The central bank by increasing the discount rate to 9.5 percent has increased the cost of borrowings for the cash-strapped government.
While the previous PPP-led coalition government had borrowed about Rs 8 trillion to be mostly used for running the government during its five-year reign, the present PML-N government is also adding billions to the national debt through extensive budgetary bank borrowings.
Official figures suggest that during two and half months of FY14 the government has borrowed over Rs 341.5 billion from the banking system. The borrowed amount depicts a whopping 85 percent increase over Rs 184.5 billion the previous government had raised from the banking system from July 1 to Sept 14 in FY13.
Wednesday was no exception as the State Bank of Pakistan (SBP) raised over Rs 15 billion for the government through auctioning the Pakistan Investment Bonds (PIBs) of 3 to 20-year maturity period. The analysts noticed a 50bps to 60 basis points hike in the cost of borrowing for the funds-starved government.
“PIB auction: Yields up 50-60bps,” said Mohammad Sohail, senior equity analyst and chief executive of Topline Securities.
The central bank Wednesday reported that coupon rates for PIBs auction were 11.25, 11.50, 12.00, and 13.00 percent for 3, 5, 10 and 20 years maturity, respectively. The total interest the loan accrued amounted around to Rs 356 million, said the SBP.
The analyst agrees that recent 50pc hike in policy rate had made the budgetary borrowings dearer for the government which has little or no option to finance the still huge fiscal deficit. Also, he said, returns on the national savings would increase for the resource-constrained government.
“Yes” he replied when asked if the 50-60bps raise in PIBs auction rates would entice the profit-conscious banks to rush for the risk-free government papers.
Sohail was positive when asked if this would lead to crowding out of the private sector, the real engine of growth. Wearisome, however, is the fact that unlike its predecessors, the Nawaz government is relying more on the State Bank for its budgetary financing.
Given the central bank’s past statements that it caters the government’s budgetary needs through printing fresh currency notes, one may aptly forecast an upward trend in backbreaking inflationary pressures in the months ahead.
According to SBP, during the period under review the government borrowed over Rs 786 billion from the central bank compared to corresponding period of FY13 when it still had a credit limit of Rs 136 billion.
On the other hand, the government still maintains a credit balance of Rs 444.6 billion with the scheduled banks compared to last year when the PPP regime had borrowed over Rs 321 billion. Given the government’s SBP-centric borrowing approach one may surmise that the economic managers may be tending to push the risk-averse banks towards the private sector to stimulate economic growth in the debt-laden country.
This, however, would be at the expense of public support as depending heavily on the State Bank’s fiscal loan would increase inflation.
Incorporating the price trends of the weekly Sensitive Price Index (SPI) data, the analysts at Shajar Research anticipate that inflation for the month of Sep’13, measured by Consumer Price Index, may range between 7.6 and 7.9pc. The price hike in August had clocked in at 8.5 percent.
Sensing this uncertainty on economic front, the investors at Karachi stocks market Wednesday reacted cautiously, thus, putting the KSE 100-share index in the red zone. The benchmark index slid by 27.5 points to close at 23,060.90 points.
“The stocks closed bearish amid concerns for rising economic uncertainty,” said Ahsen Mehanti, a director at Arif Habib Corporation.
He said falling global commodities, rising CPI inflation after record surge in government borrowing data and concerns for higher the SBP policy rate impacted the sentiments.