Government borrowing from commercial banks increased by Rs590.2 billion during FY11 compared to an increase in private sector credit of Rs121.3 billion. - File photo

KARACHI: The State Bank injected Rs218 billion in the banking system on Friday to raise liquidity which encourages banks to invest more in government papers.

The frequent injection of massive liquidity has become a regular feature and is being maintained for lending to government which sells treasury bills to borrow from commercial banks.

The government avoids borrowing directly from the State Bank for face-saving but 'indirect borrowing' through t-bills has taken shape of a debt trap which is threatening the entire financial system.

In absolute terms, government borrowed Rs1.4 trillion from domestic sources in FY1l, and as a result, stock of domestic debt reached Rs6 trillion, indicating year-onyear increase of 29.3 per cent during the year.

At the same time, the short term debt of government has been increasing alarmingly that poses both the rollover risk and interest rate risk.

Bankers said the government has put the entire financial system on threat while the State Bank has also mentioned threats emerging out of this massive government borrowing.

'The composition of domestic debt indicates that the government has borrowed Rs3.2 trillion through t-bills, having maximum maturity of one-year. This implies the government would have to rollover its entire stock offloating debt at least once in FY12,' said the State Bank in its latest report.

The SBP's t-bill holdings account for 40.8 per cent of total floating debt.

'The rollover of t-bills amounting to Rs1.8 trillion held by scheduled banks could also pose challenges, said the State Bank.

The pace of increase in domestic debt is unsustainable, as outstanding amount witnessed an average annual growth of 23.3 per cent during the last four years.

Mohammad Imran, a banking analyst, said banks would be in trouble if government fails to payback the entire amount.

He said the government as well as the entire financial system would be facing a threat if private sector starts borrowing, like it did four years back.

While banks are risk averse and private sector has to minimise its liquidity demand due to poor economic environment, the government seems to remain in fiscal trouble and would continue to rely on borrowing.

This stock of debt has to be serviced primarily by government revenue receipts which are growing at an average rate of 17.6 per cent over the last four years.

Government borrowing from commercial banks increased by Rs590.2 billion during FY11 compared to an increase in private sector credit of Rs121.3 billion.