Govt borrowing jumps to Rs2.6 trillion in eight months

KARACHI: Higher funding needs pushed the government borrowing up 259 percent in over eight months of the current fiscal year, laying bare the challenges facing the Pakistan Muslim League Nawaz-led coalition government.

The government borrowed a total of Rs2.6 trillion from the banking system, including Rs2 trillion from commercial banks and Rs597.43 billion from the central bank between July 1, 2022 and March 11, 2023 to cover the budget deficit, according to the latest data published by the State Bank of Pakistan (SBP).

In the same period of the previous fiscal year, the total borrowing had stood at Rs723.2 billion. The center borrows from domestic banks through treasury bills and Pakistan Investment Bonds’ auctions to fund its budget deficit, which increased by 23 percent year-on-year to Rs1.7 trillion in the first half of FY23, due to a lack of foreign financing and revenue shortfalls.

The government recklessly borrows from commercial banks at any rate that is feasible. Commercial banks dump government debt documents in the SBP's discount window, add their own profit margin to the discount rates, and lend to the government under the guise of the sovereign debt guarantee of lending to the government.

The government raised funds at a historic high rate of 22 percent via the T-bill auction held last week. The acceptance of offers at higher levels might be on two factors, either the government intentionally gave a signal to the market and International Monetary Fund (IMF) that the rate hike was coming by picking up the amount at higher levels or it had no option but to raise funds as there was no other avenue for borrowing.

The cost of government debt will rise in line with expectations that the next policy review, which is scheduled on April 4, will result in a substantial hike in interest rates.

Analysts expect the central bank to raise the policy rate by 200 basis points to 22 percent at its upcoming monetary policy review. The factors that could influence the upcoming monetary policy decision are a delay in resumption of the IMF programme and soaring inflation.

“Local debt servicing amount of the government is widening while the tax collection numbers are not increasing at the same pace. How the government will be able to service this kind of debt markup payments remains a question mark,” said Chase Securities in a note last week.

There are concerns about Pakistan banks having high exposure to government securities. Five Pakistani banks' long-term deposit ratings were downgraded earlier this month by Moody's Investors Service from Caa1 to Caa3. One of the reasons given by it for the rating downgrading was the banks' significant holdings of sovereign debt securities. The banks’ high sovereign exposure, mainly in the form of government debt securities that range between 36 percent-61 percent of their total assets, also links their credit profile to that of the government, according to Moody’s. Surging interest rates have curbed private sector demand for credit, which is evident from the SBP data.

From July 1, 2022, to March 11, 2023, bank lending to the private sector decreased by 72 percent to Rs248 billion. Businesses' demand for bank loans decreased as a result of the slowing economy as the nation's crisis deepened due to a lack of supplies, sky-high prices, and a funding shortage.