KARACHI: Banks’ outstanding investment in government debt securities fell 18 percent year-on-year to Rs6.206 trillion at the end of August 2018, the central bank’s latest data showed.

Yet, the banking system still remains the main source of government’s debts as it held 75.3 percent of all the investment flows towards Pakistan Investment Bonds, Ijara sukuk and market treasury bills.

Analysts said the government has to rely on domestic sources to finance increased budget deficit amid decline in tax revenue and sustained increase in current expenditures.

The Federal Board of Revenue’s collection fell Rs15 billion short of the target of Rs851 billion set for the July-September quarter.

The widening of both budget and current account deficits along with depreciation of exchange rate is contributing to increase in public debt accumulation, which is coming from both external and domestic debts.

The State Bank of Pakistan’s (SBP) data showed banks invested more in market treasury bills (MTBs) as compared to investment in Pakistan Investment Bonds (PIBs) and Ijara sukuk.

The government debt holding in short-term MTBs stood at Rs3.932 trillion in August compared to Rs4.466 trillion in the same month a year ago. The banking system accounted for 82.2 percent of investments in MTBs in August.

Analysts said the government continued to retire its maturing long-term debt, while meeting its budgetary requirements through short-term borrowing.

They said expectations about higher inflation and rise in interest rate shifted banks’ bidding pattern towards short-term

instruments. The SBP increased interest rate by 275 basis points to 8.5 percent since January.

The government is making hefty retirement in PIBs through the SBP borrowings. The government borrowed Rs2.346 trillion from the central bank during July 1 to October 18.

The changing market dynamics made it difficult for the government to roll over long-term debt and raise additional financing.

Within T-bills, the government borrowing was heavily tilted towards 3-months bills, as banks participation in 6-month and 12 month T-bill auctions was quite low.

In contrast to the MTBs, banks invested Rs1.906 trillion in PIBs in August. An amount of Rs2.745 trillion was invested in PIBs during the corresponding month a year ago.

Banks’ investment in Ijara sukuk slightly rose to Rs367.8 billion from Rs364.3 billion.

The SBP expects the budget deficit to be in the range of 5 to 6 percent of gross domestic product in the current fiscal year of 2018/19.

“In addition to the earlier policy measures aimed to contain imports, recent changes in income tax – partial reversal of the tax relief announced in the FY19 budget, administrative revenue measures, and further increase in regulatory and federal excise duties would help maintain a higher growth in tax collection,” the SBP said in its latest annual report on the state of economy.

“Similarly, the announced reduction in the development related spending and austerity measures are likely to relatively slow the growth in overall fiscal spending.”