Missing government borrowing target is not a good omen

By now, its glaringly obvious that the government lacks channels to finance its fiscal deficit. The 11 percent year-on-year growth in revenue for the first eight months, as against the 19 percent annual target is one reason for the higher deficit. Another is tight domestic liquidity.
While comfortably meeting the ceiling on net domestic assets and net foreign assets floor of SBP targets, the government missed IMFs quarterly target of central bank borrowing by Rs97 billion.
Yes, its the pain of elusive foreign flows. Had IMFs fifth tranche been on time, the government would have printed, at least, Rs30 billion on account of bridge financing for fiscal support, just as it did in the previous two quarters.
In the second quarter, the government had used Rs60 billion plus released by IMF for filling its revenue-expenditure gap and $200 million released by KSA on FoDP account. The government has relied heavily on transfer of profits by the SBP for plugging its gap as it raised Rs135 billion in the first half against the full year target of Rs150 billion.
The central bank was enjoying capital gains, owing to rupee depreciation, by selling its reserves at premium to the inter bank market. With a slowdown in rupees fall against the dollar during the last quarter, SBPs profit might not have been as high as it had been earlier this year.
Apart from these dents, fiscal borrowing from commercial banks was also abysmally low during the third quarter - the government raised Rs22 billion, on a net basis, from scheduled banks during Jan-Mar versus Rs87 billion borrowed in the previous quarter.
Its more of an agony of dry liquidity. Even the corporate sector, including private and public sector entities, borrowed a mere Rs5 billion in the last quarter, compared with more than Rs200 billion taken as loans during the quarter before. The cash starved banking sector also hinders the government to off-load any of its market treasury bills stock with central bank to commercial banks.
Is the commodity circular debt to be blamed? Well, the government retired, on a net basis, Rs59 billion under this head during last quarter against zilch in the similar period last year.
The overhang of FY09s hefty commodity financing, which stood at Rs209 billion (FY08: Rs29 bn), and two TFCs amounting Rs165 billion for the energy debt devil is leaving nothing but trouble on every bankers desk. Thankfully, on account of good performance in the war against terror, the US released $350 million out of the over $2 billion pending CSF and other war related funds during third quarter. In contrast, nothing was released under this head in prior quarters.
Yet, the need for IMF related inflows, pending CSF funds, FoDP support and the money from Kerry-Lugar bill was never felt as hard, as it did in the third quarter.
The same is the case going forward; foreign inflows are imperative in the last quarter of this year, amid fresh liquidity requirements for energy circular debt. Liquidity is also needed for commodity financing in the wheat procurement season ahead.
But missing the quarterly government borrowing target and an apparent breakdown in the process of integrated VAT implementation has probably left a sour taste for IMF delegation, which just concluded its visit to Pakistan.
The IMF delegation was loud and clear in their meeting with President Zardari and elsewhere, that they would not present Pakistans case in the lenders upcoming board review, unless there is an agreement in principle, on the implementation of VAT.
Now, it is predominantly left to Washingtons political will to use its lobby for the smooth sailing of IMFs stand-by facility, as well as the disbursement of pending US funds. The Obama administrations strategy to leave Afghanistan by 2011 tilts the odds in the favour of optimists.

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Key Monetary Aggregates FY10

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Rs (bn)                                       1Q        2Q       3Q       9M

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NFA                                        131.9     -14.7    -56.7     60.5

NDA                                       -133.2     350.2     19.2    236.2

Fiscal borrowing from SBP                  -73.6      30.7    105.2     62.4

Fiscal borrowing from Schd. Banks          117.7      87.4     22.2    227.3

Govt borrowing for commodity operations      0.1      -8.4    -58.5    -66.8

Credit to private sector                   -78.3     187.6     14.9    124.1

Credit to PSEs                              65.7      27.8    -12.1     81.4

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Source: SBP