BANKS are lending generously to the private sector these days and hope to invest heavily in government debt securities as well.
“We know it’s time for the federal government to reduce its debts obtained from the State Bank of Pakistan (SBP) — and experience tells us in so doing the government will return to banks (for borrowing),” says a senior executive of one of the top five banks.
In about seven months of this fiscal year, the federal government’s borrowings from the SBP totalled about Rs1.1 trillion.
Switching over from one source of borrowing to another is inevitable going by the history, and the government has already announced a heavier bank borrowing target for the current quarter
Instead of making any net borrowing from banks, the government retired banks’ credit of about Rs493 billion during the period. Switching over from one source of borrowing to another is inevitable going by the history, and the government has already announced a heavier bank borrowing target for the current quarter, up 29pc from its gross borrowing in the second quarter.
During the 2016-17 fiscal year, the federal government’s borrowing from banks totalled Rs361bn, or a little over one-fourth of its borrowings a year earlier. But what enabled it to slash its net borrowings from banks to that level from Rs1.365bn in 2015-16 was a massive Rs908bn borrowing from the central bank.
This pattern is going to change in the current fiscal year, officials of the Ministry of Finance say, implying that the government will reduce its borrowings from the SBP and let borrowings from banks mount up.
Excessive government borrowing from banks for years has increased the annual cost of domestic debt servicing. And the problem is that sometimes the government has to borrow more from banks to service these debts.
The government has to borrow from the SBP as well because banks cannot meet its entire requirements, and excessive borrowings from banks crowd out the private sector and depress economic growth.
Besides, maintaining a right mix of borrowing from the SBP and commercial banks enables the government to keep the cost of borrowing stable.
Sadly, for years non-bank borrowing of the government has not risen at a pace good enough to give it room to reduce its borrowings from banks or the SBP.
Poor performance of national saving schemes (NSS) and government’s inability to adopt innovative approaches for raising domestic debt from other non-bank sources are responsible for this situation. In July-December, non-bank borrowing through NSS totalled Rs92bn against Rs113.5bn a year ago.
“Economics is all about making trade-offs,” says an official of the Central Directorate of National Savings. “When interest rates remain low and stable for a long time, luring more investment into NSS becomes quite difficult, more so when stock and real estate markets promise handsome dividends.”
Not only the avenue for generating enough non-bank borrowing is apparently choked, accumulated financial losses of public sector enterprises (PSEs) are also a drag on the national exchequer. Ideally, these enterprises can help a great deal in generating non-tax revenue. But that has not been our case, as the government keeps pouring in billions of rupees every year in a futile effort to revive loss-making big PSEs.
Their privatisation plans also keep hitting snags for various reasons. The irony is that these PSEs, despite their ill financial health, also continue to borrow from banks on the back of federal government guarantees.
According to SBP data, cumulative borrowing of all PSEs stood at Rs115.6bn between July 1, 2017 and Jan 6, 2018 up from about Rs80bn in the year-ago period.
When the sum of both tax and non-tax revenue remains lower than the expenses and when expenses cannot be controlled effectively, the government fills in fiscal gaps the easy way. It either borrows heavily from banks as we have seen year after year or, worse still, it keeps printing money under the guise of borrowings from the SBP. This has happened for years, and this year is no exception.
Fiscal imbalances can partly be attributed to higher spending on development projects, but in our context domestic debt servicing eats up the bulk of fiscal resources. That is why excessive borrowing from banks undertaken for fixing fiscal imbalance during a year widens the fiscal deficit after a time lag.
But senior officials of the Ministry of Finance and Federal Board of Revenue (FBR) claim things have started changing for the better. In the July-January period, the FBR collected Rs2tr in tax revenue, even after making 33pc more payments in tax rebates and refunds. So, can we expect that the FBR will meet the full fiscal year revenue collection target of Rs4tr? Yes and no.
Historically tax collection rises in the second half of a fiscal year. Efforts to collect overdue taxes from property owners and real estate investors and increase in tax volumes on petroleum products owing to rising oil prices may help in accelerated revenue collection between February and June this year.
But can the FBR collect the remaining Rs2tr of the annual target within these five months? It seems difficult, particularly after a recent Sindh High Court ruling against the imposition of regulatory duties on hundreds of import items.
Late last month, SBP Governor Tariq Bajwa said while announcing the policy rate hike that fiscal deficit during the first half of this fiscal year is expected to fall close to 2.5pc, equal to what it was in the year-ago period. It might turn out to be so. The nation is still waiting for fiscal data for the first half.
But will the government also be able to meet fiscal deficit target of 4.1pc of GDP set for the entire fiscal year 2017-18? Historical evidence suggests that fiscal deficit remains higher in the second half than in the first half of a fiscal year. For instance, fiscal deficit in the first half of 2016-17 was about 2.5pc, but shot up to 5.8pc by the end of the year.
Besides, it is always tempting for the incumbent government to spend more during the election year and burst the fiscal deficit target.
During the election year, not only the size of the development budget is kept unusually large to gain political mileage, but more actual fund disbursement takes place quite rapidly in a few months before elections.
First we heard the announcement of an unusually large development budget of Rs1tr for 2017-18, then official records informed us that only 37.5pc of this allocation was released during the first half and now the government is speeding up work on development projects. There is no deviation from the past pattern.
Published in Dawn, The Business and Finance Weekly, February 12th, 2018