WEDNESDAY JANUARY 04:Investment bonds: government plans to borrow Rs 675 billion from banks

KARACHI: The federal government is intending to borrow Rs 675 billion from banking sector, through short-term and long-term investment bonds, during the third quarter (Jan-March) of current fiscal year 2011-12, to meet rising financial needs.
Sources in banking industry said that revenue shortfall, rising current expenditures and high subsidies have compelled the government to enhance its reliance on banking system, as the federal government has already promised cut in borrowing with the State Bank.
The government had shifted away from central bank financing during the second half of last fiscal year (2010-11) and this shift towards commercial banks financing was required to manage inflationary expectations, as the SBP and the Ministry of Finance has came to an understanding, in late 2010, to keep government borrowing below September 2010 levels.
According to State Bank of Pakistan, domestic debt and liabilities (DDL) have reached Rs 6.8 trillion by end FY11, compared to Rs 5.4 trillion at end of fiscal year 2010. This sharp increase in DDL during the year is attributed to a deceleration in foreign exchange inflows for budgetary finance, suspension of International Monetary Fund's SBA program, and increased demand for funds to finance the widening fiscal deficit in absolute terms. This situation has forced the government to rely on domestic resources for the financing of its fiscal and quasi-fiscal activities, sources said.
The State Bank of Pakistan on Tuesday issued three calendars for auction of Ijara Sukuk, Pakistan Investment Bond (PIBs) and Market Treasury Bills (MTBs) and, according to these calendars, the federal government has planned to borrow a cumulative amount of Rs 675 billion from banking sector during Jan-March of fiscal year 2012 for financial requirements.
According to the SBP, Rs 50 billion will be borrow from Islamic banking industry (IBI), through one auction of Government of Pakistan Ijara Sukuk (GIS). The target includes Rs 20.434 billion of maturing amount and Rs 29.566 billion of additional requirement. Pre-auction target of Ijara Sukuk for third quarter of fiscal year 2012 has been issued by the central bank, according to which, auction for the sale of Islamic Bond will be held on February 27, 2012, and target has been set at Rs 50 billion.
IBI has about 7 percent share in overall Islamic banking industry and they have limited liquidity space. Therefore, only Rs 50 billion borrowing target has been set for Ijara Sukuk. Remaining amount would be borrowed from conventional banking, through auction of T-bills and PIBs. Under PIBs, the federal government has planned to borrow Rs 50 billion through two auctions. This has Rs 46.553 billion of maturing amount and Rs 3.447 billion of additional requirement. First auction of 3-, 5-, 10-, 20- and 30-year long-term investment bonds will be held on February 15, 2012, with target amount of Rs 25 billion. Second auction will be held on March 14, 2012 for borrowing another Rs 25 billion.
In addition, the government intends to borrow Rs 575 billion from banking sector (other than Islamic institutions through sale of Pakistan Market Treasury Bills of 3-month, 6-month and 12-month periods. This target includes Rs 505.493 billion of maturing amount, and Rs 69.507 billion of additional amount.
Auction of MTBs will be held fortnightly, and total 6 auctions have been announced by the State Bank for the third quarter of current fiscal year. First auction of the bills will be on January 12, 2012 for sale of Rs 75 billion worth MTBs. Second auction will be on January 26, 2012 with borrowing target of Rs 75 billion.
Two auctions will be held on February 9 and February 23 with the targets of Rs 125 billion and Rs 75 billion respectively. Two more auctions have been announced, on March 8 and 22, with targets of Rs 100 billion and Rs 125 billion respectively. However, it is interesting to note that overall borrowing is less than second quarter of current fiscal year, in which the federal government had planned to borrow Rs 1.070 trillion through Pakistan Investment Bonds and Treasury Bills.
The State Bank has also made it clear that any bid can be rejected, without assigning any reason. It may be mentioned here that the government's reliance on short-term borrowing has increased significantly over the last three years, and the Domestic Debt and Liabilities to GDP ratio had reached 37.8 percent of nominal GDP by end-FY11.