Beruflich Dokumente
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MS-699
CONTENTS
Page No.
ACKNOWLEDGMENT
DECLARATION .
ABSTRACT .....
LIST OF ACRONYMS
LIST OF GRAPHS ....
01
02
03
04
05
Introduction.
Purpose of Study...
Research Objectives.
Research Methodology.
07
10
10
10
Literature Review................................ 12
Introduction....
Types of Debts..
Sources of Government Borrowing...
Instruments of Debt .
17
20
26
28
Inflation......
Interest Rate..
Crowding Out....
Currency
Budget Deficit
Government Expenditure
GDP
32
33
34
35
36
37
37
5.2
5.3
5.4
5.5
5.6
Interest Rate...
Inflation...
Crowding Out
Private Investment ......................................................
Unemployment .
44
44
44
45
46
Conclusion.. 48
6.2
Recommendations.... 49
REFERENCES..... 51
ACKNOWLEDGEMENT
All praises and thanks to Allah Almighty by whose powers and glory all good
things are accomplished. He is also the most merciful who bestowed upon us the
potential, ability and an opportunity to work on this project.
Last but not the least; we are extremely grateful to all our colleagues who equally
encouraged us in our project.
Regards,
_____________________________________________________
Danish Herchand Jacob
Wajahat Khan
Syed Manzar Hussain
DECLARATION
This dissertation is submitted in the Institute for Business and
Technology for the degree of MBA (Management Science).
We, hereby, declare that no portion of the work referred to in
this dissertation has been submitted in support of any
application for another degree or qualification of this university or
any other institution of learning.
Signatures:
Names:
Danish Herchand Jacob
Wajahat Khan
Syed Manzar Hussain
Date:
DISCIPLINE:
MONTH OF SUBMISSION:
FALL- 2012
LIST OF ACRONYMS
SBP
BoP
Balance of Payments
CDNS
DSC
DPCO
EDL
FRDL
GDP
IMF
LTD
Long-term Debt
MRTB
MTB
NSS
PIB
PKR
Pakistani Rupee
SDR
STD
Short-term Debt
TPD
USD
LIST OF GRAPHS
1.
2.
3.
4.
5.
6.
7.
8.
Introduction.
07
1.2
Purpose of Study...
10
1.3
Research Objectives.
10
1.4
Research Methodology.
10
Introduction
bonds,
bills,
and
securities.
Local
governments,
specific
lenders such as the World Bank, IMF or other international financial institutions
and creditors.
Another term called as Sovereign debt usually refers to government debt that has
been issued in a foreign currency. Another common division of government debt
is by duration of due repayment. Short term debt is generally considered to be for
one year or less e.g. treasury bills payable after three months, advances from the
central bank which are intended to bridge the gap between current revenue and
current expenditure also called floating debt. Long term is for more than ten
years also called funded debt. Medium term debt falls between these two
divisions.
Other terms are Productive and Unproductive debts. The productive debt is
expected to create assets which will yield income sufficient to pay the principal
and interest on the loan. In other words they are expected to pay their way they
are self-liquidating. On the other hand loans raised for war do not create any
asset they are a dead weight and are regarded as unproductive.
Growing government debt is an international trend. It has become a common
issue of the fiscal sectors of most of the economies. Almost all developing
countries governments are under minor or high debt situation. Government debt
is not a major problem rather problem is with the mismanagement and unsustainability of the debt. Debts are only effective if appropriate policies are in
place and can be used to control growing debt.
Pakistans Government debt to GDP was 60.10 percent of the country's Gross
Domestic Product in 2011. Historically, from 1994 until 2011, Pakistans
Government debt To GDP averaged 70.62 percent and reaching an all-time high
of 87.90 percent in December 2001 and reaching a record low of 54.90 percent
in December 2007. Generally, Government debt as a percent of GDP is used by
investors for measuring a countrys ability to make future payments on its debt
which thus affects the countrys borrowing costs and government bond yields.
