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ECO403 GDB Solution Spring 2012

The borrowing of government from State Bank of Pakistan (SBP) and commercial banks is rising drastically to meet its extra ordinary expenditures. This huge borrowing is providing less incentive to private sector of the country which is facing severe business environment along with several hurdles. Continuous borrowing from central bank would increase inflation and disable the central bank to keep policy rate low for a longer period and this could have negative impact on the already lethargic economy. According to SBP report, Consumer Price Index (CPI) inflation was 10.8 percent and is anticipated to remain in double digits during next fiscal year 2012-13. It has also been proved in the budget 2012-2013 that government estimates failed related to borrowing from public and private sector. According to the government estimation, borrowing from SBP will be zero but according to the fact and figures given in budget, it ended up borrowing over Rs.400 billion from state bank of Pakistan and about Rs.500 billion borrowing from commercial bank to combat with fiscal deficit of 7.4%. It shows that private sector acknowledgment would remain at the receiving end. Over all economy of Pakistan has to pay heavy cost to fulfill the demand of government.

 

Requirement:

Keeping in view the above figures of the budget 2012-2013, to what extent government borrowing will affect the private sector as well as overall growth of the economy of Pakistan?

Solution:

The level of government borrowing is an important part of fiscal policy and management of aggregate demand in any economy. When the government is running a budget deficit, it means that in a given year, total government expenditure exceeds total tax revenue.

If the government is running a budget deficit, it has to borrow this money through the issue of government debt such as Treasury Bills and long-term government bonds. The issue of debt is done by the central bank and involves selling debt to the bond and bill markets. Most of the government debt is bought up by financial institutions but individuals can buy bonds, premium bonds and buy national savings certificates.

Government borrowing can benefit economic growth: A budget deficit can have positive macroeconomic effects in the long run if it is used to finance extra capital spending that leads to an increase in the stock of national assets. For example, higher spending on thetransport infrastructure improves the supply-side capacity of the economy promoting long-run growth. And increased public-sector investment in health and education can bring positive effects on labour productivity and employment. The social benefits of increased capital spending can be estimated through use of cost-benefit analysis.

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