Government set to borrowRs4.3 trillion in three months

KARACHI: The government plans to borrow Rs4.375 trillion from the banks through sale of treasury and long-term papers from November 2017 to January 2018 to plug the budget gap, the central bank said on Friday.

The State Bank of Pakistan (SBP) would sell Rs4.225 trillion worth of three-, six-, and 12-month market treasury bills at the fortnight auctions to be held from November 8, 2017 to January 17, 2018, according to the SBP’s auction calendar.

The bank also said it expects to offer Rs150 billion worth of three-, five-, 10 and 20-year debt through Pakistan Investment Bonds (PIBs) The government is also set to payback Rs4.330 trillion to the banks during the period under review. It expects to raise money to cover bulk of the budget deficit from local market [banking sources] in the current fiscal year.

Financing the budget gap was likely to be carried out through sizeable financing from external sources. The budget deficit continued increasing owing to slower growth in revenue collection as well as sharp increase in expenditure.  Also, inflow of the US-backed collation support fund remains uncertain. Compared to the trend of borrowing from the SBP, the government has regressed to borrowing from commercial banks as they offer increased amounts in treasury bills and PIBs auctions.

The government borrowed Rs143 billion from banks between July 1 and October 20, 2017 for budgetary support. It had repaid Rs397 billion to the scheduled banks in the same period of last year, according to figures posted on the SBP’s website.  In expectancy of rates bottoming out, coupled with narrower spread between PIBs and T-Bill yields, banks are forced to invest more in shorter tenor securities.

However, the government prefers to borrow on short-term basis due to the banks’ inclination of higher rates on long-term debt. Analysts said government appetite for bank borrowing would remain high in FY18. However, banks, along with the placement of funds into the government securities, look to diversify their lending portfolios.

The SBP predicts budget deficit to be five to six percent of gross domestic product (GDP) in the current fiscal year. “Given the capital spending requirement of the government for completing various projects under CPEC and likely increase in provincial spending during the election year, achieving the target 4.1 in FY18 could be challenging. Moreover, any shortfall in revenue may keep the fiscal deficit close to FY17 level,” the SBP said in its FY17 annual report on the state of the economy.

Fiscal deficit stood at 5.8 percent of GDP in FY17.

Money market participants assume the interest rates to stay flat at 5.75 percent in the upcoming monetary policy decision to be issued later this month.

“At 4.05 percent the real effective interest rate (policy rate – inflation) remains at a healthy 1.70 percent, which infers that chances of an increase in policy rate in the near future remain grim,” said an analyst at Alfalah Securities.

The consumer price index inflation stood at 3.8 percent in October from 3.9 percent in the previous month.