Hike in wheat support price inflates debt

KARACHI, Dec 3: Higher support price of wheat would increase government borrowing from banks for commodity operations that has already formed a stock of Rs436 billion, said banking sources.

On Nov 23, the Economic Coordination Committee of the Cabinet had approved Ministry of Food Security’s summary to increase support price of wheat for next crop to Rs1,200 per 40kgs against last year’s support price of Rs1,050 per 40kgs.

Last year, the government had borrowed Rs38bn for commodity operations.

“The sudden increase of Rs150 per 40kgs would add more to the commodity debt this year,” said a senior banker.

The commodity financing tremendously increased in the past four years which is alarming since the government has been borrowing heavily from commercial banks to meet shortfall in revenue generation.

The State Bank in its recent report said that government’s policy of maintaining relatively higher support price for major food crops contributed to increase in the share of commodity financing in overall public sector advances from 33pc in September 2008 to 65pc in second half of the calendar year 2011.

The government has already borrowed heavily for fiscal purposes which widened the fiscal gap and is under serious criticism of independent economists and the IMF.

According to latest data, borrowing for commodity operations rose to Rs436.13bn till end of June 2012.

Bankers said government borrowing from commercial banks has crossed all limits while it ended up with even slim chance of borrowing by the private sector.

They also said the declining interest rate supports only the government, the single largest borrower of commercial banks.

The banker said banks were short of liquidity that was being met by massive injection of liquidity by the Central Bank ranging from Rs500bn to Rs550bn on weekly basis.

While banks were expecting another cut in the interest rate expected to be announced in second week of the current month, they expressed their reluctance to lend more money for commodity operations.

Banking experts and analysts said in their reports that banks’ profitability would fall next year since interest has dropped by 4 per cent in past 15 months and banks parked almost all their liquidity in government papers.

The only borrowing from commercial banks other than the government was for working capital.

The liquidity demand for commodity operations would certainly increase borrowing from the State Bank also as banks have little to offer to the government, said a disappointed banker, who doesn’t want to see further cut in the interest rate.

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