KARACHI: Accumulation of costly debts may cost the government dearly as debt servicing has consistently been rising.
The State Bank reported that during July-November 2014-15, debt servicing stood at Rs485 billion against Rs455bn during the same period last year.
This was the outcome of massive growth in Pakistan Investment Bonds (PIBs) in the last 12 months.
The SBP report “January Compendium” shows the government issued PIBs worth Rs2.305 trillion during January 2014 to January 2015.
In the 12 months, PIBs growth jumped by 68 per cent, with the total reaching Rs3.886tr. However, sukuk (Islamic bonds) witnessed a fall. The Islamic banks have been demanding higher investment options, but conventional banks are the real beneficiaries of this high yielding government PIBs. The stock of sukuk fell to Rs326bn in January 2015 from Rs370bn a year before.
The SBP reported that banks’ holding of government securities now stands at 81pc of their total liquid assets maintained. Interest payments on domestic debt have shown an annualised growth of 6.4pc during July-November of FY15, it said.
The higher issuance of bonds or higher debt accumulation was the result of increasing fiscal deficit which forces the government to borrow more.
The government kept the fiscal deficit unexpectedly low in FY14, slightly above 5pc and announced to keep it at 4.9pc in FY15. However, it is believed that low fiscal deficit in FY14 was an artificial one, but the government has denied it. The government held back large amount of about Rs500bn as circular debt to show a lower deficit.
The fiscal deficit was recorded at 1.2pc of the GDP during the first quarter of FY15 compared to 1.1pc in the first quarter of the fiscal year 2014,” said the SBP report.
In FY15, the government borrowing needs have, so far, been entirely met from scheduled banks, said the report.
The banking industry has been facing an acute shortage of liquidity. On Friday, the State Bank injected Rs773bn into the banking system, reflecting poor health of liquidity. Banks are the biggest holders of PIBs.
“Government borrowings from the banking system and credit to private sector mainly contributed to monetary expansion during FY15,” said the SBP report.
In the PIB auctions in FY15, so far the government raised greater amount than the target. During Q1-FY15, fiscal deficit was entirely financed through borrowings from domestic sources.
Published in Dawn, March 8th, 2015