Talking Business

The government’s list of difficulties didn’t get any shorter this past week as the market added its voice to the growing chorus of skepticism about its financing plan for the current year’s budget. And as if the midweek blues were not enough, the week ended with a so-called “monthly review meeting” at Q block where the finance ministry officials were supposed to give the provincial governments a crash course in fiscal responsibility, but ended up holding a list of provincial grievances in their hands instead.

The first auction for Pakistan Investment Bonds (PIBs) of this fiscal year was held last week, and the market delivered its unsympathetic verdict. The yields demanded for all tenors were disagreeably high and all bids were scrapped.  In case the market’s signal loses clarity in its long journey from Karachi to Islamabad, let me put it in plain English here: this was a vote of no-confidence in the government’s plan to finance its fiscal deficit.  The market is convinced that GoP’s long-term debt carries a premium when it sees no credible revenue generation initiatives on the horizon, no credible austerity measures, and an IMF programme on the rocks.

In case some still don’t get it, remember that the last time a PIB auction was scrapped was in November 2007.  That date is unlikely to bring back good memories for most of us.  That was also the time we saw blowouts in Pakistan’s CDS spreads, and the beginnings of an upward spiral in cut-off yields on domestic debt that took more than a year to bring under control.  After the November 2007 auction, yields on 10-year paper rose by more than 4 per cent over the next five auctions till February 2009.  And even when the market’s expectations finally found restraints, the yields had settled almost 3 per cent higher than where they were at the start of the spiral.

But let’s give credit where credit is due - no pun intended.  It was a bold move on the part of the government to scrap the auction.  Doing so was a way of telling the market to keep its expectations under control, knowing that the market’s options for deploying its liquidity are limited.  But the market has a ready answer for this, an answer furnished at the last T-bill auction held a week earlier where bids were almost double the target, basically telling the government that anything less than 13 per cent fetches you 12 months at best.  The market retains a healthy appetite for short-term paper but the government’s plan to wade deeper into longer tenors has been met with a cool response.

The next event on the horizon is now the monetary policy announcement at the end of this month.  Word on the street is that the government will use this moment to send a signal of its own:  no rate hike, present-day yields are here to stay.  The next PIB auction after that is scheduled later in August, and the market’s answer will be presented then.  Looks like finance ministry has to play chicken with the market first if it wants to go long with his fiscal numbers.

Problems on the fiscal side of things were not restricted to the money markets last week.  On Friday a group of finance officials from the provinces for what they’re calling a “monthly review meeting” these days were assembled in the finance ministry.  The meeting, we’re told, had two purposes:  to urge fiscal responsibility upon the provinces as we start the first year under the new NFC award, and to try and break the deadlock between the centre and Sindh on the GST on the services issue.

It seems the meeting found little traction. Balochistan protested that the schedule for federal transfers that used to be made fortnightly, has been changed to monthly, and that this change has been done without any prior intimation.  Sindh stood steadfastly by its right to collect sales tax on services, and Punjab and Khyber-Pakhtunkhwa urged the centre to expedite the resolution to the deadlock since prolonged uncertainty on this issue complicates revenue collection.  If the finance ministry succeeded in anything, it has chosen to keep it a secret.

On the same day, data released by the State Bank showed provincial overdraft standing at about Rs9 billion in the opening days of the new fiscal year, and that figure would’ve been double if not for an unusual nine-billion-rupee payment from Khyber-Pakhtunkhwa. This is one number I’ll be watching closely as the fiscal year unfolds.

Published in The Express Tribune, July 26^th, 2010.