Banks continue to invest heavily in treasury bills and the yield on the three-month bills has been increased yet again to 9.95 percent. This was the third auction for T-bills since 27th November this year. The government has so far raised 392 billion rupees from the sale of short-term T-bills with commercial banks accounting for 391 billion rupees. There were no takers for the 12-month bills, indicating that banks are reluctant to invest in the long-term; or banks' confidence in economic policies and their outcome in the long-term has yet to be restored.
The rise in borrowing indicates two disturbing elements in our economy: the government's budgeted revenue base has not kept pace with its budgeted expenditure and foreign inflows have not been sufficient to meet government expenditure, triggering further domestic borrowing.
It is, however, unclear whether the massive rise in the budgeted permanent domestic debt incorporated ongoing borrowing or whether the Federal Finance Minister Ishaq Dar has borrowed on the assumption that tax collections would improve and pledged foreign loans would be disbursed on time. According to budget documents, the domestic permanent debt was budgeted last year at 87.8 billion rupees and the revised estimates were 87.7 billion rupees; however, the 2013-14 budgeted amount is 292.5 billion rupees, or in other words, the budgeted amount for the current year is close to 3.5 times the stock of permanent debt for last year. The major contributor to the envisaged rise in this debt in the current year is in the ijara sukuk bonds which were budgeted to raise revenue by 182.3 billion rupees in contrast to a mere 14.3 billion rupees in the revised estimates of last year. Auction for T-bills too was heavily relied on in the budget for the current fiscal year - 5870 trillion rupees in contrast to the revised 3366.7 trillion rupees for last year - a rise of 1.1 trillion rupees. These borrowings account for the higher budgeted interest payments - from 8,304 trillion rupees in the revised estimates for last year to 10,006 trillion rupees in the current year.
It also stands to reason that the rise in the yield of government paper, a product that is risk-free for the banks in contrast to lending to the private sector, reflects some hesitation on the part of banks to purchase the bills at the old yield. Domestic borrowing with the objective of financing a budget deficit is a highly inflationary policy however its inflationary impact can be minimised if the money is channelled into infrastructure development, education and health with the potential of enhancing output and consequently growth in the long run. In this context, it is relevant to point out that education and health are no longer federal subjects and the infrastructure projects remain hostage to the law and order problems as well as energy shortages.
The PML-N government has been particularly vocal about its focus on promoting private sector activity, based on the belief that the private sector can produce much more efficiently and cost-effectively relative to the public sector. However, the private sector may not have the resources or the confidence to take on large infrastructure projects and a better option in the current state of the economy would be to go for public-private partnerships. The then President, Asif Ali Zardari, never tired of rhetorically promoting public-private partnership but no work was done on the ground as the Ministry of Finance remained engaged in fire-fighting during the period 2008-2013. True that today too, the economy remains in a crisis situation but borrowing domestically and externally to bring the budget deficit down to what has been agreed with the International Monetary Fund under the 6.4 billion dollar Extended Fund Facility must not be the favoured policy. A better option would have been to proactively go after the tax evaders and enhance documentation, an approach that has been abandoned yet again after pressure from the business community; and reduce expenditure through streamlining the civil service, including the Federal Board of Revenue that has an estimated leakage of 500 billion rupees per annum.
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