Since independence Pakistan is facing serious problems in balance of payments
deficit. To finance this deficit in balance of payments, the country adopted to rely
on external debt. In July 1950, Pakistan joined the International Monetary Fund
(IMF) and World Bank. In 2001 Pakistan was ranked as severely indebted
country of South Asia by World Bank. The outstanding government debt of
Pakistan has exceeded its GDP and thus income per capita is lower than per
citizen indebtedness.
In the past whenever there was an emergency usually a war the monarch on his
own personal credit. Book on history abound in instances of fabulous hoards and
accounts of loots and sacks of hoarded wealth either from kings treasuries or
from temples and church. But this method of finance is not suited to modern
conditions. It will be inadequate and uneconomical.
Beside war there are several other causes which have brought about great
increase in the size of public debt. The most important cause of increase in
public debt is war or war-preparedness. Nation attaches a great importance to
their territorial integrity and they consider no sacrifice too much to defend their
country. Every war therefore leaves the country under greater debt.
The increase is also due to fairly frequent budget deficits on current accounts.
The deficits arise from the necessity of maintaining full economic activity in the
economic which may have ceased to expand.
Increase in public debt is also due to the undertaking of welfare schemes by
governments in modern times. In public utilities where there is no convenient
profit check no tight control over costs can be maintained and there are more
losses than gains. They also add weight of public debt.
In recent year urge for economic growth has induced the under-developed
countries to contract debts both internally and externally. The volume of public
debt has consequently swollen.
1.2 Purpose of Study
The main purpose of my study is:
(i)
(ii)
To find out the impact of government debt borrowing from central bank.
(iii)
banks.
1.3 Research Objectives
The basic objectives of this research report are to find out the impact of
government debt on Pakistans economic growth. To find out the impact of
government debt borrowing from central bank and commercial banks and its
direct effect on various variables such as GDP, inflation, interest, crowding out
and other factors.
1.4 Research Methodology
The suggested methodology which can be successfully applied in our
comparative case study. Gathering the previous studies that centers in the
application of the impact of government debt on economic growth of Pakistan are
a great advantage for the study. In the use of the same method the ideas,
knowledge, and skills can be applied.
10
Literature Review
12
11
2010, The Impact of High and Growing Government Debt on Economic Growth, European Central Bank.
2011, The Real Effects of Debt, Federal Reserve Bank of Kansas City.
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12
governments
financing needs and its payment obligations are met at the lowest possible cost
over the medium to long run, consistent with a prudent degree of risk. see IMF
and WB (2001).
Martin Melecky3 analyzed survey data on public debt management strategies
across income groups, regions and levels of indebtedness using graphical tools.
Regression analysis was carried out to explain the graphical analysis and
condition on more economic indicators possibly relevant for public debt
management. More specially, the graphical and regression analyses were
focused on explaining how the incidence of (i) public debt management
strategies, (ii) the published strategies and (iii) strategic benchmarks varies
3
2007, A Cross-Country Analysis of Public Debt Management Strategies, The World Bank, Banking
& Debt Management Dept.
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2011, Public Debt in Advanced Economies and its Spillover Effects on Long-term Yields, IMF.
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increase in expected AEs debt-to-GDP ratio (and in particular the U.S. debt) has
a significant impact (about 10 basis points evaluated at the 2010 debt ratio
levels) on EMEs yields. They also show that the U.S. debt ratio has a broadly
similar impact on the real yields of others AEs.
The interest rate channel is an important element in explaining the spillover effect
from AEs debt. They show that AEs real rates, and in particular U.S. long-term
real rates, have spillover effects on other countries real yields, including EMEs.
Douglas W. Elmendorf and N. Gregory Mankiw5 touched on some of the major
issues in the debates over the effects of Government debt. Because of the broad
scope of this topic, they have had to be selective.
An important economic issue facing policymakers during the last two decades of
the twentieth century has been the effects of government debt. The reason is a
simple one: The debt of the U.S. federal government rose from 26 percent of
GDP in 1980 to 50 percent of GDP in1997. Many European countries exhibited a
similar pattern during this period. In the past, such large increases in government
debt occurred only during wars or depressions. Recently, however, policymakers
have had no ready excuse. This episode raises a classic question: How does
government debt affect the economy? That is the question that they take up in
his paper.
