Govt pays back Rs92bn bank loans

KARACHI: The government has repaid loans to the banks as it has ample funds on hand to meet its spending requirements, thanks to unusually high dividend income from the central bank and improved external inflows.

Data on monetary aggregates from the State Bank of Pakistan showed on late Tuesday that the federal government retired Rs92.181 billion in debt to the banks between July 1 and October 4, 2024. However, it borrowed Rs1.835 trillion from banks in the same period last year. The government paid back Rs1.098 trillion in loans to the SBP during the same period of this fiscal year.

This data, which provides information about public- and private-sector borrowing trends from banks, is released every week. However, it was pending since September 16.

Despite being the biggest borrower of banking funds, the government has chosen not to act in this manner after a huge injection of liquidity by the SBP, indicating that it has sufficient cash on hand and can easily meet its financing needs without having to borrow money from banks. This situation led the government to start buying back its own securities maturing in December this year, which helped reduce secondary market yields significantly. This, in turn, helps the government in retiring the stock of domestic debt and, along with a reduction in interest rates, helps lower borrowing costs.

“The unusually high dividend income from the SBP, totalling Rs2.7 trillion, along with fiscal consolidation, has enabled the government to reduce its borrowings,” said Awais Ashraf, director research at AKD Securities Limited.

“Recently, the SBP held two buyback auctions for T-bills, amounting to Rs826 billion, to retire T-bills maturing in December, while raising less than the targeted amount in recent fixed-income auctions,” Ashraf added.

“This has led to a significant decline in yields on government securities, with 3-month and 6-month papers now trading at discounts of 204 and 328 basis points, respectively, below the discount rate,” he said.

The government’s borrowing needs from banks have decreased at the start of the fiscal year 2025 due to lower inflation and improved tax revenue collection. The government has been concentrating on fiscal discipline and better budget management in order to reduce the fiscal deficit by controlling expenditures and improving revenue collection through better tax administration.

Sana Tawfik, analyst and economist at Arif Habib Limited, mentioned that the government’s liquidity position has also improved due to the receipt of the first tranche of $1.03 billion from the International Monetary Fund under the 37-month Extended Fund Facility.

Foreign funding, combined with fiscal discipline, has helped to lower government financing needs and reduce open market operations (OMOs). The net outstanding injection or OMO stood at Rs9.26 trillion as of October 15, compared with an all-time high of Rs12 trillion as of June 2024.

According to the most recent figures, it appears that banks have been unable to utilize surplus liquidity, as the private sector repaid Rs311 billion in loans to banks during July 1 to October 4, 2024. This is compared to banks retiring Rs289.9 billion in debt to the banks during the same period a year ago.

The banks are facing the problem of having excessive liquidity. If banks don’t lend out at least 50 per cent of their available funds by the end of December 2024, they will have to pay an extra 10 per cent tax. If the lending ratio is between 40-50 per cent, they will face an additional 10 per cent tax, and if the ratio falls below 40 per cent, they will have to pay a 16 per cent additional tax. To avoid these extra taxes, some banks offer loans with interest rates as low as 4.0 per cent, 12 per cent below the Karachi interbank offered rate (Kibor).\