The State Bank of Pakistan on Friday said that government budgetary borrowing is the major contributor to expansion of net domestic assets and monetary growth. According to the Monetary Policy Statement (MPS) continued government borrowings from the banking system for budgetary support put further pressure on the banking system resources.
"Due to uncertainty and delays in external financing of the budget, government also borrowed substantially from SBP. In contrast with first half of FY10, its borrowings increased continuously and remained considerably above the target agreed with SBP in IMF''s SBA programme throughout second half of last fiscal year," it said.
In fact, both the Q3-FY10 and Q4-FY10 targets were breached. For example, the stock of net government borrowing from SBP increased to Rs 1171 billion (on cash basis) as on 30th June 2010 against the target of Rs 1130 billion. After taking account of government deposits, the total net government borrowing for budgetary support from the banking system was Rs 330.4 billion in FY10, which is 52 percent of the total monetary expansion in FY10.
According to MPS, as against the pre-announced T-bill auction target of Rs 890 billion for second half of FY10, the government realised Rs 961.9 billion, including maturities of Rs 850.7 billion. Two points are worth highlighting here. First, banks offered Rs 1,855.1 billion in these auctions, which is much higher than the announced target, SBP said.
Adding that this indicates banks'' willingness to continue to subscribe to government paper and reflects their risk averse behaviour. Put differently, the current and expected scale of government needs is providing incentives for banks to invest in risk free government T-bills at high interest rates rather than the risky private sector.
Second, given the T-bills already issued in FY10, Rs 1347.6 billion will be required just to rollover the maturing amount in FY11. In addition, after including the issuance of T-bills of 3- and 6-month tenor for fresh borrowing requirements in FY11, this amount may increase further.
"To put this in context, in FY08, the rolling over of maturing T-bills, issued in FY07, amounted to Rs 576 billion. Similarly, in FY09, the rolling over of maturing T-bills, issued in FY08, amounted to Rs 880.4 billion. Thus, the pressure created from the fiscal position over the last four years will continue to have a bearing in the coming years," the MPS said.
Government borrowing for budgetary support combined with credit extended to the private sector, PSEs, and commodity operations contributed into an overall expansion of Rs 487.7 billion in the NDA of the banking system during FY10. Incorporating an expansion of Rs 152 billion in the NFA of the banking system, the broad money (M2) grew by 12.5 percent. For FY11, with a fall in NFA and strong growth in NDA of the banking system, M2 is projected to grow by 13.0 percent.
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