15
Introduction ..
17
3.2
Types of Debt .
20
3.3
26
3.4
Instruments of Debt
28
16
Introduction
Accumulation in debt stock has been the prime problem faced by both
developing and developed countries. Developing countries face this problem
more often as they need to borrow to facilitate their development process and
accelerate the pace of growth. However, the borrowed funds required to be
allocated properly for the productive expenditures and in accordance to their
repayment ability. Though debt is useful for the growth of the economy however
dependence on debt must be closely monitored and proper strategy should be
adopted for enhancing the repayment capability of the country. High and
unsustainable levels of debt have serious repercussions for the economy in
terms of heavy debt servicing and decreased developmental expenditures,
essential to carry on the growth process. Besides, availability of lesser funds for
investing in the economy and increase in taxes for repayment, hampers growth
as it limits the productive investment, resulting in shrinking of the debt repayment
capacity of the economy. It creates crowding out effect as well as has negative
impact on the foreign and domestic investment and development plans of the
government.
The fiscal and real sectors of the economy are strongly linked to internal and
external debt through certain economic variables. On one hand, it appears that
the budget deficit is the major cause of domestic debt. While, on the other hand,
it turns out that the deficiency in savings and its effects on the balance of
payments is the basis of foreign debt. Notwithstanding the rationale behind the
occurrence of debt, the level and rate of growth of public debt should not unduly
limit the countrys monetary, fiscal and exchange rate flexibility. A sound debt
management strategy ensures that ample financing is provided for development
and growth objectives to be met. While a debt policy can guarantee the
sustainability of a countrys stock of debt, the need for these debt flows is
eventually determined by fiscal and monetary stance along with developments on
the external account. Conversely, the absence of prudent debt management will
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17
18
focus shifted towards domestic sources that led to shortening of maturity profile
of public debt. A confluence of unfavorable factors including lower GDP growth,
devastating floods, severe energy shortages, hemorrhaging Public Sector
Entities (PSEs), high inflation, weak security situation and global economic
recession resulted in higher fiscal deficits in the recent past.
Financial discipline over a prolonged period is essential for maintaining
macroeconomic stability in the economy. There is a general consensus that a
persistent commitment to financial discipline can be achieved by following rulebased fiscal policy. Pakistans government formed and incorporated a rule-based
fiscal policy with the Fiscal Responsibility and Debt Limitation (FRDL) Act 2005,
and was passed by the Parliament in June 2005. This Act ensures responsible
and accountable fiscal management by all governments, the present and the
future and also encourages informed public debate about fiscal policy.
In the country review, Sri Lanka is leading with more debt with Pakistan and India
on second and third positions.
19
3.2
Types of Debt
Domestic Debt:
Domestic debt is widely perceived as being an endogenous rather than an
exogenous policy choice variable and hence, a countrys issuance capacity in
this regard is determined by the level of income, pool of savings and institutional
quality. Moreover, the budget deficit can be covered directly through money
creation by the central bank or by increased credit of the banking system.
Excessive monetary financing translates into excess overall demand and
inflation. Compared to borrowing from the central bank, market-based domestic
borrowing adds more to macroeconomic stability, low inflation and reduced
exposure to external real and domestic monetary shocks, domestic savings
generation and private investment. Hence, governments by and large, opt for a
market-based domestic borrowing strategy in order to develop domestic financial
markets.
On the downside, though, a broad expansion in domestic debt poses significant
negative connotations for private investment, fiscal sustainability and ultimately
economic growth and poverty reduction in case of thin financial markets and poor
debt management capacity. Additionally, given access to cheap external finance,
in the form of concessionary loans and grants from international financial
institutions, governments preferably avoid seemingly expensive domestic
borrowing. Nonetheless, liquid domestic debt markets can help strengthen
money and debt capital markets, boost private savings, and stimulate
investment. Domestic debt consists of three main types: permanent debt, floating
debt, and unfunded debt.
