KARACHI – The cash-strapped government, despite opening additional revenue channels through imposing a special excise duty and flood surcharge on payable taxes, is continuing to draw upon the banking system for meeting its still heavy budgetary expenditures. The embattled coalition government eyes the realisation of an additional collection of at least Rs 51 billion thorough levying the IMF-backed 15 percent flood surcharge and 2.5 percent special excise duty on the import of luxury items. Last week saw the federal government borrowing over Rs 162.81 billion from scheduled banks through auctioning the State Bank of Pakistan’s (SBP) Market Treasury Bills (MTBs) to be matured in three, six and twelve months.
While the government, apparently fearing crowding out of the growth-oriented private sector, has shifted its budgetary borrowing focus from central to commercial banks, the latter have also welcomed the trend and are prioritising investment in risk free and highly weighted government securities. This is evident from the fact that compared to the SBP pre-auction target of Rs 150 billion, the scheduled banks submitted bids of over Rs 288.054 billion, Rs 60.989 billion for 3-month, Rs 124.215 billion for 6-month and 102.850 billion for the 12-month MTBs. In the last auction that was conducted by the SBP on the ninth of this month, banks came up with offers valuing over Rs 307 billion against Rs 170 billion targeted by the government.
The central bank, however, had realised only Rs 162.628 billion out of the offered bids. Additionally, the SBP has nodded to bids having a face value of Rs 162.815 billion at a weighted average yield of 13.2542, 13.6085 and 13.7726 percent for three, six and twelve months treasury bills, respectively.
The cut-off yield for the three respective maturities was 13.2542, 13.6441 and 13.8035 percent. SBP’s Auction Target Calendar for third quarter of the current financial year shows that Monday’s was the last MTBs auction of the outgoing quarter. The federal government had set a target of Rs 980 billion to be borrowed from the scheduled banks during the third quarter ranging from January to March.
According to the central bank, borrowing target was to be achieved through raising Rs 175 billion, Rs 185 billion, Rs 150 billion, 150 billion, 170 billion and Rs 150 billion from the scheduled banks in six separate auctions scheduled on January 12, January 26, February 09, February 23, March 9 and March 22. The billions of rupees were borrowed from the banks at the benchmark six-month MTBs weighted average yield that, the analysts believe, was backbreaking and remained variable after every auction.
Moreover, the government was also to borrow at least Rs 35 billion through selling the Pakistan Investment Bonds (PIB) of three, five seven, ten, fifteen, twenty and thirty years maturity period during January-March FY11.
Rejecting other bids, the government, in the March 16 auction, borrowed over Rs 20.664 billion through selling three, five and 10 year PIBs at weighted average yield of over 14 percent per annum. In addition, was the realisation of over Rs 47.539 through auctioning three-year Islamic bonds or Ijara Sukuk in the only auction held on the first of this month.
Furthermore, the response from the Islamic banks, which were desperately looking for a risk-free investment window like Ijara Sukuk, was overwhelming. The banks offered bids of Rs 56.839 billion against Rs 45 billion targeted by the Federal Ministry of Finance. While banks, lured by a higher rate of return and zero risk factor, are diverting their investment to government securities, economic observers warn of adverse implications of the trend on the country’s overall economy that is expected to grow two to three percent during this fiscal year.
State Bank Governor Shahid H Kardar, in a recently-held conference on “SME Banking in Pakistan”, also expressed his concern of the declining trend in bank credit to the country’s small and medium enterprises. The SBP governor noted that banks lending to the growth-oriented SMEs had declined from Rs 437 billion to Rs 334 billion during the last three years at a time when input prices had soared sharply pushing up demand for working capital credit.
