An estimated figure of fiscal deficit is over Rs1 trillion for 2011-12 which means another spell of large borrowing from banking and non-banking system. - File photo

KARACHI: Holdings of government securities by banks and non-bank institutions have crossed Rs3 trillion. The government seems to be sleepwalking into debt trap despite absence of foreign lenders.

The details provided by the State Bank suggested that even the insurance sector has found the government papers the best place to park their liquidity and earn safe return.

The State Bank reported that the Pakistan Investment Bonds (PIBs) were mostly purchased by the non-bank and corporate sector. The non-bank and corporate sector share in PIBs till August 31, 2011 rose to 59.4 per cent of the total PIBs while that of scheduled banks was 40.6 per cent.

The insurance sector invested Rs146 billion in PIBs which accounts for 38 per cent of the total investment by non-bank sector. Different Funds collectively invested Rs135 billion (35.5 per cent) in the PIBs.

The pattern shows the flow of money towards non-productive government borrowing. These government borrowings have so far been failed to pull the economy out of severe recession.

The scheduled banks also invested Rs261 billion in the PIBs while the total non-bank sector’s investments were Rs382 billion.

The highest investment of scheduled banks was to purchase Treasury Bills which rose to Rs1.755 trillion. The non-bank and corporate sector’s holding of T-bills also rose to Rs481 billion.

According to the State Bank report, the entire holdings of the government papers by banks and non-bank institutions reached Rs3.104 trillion.

This massive debt requires huge spending for its services while the revenue generation has yet not improved despite so-called strategies being adopted by the government and the Federal Board of Revenue.

This enlarging debt burden might see a significant increase by the end of this fiscal year since the government has been facing acute shortage of revenue against its rising spending. It means the fiscal deficit could be even higher than 6 per cent of gross domestic product.

An estimated figure of fiscal deficit is over Rs1 trillion for 2011-12 which means another spell of large borrowing from banking and non-banking system. The greater the debt, the greater will be servicing cost which means the government could have very little room for development spending. Like previous year when the development spending was negligible and was slashed several times, this year again low spending on development front could hamper the economic growth.

Analysts said increasing external debt servicing would ultimately hurt the domestic spending. “From February 2012, the return of IMF loan and interest would begin while no other external sources are in sight which means the government’s domestic borrowing would only add to the spending problem and downturn to the economic growth,” they added.