KARACHI – The federal government appears all set to sustain its dependence on private sector borrowings for meeting its budgetary requirements during the third fiscal quarter, despite warnings from the International Monetary Fund (IMF) and the State Bank of Pakistan.
The central bank has set a target of Rs 1.060 trillion, to be raised form the open market, through issuance of Government Ijara Sukuk (GIS), Government Market Treasury Bills (GMTBs) and Pakistan Investment Bonds (PIBs) during the ongoing third quarter of the current financial year 2010-11.
However, analysts termed the target as unrealistic. They said that sufficient liquidity was absent in the private sector, including commercial banks which, the State Bank believes, have improved their financial health through greater investment in risk-free and high-yield government securities.
Analysts see a target-based “austerity plan”, which is consistently supervised by the parliament, as a sole remedy to the government’s increasing reliance on domestic and external borrowings. If current trends of government borrowing continued, the economy would cripple irreversibly.
Auction targets released by the State Bank reveal that during the third fiscal quarter, ranging from January to March 2011, the federal government would raise Rs 980 billion, Rs 45 billion and Rs 35 billion from private sector through the respective sale of GMTBs, GIS and PIBs for short and long-term maturity periods.
Target calendars show that the central bank would auction the three, six and twelve month GMTBs during the third quarter on January 12, January 26, February 9, February 23, March 9 and March 22 to raise, respectively, the targeted 175, 185, 150, 150, 170 and 150 billion rupees.
The State Bank, on the 16th of February and March 2011, would also auction PIBs worth Rs 35 billion for a maturity period of three, five, seven and 10 years (re-opening of July 22, 2010 issue) and 15, 20 and 30 years (re-opening of Aug 30, 2008 issue) during the said period.
In addition, the central bank has invited tenders for the sale of three year Islamic bonds from the designated primary dealers to raise Rs 45 billion. “Maximum value of the asset under the present issuance program of the Ijara Sukuk stands at Rs 102.42 billions,” the bank said. “It is highly unlikely that the set target would be met as neither the banks nor the private sector have liquidity and huge surpluses,” Azfar Bin Shahid commented, while taking to Pakistan Today.
Even if banks prepared to lend huge amount to the funds-starved government, the analyst viewed, that would be at a “tremendously high mark up rate”. Terming the luxuries-loving government and the profit-conscious banking sector as ultimate beneficiaries of Islamabad’s ongoing borrowing craze, Shahid claimed that commercial banks were fleecing the government by charging exorbitant premiums for a sovereign risk that is zero in nature.
“The banks are charging the government with a three percent premium in the name of risk, while they (banks) charge only 1.5 percent premiums from the corporate sector where the risk happens to be higher, relatively,” he wondered.
The analyst maintained that high-yield investment in the risk-free government securities had made banks reluctant from lending to the private sector “Even if they lend to the private institutions that would be at 16 percent (interest rate),” he said adding that government’s debt servicing burden would further increase as a result of the new borrowing targets.
Shahid proposed that an “austerity plan” must be followed through setting quarterly targets, achievement and implementation of which, should be supervised by the Parliament. He also appeared critical of an unnecessary delay on the part of Islamabad in legislating and implementing the 19th Amendment which called for cutting the size of federal and provincial cabinets besides other luxuries of government officials.