This imbalance in the term structure of domestic debt needs to be addressed as
undue reliance on short-term sources of financing raises the rollover or
refinancing risk for the government. Failure to issue new debt in order to mature
a large amount of outstanding short term debt may trigger a liquidity or debt
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rollover crisis. The increase in frequency of such operations (due to their short
term nature) coupled with any adverse rise in interest rates may leave the
government vulnerable to high cost of debt.
Domestic Debt Types:
Permanent Debt
Permanent debt includes instruments for medium to long-term debt such as
Pakistan Investment Bonds (PIBs). The share of permanent debt in total
domestic debt is continuously declining since 2004-05 owing to irregular and thin
issuance at the longer end of the sovereign yield curve. This declining trend was
reversed in FY2011 with the debt management strategy to lengthen the maturity
profile of domestic debt. Contribution of permanent debt to total domestic debt
stock increased to 19 percent in FY2011 from 17 percent in FY2010. The
outstanding stock of permanent debt grew by 41 percent over last fiscal year,
registering a net addition of Rs 327.6 billion in 2010-11. Sizeable receipts from
Government Ijara Sukuk bond and Pakistan Investment Bonds contributed to this
expansion. Government mopped up net of retirement Rs 182.4 billion through
successful auctions of Ijara Sukuk bond and Rs. 112.3 billion through Pakistan
Investment Bonds during fiscal year 2011. Prize bonds observed a rise of 17
percent in its stock during the period under review. A dearth of private sector
credit demand during 2010-11 and banks preference of risk-free sovereign credit
in view of mushrooming non-performing loans augured well for the government
securities market and overwhelming participation was witnessed in their auctions.
Notably, the coupon rates on PIBs were increased in line with market
expectations.
Floating Debt
The short-term borrowing needs of the government are catered by floating debt
which includes Treasury Bills. The share of floating debt to total domestic
increased to 54 percent in FY2011 from 52 percent in last fiscal year. Floating
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22
23
debt creating foreign were responsible for this muted growth of EDL adjusted for
currency movement. There was no fresh disbursement under IMF-SBA during
the period under review whereas other heads underwent minor changes. As a
percentage of GDP in dollar terms, the EDL was down by 290 bps in 2010-11
compared to 2009-10 and approximated to 28.5 percent.
24
year. This has mainly emanated because no new commercial loan was raised
and other bilateral were repaid.
Private Non-Guaranteed Debt
The outstanding stock of private non-guaranteed debt increased by only US$ 315
million at the end the fiscal year 2010-11 at US$ 3.483 million. Slower economic
activity, prolonged power outages and deteriorating security situation has held
back the corporate sector to embark upon any fresh investment and hence,
shrinkage in financing needs to be met through external sources was apparent in
the form of diminishing private sector debt.
IMF Debt
Pakistan entered in to Stand by Arrangement with IMF in 2008; during the fiscal
year under review no fresh disbursements were made rather repaid US $ 267
million to IMF.
Foreign Exchange Liabilities
Foreign Exchange Liabilities (FEL) mainly comprise of central bank deposits and
foreign currency bonds. FEL decreased by 9.1 percent in FY2010-11 and
summed to US$ 1.0 billion at end-June 2011.
Currency Movements and Translational Impact
Foreign loans and other debt obligations of the Government of Pakistan are
contracted in various currencies. The bulk of these loans (approximately 93
percent) are in three major international currencies. For reporting purposes, the
outstanding balance of these loans is converted into US Dollar. Hence,
movement in the US Dollar vs. third currency exchange rates has a significant
impact on Pakistans outstanding stock of external debt. Depreciation of the
dollar will cause an increase in the outstanding stock, while appreciation will
cause a decrease. During the course of 2010-11, currency movements caused
an increase of approximately US$ 3.3 billion in Pakistans outstanding EDL. On
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25
the contrary, first quarter of the current fiscal year registered a decrease of US$
44.7 million in EDL owing to currency movements.
