Funds-starved govt borrows record Rs 1 trillion in 3 months

Constrained by poor foreign financial inflows and a narrow tax base, the resource-constrained federal government’s public debt shot up by a record Rs 1 trillion during the first quarter of current fiscal year, said the central bank Friday.

Despite such negatives, the State Bank recorded the country’s Gross Domestic Product (GDP) having increased by 5.0 percent during July-Sept FY14. “The public debt posted a record increase of Rs 1 trillion during the quarter,” said the State Bank of Pakistan (SBP) in its first quarterly report on the State of Economy.

The historic increase in the cash-strapped government’s public debt, however, does not represent the fiscal imbalances alone, which recorded only a modest increase, the regulator observed. Instead, it said, the growth could primarily be traced to large revaluation losses associated with the external debt stock due to adverse exchange rate movements during the period.

The SBP observed the rupee having depreciated against the dollar by 6.0 percent during 1QFY14. This devaluation depicts a decline of 5.7 percent when compared with 0.3 percent in the corresponding period of FY13. “There is a corresponding need to re-balance the maturity profile of Pakistan’s domestic debt,” the bank observed.

It said growing prominence of three-month instruments in the outstanding volume of Treasury Bills required attention because this exposes the financial system to interest rate and roll-over risks. Further, the State Bank said the country’s GDP grew by 5.0 percent during the quarter compared to only 2.9 percent of last year, and a target of 4.4 percent for the full year.

Since macro-economic indicators were favourable at the start of the year, the increase in real GDP growth in FY14 is “discernible”. The industry and services were the major drivers of growth, as agriculture performed below target. As the industrial sector revived, import pressures reappeared, especially for capital goods and raw materials. The import of petroleum, machinery and metal was particularly strong which increased the trade deficit by $ 0.6 billion during Q1-FY14 over Q1-FY13.

Additional stress on the current account came from delayed inflows of Coalition Support Fund (CSF) in Q1-FY14, the bank said. As a result, the current account posted a deficit of $ 1.2 billion in 1QFY14 against a surplus of US$ 0.4 billion in 1QFY13. Although worker remittances posted an impressive 9.1 percent growth, this was not enough to cover the foreign exchange gap in other heads.

The SBP said the repayments on external debt continued to exceed fresh disbursements while foreign investments remained shy. “This caused a strain on the country’s dollar reserves that posted a decline of $ 1.2 billion,” it said, adding this caused the rupee fall by a whooping 6.0 percent.

The report also pointed out that headline consumer price index (CPI) inflation increased to 8.1 percent in Q1-FY14, compared to only 5.6 percent in the preceding quarter.

The SBP increased its policy rate by 50 basis points (bps) to 9.5 percent in the monetary policy decision announced in September last year to rein in the second-round effect of food inflation, curb inflation expectations and to counter market sentiments following the volatile rupee.

According to SBP, the government’s budgetary borrowing from the central bank was more pronounced, as the commercial banks did not participate actively in treasury bill auctions held during the quarter. As a result, the government could not meet the limit of zero quarterly borrowing from the SBP, though its borrowings were well below the limit agreed with the IMF.