The targets set by the State Bank for government borrowings through the sale of Pakistan Investment Bonds (PIBs), treasury bills (T-bills) and Ijara Sukuk (Islamic bonds) for the third quarter of FY16 speak loudly about the expected state of fiscal deficit and its sources of financing during this period. According to the SBP, government will borrow Rs 1.9 trillion in January-March, 2016, mostly to meet domestic debt repayments. The largest amount of Rs 1600 billion will be borrowed through the auction of T-bills. The maturity amount of T-bills is Rs 1509 billion which means that the government will borrow an additional amount of Rs 91 billion through this source. The stock of banks' investments in the T-bills was Rs 2.6 trillion till the end of November, 2015. Non-banks also invested Rs 290 billion which raised the investment in T-bills to Rs 2.92 trillion. However, the highest amount was invested in PIBs which rose to Rs 4.36 trillion at the end of November, 2015. In the quarter January-March, 2016, the government will borrow Rs 200 billion through PIBs and retire Rs 239 billion. The gap of Rs 39 billion will be filled by additional borrowings through T-bills. The government will also borrow Rs 100 billion from the Islamic banks through Islamic bonds during this quarter. Another report of the State Bank showed that deposits of banks had increased by Rs 699 billion during the first eleven months of 2015 while they invested Rs 1204 billion in the government paper during the same period.
The bankers have been quite pleased about the performance of financial sector in terms of indicators like overall profitability, return on equity and containment in the level of NPLs in the recent past, yet the above information reveals a highly disturbing trend. The outstanding amount borrowed from the banks through PIBs, T-bills and Islamic bonds and the targets set for January-March, 2016 is a clear indication that the financial institutions are mainly catering to the demands of the government for its borrowing requirements and are less concerned about the credit needs of the private sector. The government has become mainly dependent on the banking system because of a huge gap in the aggregate public revenues and expenditures and its inability to raise funding from other sources of financing the budget deficit. Also, the repayment and maturity amount of government securities is so huge that the authorities are bound to borrow more from the same source, ie, banking system again and again. Obviously, the massive outflow of Rs 1.9 trillion from the banking system in a single quarter to be invested in PIBs, T-bills, etc, will not allow banks to make advances to the private sector in sufficient amounts. It, nonetheless, needs to be noted that bankers are not unhappy with this trend; they are not much inclined to raise deposits by offering a higher rate of returns as they are largely content because the SBP is prepared to finance the government requirements by lending to the banks for the purpose. Such an arrangement between the banks, SBP and the government may be convenient for them and satisfy the IMF but is bound to add to the overall debt burden and retard economic growth of the country. Another worrying aspect is that increasing level of debt stock through this process would not let the country to come off from this vicious circle easily in the near future though it is not difficult to think about the ways to get over such a difficult situation. Essentially, the solution to this problem would revolve around the narrowing of fiscal gap by a substantial margin, innovative ways to raise more deposits by banks and financing the budget deficit through non-banking sources of finance.
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