Government borrowing from SBP surges to Rs5.348 trillion

KARACHI: Government borrowing from the central bank jumped 2.6 times in 11 months of the current fiscal year, as Islamabad continued to rely on the State Bank of Pakistan (SBP) to finance the budget deficit.

Latest data issued from the SBP showed that the government borrowed Rs5.348 trillion from the central bank during July 1 to May 17, 2019, compared with Rs2.086 trillion in the corresponding period last year.

However, the government retired Rs3.698 trillion debt of commercial banks during the period under review.

A major portion of government borrowing from the SBP seems to have funded the budget deficit, which was on an upward trajectory due to a shortfall in revenue collection, higher than budgeted interest payments and security related expenditures.

The budget deficit climbed five percent of gross domestic product in July-March FY19. A frequent rise in this borrowing also indicated that banks remained unwilling to lend the government at the existing interest rates. The SBP in its latest monetary policy statement said the increase in monetisation of the deficit has added to inflationary pressures. It also said that a greater reliance on central bank financing of the deficit has acted to dilute the impact of previous monetary tightening.

However, the fresh auction of the market treasury bills, held on May 23 followed the SBP’s 150 basis points hike in the policy rate, showed a greater reliance on commercial bank financing by the government.

The government borrowed Rs3.1 trillion from banks via t-bills against a target of Rs600 billion.

A report published by Taurus Securities said interest in the t-bills auction was entirely skewed towards the shortest tenure (3-Months) amounting to acceptances of over Rs3 trillion at a weighted average cut-off yield of 12.57 percent (+157bps higher than the previous issue).

“Banks are expecting a further rise in interest rates. The surge in cut-off yields is the direct outcome of the 150bps recent hike in the policy rate by the SBP,” it said.

“Further, the amount borrowed ie Rs3.1 trillion, is the highest in a single t-bills auction since the Rs3.2 trillion borrowed by the government of Pakistan back in July 2018,” it added. The higher subscriptions were a result of the government’s willingness to borrow from the system rather than the SBP due to debt monetisation concerns, the report noted.

Rolling net maturities of R1.8 trillion between March and May 2019 also compelled the government to avail financing from the commercial banks for budgetary support.

Analysts said the government has to build fiscal discipline by cutting dependence on the central bank to finance deficit during the IMF-supported $6 billion three-year extended fund facility.

Analysts also said the upcoming budget would be aiming for a primary deficit of 0.6 percent of GDP. This provides some indication as to how much of fiscal deficit the government would be aiming for next year and would likely be the key prior action of the IMF programme.

“Assuming debt repayments of around Rs2 trillion, the government will likely target a fiscal deficit of around 5 percent for FY20 (we assume 5.7 percent) compared to around 7.3 percent expected this year,” said the Topline report. The SBP increased the policy rate by 150 basis points to 12.25 percent last month in response to higher inflation, elevated fiscal deficit and its increased monetisation.