Morning Call about Government borrowing – Arif Habib Limited

Karachi, July 12, 2012 (PPI-OT): Domestic resources constitute bulk of government borrowings

Net government borrowings clocked in at PKR 1.3trn in FY12 as compared to PKR 0.5trn last year.

According to Arif Habib Limited, borrowings for budgetary purposes witnessed an exponential growth of 115% to PKR 1.2trn in FY12 from PKR 590bn in FY11. Major reasons owing to this high public borrowing requirement were insufficient foreign inflows due to slow privatisation process, mounting government expenditure, lower than targeted revenue collection, losses of Public Sector Enterprises and huge rupee subsidies on commodities that stimulated the government to extract major chunk of finance from the domestic resources.

We, therefore, underline the Government borrowing performance in FY12 and going forward in FY13 probable risks which may pump up government borrowing requirement.

Government mainly sought commercial banks’ financial assistance
A greater reliance was put onto commercial banking sectors (56% of the total borrowing for budgetary support or PKR 704bn as of 29th Jun’12) to gain financial support. This marks an increase of 18% YoY in FY12 from PKR 598bn recorded in FY11. The State Bank reported that the government borrowing from the scheduled banks in 7MFY12 crossed even the borrowing it made during the whole FY11 i.e. 166% higher (PKR 674bn) than the borrowing of PKR 263bn made during the corresponding period in FY11.

Banker to the State lends PKR 564bn in FY12
The total borrowings from SBP surged from a negative balance of PKR 8bn to a hefty amount of PKR 564bn on June 29th, 2012. Even in its Monetary Policy Statement of April’12, SBP stated “government borrowing as one of the sources of liquidity pressures.” According to the recent State Bank of Pakistan (Amendment) Act (2012),”government borrowing from the SBP is required to be repaid at the end of each quarter and the existing stock is to be retired within eight years”. However, reality portrayed a completely picture i.e. due to financial problems the government was unable to retire borrowing at end of every quarter.

Borrowing mix in FY13
Going forward Arif Habib Limited believes FY13 government borrowing requirement will mirror that of witnessed in FY12. Government borrowing will remain skewed towards commercials banks. The government has set up a target financing target of PKR 1105bn in FY13. Domestic financing of estimated PKR 484bn (or 43% of the total financing) will be raised through banks while PKR 487bn or 44% (of the total financing) will through non-banks. The SBP has pushed for a net-zero financing from SBP, which Arif Habib Limited thinks would be overly optimistic to believe that government will restore to such policy keeping in mind already PKR 564bn standing in its account. Whereas on the external side, bleak outlook over external funds will be a major risk pertaining to domestic borrowing. IMF due payments will also be a risky factor which amounts to USD 1.5bn in FY13.

Heavy government’s borrowing may reduce the probability of policy rate cut
Heavy reliance on domestic sources, higher fiscal deficit of 7 per cent with double digit inflation and increase in savings rates, in Arif Habib Limited’s opinion will not allow the State Bank to cut discount rate further. Investment in latest T Bill auction was more skewed towards longer maturity bills, which indicates that the market is expecting a cut in the discount rate. Arif Habib Limited however does not share the enthusiasm of the market as above mentioned factors are likely to downplay on a possible cut in next monetary policy.