Debt collection suspended as govt savings top Rs262bThe government has suspended domestic debt collection for the time being as its savings soared to a startling Rs262 billion largely because of inability to expedite spending, especially capital spending.
The government has suspended domestic debt collection for the time being as its savings soared to a startling Rs262 billion largely because of inability to expedite spending, especially capital spending.
The government, at the start of the fiscal year, had planned to raise Rs111 billion in debt from the domestic market to cover budget deficit and fund development works. But so far it has only raised Rs58.3 billion in debt from the domestic market by issuing treasury bills, and development, citizens saving and foreign employment saving bonds.
“We have decided to further slow down the process of domestic debt collection, as treasury surplus has soared [to Rs262 billion],” Laxman Aryal, head of the Economic Policy Analysis Division at the Ministry of Finance, said. “We will, however, ramp up issuance of debt instruments in the last month of the fiscal year [mid-June and mid-July] and fulfil our promise of raising Rs111 billion in domestic debt.”
The government had in fact slowed down the process of domestic debt mobilisation from mid-April. In the Nepali calendar month of Baishakh (mid-April to mid-May), the government was planning to raise Rs39.25 billion in domestic debt. But it raised only Rs28 billion.
The government was planning to raise another Rs36 billion in the Nepali calendar month of Jestha (mid-May to mid-June). But it has deferred this process until next month. However, the plan to issue Rs5 billion worth of 364-day treasury bills and Rs5 billion worth of five-year Citizen Saving Bond, which was floated on the market on May 7, has not been cancelled.
The remaining securities will be put on sale only in the Nepali calendar month of Asar (mid-June to mid-July)-the last month of the fiscal year 2016-17, the government’s internal debt mobilisation calendar shows.
A big chunk of debt instruments floated by the government is bought by banks and financial institutions. In the current fiscal year, around 90 percent of the securities up for grabs are meant for these institutions and the remaining for the public.
Banks and financial institutions purchase these debt instruments largely to maintain the statutory liquidity ratio (SLR). The Nepal Rastra Bank (NRB), the central monetary authority, has made it mandatory for commercial banks to maintain SLR of 12 percent. This means 12 percent of the total deposits of banks must either be parked at the central bank, kept in the form of cash in their vaults or invested in securities, like bonds and treasury bills, issued by the government.
Since idle cash does not provide any return, banks prefer to invest a big chunk of this money in debt instruments issued by the government to maintain SLR.
This provision of maintaining SLR is also mandatory for other financial institutions but ratios vary. For instance, development banks have to maintain SLR of 9 percent and finance companies have to maintain SLR of 8 percent, while development banks and finance companies that do not collect current and call deposits have to maintain SLR of 6 percent.
As all the financial institutions have to invest a portion of their deposits in government’s debt instruments, they look forward to purchasing bonds and treasury bills.
But this year banks and financial institutions are not in a hurry to purchase these securities because of tight liquidity situation in the banking sector. This is reflected in interbank lending rates-the interest rate at which commercial banks borrow
money from each other for a period of seven days-which has again shot up to around 4.5 percent.
“The portion of excess liquidity in the banking sector has shrunk since mid-April when the government collected second instalment of income tax,” said Sanima Bank CEO Bhuvan Kumar Dahal.
Taxman here has made it mandatory for taxpayers to deposit 40 percent of the estimated annual income tax amount within mid-January. Firms have to deposit second income tax instalment of 30 percent in mid-April and the final instalment in mid-July.
“We believe over Rs30 billion entered the government’s coffers in mid-April, as firms paid second income tax instalment, which tightened liquidity position,” said Dahal.
However, the liquidity situation is likely to improve in the coming days as around Rs31 billion in NRB Bonds will mature beginning May 30 till July 15. Also, the government’s capital spending shoots up during the last three months of the fiscal year, which generally replenishes the coffers of banks and financial institutions.
“These are also the reasons why the debt mobilisation process was deferred by a month,” a senior NRB official told the Post on condition of anonymity.
But again the entire problem surfaced because the government could not spend the revenue it had collected over the months, Dahal said. “So, the focus should be on enhancing public spending capacity,” he added.
The government, as of Monday, spent only 48.9 percent of the annual budget of Rs1,048.9 billion, while only 31.7 percent of the total capital budget of Rs312 billion was utilised till that period.