The government is seemingly relaxed on its borrowing pattern right after the exit of the fund programme. There is an SBP act which has clearly defined limitation of federal government borrowing and there was a quantitative target of IMF programme too. The regulation requires net zero government borrowing at the quarter end.
The government has taken the leeway of running high borrowing from the SBP in the first two months of any prior quarter. Its happening now. According to the SBP data, government borrowing from the central bank on cash basis stood at Rs790 billion till September 2. And it has to be technically zero by September end to comply with the SBP Act.
Should the government fail to comply, the Finance Minister has to place before the Parliament, a statement giving detailed justification.
Its premature to say what the finance ministry has in its mind and how is Dar thinking to tackle the variance, if at all he is thinking. If the government gets back the borrowing to net zero by the end quarter; there is no problem. Can the government do so?
Yes it can. All it requires is an outright issue of T-Bills (outside the scope of biweekly auctions) to the tune of its quarterly SBP borrowing (which was Rs790bn on 2nd Sep) and in order to maintain banks liquidity, an OMO injection simultaneously would do the trick.
What has been happening in the past three years is that the government kept on borrowing from commercial banks and the SBP kept on pumping liquidity through reverse OMOs. The catch is an excess spread for banks at virtually no cost. OMOs are usually issued at 20 bps below prevailing T-Bill rates and banks borrow from the window and lend it to government without any hesitation.
Will the government do the same this quarter? That is a difficult question and only those who can read Dar's mind can answer it. However, in the past three years, while the country was under funds programme, government was never so relaxed in missing this target (see the graph).
It is evident from the fact that the government retirement from the SBP was Rs112 billion in the corresponding period last year; and the borrowing currently hovers around Rs800 billion. A net difference approaching a whooping trillion rupees mark.
The finance ministry has shown no attention to square the position. It seems likely that the government will miss its target.
And the only difference this quarter is that there is no check from the IMF. This shows how prudent macroeconomic management can precipitate in thin air, once the tranches go out of the way.
The other question is what fundamental difference is between direct borrowings from SBP to outright issuance financed by OMOs. It is an added 20 bps cost to government.
They both have same inflationary impact and can potentially devalue currency. The spirit of the regulation has surely remained missing in the recent past.
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