RIZWAN BHATTI

KARACHI: In order to meet the rising fiscal deficit, the federal government intends to borrow a huge amount of Rs 2.7 trillion from the banking sector during the third quarter (Jan-March) of current fiscal year 2016-17 (FY17).

Analysts said that decline in foreign inflows, revenue shortfall and rising expenditures have compelled the government to enhance its reliance on domestic banking system to meet the required finances. The Federal Board of Revenue (FBR) is making efforts to achieve tax revenue target, however still it is facing a shortfall that resulted in higher borrowing for budgetary support.

“In the current scenario, when the government is facing a revenue shortfall and expenditures are increasing gradually, the federal government has one option, ie, to borrow from the domestic banking system to meet fiscal deficit,” they added.

The State Bank of Pakistan (SBP) Tuesday issued two calendars for the auction of Pakistan Investment Bond (PIBs) and Market Treasury Bills (MTBs) for tentative borrowing from the banking sector during the next three months (Jan-March) 2017. According to these calendars, the federal government has planned to borrow Rs 2.7 trillion from the banking sector in third quarter of FY17 to fulfil its financial requirements.

According to the SBP, an amount of Rs 150 billion, against Rs 176.038 billion maturing, will be borrowed through three auctions of long-term investment bonds. The first auction of 3-, 5-, 10- and 20-year PIBs will be held on Jan 25, 2017 with the target amount of Rs 50 billion. Two more auctions for borrowing of Rs 50 billion each will be held on Feb 22, and March 22, 2016 respectively.

In addition, the government has planned to borrow a massive amount of Rs 2.55 trillion through the sale of Pakistan Market Treasury Bills of 3-month, 6-month & 12-month in third quarter of FY17. This amount includes Rs 2.507 trillion maturing amount and an additional amount of Rs 42.451 billion.

The auction for MTBs will be held fortnightly and total seven auctions have been announced by the State Bank for the Jan-March period of current fiscal year. The first auction will be held on Jan 4, 2016 for the sale of Rs 200 billion worth MTBs. The second auction will be held on Jan 18, 2016, with a tentative target of Rs 450 billion.

Two more auctions will be held on Feb 1 and Feb 15, 2017 with a target of Rs 550 billion and Rs 550 billion, respectively. Three auctions have been planned in March 2017 to borrow an amount of Rs 800 billion.

The SBP in its recent report said that banks were parking their excess liquidity in the government papers. However, their overall exposure to the government declined by Rs 268.1 billion during Q1FY17 due to two factors: first, unusually large volume of PIBs matured during the quarter, which was not rolled over by the government and secondly the government scaled up its borrowings from the SBP.

Typically, the increase in the government borrowings from the SBP is considered inflationary via its direct impact on reserve money growth. However, in this period, the impact of the government borrowings on reserve money growth was offset by the rollback of equivalent volume of OMO injections from the interbank market. In effect, the increase in net claims on government was offset by a proportionate fall in other items.