External Debt Servicing
During FY2010-11, external debt servicing summed to US$ 4,799 million that is
14.3 percent lower than the previous year. A segregation of this aggregate
number shows a payment of US$ 2,348 million in respect of maturing EDL stock
while interest payments were US$ 963 million. US$ 1,488 million was rolled-over.
Among the principal repayments, US$ 980 million of multilateral debt and US$
325 million of Islamic Development Bank accounted for most of the share.
Similarly, hefty interest payments worth of US$ 963 million on foreign currency
public debt contributed to the bottom line. In FY2010-11, the central bank
deposits were mostly rolled-over. During July-September 2011, the servicing on
external debt was recorded at US$ 1.356 billion. Out of the grand total, principal
repayments were US$ 475 million and interest payments were 181 million. The
rollovers amounted to US$ 700 million in the first quarter of 2011-12. Over the
last
three
years,
the
debt
servicing
levels
have
notably
increased.
Notwithstanding, with the IMF-SBA repayments set to initiate in the second half
of FY 2011-12, the servicing will increase to much higher levels.
3.3
26
The constant need for borrowing to finance the budget deficit has resulted in a
progressive deterioration of the countrys debt position. Pakistans total debt and
liability stock (TDL) has surged largely driven by the persistently large fiscal
deficits.
While financing through the banking system has traditionally been the primary
source of funding the budget deficit, it has gained further importance and growth
recently. In addition, non-bank borrowing has also become a popular avenue for
seeking domestic financing. Within non-bank sources, financing through National
Saving Schemes and short term Treasury Bills is more popular.
27
(3) Provincial and federal government borrowings for financing quasi-fiscal deficit
i.e. commodity operations, borrowings by public sector enterprises (PSEs)
and autonomous bodies, and subsidies extended to various governmentsponsored special credit schemes.
3.4
Instruments of Debt
28
redeemable before maturity. Sukuk Bond is script less & traded freely in the
Secondary Market and is transferable.
Prize Bonds
Prize Bonds Scheme is offered by Government of Pakistan. These Bonds are
available in the denominations of Rs.200, Rs.750, Rs.1, 500, Rs.7, 500, Rs.15,
000, Rs.25000 and Rs.40,000. These bonds are issued in series. Each series
consist of one less than 1,000,000 bonds. No fixed return is paid but prize draws
are held on quarterly basis. The draws are held under common draw method and
the numbers of prizes are same for each series.
Treasury Bills (T-Bills)
Treasury bills (T-Bills) are zero coupon instruments issued by the Government of
Pakistan and sold through the State Bank of Pakistan via fortnightly auctions. TBills are issued with maturities of 3 months, 6 months and 1 Year and are priced
at a discount. T-Bills are risk free. T-Bills are SLR eligible securities that are
actively traded in the secondary market and are therefore highly liquid. They are
issued with a minimum denomination of Rs.100, 000.
National Savings Schemes (NSS)
National Savings Schemes (NSS) are offered by Government of Pakistan which
includes various Defense Savings Certificates such as; Defense Savings (DSC),
Special Savings (SSCR), Regular Income (RIC), and Behbood Savings (BSC).
This also includes various Savings Accounts such as; Savings (SA), Special
Savings (SSA), and Pensioners Benefit (PBA). Prize Bonds are also offered in
these schemes which have been discussed above.
29
Inflation .
32
4.2
Interest Rate
33
4.3
Crowding Out ..
34
4.4
Currency .
35
4.5
Budget Deficit .
36
4.6
Government Expenditure .
37
4.7
GDP .
37
30
31
Inflation
32
4.2
Interest Rate
Increase in inflation will also bring an increase in the interest rate. When the
government borrows money to pay expenses, the money it receives is not free.
The interest on the debt will be paid from future tax receipts. Both a large debt
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and a high interest rate on any debt will generate high debt service payments to
pay the interest. In both cases, the high debt payments will necessitate cuts in
the provision of services. To pay interest on the debt, especially if spending does
not decrease, taxes must be raised to generate more income for the government.
