KARACHI: The government’s borrowing for budgetary support sharply declined by 42 per cent in the first 10 months of the current fiscal year, indicating a trend that may result in lower fiscal deficit for the year.

The State Bank’s latest data shows the government borrowed Rs676 billion during July-April period of 2020-21 compared to Rs1,171bn in the same period last year — a decline of Rs495bn, or 42pc.

In the wake of no funding from the central bank for the last two years, low borrowing for budgetary support indicates an improved performance on fiscal side.

On May 7, the Ministry of Finance reported that fiscal deficit as percentage of GDP stood at 3.6pc in nine months (July-March) of FY21 against 3.8pc in the same period of FY20. The deficit was 8.1 per cent in FY20 compared to 9.1pc in FY19. The government has set 7pc fiscal deficit for FY21.

“A lot of budget deficit has been financed from external sources. That’s why the government’s reliance on domestic sources has been lower,” said Samiullah Tariq, head of Research at Pak-Qatar Investment Company.

Since there is no borrowing from the SBP, government borrowing from domestic sources was mainly through banks.

In the last quarter of FY20 (April-Jun), nearly 53pc of the budgetary borrowing from the banking system was in the form of withdrawals from government deposits held with the central bank.

SBP’s the annual report said that as a result, while the overall fiscal deficit increased by Rs1.7 trillion during Q4 due to Covid-19 related expenditures, public debt increased by Rs1.1tr.

The government expects the fiscal deficit for FY21 around 7pc but analysts said it may be more since the last quarter usually witnesses high disbursement of liquidity. They said that this was despite low borrowing for budgetary support and lesser fiscal deficit in first nine months.

The government reliance on banks did not increase compared to last year as it borrowed slightly higher amount compared to last year from scheduled banks. Borrowing during the 10MFY21 was Rs1,875bn against Rs1,872bn in the same period of last fiscal year; an increase of just Rs3bn.

Scheduled banks financed the bulk of the government’s funding requirements, and as a result, the share of scheduled banks in total domestic debt increased from 33pc during FY19 to 40pc during FY20.

During the current fiscal the government’s borrowing from scheduled banks would increase the banks’ share in the domestic debt.

More than two-third of the rise in domestic debt came from permanent debt, which includes longer tenor instruments like PIBs, Ijara Sukuk and prize bonds.

According to a SBP report, government domestic debt increased by Rs2.5tr during FY20, compared to a rise of Rs4.3tr previous year. More than two-third of the rise in public debt during FY20 emanated from government domestic debt.

However, analysts and researches said the share of foreign burrowing for budgetary support has increased significantly this year FY21. FY20 saw a record surge in foreign investment in domestic debt instruments, though most of this capital reverted during the Covid-driven global sell-off.

The government started borrowing for long-term domestic bonds to avoid large payments on account of debt servicing on short-term maturity papers, which has the biggest share in budgetary allocations.

At the end of FY19, the government re-profiled the existing stock of SBP borrowing from short-term to long-term (one to 10 years). This re-profiling had increased the share of long-term debt (permanent and unfunded) in total domestic debt from 46pc at end-FY18 to 73pc at end-FY19. The share of long-term debt further increased to 76pc at the end of FY20.

Regarding PIBs, the government mobilised funds worth Rs2tr (net of maturity) during FY20, compared to only Rs0.3tr during FY19.

Analysts said that despite low budgetary borrowing and no funding from the SBP, the government did well with the help of foreign inflows. 

Published in Dawn, May 16th, 2021