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KARACHI: The State Bank of Pakistan (SBP) injected Rs700 billion into the banking system on Friday.
Banks have been investing heavily in government papers while the government has also borrowed Rs847bn from the central bank since the beginning of the fiscal year. The government has been retiring long-term Pakistan Investment Bonds (PIBs), which benefited the government due to the low interest rate. However, banks still hold PIBs worth Rs3 trillion.
The low interest rate significantly reduced the government’s debt servicing in the current as well as previous fiscal years. The government spent 41pc of its tax revenues on interest payments in 2015-16. It had spent half of its revenues on interest payments in the preceding year.
The interest rate during the current fiscal year has remained as low as 5.75pc, which benefited the government while almost all banks reported lower profits.
The SBP injected Rs700bn for seven days at the rate of 5.81pc, which is just six paisa higher than the policy rate. The SBP conducted an auction for treasury bills on Nov 23 to raise Rs289bn for three-, six- and 12-month instruments while the cut-off yield remained almost the same (5.94pc) with slight variations for all tenors.
It reflects that banks are doing business with the government at a narrow margin, but not extending loans to the private sector. An SBP report issued early in the week showed that private-sector credit off-take during 130 days of the current fiscal year was still negative at Rs21bn.
Increased borrowings by the government have led to monetary expansion, which clocked up at 1.49pc (Rs190bn) in 2016-17 so far against 0.46pc monetary growth in the same period of 2015-16.
Higher government borrowings reflect the widening fiscal gap, which means the deficit can exceed the target set in the budget. The fiscal deficit for the first quarter was reported at 1.3pc of the gross domestic product (GDP), although it should ideally be restricted to 3.8pc for the entire fiscal year.
The SBP will announce monetary policy for the next two months today. Most analysts believe the SBP will keep the interest rate unchanged on grounds of the prevailing low inflation, greater benefit for the government in terms of reduced debt servicing and enhanced monetary expansion.
The SBP in its annual report for 2015-16 acknowledged that the decline in the interest burden in the fiscal year was due to a fall in overall interest payments as well as a sharp rise in the federal tax collection. However, the same report said the tax-to-GDP ratio in Pakistan is still one of the lowest in the world.
Published in Dawn, November 26th, 2016