When the government has less money to spend, it cuts back on services. When
taxes are increased, consumers have less money to spend because the
government takes more of it. Thus one of the effects of government debt is less
money to be spent in the future, either by the government or by individuals.
Pakistans short term market interest rates remained volatile and on average on
the higher side, imparting inertia to other market interest rates. As a result, the
decline in lending rates for the private sector, after a 200 basis point reduction in
the policy rate in H1-FY12, has been less than desirable.
The long term interest rates, on the other hand, increased in July 2012. As a
consequence, the spread between 10-year PIB rate and 6-month T-bill rate
increased to 121 bps.
4.3
Crowding Out
Crowding Out effect occurs when increase in public sector spending replaces or
drives down the spending in private sector. Crowding out refers to when
government must finance its spending with taxes and/or with deficit spending,
leaving businesses with less money and effectively "crowding them out." One
explanation of why crowding out occurs is government financing of projects with
deficit spending through the use of borrowed money. Because the government
borrows such large amounts of capital, its activities can increase interest rates.
Higher interest rates discourage individuals and businesses from borrowing
money, which reduces their spending and investment activities.
Because a government can tax its citizens to pay back its debts, it may be seen
as more creditworthy than private borrowers. The government can also offer
exemptions from income taxes on interest on its own debt, making its debt more
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Currency
35
4.5
Budget Deficit
36
4.6
Government Expenditure
Pakistans government failed to achieve the revenue collection target and did not
receive external resources and its expenditures increased resulting in higher
deficit. The countrys total expenditures stood at Rs3,936 billion or 19.1 per cent
of the GDP against the countrys revenue collection of Rs 2,566 billion or 12.4
per cent of the GDP thus leaving fiscal/budget deficit at Rs 1,370 billion or 6.6
per cent of the GDP in the previous financial year 2011-12. The official figures
further revealed that total expenditures stood at Rs 3,866 billion. The expenditure
on interest payment has recorded at Rs889 billion in the last financial year 201112, defence expenditure increased to Rs 507 billion, the non-defence, noninterest expenditures increased to Rs823 billion in FY 2012. The expenditures on
subsidies have recorded to Rs167 billion in the last fiscal year. The development
expenditures increased to Rs317 billion in FY 2012. The provincial current
expenditures have been recorded at Rs981 billion in 2011-12. The provinces
overspent Rs28 billion, or 0.6 percent of GDP, incurring a net deficit of 0.2
percent. The expenditures of provinces on development jumped to Rs375 in FY
2012.
4.7
The Gross Domestic Product (GDP) in Pakistan was worth 211.09 billion US
dollars in 2011. The GDP value of Pakistan is roughly equivalent to 0.34 percent
of the world economy. Historically, from 1960 until 2011, Pakistan GDP averaged
48.82 Billion USD reaching an all-time high of 211.09 Billion USD in December of
2011 and a record low of 3.71 Billion USD in December of 1960. The gross
domestic product (GDP) measures of national income and output for a given
country's economy. The gross domestic product (GDP) is equal to the total
expenditures for all final goods and services produced within the country in a
stipulated period of time.
Pakistan recorded a Government debt to GDP of 60.10 percent of the country's
Gross Domestic Product in 2011. Historically, from 1994 until 2011, Pakistan
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38
Budget Deficit ..
42
5.2
Interest Rate
44
5.3
Inflation ....
44
5.4
Crowding Out .
44
5.5
Private Investment .
45
5.6
Unemployment ..
46
39
Selling Treasury Bills (T-Bills), Pakistan Investment Bonds (PIBs) and Ijara
Sukuk through the auction system.
(2)
(3)
Each of these forms of borrowings is assessed in this section, along with their
associated implications. Before the introduction of Treasury bill auctions in March
1991, the government used to borrow from commercial banks through the tap
system by selling 3-month T-Bills at administered rates. Borrowing on tap
enabled the government to manage liquidity (through this tap) by either selling
T-bills, or by injecting money in the market by redeeming already sold bills
through discounting. It is generally agreed that the use of tap sales is linked to
governments cash management capabilities; if these capabilities are limited, tap
sales are a source of timely access to funds. However, the tap system fails to
establish a pricing mechanism based upon the supply of funds in the market and
their demand thereof by the government. Since banks are generally forced to
lend at a fixed rate offered by the government, it further impedes efficient credit
pricing for the private sector.
