KARACHI: The government has announced its decision to stop borrowing funds from the State Bank of Pakistan (SBP) in the next fiscal year after cumulative borrowing in the ongoing fiscal year doubled to Rs2.7 trillion as of June 14 compared to Rs1.43tr in the same period last year.

The disappointing revenue collection during the ongoing fiscal year forced the government to borrow heavily from the SBP but the decision not to borrow from next fiscal year does not tally with the actual revenue position of the government.

The government in the budget 2019-20 plans to increase revenues by up to Rs1.4tr on account of higher inflation and reducing subsidies.

At the same time, the government’s debt retirement to scheduled banks has more than tripled to Rs859 billion compared to Rs247bn in the same period last year.

Sources in financial sector believe that in the absence of central bank, the government will look towards the commercial banks for its financing needs.

The possible huge outflow of funds from the banks to the government would practically dry up the liquidity for private sector ultimately affecting the overall economic activity.

However, with the approval of the IMF programme by the IMF board, it is likely that funds from other bilateral sources will resume and help government decrease its reliance from the SBP as well as the commercial banks.

The commercial banks have already invested Rs5.2tr in the government papers till April including Rs3.122tr in treasury bills and Rs2.077tr in Pakistan Investment Bonds (PIBs).

On the other hand, non-bank financial institutions have also invested Rs1.364tr in PIBs and Rs678bn in T-bills bringing the total investments from the private sector till April — including banks — to a whopping Rs7.3tr.

The government’s total domestic debt as of April have reached Rs18.5tr. Financial sector analysts believe that the government would opt to issue long-term PIBs to raise liquidity with highly attractive rate of around 13 per cent or more.

The PML-N government had also issued PIBs at higher rates in the beginning of their five-year tenure but the move proved to be costly after interest rate fell to single digit.

Bankers have also warned that the government’s recent drive to get Rs40,000 prize bonds registered could also deprive it from possible source of borrowing.

Published in Dawn, June 23rd, 2019