According to the central bank’s auction calendar for March-May, a huge sum of Rs1.37trn would be raised through the sale of Market Treasury Bills of three-, six- and 12-month maturities.
Out of the target amount, around Rs1.3trn would be utilised to pay the prior debt maturing during this period, leaving Rs75bn for the government to meet its current needs.
Besides T-bills, the government also takes loans from banks through long-term Pakistan Investment Bonds (PIBs). This keeps the State Bank of Pakistan (SBP) in the market almost around the year, mobilising huge sums of money either to pay maturing T-bills or six-month PIB coupon interests. During March-May, seven T-bill auctions will be held.
Traditionally, domestic, local-currency debt comprises floating debt, permanent debt and unfunded debt. Floating debt — of three- to 12-month maturity — is largely meant for commercial banks who invest in T-bills to meet statutory liquidity requirements (SLR). SLR is a mandatory for commercial banks with the central bank as a cushion against their activities.
Permanent debt includes long-term government securities where generally risk-averse institutions and individuals invest. This used to be a rather unattractive area for banks, mainly due to the lower rates of return offered.
Meanwhile, savings certificates and prize bonds etc comprise unfunded debt in Pakistan, where the government mobilises billions from the general public. Such borrowings are non-inflationary in nature.
In the past, the government’s borrowing from the banking system remained largely under floating debt, where commercial banks invested in T Bills because private sector credit was still a priority area for them. And to meet the government’s additional funding requirements, the SBP itself used to invest in T-bills.
If the current spree of the government’s borrowing from banks continues unabated, the next government will inherit two circular debts: one originating from the energy sector and the other from bank borrowings
Now, the situation has changed altogether. Banks are the biggest provider of funds to the government both under floating and permanent debt, through their investment in T-bills and PIBs. The SBP in not investing in these securities so as to keep its net domestic assets (NDA) at levels agreed with the IMF, and that is why commercial banks are investing heavily in auctions of government paper.
NDA represents the central bank’s claims on the government and the private sector. If the SBP directly invests in T-bills and PIBs, it unduly inflates the NDA in the shape of more claims on the government.
As a result, there is a shortage of liquidity in the market, making the SBP go for massive open market operations (OMOs). In the week ending March 20, the central bank first mopped up Rs229.57bn by selling T-bills, and then injected a big Rs842.5bn into the system a few days later.
Banks have landed into a bubble territory due to such conduct of the banking business. Instead of avoiding single-party exposure, our banks have placed all their eggs in the government’s basket, ignoring private sector, which is the engine of growth and employment.
This has created a vicious circle under which new debt is raised to pay the previous debt. The huge debt of Rs1.4trn (to be raised during March-May) would mature in a year’s time, along with previous debts. This means the mobilisation of trillions of rupees from banks would remain an integral part of the SBP’s domestic debt management in the coming time.
This government inherited an energy circular debt from the previous government. If the current spree of the government’s borrowing from banks continues unabated, the next government will inherit two circular debts: one originating from the energy sector and the other from bank borrowings.
Owing to multiple challenges, the government’s funding requirements are increasing day by day. Therefore, it should exploit all options and enhance tax collection and ensure fiscal discipline. And to meet the government’s urgent needs, the SBP should itself invest in T-bills and PIBs. Meanwhile, to promote growth and employment, commercial banks need to restrict their investment in government papers to the extent of meeting their SLRs.
The economy is awash with liquidity, which is being invested in the stock market, real estate and sale/purchase of foreign currencies. With the recent cut in the SBP’s policy rate, banks have further reduced their saving rates.
It is high time that the general public and institutions are offered attractive savings (permanent and unfunded debt) instruments that encourage them to place their savings in safe avenues instead of losing their eggs in risky ventures.
The writer is President, Institute of Banking and Business Learning, Lahoremunir1951@hotmail.com