July 16 - 22, 20

In a desperate move the Government of Pakistan (GoP) has decided to open Nato supply routes. Over the next six months US$1.2 billion will be released from Coalition Support Fund, which may help in containing erosion of foreign exchange reserves and further depreciation of Pak Rupee. The immediate and most contentious issue of budget deficit may also be resolved to some extent. However, analysts term this hoping against the hopes because during FY13 Pakistan has to pay $3.8 billion to the international Monetary Fund (IMF) alone. Since crude oil prices are not likely to come down in any significant manner, trade deficit may increase further.

Drying foreign inflows are compelling the government to rely heavily on the domestic sources for financing of budget deficit and government borrowing from the banking system is on the rise. The cash-strapped PPP-led coalition government borrowed Rs308 billion in the first auction of FY13 through auction of Treasury Bills to meet its financial requirements. The government had set an indicative target of Rs225 billion, but mopped up Rs 308 billion. Most of participation was witnessed in the six and 12-month period papers, suggesting that banks are expecting some cut in the key policy rate in near future.

However, some analysts have contrary opinion and strongly believe further reduction in discount rate may not be possible. During first half of FY12 State Bank of Pakistan (SBP) followed monetary easing stance and cut the discount rate by 200bps to 12% from 14% in two stages. However, later on it avoided further reduction and maintained the discount rate at 12%. This freezing of discount rate at 12% indicates weakness in the external accounts and monetary factors which were deeply affected by high inflation, fiscal mismanagements and domestic liquidity position especially in 2HFY12.

In the first T-Bill auction of FY13 aggressive participation was witnessed by the market participants as bids worth of Rs416 billion were received against an indicative target of Rs225 billion. However bids worth Rs285 billion were accepted with the face value of Rs308 billion. One of the significant factors in this auction was the preference for higher tenure six and twelve month maturities.

The cut off yields for 3, 6 and 12 month bills declined by 4.6bps, 2.2bps and 1.3bps compared to previous auction to stand at 11.8742%, 11.9195% and 11.9396% respectively. Whereas. Rs51 billion were realized in 3-month, Rs125 billion in 6-month and Rs110 billion in 12-month bills. With still two more T-bill auctions to be held before the next MPS, the biding pattern observed in this auction signifies that market participants are not foreseeing any increase in discount rate in short to medium term. However with Ramadan inflation frenzy still to be witnessed along with seasonal increase of POL prices during winter and a consequent impact of lag effect from huge government borrowing during FY12, analysts expect it will be difficult task for SBP to maintain discount at current level.

Analysts said 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, at least for the time being. Further, support to the idea come from soft inflation numbers expected in coming few months, despite Ramadan. Participation in the longer tenure in first T-bills auction has, further strengthened the expectation of rate cut.

Recent M2 (Broad Money) supply figures show a dramatic rise in money supply by Rs181 billion during last week of June 12, posting the cumulative increase of 14.4%YTD till June 29, 2012 compared to growth of 11.69%YTD witnessed a week earlier, increasing by 271bpsWoW. However compared to last year figures, M2 growth during FY12 stood at Rs964 billion (14.4%YoY) compared to the monetary growth of Rs918 billion (15.9%YoY) witnessed during FY11. The current trend in M2 growth is single-handedly driven by the surge in the government borrowing, which has been pumped up by 125% YoY (Rs1.31 trillion) compared to the borrowing of Rs590 billion during FY11. Borrowing from the central bank reached R564 billion during FY12, as compared to negative borrowing from SBP at the end of FY11, while borrowing from scheduled banks have also surged rapidly by 17.6%YoY to Rs704bn during the year.

Cumulatively, government borrowing contributed 67.2% in incremental supply growth compared to the previous year. Meanwhile, borrowing under the commodity operations also surged to Rs38 billion compared to negative figures last year. However, one of the positive factors in this scenario was the massive surge of 94%YoY growth in private credit offtake which reached at Rs235 billion during FY12. This positivity was overshadowed by persistent increase in borrowing for budgetary support.

While the above stated factors indicate improvement in the prevailing situation, some the cynics term this complacency. They fear that the incumbent government will indulge in overspending to satisfy its annoyed vote banks but it is almost impossible to rectify the situation. It was expected that with the election of new leader of the house spells of electricity and gas outages will be contained. However, no tangible measures have been taken as yet. At the best gas supply of industrial units is being curtailed and diverted to power plants, which is proving a futile effort.

The first downpour of monsoon has started and soon the entire country will be affected by torrential rains and floods. Though, the policy planners have been reminded repeatedly of the possible intensity of floods, hardly, any measures have been taken. It seems the policy planners wish to avail another opportunity to beg from the international community. However, they tend to forget that response from the donors/international community was lukewarm in 2010 and 2011. Only politicians could be held responsible for this because they kept on mudslinging on each other even during the most difficult times, which shattered confidence of the donors.