Government borrowings from banking sector, including CB surge in July

• Govt. borrows whopping Rs.320bn largely for settling billion dollar bond
• Rs.213.5bn printed to settle bond on July 26

Borrowings by the government in July from the Central Bank and licensed commercial banks amounted to a whopping Rs.320 billion, nearly double the figure in June, as the government settled a billion dollar bond from printed money while the semi-dormant economic activities weighed on State coffers as tax collection faltered. 
According to the latest data available through July, the government had borrowed a total of Rs.318.8 billion during the month, a large part of which or Rs.213.48 billion was caused by the fresh money printed to settle the bond on July 26.

However, this printed money stock is unlikely to put pressure on prices as it didn’t come into circulation, instead was swapped for dollars. 

Barring this amount drained as bond repayment, such borrowings rose by only Rs.25.62 billion, as total borrowings from the monetary authority for the month were Rs.239.1 billion. 

In comparison, the total borrowings by the government in June were Rs.170.6 billion as such borrowings rose in volumes and pace since the economy started experiencing 

continuous disruptions by virus related restrictions since mid-April, depriving the government of tax revenues.
For instance, the government borrowed only Rs.39.5 billion in April before increasing such borrowings to 58.9 billion in May when the lockdowns came into effect. 

In June, the government not only lost its revenues but also had to distribute a stipend for those who lost their incomes, an exercise which costs around Rs.30 billion in a single round, while ramping up its expenses to combat the virus. 

As lockdowns last long and are taking a massive toll on the economy, the government this week announced some measures of austerity to cut expenditure. 

By the end of September 01, the total stock of outstanding bills held by the Central Bank on behalf of the government stood at Rs.1,221.10 billion, up from Rs.1,141.05 billion on July 30 and Rs.919.24 billion on June 30, reflecting the pace of liquidity injections by the Central Bank. 

The increase in Central Bank’s holdings in July, which was around Rs.222 billion, roughly corresponds with the amount of borrowings made by the government from the monetary authority in that month.  

Meanwhile, the government borrowed a further Rs.79.7 billion from licensed commercial banks in July, up from Rs.46.3 billion in June and little over Rs.76.6 billion extended to the private sector in the same month. If the money is not injected by the Central Bank at the overnight window to make up for the unsold treasury bills and bonds at auctions, the rising borrowings by the government from licensed banks could crowd out the private sector and thereby likely to cause pressure on prices and foreign exchange which happens through higher imports.

As a result, classical economists call for restraint on liquidity injections by the Central Bank to keep prices and foreign exchange rate in tact. Meanwhile, the outstanding credit to public corporations rose by Rs.8.8 billion, easing from Rs.19.4 billion in June.  

As a result, the money supply in the economy as measured by the broad money or M2b rose by 21.1 percent—about the desired level by the authorities.