Govt seeks swift credit line
PHOTO: FILE
The cash-strapped government is working to acquire a fast credit line from banks to meet its large funding requirement to run day-to-day business and finance fiscal deficit, a research house said on Monday.
Though the government may continue to borrow through the auction of debt securities, treasury bills (T-bills) and Pakistan Investment Bonds (PIBs), it is slightly time consuming while its funding needs are urgent as well as high.
“This (new credit line) will likely avoid any competitive bidding process and will provide the government with required funds earlier than scheduled,” JS Global Head of Research Amreen Soorani said in a commentary.
The government has already borrowed Rs4.4 trillion from banks in the first seven months of current fiscal year compared to the earlier target of acquiring that financing over full fiscal year 2022-23.
Accordingly, “the fiscal deficit is expected to breach the budgeted target of Rs4.5 trillion (5.4% of GDP) by 38% to Rs6.2 trillion (7.4% of GDP),” she said.
“The unprecedented times have called for out-of-the-box measures as the finance ministry is reportedly working on a new way for the government to borrow money from the public or through the availability of credit lines from banks,” Soorani stated.
As per news flow, direct borrowing from banks has been approved by the cabinet. Its need has arisen under the crisis scenario since the government is facing a dearth of funding to meet fiscal requirements because the deficit is expected to breach the budgetary ceiling.
“The revised target for fiscal deficit is 15% higher than the FY23…deficit projection reportedly shared with the International Monetary Fund (IMF) two months ago,” the research head mentioned.
The new arrangement may be for short term given the extraordinary scenario rather than being a recurring feature.
The new financing line is under consideration owing to gaps in auctions versus more urgent need for funds and the rising yields, making financing expensive.
“The arrangement will enable banks to lend to the government without any competitive bidding, which is likely to be cheaper compared to the prevailing securities’ yields.”
When compared with the budgetary numbers for FY23, the government had projected 19% of funding (Rs843 billion) for bridging the fiscal deficit from banks and the remaining from external (35%) and non-banking sources (national savings, etc).
With global monetary tightening coupled with Pakistan’s reduced capacity to repay debt amid a contracting import cover, the country’s high risk profile has now limited the avenues of external borrowing. This is happening in the midst of prolonged talks with the IMF under the ninth review that has delayed a $1 billion loan tranche, followed by fresh inflows from other lenders, she said.
In the first half (Jul-Dec) of current fiscal year, mark-up expenses accounted for 55% of the total revenue, which are expected to increase further amid higher rates in the second half of FY23.
With rising inflation and expectations of continuous monetary tightening, shorter-tenor rates stand just shy of 20%, which were close to 15% at the start of current fiscal year.
The higher shorter-tenor yields (highest since at least 2000) have kept yield curve inverted for the past 11 months.
In the last two decades, this is the longest time the yield curve has remained “inverted”, the last instance being in 2019-20 (for 10 months). Also, longer-tenor yields have picked up recently, reaching a 14-year high.
She believes that a new avenue of assets is likely to attract the Islamic banking sector, given its limited investment options compared to conventional banking and also because assets to back financing are available.
Published in The Express Tribune, February 28th, 2023.
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