Govt borrowing from banks surpasses Rs1trln mark in FY17

KARACHI: Government borrowing from commercial banks has surpassed the Rs1 trillion mark during the last fiscal year ended in June, mainly due to high public spending.

The State Bank of Pakistan data released on Thursday showed that the government borrowed Rs1.087 trillion from banks for budgetary support in FY17, up 37.38 percent from a year earlier.  

A widening budget deficit caused surge in bank borrowing during the last fiscal year. An increase in public spending, especially development and defence, weaker tax revenues and lower foreign inflows continued to weigh on public finances and pushed bank borrowing significantly up.

The slowdown in non-tax revenues caused by decline in inflows from the coalition support fund also contributed to a rise in bank borrowing. The government met a bulk of its financing requirements through borrowing from the SBP.

The SBP’s figures revealed that the government borrowed Rs711 billion from the central bank to fund its budget-related spending in FY17. However, it repaid an amount of Rs369 billion in debts to the SBP in the previous year. The government resumed reliance on SBP financing since the first quarter of last year, following the completion of the IMF-supported Extended Fund Facility Programme.

Low participation and high rates in the auctions of market treasury bills and Pakistan Investment Bonds, with no external financing available, left no single options for the government but to meet its funding shortfall duly via borrowings from the central bank.     

The government also returned to increased SBP borrowing to pay large one-off PIBs maturities in some of the quarters of last year. Analysts see the government is likely to continue borrowing during the current fiscal year and later due to increased economic activity and of course general elections. Hence, the domestic debt will go up.

They said short-term borrowing from the banking system along with rising dependence on the central bank could hurt the fiscal consolidation efforts of the government. The IMF, in its latest report, stated that fiscal pressures could rise during the period leading up to the mid-2018 general elections, and growth-supporting reforms could slow.

The Fund said fiscal consolidation slowed substantially in FY17. “The FY18 budget is subject to risks and reaching the deficit target will likely require significant additional revenue measures. Gradual fiscal consolidation should continue through the medium term to address debt-related vulnerabilities,” the IMF advised.

“Fiscal performance has been affected by lower-than-expected revenues. Recent fiscal slippages and the 2017/18 budget imply that these targets will take longer to achieve.”

The Fund stressed for gradual reduction in the stock of government borrowing from the SBP that would be important to support the independence and credibility of the monetary policy.

Analysts expect the budget deficit to reach almost six percent of the gross domestic product against the official target of 4.1 percent in FY18. It was at 4.2 percent in FY17.  

The central bank also called for changes to the government’s borrowing policy as it was creating hurdles in the financial intermediation function of banks.

The SBP, in its Financial Stability Review (FSR) for the year 2016 said the exposure of the banks to the public sector, in terms of advances, investments, money market activities, off-balance sheet items, and revenue generation remained significant.