The federal government is expected to post a deficit of Rs850 billion or four percent of GDP, most of it to be financed through domestic sources. The 48.5 percent or Rs413 billion is proposed to be financed via non-bank sources and 35 percent or Rs314 billion through bank sources with no incremental borrowing from the SBP.
The debate whether the government would be able to meet the desired deficit is another matter. there a number of permutations of how Rs850 billion will be financed in FY12 and its impact on the domestic interest rates.
FY11 in perspective: To maintain stability in the financial market, raising debt from public debt sources and public account are key considerations. It is believed that excessive borrowing from any of these sources would lead to a hike in interest rates unless the central bank keeps the market liquid through Open Market Operations (injections), said Muzzammil Aslam at JS.
A similar trend was witnessed last year when the government raised a net Rs261 billion through Public debt against the budgeted target of Rs116 billion. Primary reasons for higher domestic borrowings were lower external receipts and higher than budgeted deficit during the fiscal year.
The impact of higher borrowing from domestic sources also resulted in hike in domestic interest rates and the SBP raised the policy rate by 150bps in three intervals (of 50bps each). Additionally, the current account surplus played a pivotal role in maintaining the liquidity, owing to higher exports and remittances. Therefore, any slippage in the current account would lead to a liquidity crisis in the market in FY12.
FY12 in perspective: As mentioned above, the government this time around is completely relying on higher tax receipts, contained current account balance and in turn borrowing from domestic sources. The government is anticipated to borrow a net public debt of Rs248 billion mainly from T-bills and PIBs and Rs164 billion from public accounts (mainly from National Savings Scheme). It is expected that huge T-bills auction targets throughout the next fiscal year will keep raising market’s expectation of higher interest rates, he added.