ISLAMABAD- The net bank credit to the government for financing commodity operations and budgetary support amounted to Rs. 423 billion during July-May FY08 against Rs.185 billion during the same period last year. According to an official data, the Credit to government for commodity operations expanded by Rs. 60 billion during July-May FY08 as compared to contraction of Rs.26 billion during the same period last year, while credit to government for budgetary support increased to Rs. 362 billion. In the current fiscal year, domestic and external shocks of extra-ordinary proportions caused large slippages on the fiscal side. The financing plan of the fiscal deficit also affected by these shocks. The overall fiscal deficit of Rs.398 billion was to be financed by external sources(Rs.193 billion), and domestic sources (Rs 131 billion).The remaining Rs. 75 billion was to come from privatization proceeds. Within domestic sources, Rs 81 billion financing was to come from banking sources while the remaining Rs 50 billion was to come from nonbanking sources. The domestic and external shocks not only increased the size of the fiscal deficit but they also changed the composition of financing. The borrowing requirements increased from Rs. 324 billion (the net of privatization proceeds) to Rs. 683.4 billion (with no privatization proceeds)- an increase of 111 percent. The External resource inflows were adversely affected by these shocks and against the budgeted level of Rs.193 billion, only Rs.119.4 billion is likely to materialize. Pakistan could not complete the transaction of GDRs of the National bank of Pakistan and could not launch sovereign and exchangeable bonds. Furthermore; some of the lending from the multilateral banks could not be materialized. These developments had adversely impacted the external resource inflows which remained below the budgeted level. Thus, the brunt of adjustments on the financing side fell on domestic sources. Against the budgeted financing of Rs 131 billion from domestic sources, it increased to Rs 564 billion. Within domestic sources, the bulk (82.2 percent) of financing came from banks while the remaining Rs 100 billion or 17.8 percent came from non-bank sources. Most importantly, the borrowings from the State Bank of Pakistan reached at an alarming level which is posing serious complications for the conduct of monetary policy. On cumulative basis, as on May 10, 2008 government has borrowed Rs.551 billion from SBP during the current fiscal year, which has almost doubled the stock of MRTBs with SBP to Rs.945.9 billion. To put this in perspective, the July-May FY08 borrowings are twice the net borrowings seen during the preceding three years. The reliance on central bank borrowing is partly an outcome of scheduled banks' reduced interest in government papers. It may be pointed out that the government had borrowed substantially from the scheduled banks during Q1-FY08. This trend however changed completely in subsequent quarters when scheduled banks showed little interest in the T-bill auctions. This probably reflects strong seasonal demand for private sector credit as well as attractive returns on such loans and tight liquidity conditions in the inter-bank market. In addition, the expectations regarding changes in discount rate in the monetary policy statement for H2-FY08 also limited the scheduled banks' participation in the auctions of the government securities.