KARACHI- A report by the Standard Chartered Global Research fears that the central governments borrowing from the banking system for deficit financing will increase to Rs550 billion in the next fiscal year 2011-12 against the budget target of Rs 304 billion due to a higher-than-targeted fiscal deficit and lower-than-targeted external financing. According to a report titled, Pakistans FY12 budget-Resource constraints bite, written by Sayem Ali, a senior economist at Standard Chartered Bank, the government is seeking to reduce its FY12 borrowing from banks to Rs 304 billion (1.4pc of GDP), from Rs 633 billion (3.5pc of GDP) in FY11. However, there is a real risk that bank borrowing will be significantly higher as International Financial Institutions (IFIs), including the IMF, have suspended disbursements on the sharp debt build-up and slow pace of reforms. The IFIs will not release money unless they see tangible progress on reforms outlined in the FY12 budget. In this scenario, the government estimates that it will raise $3.3 billion (1.4pc of gross domestic product) in loans from IFIs look highly improbable. Programme loans of $1.4 billion for budgetary support in FY12 are particularly at risk; the government received only $450 million in FY11, the report stated. The government has budgeted $400 million under the Kerry Lugar Bill in FY12; last year it received only $179 million. Similarly, $800 million is earmarked in privatisation receipts. No privatisation has taken place since 2007 and it seems highly unlikely that the government will be able to push through the privatisation of state-owned enterprises at this stage, the report revealed. The report predicted that the pressure will remain on bank borrowing for deficit financing and the government deficit will be higher than its forecast. The fiscal deficit will exceed the governments 4 per cent projection and could stand at Rs 1.05 trillion, or 5 per cent of gross domestic product (GDP) in the upcoming fiscal year with higher-than-budgeted spending by provinces and lower-than-targeted tax collection. The report warned that external financing will remain low at 0.4 per cent of GDP, against a budget target of 0.6 per cent of gross domestic product (GDP). Non-bank domestic borrowing, primarily through the national saving scheme, is budgeted at Rs 413 billion, or 2 per cent of gross domestic product (GDP), with little room to expand borrowing. Hence, the bulk of deficit financing will come from the banking sector. In the first 11 months of FY11, the government borrowed Rs 480 billion from commercial banks and Rs 153 billion money printed from the central bank. Banks appetite for holding government paper is limited; they already hold Rs 2.1 trillion of government debt against the stipulated regulatory reserve requirement of Rs 980 billion. Hence, markets will demand a higher premium to purchase government debt and rates should remain firm, the economist wrote in his report. Private investment spending is also targeted to rise in FY12, as the government reduces its borrowing from banks, creating space for banks to lend to the private sector. Private investment spending has been crowded out in the last four years as heavy government borrowing has kept lending rates high, declining sharply from 15.4 per cent of GDP in FY07 to 8.5 per cent of GDP by FY11, the economist added. According to the economist, the government targets a reduction in inflation to 12 per cent in FY12, from 14.5 per cent in FY11. This is to be achieved through reduction in the sales tax (GST) rate to 16 per cent, from 17 per cent earlier, and commitment to stop printing money for deficit financing. Inflation has remained high in the last four years, as government has printed a record amount of money to finance its large deficit. A sharp reduction in subsidies will add to inflationary pressures in the short term. The removal of subsidies and higher taxes on agricultural inputs is likely to lead to an increase in the prices of sugar, wheat and rice, Ali said.