* Keep borrowings within budgeted targets
November 22, 2012, 12:00 pm
The Central Bank says it is concerned over the rapid increase in domestic borrowings of the government because deviation from budgeted levels would make monetary policy implementation difficult.
"The expansion of credit to the public sector, which includes the government and public corporations remains a concern. Being less sensitive to changes in interest rates, net credit to government depends on the budget deficit and the government’s strategy to finance the deficit, while credit to public corporations depends mainly on the operational losses they incur," the Central Bank said in its recent report ‘Recent Economic Developments: Highlights of 2012, Prospects for 2013’ released earlier this month.
"It is essential that public sector borrowing from the banking sector is restricted to the budgeted levels, in order for the monetary authority to maintain monetary expansion at the targeted level, which is essential for the success of monetary policy implementation," the Central Bank said.
According to latest data published by the Central Bank and Treasury, the government seems to be way off targets set in the 2012 budget.
Total outstanding government debt reached Rs. 6,249 billion as at end August 2012, the Central Bank said last week, growing by Rs. 1,115.6 billion during the first eight months of this year. According to the 2012 budget, the government’s borrowing limit for the full year is Rs. 1,104 billion, the Central Bank said.
According to the 2012 budget, the government’s debt requirement for 2012 was Rs. 776.2 billion from domestic sources and Rs. 327.8 billion from external sources. However, by end August 2012, the domestic debt component grew by Rs. 449.1 billion from end December 2011 while foreign debt increased by Rs. 666.5 billion.
The government has said it would not go for foreign commercial borrowings next year, and instead raise a bulk of its financing from non-bank domestic sources via the issuance of Treasury securities, EPF, NSB and SLIC.
With the budget deficit estimated at Rs. 507.4 billion next year, the government hopes to raise Rs. 86 billion from foreign sources (non-commercial) to finance the deficit, a sharp decline from Rs. 205.6 billion estimated for this year, while domestic borrowings are estimated at Rs. 421.4 billion, almost doubling from 259.6 billion in 2012.
Non bank domestic borrowings are expected to carry the weight of the deficit, surging to Rs. 289.4 billion next year from 84.6 billion this year.
Economists point out that for the government to successfully the required non-bank domestic borrowings, interest rats would have to be attractive, leaving little space for monetary policy easing next year.
The budget deficit target for this year was 6.2 percent of GDP, however, by end August the deficit had reached 6 percent. The government says it is committed to meeting the target but analysts then expect some drastic changes.
According to Frontier Research: "For instance total revenue for the first eight month has risen by 10% year-on-year. To get to the full year estimate for 2012, revenue for the remaining four months of 2012 (Sep-Dec 2012) have to rise by 17.4% year-on-year compared to the final months of 2011. On the expenditure side, total recurrent expenditures which has risen by 13.2% year-on-year in the first eight months of 2012 is estimated to rise by only 5% year-on-year in the remaining months of 2012. On capital expenditure which had risen by 32% year-on-year in the first eight months of 2012, is projected to fall by 31.4% year-on-year in the remaining four months of 2012.
"As a result of the above movements in revenues and expenditures, the budget deficit which had risen by 30% year-on-year in absolute rupee terms the first eight months is estimated to fall by 89.2% year-on-year in the final four months of the year."