Govt plans to borrow over Rs1 trillion during Q4

RIZWAN BHATTI

KARACHI: To meet the rising fiscal deficit, the federal government has planned to borrow over one trillion rupees from banking sector during the fourth quarter (April-June) of the current fiscal year 2011-2012.

Sources in banking industry told Business Recorder on Saturday that the government was facing a serious financial problem owing to higher current and development expenditures and slow foreign inflows.

The federal government had envisaged a net amount of Rs 134.5 billion in terms of net external borrowing during fiscal year 2012, however it had received only Rs 34 billion so far. The dearth of external financing was likely to further aggravate the burden of borrowing on domestic sources, they added.

In addition, it looks difficult that the Federal Board of Revenue (FBR) will achieve annual revenue collection target of Rs 1,952 billion followed by slow economic activities and energy crisis.

In the prevailing scenario, when the government is facing revenue shortfall and expenditures are increasing gradually, it is necessary to borrow from banking system to meet the fiscal deficit.

The State Bank of Pakistan has issued three calendars for the auction of Ijara Sukuk, Pakistan Investment Bond (PIBs) and Market Treasury Bills (MTBs) to more borrow for the government. According to these calendars, the federal government has planned to borrow Rs 1.085 trillion from banking sector during the last quarter (April-June) of fiscal year 2012 for financial requirements.

A small share of target will be borrowed from Islamic banks, while remaining amount will be captured from conventional banking through auction of T-bills and PIBs.

According to the SBP, an amount of Rs 50 billion will be borrowed from Islamic Banking Industry (IBI) through auction of three-year Government of Pakistan Ijara Sukuk (GIS).

Pre-auction target of Ijara Sukuk for fourth quarter of fiscal year 2012 has been issued by central bank according to which two auctions will be held during last quarter for the sale of Islamic Bond. The first auction will be held on April 23, 2012 with target of Rs 25 billion, while second auction will be on June 20, 2012 for borrowing of another Rs 25 billion.

The IBI has over 7 percent share in overall banking industry and now they have much liquidity space. Therefore, it is being expected that Rs 50 billion will easily be borrowed from the IBIs through 3-year Ijara Sukuk.

The federal government is intending to borrow Rs 40 billion through auction of 3, 5, 10 and 20-year long term investment bonds during the last quarter. The first auction for the sale of 3, 5, 10 and 20-year PIBs will be held on April 25, 2012 with target amount of Rs 20 billion. Another, Rs 20 billion will be borrowed on May 23, 2012.

In addition, the government has planned to borrow Rs 995 billion from banking sector through sale of Pakistan Market Treasury Bills (MTBs) of 3-Month, 6-Months & 12-Months. Auction of MTBs will be held fortnightly and totalled 7 auctions have announced by the State Bank for the fourth quarter of current fiscal year. The first auction of the bills will be on April 4, for sale of Rs 160 billion worth MTBs. The second auction will be on April 18, with a target of Rs 200 billion.

Three auctions will be held during May 2012, the first will be on May 4, 2012 with a target of Rs 180 billion and the second on May 18, 2012 with a target of Rs110 billion. The third auction will be conducted on May 30, 2012 to borrow Rs 140 billion. Two more auctions have announced on June 13 and June 27 with an amount of Rs 120 billion and Rs 85 billion respectively.

In fact, the government increased its reliance on borrowing from the central bank during second-FY12, on account of liquidity shortages in the market, which impeded commercial banks' ability to invest in government paper.

According to the SBP, during the second quarter of the fiscal year, the government borrowed Rs 227.9 billion from the SBP while retiring Rs 45.0 billion to the commercial banks in the same period. This is exactly opposite of what occurred in the first quarter when there was a net retirement of Rs 103.5 billion to SBP while borrowing from commercial banks was recorded at Rs 223.0 billion.

"Less than target revenue collection and massive raise in current expenditures have compelled the government to enhance its reliance on banking system for borrowing," economists said.

Although, the FBR is making all efforts to achieve the revenue target, the services tax collection by Sindh province may upset, FBR's actual revenue target, they added.

According to the SBP in the absence of external financing, excessive reliance on costlier domestic resources for financing these fiscal imbalances is increasing the country's debt servicing burden, and hence complicating debt management and in the presence of persistent revenue and primary deficits incurred by the country during the past several years, such an increase in debt servicing implies further increase in borrowing requirements- a situation which may push the country into a debt trap.