currency increasing the money supplies. According to the SBP Act September 2022, there goes a permanent prohibition on directly borrowing from central banks. The infusion of substantial liquidity emerges as a key factor fueling rampant inflation and poses a challenge to the State Bank of Pakistan’s (SBP) attempts to regulate price levels. The excess money circulating exceeds the available goods, creating heightened demand that invariably causes a surge in prices.
The cyclical relationship between the injection of excessive liquidity, increased consumer spending, import surges, current account deficits, and inflationary forces underscores the intricate web of challenges faced by Pakistan’s monetary policy. The only way to get out of this crisis is by government making a control to their expenditures and increasing the revenue. As it can conduct to lower money supply and inflation.
