KARACHI, Nov 29: The government has benefited most from a four per cent cut in the State Bank discount rate so far this fiscal year.

Senior bankers say the government has raised Rs90 billion or so from the banking system by selling treasury bills during July- November 2001 though its net borrowing has been less than 50 per cent of this amount.

They say the cut in the discount rate followed by lowering of treasury bills yield reduced the government’s cost of borrowing.

Whereas the central bank cut the discount rate from 14 to 10 per cent since July, it lowered the maximum yield on three-month and six-month T- bills by 4.20 per cent to 7.9 per cent and 8.3 per cent respectively. The yield on one-year T-bills also fell by three per cent to 8.9 per cent. This huge fall in the treasury bills yield has sharply cut the government’s cost of borrowing but it is difficult to work out how many billions of rupees the government has saved on interest payment.

Does this mean that the government has manipulated the cut in the SBP discount rate. “Not at all,” said a central banker who refused to be named.

“It just happened so. The private sector credit demand slumps between April-September every year and it creates room for higher government borrowing.”

This year the slump extended into October: Net private sector credit offtake was minus Rs14.5 billion at the end of October. In other words, the private sector had made a net retirement of Rs14.5 billion bank credit between July-October. Bankers said had the private sector credit demand been picking up at a normal pace since the start of the month, this figure should have been much lower.

The key reason for the private sector credit demand having not picked up even at the end of October is that the country has been facing an economic slowdown. But businessmen say had the banks cut their lending rates in response to the cut in SBP discount rate, it might have spurred credit demand by the private sector.

Senior bankers say since the private sector demand was yet to pick up, it was only natural for the government to keep borrowing from the banking system and retire part of that when the private sector demand picks up.

If the government stops borrowing at a time when the private sector is also not borrowing much from the banks that will hold up monetary expansion plunging the economy deeper into the slump.

It is against this backdrop that the government sector kept its net borrowing for budgetary support at Rs36.1 billion up to end of October against the full fiscal year target of minus Rs54 billion. The recent government decision to enhance spending under public sector development plan by Rs13 billion to Rs140 billion is also aimed at accelerating monetary expansion for economic growth.

Bankers say what is delaying a possible cut in their lending rates is the severe liquidity crisis the banks have been facing since September 11. They say the inter-bank market has now become almost used to an average discounting of Rs10 billion daily in spite of some timely liquidity injections made by the State Bank.

The roots of this serious liquidity crisis could be traced in the outflow of rupee funds from the banking system in the wake of the September 11 attack on the US soil and the counter US attacks on Afghanistan. Besides, people are also taking out money from the bank accounts for traditional pre-Eid purchases.

Bankers say the pace of withdrawals would further pick up when companies would start giving out Eid bonuses and paying advance salaries to their employees sometime next month.

FUTURE OUTLOOK: Senior bankers say the delay in sugarcane crushing this year may further decelerate the demand for private sector credit. But they say that the two per cent cut in export finance rate effective from December 1 may help the exporters get more credit from banks than they would have taken, had the finance rate not been slashed.