February 4, 2003	Tuesday	Zul Hijjah 2,1423

KARACHI, Feb 3: The government has retired a huge debt of the State Bank of Pakistan by borrowing money from the banks in the first half of this fiscal year. It did not use the money borrowed from the banks in productive or development areas as it was not short of funds to meet its budgetary expenses during this time.

The government policy to retire the State Bank credit out of its borrowings from the banking system has kept inflation from shooting up and has also lowered the cost of its domestic debts.

Senior bankers say the government made a massive borrowing of Rs 149 billion from the banking system in July/December 2002 but at the same time it retired Rs 42 billion worth of credit taken from the State Bank. The borrowing from the SBP was made through creation of treasury bills whereas the borrowing from the banks was made through auction of the bills in the market. Bankers say the government used a major part of the Rs 149 billion borrowed from the banks also to clear Rs 123 billion worth of the adhoc treasury bills created in the last decade for specific purposes.

“This means the government replaced some expensive debts with cheaper ones,” explained a source close to SBP referring to the retirement of the treasury bills for replenishment of government accounts. (The adhoc T-bills created in 1990s and afterwards for specific purposes carried a nominal yield of half a per cent only).

“This also means that the government has been able to avoid a somewhat more direct inflationary impact of its borrowing from the central bank.” The government borrowing through treasury bills created by the SBP is priced at the weighted average yield of the last auction of the bills in inter-bank market. Whereas its borrowing from the market is priced according to the demand and supply of the bills. That is why a sharp decline in the T- bills yield in July/December 2002 prompted the government to retire its borrowings from the central bank that were obviously more expensive as these were acquired before the fall of the yield.

The weighted average yield on benchmark six-month T-bills fell to 4.32 per cent at end-December 2002 from 6.27 per cent six months ago.

The impact of the government borrowings from the central bank is more direct on the priceline as it increases the net domestic assets of SBP as well as reserve money and quite often leads to printing of money. That enhances inflation. But borrowings from the banking system makes a rather indirect and lesser impact on the priceline as the liquidity soaked from the system is normally backed by production of goods and services. So it seems logical for the government to retire the debts taken from the State Bank and borrow more from the banking system. “This was one of the factors that helped the government keep inflation at 3.55 per cent in the first half of this fiscal year,” explained a source close to SBP.

Senior bankers say the trend continues. In January also the government made heavy borrowings from the banks and seemingly used the same for retiring the SBP credit. Final figures would pour in after some time.