When it comes to managing public finance, exploring new ideas isn’t bad. But before we talk about it, let’s have a look at some numbers.

Total stocks of commercial banks’ investment in government securities came down to Rs5.04 trillion in March this year from Rs6.34tr in March 2018. This means banks divested Rs1.3 billion during this period on a net basis.

Did the same indicator show a similar trend on a full fiscal year timeline? No. Banks’ investment in government securities was Rs7.67tr in June 2017 and remained almost unchanged at the end of June 2018. So we’ll have to wait for end-June data to see if banks are really reducing investment in government securities.

When banks invest less in government securities, they can lend more to the private sector. Their job as financial intermediaries is not to maintain a large deposit base only to continue investing in government securities. Their job is to meet the borrowing requirements of the private sector, although investing in government securities is in no way an unwanted exercise. The excess of it is.

But why are banks eager to invest in government securities? Why can’t they increase lending to the private sector? There are many reasons — and all known to our intelligent readers. But just focus on one thing now: when the banks’ deposit base swells, they have to employ additional liquidity somewhere to make money. And investing in government securities is more secure than lending elsewhere.

The treasury single account will encourage banks to invest more in the private sector instead of holding excessive government securities

So did the banks’ deposit base shrink between March 2018 and March 2019, forcing them to reduce net investment in government securities?

It didn’t actually shrink. But it didn’t show as much growth as it did a year ago: between March 2017 and March 2018, the deposit base grew by Rs.1.4tr, but the next year it expanded by just Rs885bn.

If we keep this context in mind, it’d become easier to understand why a country like Pakistan should move away from multiple treasury accounts to a treasury single account (TSA). The deposit base will see a fall when the government will move gradually towards TSA and shift its deposits maintained with commercial banks to the central bank. Individual banks if and when hit by this process will have smaller deposits to continue investing excessively in government securities. The central bank will do it.

But the central bank has long been lending to the government anyway. How will this new arrangement help it or the economy? Actually, a very large part of the central bank’s lending is nothing but a permission to the government to print more fresh currency notes. When the central bank would have a larger base of government deposits with it — via the TSA — the stock of its net lending to the government would decline.

That would help the government make more borrowing from the central bank — and less from commercial banks — and, that too, without exceeding the limits on its fresh net borrowings from the central bank.

As a consequence of the TSA — and a gradual shift of government deposits from multiple accounts to a single account at the SBP — net government borrowing for budgetary support from the central bank would decline. The reason is that net borrowing is calculated after subtracting the government deposits maintained at the SBP.

That would help the government borrow more from the central bank. But to keep the overall budgetary borrowing at manageable limits, it would have to reduce its borrowing from commercial banks. As discussed earlier, switching over gradually to the TSA would squeeze the banks’ ability to lend excessively to the government. So the TSA would rather compel the government of the day to borrow less from commercial banks, forcing banking institutions to lend more to the private sector. Eventually, banks would be doing what they were supposed to engage in: financial intermediation.

Some quarters have raised concerns that moving towards the TSA will hurt the banking industry and may also lead to a mini-crash in the capital market.

To address this concern, the SBP has already made it clear that switching over to the TSA will happen with input from all stakeholders.

A lot depends on how this concept is developed for implementation. For example, at what pace is it implemented? How are relevant laws and regulations modified to make this concept a reality? How the economy behaves and what results the drive for documenting the grey economy produces will also matter.

Currently, low economic growth means difficulty for banks to expand their deposit base and boost private-sector lending amidst relatively low demand. If the grey economy is documented in a big way — and in a short period — both issues can be taken care of. But if it doesn’t, perhaps it will take fiscal and monetary authorities a long time in moving towards the TSA.

The banks’ role in the development of the capital market is crucial. And to make sure that they continue to play that role, encouraging banks to invest more in the private sector’s debt and equity instruments rather than government securities is also important. The TSA can help in this regard too. When they will be forced to invest cautiously in government securities after the launch of the TSA, they will eventually begin looking for opportunities to invest elsewhere.

Besides, the TSA can help discipline government finances and make it easier to detect irrational behaviour in the movements of government deposits — or their transfer from one account to another. That is helpful from the viewpoint of international lenders as well.

Through a press release issued on April 17, the central bank made it clear that “no decision has yet been taken to implement the TSA and that any decision in this regard will be taken after due consultation with all the stakeholders and (after) assessing its impact on the banking industry.” It also warned that it would be “premature to form any opinion about the proposed policy decision and thus the market players should avoid engaging in any speculative activities based on this proposal, which is still under examination.”

Published in Dawn, The Business and Finance Weekly, April 29th, 2019