July 16 - 22, 20

A cash-strapped PPP-led coalition government is opting for heavy borrowing from all available sources putting burden on economy apart from causing fiscal deficit posing more challenges ahead.

Borrowing by the federal government has been one of the main reasons behind the recent wave of price hikes in the country. Efforts of the State Bank of Pakistan (SBP) to control inflation have been rendered useless by reckless government borrowing - including bumping up the interest rate to make borrowing more expensive for the private sector.

The government has resorted to borrowing from the central bank in order to meet expenditures since it has failed to broaden the tax base or cut non-development spending.

The biggest challenge for the central bank was government borrowing, the burden of which fell mainly on the private sector in terms of a squeeze in lending. Apart from causing inflation, unrestricted access of the government to borrow from the State Bank complicates liquidity management, dilutes the impact of monetary policy stance and puts pressure on the exchange rate.

As per estimates of economists, the government's domestic borrowing from the banking system to finance budget deficit will be almost double in the fiscal year 2012-13 in anticipation of a widening gap between government receipts and spending.

According to them, the banking system, including the State Bank of Pakistan and the commercial banks, are expected to lend more than Rs700 billion to the federal government for the budgetary support in the financial year 2012-13 as against the government estimates of Rs484 billion.

It may be noted that the bank borrowing was budgeted at Rs304 billion for the fiscal year 2011-12; however, it was revised to Rs940 billion in FY12. The raise in borrowings has not only put liquidity pressures on the banking sector as well as the State Bank, but also resulted in higher inflation. This suit is all set to be followed in FY13.

Financial experts believe that the government public spending will see a record hefty increase in FY13 because of election year, edging the size of the government's borrowing up to a significant level. Almost 80 percent of funds seem to be utilised in the first six months of FY13; however, in the absence of external inflows, there would be a significant financing stress on the government in the second half of the next fiscal year. Reliance on bank and non-bank borrowing will keep interest rate high with no major growth expected in the private sector credit off take, they said.

They maintained that the consolidated fiscal deficit for the FY13 is projected at Rs1.1 trillion (4.7 percent of GDP), but it is likely to touch Rs1.8 trillion or 6.7 percent of GDP in the fiscal year 2012-13.

Experts estimate 700 to 800 billion rupees to be printed by the SBP in FY13 to fund the higher deficit, adding to inflation concerns. The government printed Rs450 billion in FY12, while the banks had lent around 600 billion rupees in FY12, they said.

In the wake of government's borrowing on banking sector, they said that the earnings of the banking sector will be flat as compared to the last year but their expenses on bad loans' provisioning could decline due to contraction in the growth of the credit to the private sector.

Furthermore, the government borrowed Rs308 billion through auction of Market Treasury Bills (MTBs) to meet its financial requirements. This is the first and over the target borrowing through MTBs during the fiscal year 2012-2013 (FY13). For the first auction, the federal government had set a target of Rs. 225 billion, but it borrowed an amount of Rs. 308 billion. The MTBs' first auction of FY13 has fetched over Rs. 416 billion worth bids.

In response to the SBP Tenders for Sale of 3-months, 6-months & 12-months of Government of Pakistan Market Treasury Bills, overall Rs 416.326 billion with a realized amount of Rs. 386.250 billion bids were received through Primary Dealers from July 10, to July 11, 2012. However, bids worth Rs 307.916 billion with a realized amount of Rs 285.994 billion were accepted.

Most of participation was witnessed in the 6- and 12-month period MTBs, which depicts that banks are expecting some cut in the key policy rate in near future. A cut-off yield of 11.8742 percent has set for the sale of 3-month MTBs and bids accepted worth Rs 52.081 billion with realized amount of Rs. 50.696 billion.

For the 6-month, the SBP accepted Rs. 132.635 billion bids with 11.9195 percent cut-of yield. Similarly, a cut-of yield of 11.9396 percent was set for the 12-month period T-bills with bidding amount of Rs. 123.2 billion.

Analysts believe that the two positive developments, firstly reduction in the international oil prices and secondly reaffirm relationship with the US, have somewhat reduced the expected pressure on the external and fiscal accounts from earlier assessment. Further, support to the idea come from soft inflation numbers expected in coming few months, despite incorporating the Ramadan that has provided the central bank the room to reassess its stance and cut the policy rate from 12 percent, while still keeping the real discount rate in the positive territory, they said.