KARACHI - The State Bank of Pakistan has showed a serious concern over the continued heavy borrowings of federal government from the banking system over the last two months of the current financial year, indicating if the governments reliance on the SBP and scheduled banks to finance the budget deficit through short-term Treasury Bills (T-bills) continues to rise, there will be a strong possibility of 'rollover risk this year. The SBP in the monetary policy statement while quoting provisional figures revealed that the government borrowed Rs220 billion during July 1 to September 24 compared to Rs126 billion during the corresponding period of the last financial year. This is against the spirit of macroeconomic stabilisation, since the elimination of governments borrowing from the SBP was one of the main commitments of such a programme. The fresh borrowings from the banking system during this year will increase these borrowings even further, especially if the spending requirements increase and there is no commensurate increase in tax revenues, it said. This trend entails substantial risks to economic stability in the immediate future and places a considerable pressure on the already high debt burden of the country. Rising NPLs and relatively low private sector the credit demand may create problems for the banks to meet the governments borrowing requirements at the cost of private investment in the economy. This could make the task of reviving economic growth and bringing inflation down to single digit level much more difficult, the SBP added. Similarly, the IMF in its recent country report estimated Rs2 trillion in T-bills, which needed to be rolled over this year owing to higher domestic net financing needs of the government caused by the catastrophic floods. On the other hand, domestic private demand will soften and undermine the already weak recovery in private sector credit growth, it added. According to SBP , the dependence on foreign borrowings has also increased due to continuous decline in the domestic national savings and private foreign investments in the country. The substantial narrowing of the external current account deficit in FY10 provided some breathing space. The SBP monetary policy document revealed that after registering a reduction of 2.3 percent in FY10, imports seem all set to grow significantly, especially after the floods, and may post a double-digit growth in FY11. Although the growth in exports was also projected to increase in FY11, the recent floods and the resulting disruption in productive activity could act as a dampener if the damage to the cotton crop turns out to be extensive. Thus, the expected increase in the external current account deficit and uncertain foreign inflows could put pressure on SBPs foreign exchange reserves and exchange rate in FY11. It also stated that most of the expansion in broad money in FY11 is expected to be driven by a considerable growth in the Net Domestic Assets (NDA) of the banking system accompanied by a possible decline in the Net Foreign Assets (NFA), which does not bode well for the inflation outlook. The central bank pointed out that there might be possible liquidity pressures in the market. The SBP stands ready to manage the system wide liquidity and maintain the short-term interest rates consistent with its monetary policy stance. However, more is expected from the fiscal authority to articulate and implement a coherent strategy and the market continues to look to the government for greater fiscal discipline to allay fears of rising inflation, the SBP advised. The key features of this strategy, as already mentioned above, will have to include broadening of the tax base, adhering to the principles of the Fiscal Responsibility and Debt Limitation Act (2005) in letter and spirit and restriction of the governments borrowing from the SBP . Failure to do so will only increase the economys reliance on foreign borrowings with its own complications and risks, the SBP mentioned.