To the sheer advantage of private sector borrowers, the resource-constrained government appears to have lessened its reliance on the local funders, masterly the banks, to cater its non-development budgetary expenditures.
The private borrowers would find an extra cash of over Rs 400 billion available for them with the otherwise risk-averse commercial banks as the cash-strapped federal government has slashed its budgetary borrowing target by 30 percent for the third quarter of FY15.
Friday saw the central bank issuing its auction target calendar for 3QFY15, January-March 2015.
During the period under review, the State Bank would be raising Rs 975 billion for the funds-starved federal government to bear mostly running of the government expenses. The targeted amount would be raised through auctioning 3-, 6- and 12-month Market Treasury Bills (t-bills) and Pakistan Investment Bonds (PIBs) of 3-, 5-, 10- and 20-year maturity periods.
A break-up shows that the government would be borrowing from the primary dealers Rs 825 billion through t-bills while Rs 150 billion would be raised through the sale of PIBs.
The SBP’s calendar also shows Rs 165.23 billion and negative Rs 63.18 billion to be borrowed as an “additional requirement” of the government.
Coupon rates for 3, 5, 10 and 20-year PIBs maturities have been set at 11.25, 11.50, 12 and 13 percent, respectively.
With economic observers dubbing it a welcome move for the almost-crowded-out private businesses, a quick comparison reveals that the targeted amount stands at least 30 percent or Rs 420 billion lower than the previous quarter: Oct-Dec FY15.
For 2QFY15, the government had set a huge budgetary borrowing target of Rs 1.395 trillion, Rs 1.245 trillion through t-bills and Rs 233 billion through PIBs sales. Also, the first quarter’s target was set at Rs 1 trillion, up by Rs 25 billion than the current one.
The State Bank’s 3QFY15 target depicts that the government is relying less on its local sources of financing on the back of improved foreign inflows. “Indeed, you are dot on,” senior analyst Khurram Schehzad told Pakistan Today.
The government has so far received $ 1.1 billion under 3G auction, $ 1.5 billion under Saudi Fund, $ 2 billion from Eurobond issue, $2.1 billion from IMF tranches, $ 725 million from Coalition Support Fund and $ 350 million from privatisation proceeds.
These inflows, Khurram said, helped the country’s depleting dollar reserves grow beyond $ 15 billion from $ 8.3 billion in January 2014. “USD value came down (by 4.d percent) from Rs 105.36 to Rs 100.60,” he said. The analyst said the Sukuk and Eurobond issues had helped the government decrease its borrowing needs from the banks. “Massive decline in oil prices and subsequent power subsidies have created fiscal space and decreased borrowing needs,” he said.
This, Khurram said, was good for financial markets as the crowding out of the private sector would be lower. Besides, the central bank was likely to further slash the monetary policy by what Irfan Saeed of InvestCap Research said 50-100 basis points on the back of easing inflation numbers.
Khurram said the cost of borrowing would be “lower” going forward. This, he viewed, would push the banks towards their “core” job of lending to the private sector, the real engine of growth in a developing economy like Pakistan.
“When rates go lower on government papers with declining borrowing needs banks to shift towards their core jobs,” he said.
Drawn towards bottlenecks like the banks’ huge non-performing loans that the SBP counted at Rs 625 billion as of Sept 30 (2014), the analyst said the bad debts of the risk-averse banks were “improving”.
Saim Ali at Standard Chartered Bank also was positive about the government’s reduced reliance on banks for its budgetary needs. The 3QFY15’s lower target he attributed to “more foreign inflows”.
Plus, he said, the need to borrow by the government had declined due to the latter’s shift towards longer tenor debt which reduced rollover borrowing.
This, Saim said, would “definitely” reflect positively on the banks’ lending to private sector. Khurram, however, warned that the government’s persistent dependence on borrowings, foreign or domestic, instead of expanding the country’s tax net was “not at all” sustainable for Pakistan, a struggling economy.
Also, given the fact that the State Bank is pumping billions in the banking system the question remains whether the banks have enough cash to finance the most-important private businesses.
Friday also saw the central bank injecting Rs 513.10 billion into the banking system at 9.30 percent annual rate of return. All the 30 bids offered against the 7-days contracts were accepted.
From July 1st to Dec 12, the government’s bank borrowings stand at Rs 229.5 billion. Having borrowed Rs 441.4 billion from scheduled banks, the government still has a credit limit of Rs 212 billion with the State Bank.
