TUESDAY DECEMBER 20: Market-based commodity borrowing proposed

KARACHI: The State Bank of Pakistan has suggested that market-based commodity borrowing can reduce the government's financial burden on account of interest payments. According to SBP's annual report, commodity loans are expensive for the government, specifically, while the federal government borrows at T-bill yields and commodity loans are priced above KIBOR by a set margin.
Therefore, any attempt to substitute expensive commodity financing with market based borrowing would reduce the government's financial burden on account of interest payments. Net retirement in commodity finance loans was one of the few positives during the year. Commodity finance loans registered a net retirement of Rs 15.7 billion in FY11 compared to net disbursements of Rs 77.0 billion in the preceding year.
Under commodity operations, a significant improvement was registered in the outstanding stock of wheat financing and the timely decision to export surplus wheat strengthened repayment capacity of procurement agencies, and created room for wheat procurement for FY11, the report said. Moreover, actual wheat procurement also remained lower than the targeted quantity. Consequently, demand of commodity loans remained subdued.
The federal and provincial procurement agencies retired Rs 23.1 billion of wheat advances during FY11, which stands in contrast to an increase of Rs 48.4 billion in the previous year. According to the report, a number of factors were responsible for hampering the wheat procurement drive during FY11 including: (1) lack of proper storage facilities since the agencies were already carrying wheat stock from the preceding year; (2) efforts to manage financial burden; and (3) non-materialisation of subsidy receivables from the government. Aside from wheat, rice advances also experienced retirement during FY11. Procurement agencies made repayments by offloading rice stocks in the market. In addition to domestic procurement, banks also financed imports of sugar and fertiliser during FY11.