A cry beyond borders


Only improved foreign inflows can help as cash-strapped govt keeps borrowing billions from risk-averse banks
Having borrowed a record Rs 1.2 trillion from the banking system, the cash-strapped government keeps its focus intact on the central and scheduled banks for bridging its ever-widening fiscal deficit that in FY12 accumulated to over Rs1.7 trillion, above 8 percent of GDP.
According to central bank, the funds-starved federal government has set a rounded off target of Rs 1.590 trillion to be borrowed from the scheduled banks during first quarter of the FY13, July-September. In its bank borrowing spree that, the analysts warn, has a highly inflationary impact on the economy, the government had borrowed Rs 1.085 trillion during the fourth quarter, April-June, and Rs 777 billion during the third quarter, January-March, of FY12 to cater its ever increasing budgetary needs.
“Domestic structural weakness like low tax to GDP ratio and higher subsidy coupled with restricted external flows forced government to rely highly on the banking channel to fill the escalating budget deficit,” viewed Topline Research analyst Nauman Khan.
The analyst observed that contrary to last few years’ trend, the onus had shift towards inflationary central bank borrowing. The official data show that the government’s budgetary borrowing from the State Bank accumulated to an alarming Rs 505 billion in FY12 against the retirement of Rs 8 billion in FY11. “This record borrowing from the central bank to fund the fiscal deficit is a major cause of concern which has also been pointed by State Bank in its recent publications,” said Khan.
Wednesday, too, saw the resource-constrained federal government raising over Rs 360 billion from the banks through auctioning Market Treasury Bills (MTBs) of 3-, 6- and 12-month maturity period. The new budgetary loan, having a total face value of Rs 360.269 billion, was taken at a cut-off yield ranging from 11.8283 percent to 11.8745 percent and 11.8894 percent, respectively, for the 3-, 6- and 12-month T-bills.
The borrowed amount was against the otherwise liquidity-starved primary dealers’ (mostly banks) offer of Rs 441.177 billion.
During the current quarter, the government would borrow over a trillion rupees from the banks through selling the T-bills, Pakistan Investment Bonds (PIBs) and the Ijara Sukuk, Islamic bonds. Of the total Rs 1.5 trillion targeted amount, Rs 12.897 billion would be raised as an additional requirement of the government.
Such inflationary borrowings, Khan said, would be a major factor in the minds of authorities regarding the future direction of the interest rates that currently stands at the pre-2008 level of 12 percent. “We believe the materialization of Coalition Support Fund could reduce the government’s borrowing at least in early part of FY13,” the analyst said.
Further, the analyst said, there was still a room of 50 to 100 basis points rate cut in the discount rate at least in early FY13, if the foreign flows materialized. The United States would, reportedly, this week transfer over $ 1.2 billion under the CSF to the dollar-hungry Pakistan which in FY12 faced a $ 4.2 billion current account deficit.
“With external account under pressure in FY12, the onus of financing the fiscal deficit fell squarely on the domestic sources and that particularly on central bank borrowing,” Khan said. Dubbing it against the spirit of SBP Act passed by the parliament in April 2012, the analyst said in FY12 the government financed approx. 70% of its budget deficit from the banking channel as against 52% in FY11. The economic observers call it a sort of cyclical debt as the central bank, on one hand, is raising billions of rupees from the banks for the government and injecting heavy liquidity into the system on the other. The SBP believes many of the small banks would fail if it stopped pumping cash in the system. The economic observers are concerned as the cash-strapped governments, both in the center and provinces, whereas are relying almost totally on the banks for catering their burgeoning budgetary requirements, the banks’ advances to the private borrower are depleting to a nominal level.
The analysts’ concern is that much of the banking liquidity being sucked up by the cash-strapped government is being used for non-productive purpose: running of the government. This trend, they warn, would leave the private sector sans cash thus dealing fresh blow to the government’s growth targets.