KARACHI, June 17: The government borrowing from the banking system burst through the revised annual target of Rs60 billion on June 4. Between July 1, 2004 and June 4, 2005, the government borrowing for budgetary support increased by Rs68.3 billion, exceeding the revised target of Rs60 billion for the entire fiscal year ending on June 30, data released by the State Bank show.

While presenting the budget for the next fiscal year, the government had said the current fiscal year would end up with its borrowing from the banking system totalling Rs80.8 billion.

Initially, the government borrowing target was set at Rs45 billion for the current fiscal year but it was revised upwards to Rs60 billion as part of overall revision in annual credit plan. Now, as the revised budget estimates for this fiscal year show, the government borrowing for budgetary support would actually reach Rs80.8 billion at the end of the year.

This belies the claim a senior government official made recently that the government had skipped auction of long term bonds because it did not need money. “We don’t need money to finance the fiscal deficit this year,” said Dr. Ashfaque H. Khan in an interview with Reuters earlier this week. He had said this while explaining why the government had decided not to hold a scheduled auction of long-term Pakistan Investment Bonds or PIBs.

“The PIBs are a source of borrowing for the government, and we don’t need money,” he said.

The government held three quarterly PIBs auctions between July-March 2004-05 but as it was not willing to improve the yields it scrapped all these auctions.

Finally, it decided not to hold the fourth and final auction due this month and this fiscal year is going to close without any government borrowing through PIBs. In the last fiscal year the government had sold more than Rs96 billion worth of PIBs.

This is going to send a wrong signal to the market that the government is least interested in developing a long term yield curve for which the PIBs were introduced in 2000.

The government reluctance to increase the yields on PIBs in three successive auctions during July-March 2004-05 has already raised questions about its commitment to developing a bond market and establishing a yield curve.

Bond market players particularly insurance companies say the skipping of PIBs auction would deprive them of an opportunity to park their long term funds.

Many senior bankers also privately criticize the government decision of skipping PIBs auction but their chief spokesman Mr Shaukat Tarin says that for him the decision of skipping is understandable. “If I were to create debt at a time when the interest rates are rising I would rather not prefer it so the government is perhaps right in postponing the auction of PIBs,” he said when reached by Dawn over telephone. Mr. Tarin who heads Pakistan Banks Association said: “What the government is trying to do is to manage their debt profile.”

When pointed out that deferring the sale of PIBs might impede development of bonds market he said “holding of the auction could also prove counter-productive and distort the market at the moment.”

Explaining, he said that since the interest rates are moving too fast now, the market is sure to demand very high yields for bonds and that might raise expectations levels even if all bids are not accepted. “The government is waiting for the inflation to fall to and the interest rates to stabilize before it could think of debt creation through PIBs.”

Mr. Tarin and others who defend the decision of skipping PIBs sale make a point saying that PIBs are instruments of debt creation while treasury bills are instruments of liquidity management. In so saying they imply that that raising debt through PIBs at a time when interest rates are moving up is not advisable whereas borrowing through treasury bills is fine.

The point they miss is that avoiding an inevitable increase in interest rates in short term or long term always entails a carry-over impact on several areas of the economic performance. An increase in PIBs yields at this stage should have reinforced the SBP’s tightening of short-term interest rates thereby making a more meaningful impact on inflationary expectations. By keeping the PIBs yield at their previous levels—-already below coupon rates—-the government itself has provided an excuse to those who are fanning inflationary expectations and making it difficult for the SBP to contain inflation through interest rates tightening.

Inflation in May 2005 fell to 9.84 per cent year-on-year from 11.1 per cent in April but July-May 2004-05 inflation stood at 9.33 per cent, exceeding the full fiscal year target of five per cent. Indications are that inflation during this fiscal year would be around 9.4-9.5 per cent. This means the State Bank would continue to tighten interest rates throughout next fiscal year to keep it at the targeted level of eight per cent.

That tightening would increase the treasury bills yields to new highs making it all the more difficult for the government to auction long term bonds because in that case it would have to increase their yields much faster than what is required now.

The government decision to block an increase in the PIBs yields in the first three quarters of this fiscal year has already come under question and even experts like Mr. Tarin also believe that it was a mistake.

Currently one-year treasury bills yield is at 8.4 per cent, far higher than the coupon rates of six, seven and eight per cent on three-year, five-year and 10-year PIBs respectively.

In the last auction of PIBs in May 2004, weighted average yields on three-year, five-year and 10-year bonds stood at 4.23pc; 5.27pc and 7.13pc, below their respective coupon rates.