KARACHI, April 10: Falling treasury bills yield has enabled the government to clear expensive central bank debts by borrowing cheap money from the commercial banks.
The government retired Rs34 billion SBP debt between February 15 and March 15 this year as T-bills yield continued to fall due to excess liquidity in the banking system and limited lending avenues.
The government is borrowing heavily from commercial banks to retire expensive SBP loans, says head of treasury of a foreign bank. But the SBP policy of allowing a free fall of T-bills yield (that makes it possible for the government to retire the SBP loans through fresh borrowings from the commercial banks) may backfire, he warns.
The yield on six-month treasury bills fell to a historic low of two per cent in the first week of March, thus providing the government an incentive to borrow heavily from the commercial banks and use it for retiring SBP debts.
Bankers see a flaw in this policy of the government and believe that the flattening of the T-bills yield would hit the banking system hard and have a negative impact on overall economy as well. But senior officials of the Ministry of Finance and the central bankers believe the policy is in the best direction and is saving the banks from a disaster.
If we do not borrow from banks and they continue to fail in employing much of surplus liquidity somewhere else they would be hit harder, says an official of the Ministry of Finance. Banks should appreciate this point instead of hoping against hopes to see T-bills rate stabilizing, says a source close to the State Bank.
According to the revised credit plan for this fiscal year net government borrowing for budgetary support should stay negative at Rs29.2 billion. The government has superseded the target and brought down its net borrowing for budgetary support to Rs34.3 billion as on March 15.
Sources close to the SBP say that the current fiscal year may end up with a much higher net negative borrowing of the government. This is possible because the government seems confident to meet the fiscal deficit through other resources revenue and non-revenue items included. And there is nothing to suggest that the government might engage itself in any extra development project before the close of the fiscal year in June.
The government has been retiring the loans it gets from the banks under commodity operations i.e. to finance the purchase of wheat, cotton and fertilizers, etc., through state-run corporations.
Between July 2002 and March 15, 2003, the government retired Rs38.5 billion of commodity operations loans. Under the revised credit plan the target for commodity operations loans is minus Rs16 billion.
