KARACHI: With banks parking their money in risk-free government securities in huge sums, private sector has found no space to borrow from financial institutions since the beginning of FY20.

The State Bank of Pakistan’s latest data shows the government borrowed Rs1.367 trillion from July 1 to Aug 2 (33 days) as against net debt retirement of Rs20.2bn during the same period last fiscal year.

This shift in government’s borrowing to the private banks came as a result of SBP’s decision to stop lending to the centre and finance its cash shortages. Banking money’s flow now directed towards the government papers is likely to hit economic growth by adversely affecting the investment landscape of the country.

The cash-strained government is also trying to maximise its revenue through different tax measures. However, this has taken a toll on economic activity in the country as traders have registered a strong reaction through calls for strikes and shutdowns. The trade bodies and the Federal Board of Revenue are yet to reach any final decision that may remove such uncertainty and logjam between the government and industry.

Recently the SBP governor also hinted towards economic uncertainty but remained hopeful that the set targets were clear and achievable.

According to the data, private sector recorded a net retirement of Rs122.3bn during this period, as compared to Rs36.3bn paid back in same period last fiscal year.

The persistent rise in policy rates by the central bank lured private sector to start investing in the government papers, which offers a higher return without any default risk. The current key interest rate of 13.25 per cent has pushed up the returns on both short-term treasury bills and the long-term Pakistan Investment Bonds.

The government has set a mammoth target for borrowing through T-bills while the banks are still cautious to invest in long-term securities as most of their investment is limited to the three-month treasury papers.

Another dataset published by the SBP reveals that scheduled banks had invested about Rs6.45tr in government papers as of May 31.

The borrowing comes amid a rising debt stock owed by the federal government as its total outstanding debt clocked in at Rs31.784tr as of June FY19 end, soaring by a massive 31.27pc over Rs24.212tr recorded in same period last fiscal year.

However, financial sector experts expressed their doubts over the sustainability of the government’s move to not borrow from the central bank.

Some were of the view that the government’s borrowing requirements are higher than the last fiscal year in order to boost the economic growth rate, which has already been projected to slow down according to the International Monetary Fund and other international organisations.

Published in Dawn, August 16th, 2019