Therefore, the auction system is considered to be a superior alternate to the tap
arrangement with the onset of financial liberalization and associated reforms, the
sale of public debt on tap was replaced with the auction system in March 1991.
For this purpose, government introduced two debt instruments, Government of
Pakistan Market Treasury Bills of 6-months maturity and Federal Investment
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Bonds (FIBs) of 1, 3, 5 and 10 years maturity. FY92 was the first full year of
government borrowing through the auction system, with the government raising
Rs. 76 billion through 6-month T-Bills and Rs. 45 billion through FIBs.22 In the
interest of boosting the corporate debt market and to introduce longer tenor
securities, the government decided to launch Pakistan Investment Bonds (PIBs)
in December 2000. Assessing the characteristic features of the T-bills auction
system used by the central bank reveals that the SBP follows the Multiple
Price/Sealed Bid auction mechanism.
For the implementation of the auction system, a system of Approved Dealers
was set in place. Approved Dealers had to ensure a wide distribution of
government securities and work for the development of a secondary market.
However this system was reformed in 2000 wherein the concept of Primary
Dealers was introduced and this continues to date. Presently, T-bill auctions are
carried out on a fortnightly basis, conducted every alternate Wednesdays with
settlement the next day. Primary Dealers submit sealed tender applications on
Tuesday and Wednesday which are opened in public on Wednesday and then a
cut-off rate is decided for each tenor. During the period from 1995 to 2009, the
cut-off rate was decided by SBP. However, to separate functions of debt and
monetary management, the responsibility of deciding cut-off rates was
transferred to the Ministry of Finance (MoF) with effect from January 2009.
Depending upon governments borrowing needs and the maturity profile of
previous issues, the MoF had started making public announcements of quarterly
targets for T-Bills and semi-annual targets for PIBs, from November 2008. In
addition to meeting the governments financing needs; T-bill auctions have the
embedded objective of developing the secondary market for government debt
securities. Banks participation in T-Bill auctions has increased considerably
since FY09. With quarterly limits on the increase in NDA under the IMF-SBA
since November 2008, governments recourse to central bank borrowing
generally remained within stipulated limits and it diverted its funding needs
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towards scheduled banks. Banks on the other hand had already started to show
signs of credit restraint given the increase in the stocks of NPLs since end-CY08,
and investing in government securities helped them in consolidating their risk
profile shows banks willingness to invest in T-bills as indicated by the increased
net (quarterly) amount offered in FY10. On the other hand, the amount accepted
also showed a rise in Q4-FY10. Net accepted amount in T-Bills auctions was Rs
335.6 billion in FY10 relative to Rs 186.4 billion for FY09, with a rise of Rs 149.3
billion. The higher quantum of borrowing by the government through auctions is
due to both delayed and lower than anticipated realization of external inflows,
and rising fiscal spending along with low tax receipts during the year.
Notably, banks are generally likely to divert their pool of loanable funds to
investments in government securities if they offer a higher rate of return,
irrespective of risk considerations from higher NPLs. The spread between the
return on loans disbursed to the private sector and the T-bill rate shows a
declining trend which has served as an incentive for banks to invest more heavily
in risk-free government securities, rather than lend to the private sector, to the
extent that demand for credit exists.
Not only are banks loanable funds tied up in financing governments budgetary
borrowings, they are also used for financing commodity operations and public
sector enterprises. The impacting factors are described below:
5.1
Budget Deficit
Government borrowing from commercial banks for the budgetary support has
more than doubled during July 1 to October 19 as compared to the same period
last year, according to the latest statistics of the State Bank of Pakistan on
Friday.
42
43
5.2
Interest Rate
Inflation
Crowding Out
44
progress and governments intension to resolve it by issuing TFC could ruin the
private sector further as the countrys budget deficit has risen to 4.5 percent or
Rs 932 billion in the first half of the financial year.
