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Financing budget deficit
- Tuesday, July 12, 2011 - From Print Edition


ISLAMABAD: In order to bridge financing of the ballooning budget deficit, the government plans to revive short-term savings certificate for three, six and 12 months period with minimum investment requirement of Rs10,000 from October, it is learnt.


“The Ministry of Finance has put on hold the proposal to launch this scheme for the last one-and-a-half-year, but now it has been decided that this scheme will be launched and the rates similar to the Treasury Bills (T-bills) will be offered to potential investors of this short-term saving certificates,’ a senior official of the Finance Division told The News on Monday.


The official said that the Ministry of Finance is also considering a proposal to allow launching of this short-term saving certificate at the stock markets of the country that could help the bourses get required funds.


When contacted, Federal Secretary Finance, Dr Waqar Masood said that he could not respond on the issue as he would have to see the official files for this.


But official documents suggest that the government is planning to offer rates on the upcoming short-term saving certificates similar to offered rates of T-bills in order to diversify its domestic debt market.


The rates of T-bills are hovering around over 13 percent so the small investors will also be lured with higher profit returns.


The Central Directorate of National Savings (CDNS) generated net investment of Rs230 billion during the last financial year 2010/11 against the envisaged target of Rs220 billion. For the ongoing financial year, the targets were slashed down to Rs186 billion for the ongoing financial year 2011/12 because the government has imposed a ban on institutional investment in accordance with the decision of the Economic Coordination Committee (ECC) of the Cabinet that ultimately provided extraordinary benefits to the banking sector after turning of government as desperate borrower, which is mainly relying upon getting money from the commercial banks by providing them space to dictate the State Bank of Pakistan (SBP0 on the monetary stance, the sources said.


The government envisaged budget deficit at four percent of the GDP, equivalent to Rs850 billion in the ongoing fiscal year with the condition that the provinces will generate 0.6 percent of the GDP as surplus in their budgets, but this target could not be achieved so the start of this financial year commenced with in-built slippages on fiscal framework agreed with the International Monetary Fund (IMF).


The hike in the budget deficit up to 4.6 percent of the GDP will result into increased pressure on the financing plan of this deficit as the government will have to manage Rs975 billion to bridge this deficit.


The financing of the budget deficit is managed through external and internal inflows and keeping in view shrinking avenues from multilateral and bilateral donors, the pressure on domestic market increased manifold.


Keeping in view the condition imposed by the IMF for bringing borrowing from the SBP at zero by the end of every quarter, managing the fiscal deficit is relied upon the domestic market, including the CDNS and borrowing from commercial banks.


By curtailing the role of CDNS simply means that the banking sector is on the driving seat and they are set to exploit the existing situation, knowing that the government will come to obtain money from them at secured and guaranteed rates and their strategy will be investing in T Bills in short-term of three months instead of 12 months.