Banks’ investment in govt debt falls near 8pc in FY19

KARACHI: Banks’ investment in the government securities fell 7.94 percent to Rs6.786 trillion at the end of June 2019 from Rs7.372 trillion in the same period a year ago, the central bank data showed on Tuesday.

Analysts said decline in the banks’ investment in the government debt was driven by the latter’s higher budgetary borrowing from the State Bank of Pakistan as it was depending more on external inflows to finance its increasing budget deficit.

Banks’ share in overall investments in the government papers remained up at 76.4 percent, showing higher reliance on bank borrowings to fill the budget gap.

The State Bank of Pakistan (SBP) data revealed the government debt holding in short-term market treasury bills (MTB) fell to Rs4.475 trillion in June from Rs4.786 trillion in the same month last year. Their share in MTBs was recorded at 88.3 percent.

Contrary to the MTBs, banks investment in the Pakistan Investment Bonds (PIBs) rose to Rs2.250 trillion from Rs2.218 trillion.

Banks’ investment in Ijara Sukuk sharply dipped to Rs61.2 billion from Rs367.7 billion.

The government’s dependence on commercial bank borrowing is expected to increase during the current fiscal year.

The latest MTBs and PIBs auctions saw a heavy participation by banks and other investors. These auctions were in response to IMF’s criteria of lengthening maturity profile of government loans and shift of borrowings from the SBP to commercial banks and other investors.

A hefty budget deficit also remained a major source of concern for the government.

The budget deficit jumped to record high of 8.9 percent of gross domestic product (GDP) in the last fiscal year, compared to 6.6 percent in previous year. The numbers are different from the revised estimates of 7.2 percent which the governmnet presented in budget FY20.

“The fiscal deficit fell short of government expectations mainly on the back of lower than expected FBR (Federal Board of Revenue) tax revenue collection of Rs3.8 trillion (against revised estimates of Rs4.1 trillion),” brokerage Topline Securities report said.

“Interest expense as percentage of tax revenues increased to all-time high of 47 percent versus FY18 ratio of 34 percent. Higher interest expenses are due to increase in interest rates coupled with bank borrowings to finance fiscal slippages,” the brokerage report added.

Pakistan’s public debt surged by 31.2 percent or Rs7.572 trillion in the last fiscal year of 2018/19, as financing of budget deficit and the currency depreciation contributed significantly to the rise in this debt.

Budget deficit rose to a record high of 8.9 percent to Rs3.4 trillion of gross domestic product in FY19, which was led by low tax collection and high interest payments.

Muhammad Sohail, CEO at Topline Securities said a similar high was seen back in FY12, when the budget deficit was up 8.8 percent.