Moreover, the persistent depreciation of Pakistan currency, slow exports growth,
rising oil prices, weak foreign inflow could further aggravate the liquidity
shortages being faced by the government. Persistent government borrowings will
certainly put pressure on interest rates in the long run. Hence, it is imperative that
government now should look to improve tax collection and increase tax base to
solve budget deficit problem.
5.5
Private Investment
High government borrowing can cause crowding out. This means private sector
investment is reduced because the private sector are lending to the government
instead of investing in more profitable private projects. Economy seems to have
no indication of positive growth as main engine for growth, the private sector, has
been retiring bank debt instead of borrowing to accelerate activities.
According to the report, the private sectors net retirement rose to Rs92 billion. It
was even worse than last years net retirement of Rs62 billion which resulted in
growth much below the target. However, banks half yearly result showed that
profit was up by 20 per cent compared to six months of previous year. Most of
the income was earned by lending to the government. Nothing changed during
the first quarter of the current fiscal year as banks continued to invest in
government papers while the private sector remained out of debt market.
Bankers said the private sector borrowing would rise in second quarter of this
fiscal year as sector requires huge amount to continue their machines operating.
The private sector, especially textile sector, requires huge working capital to buy
cotton, yarn and other related raw and semi raw material. During the previous
year, private sector borrowing for working capital increased substantially high,
but no project financing was noted.
Institute of Business & Technology
45
5.6
Unemployment
46
Conclusion ...
6.2
Recommendations .. 49
48
47
Conclusion
Recent levels of high government debt and large external debt are results of
persistent fiscal and current account deficits, non-optimal utilization of financial
resources, diminishing debt carrying capacity and rising cost of borrowing.
Unfortunately, government has not installed any system to quantify and manage
the fiscal impact of these debts; rather these debts are created essentially on an
ad hoc basis and without regard to fiscal consequences.
Soundness of Pakistans debt position remains higher than the internationally
accepted thresholds. Total Government debt levels around 3.5 times and debt
servicing below 30 percent of government revenue are generally believed to be
within the bounds of sustainability. Total government debt in terms of revenues
has increased to 4.7 times during 2010-11, as opposed to 4.3 times in the
previous fiscal year whereas the debt serving to revenue has declined to 37.7
percent in 2010-11 from 40.4 percent in 2009-10. Regardless, the widening gap
between the real growth of revenues and real growth of Total Government Debt
needs to be aggressively addressed to reduce the debt burden and improve the
debt carrying capacity of the country to finance the growth and development
needs.
Pakistans external debt and debt servicing in terms of foreign exchange
earnings stood at 1.3 times and 11.4 percent during 2010-11 compared to 1.5
times and 16.5 percent respectively in 2009-10, within the acceptable threshold
of 2 times and debt servicing below 20 percent of foreign exchange earnings.
However, repayment of IMF debt starting from 2HFY2012 will put pressure on
external debt servicing in coming years, therefore it is imperative for the
government to take measures for attracting both debt and non-debt foreign
currency flows.
48
Recommendations
49
Major debt reductions are mainly driven by decisive and lasting (rather than timid
and short-lived) fiscal consolidation efforts focused on reducing government
expenditure, in particular, cuts in social benefits and public wage spending.
Second, robust real GDP growth also increases the likelihood of a major debt
reduction because it helps countries to grow their way out" of indebtedness.
High debt servicing costs exert a disciplinary effect via market forces and require
governments to set up credible plans to stop and reverse the increase in debt
ratios.
Drastic and permanent fiscal consolidation mainly concentrating on the
expenditure side seems more appropriate than tax increases and timid
adjustments. With the appropriate fiscal policies, country can foster economic
growth and restore fiscal sustainability.
50
REFERENCES
1.
2.
3.
Checherita, Cristina and Rother, Philipp (2010), The Impact of High and
Growing Government Debt on Economic Growth, European Central
Bank Paper.
4.
5.
6.
7.
8.
51