KARACHI, Oct 23: The government sector borrowed Rs43.5 billion for filling in the gaps between its income and expenses in the first quarter of this fiscal year against the full year target of Rs15 billion.

“The increased government borrowing in the first quarter does not mean that we will miss the full-year target,” said a senior official of the Ministry of Finance told Dawn. He said it was natural for the government to go for bank borrowing at a time when the interest rates are low but there are indications these have bottomed out. “Frankly speaking I agree that the interest rates have seemingly bottomed out,” he said, implying that the government borrowing was well-timed. The government borrows money from banks as and when required, but it has to keep its borrowing within targeted limits at the year-end.

Since Pakistan is currently pursuing economic reforms tagged with a $1.4-billion three-year IMF-supported Poverty Reduction and Growth Facility it has to meet certain targets that the two sides agree upon. Keeping government borrowing within limits is one of them but this is largely an indicative target and the government does explain to the IMF the reasons if and when the target cannot be met. In the last fiscal year, the government bank borrowing for budgetary support had reached minus Rs55.9 billion against the target of minus Rs29.2 billion. The reason was obvious: the gap between the government earnings and expenses narrowed more than it had anticipated.

This trend has reversed now not only because the government is taking advantage of low interest rate environment, but also due to the fact that its borrowing from non-bank sources has been on the fall. Net retirement of Rs2 billion has taken place in national saving schemes and the government has also not been able to raise enough funds through sale of long-term Pakistan Investment Bonds.

“Naturally then the government is focussed on bank borrowing and rightly so,” said a senior official of the State Bank. When asked does this mean that the government will have to allow some spike in the interest rates he said: “It is premature to make such a projection.” But the official admitted that the picture would become clearer after the government holds the second auction of long-term PIBs early next month. He said the central bank and the Ministry of Finance had been discussing about how to lure more investment in PIBs without allowing a sharp increase in the yield structure.

The government sector borrowing includes borrowing of the federal government and that of the provincial governments as well. Senior bankers say the fact that the government has used the bulk of its bank borrowing during the first quarter of this fiscal year in retiring the State Bank’s credit shows that it wants to contain its cost of borrowing. “It also shows the government concern that it wants to keep inflation low,” said treasurer of a local bank. The government borrowing from the central bank is seen by economists as more inflationary than its borrowing from the banking system.

According to the latest statistics available on SBP website, the government mopped up Rs72 billion from the banking system by selling treasury bills at low rates in the first three months of this fiscal year. But at the same time it retired Rs44.8 billion worth of SBP credit.

The government bank borrowing of Rs43.5 billion for budgetary support combined with a Rs15.8-billion borrowing by the private sector in July-September this year shows that the banking system has been excessively liquid. This excessively liquid system made it possible for the government to raise debts through one-year treasury bills at a weighted average return of 2.15-1.92 per cent; through six-month bills at 1.60-1.21 per cent and through three- month bills at 1.46-1.65 per cent. Senior bankers say if the bulk of banking system liquidity is not lifted by allowing a modest increase in T-bills and PIBs yield structure it would eventually fuel inflation after a time-lag. In the first quarter of this fiscal year consumer inflation remained well within the annual target of four per cent showing a year-on-year increase of only 1.78 per cent.