Government seizes liquidity opportunity to ramp up internal debt

The government is rapidly raising internal debt, taking advantage of sufficient liquidity in the banking system. 

Nepal Rastra Bank (NRB) is also raising debt, originally slated for the second quarter, now as it would reduce the cost for the government and also help manage liquidity to some extent.

The government has set a target of raising Rs 240bn internal domestic debt in the current fiscal year. Out of this amount, the central bank has already secured Rs 87.31bn. This includes Rs 35bn that the central bank had initially planned to raise in the second quarter, according to the Monetary Management Department of the NRB. Of the Rs 87.31bn raised from the market so far, Rs 5bn was collected via treasury bills, with the remaining Rs 82.41bn through development bonds.

The weighted interest rate of treasury bills stands at six percent, and domestic bonds at seven percent, according to the department. Central bank officials say that they decided to raise funds targeted for the coming quarters in the first quarter to take advantage of the easy liquidity situation and low cost of funds and also to manage the banking system, which is flush with liquidity.

Banks have around Rs 500bn in investable funds. Banks have total deposits of Rs 5,823bn and total loans of Rs 4,838bn. They added Rs 35bn in deposits and invested Rs 54bn in the first two and a half months of the fiscal year, ending in September. In the same period of the previous fiscal year, banks had seen deposits fall by Rs 36bn while their loan flow had gone up by Rs 24bn.

The central bank plans to raise Rs 55bn each in the first and second quarters, Rs 53bn in the third quarter, and Rs 77bn in the fourth quarter. As per the schedule, it has already raised Rs 55bn that it had intended to raise in the first quarter. Going further, it has raised about Rs 34bn out of the Rs 55bn, which it had scheduled to raise in the second quarter, in the first quarter itself.

Banks, which were already in a comfortable liquidity situation, are further flush with lendable funds after the government allowed them to count 60 percent of funds of local units parked in them as deposits. Because of this, the inter-bank lending rate has come down to around two percent compared to six percent in the past.

The central bank, which used to absorb liquidity in the past through tools like reverse repo when interbank rates fell below 4.5 percent, hasn’t been able to implement such tools yet. This is because the interbank rates have come down due to the government’s decision to send additional funds into the banking system by allowing banks to count local government’s funds parked in them as deposits. We are in a wait and watch situation regarding our next move, an official at the department said.

 

The government, meanwhile, has failed to expedite its spending. According to the Office of Financial Comptroller General, the government has expended only 11.77 percent of its total budget allocated for the current fiscal year in the first two and a half months (between July 16 and Oct 8). The progress in capital budget expenditure remains at a disappointing 3.78 percent, while recurrent expenditure stands at 13.78 percent.