The government which is on a dubious, trailblazing gargantuan borrowing path, is set to further increase its borrowings over its vis-à-vis by a gigantic Rs 441,371 million or by 103.1% when it's due to borrow Rs 24,000 million from the domestic market by selling Treasury (T) - Bills and T -Bonds this week.
Such a borrowing would take up its domestic borrowings to a massive Rs 869,580 million equivalent to 8.9% of GDP as per last year's GDP figures.
This compares with a mere Rs 428,209 million borrowing made in the whole of the first half (1H) of last year by its arch political rival, the SLFP led UPFA coalition government, currently in opposition.This year on year increase of Rs 441,371 million in borrowing is equivalent to 4.5% of GDP, whereas, a borrowing of Rs 428,209 million made in the 1H of the previous year by the former regime is equivalent to 4.4% of GDP.
Such increased borrowings are due to the government's pledge to keep up with its election promises, with a general elections looming round the corner. For instance the present regime gave a Rs 10,000 per mensem wage hike to public servants which increase alone costs the exchequer an additional monthly sum of Rs 30 billion to meet these commitments.
Barring this week, with still another two working days of the month remaining before the month end in the week following and with 1 July being a Poya holiday for the markets, one may witness an envisaged further increase in government borrowings before the month end, by the announcement of an early auction next week.The possible disadvantage in such huge government borrowings is that it may lead to the crowding out of the private sector, thereby causing rates to rise. Such pressure may be negated by Central Bank (CB), by cutting its policy rates.
CB is due to make its monetary policy stance for the current month known on Monday (29 June).
CB's present standing deposit facility is at 6% and its standing lending facility at 7.50% respectively. CB last cut both of these rates by 50 basis points each two months ago in April, but left them unchanged last month.An excess liquidity figure of Rs 63 billion as at Friday (19 June) may warrant for such a rate cut due to the availability of supply. On the other hand Sri Lanka is witnessing a balance of payments crisis, pronounced by CB's moral suasion diktat and the selective selling of US dollars from its foreign reserves because of demand, which supply is unable to match.
Therefore, any rate cut would cause further pressure on the country's foreign reserves and also on the rupee, due to the further creation of demand. And a rate hike to counter this would lead to destabilizing private sector credit growth, a growth needed to boost investments.
Therefore, under the circumstances, rates would remain unchanged, but government's borrowings would continue to grow, until such time an election is called.
Courtesy: Ceylon Financial Today 22 June 2015