In what may not be music to the years of the credit starved private sector, the government has earlier in this month borrowed around Nu 2.7bn from the banks.
Of the total amount, Nu 1.7bn was borrowed through Treasury Bills and more than Nu 1 bn was borrowed from the banks through RMA.
The money was taken to pay back an earlier Treasury Bill of Nu 2.5bn which could not be paid back from the government budget due to cash shortfall but had to be borrowed.
The Finance Secretary Lam Dorji said, “T-Bills is a continuous cash management process that the government has been doing and it not only helps the government deal with cash shortages, but also helps the development of the capital market.”
The government’s loan from the financial market has flagged off several issues now facing the Bhutanese economy.
A concern with the government using up so much liquidity from the banks is the possibility of the government taking more such loans resulting in credit scarcity for businesses and individuals. This will also possibly counteract and impact the yet to be implemented Economic Stimulus Plan (ESP). The centre point of the Nu. 5bn ESP is to pump in Nu. 4bn into the banks so that they can start giving out loans.
A matter of concern is that given the financial situation, the government may soon go in for more T-Bill that will mop up more liquidity from the economy.
In 2013 alone, mainly during the time of the former government, around Nu.13bn in T-Bills were taken and repaid. In 2012, the figure was Nu.16bn.
This comes in the backdrop of a RMA study showing that the Bhutanese financial market had around Nu.13bn worth of credit potential in October from all financial institutions.
In 2012, the total size of the credit market including loans taken were around Nu.50bn plus.
A government official said, “Banks will always prefer to buy T-Bills to giving loans because these bills are backed by the government with no chance of default, and moreover they can show these T-Bill as part of their 20 percent Statutory Liquidity Requirement (depositors money that is not loaned out and can be given on short demand) required under banking regulations.”
While the government benefits from getting the required money to fund budgetary shortfalls and the banks gets an assured return, the only losers are the private sector and those seeking loans as there would be that much less money to loan out.
Despite the RMA easing some risk weightages in areas like agriculture, education, government backed loans etc. in August 2013 allowing banks to lend some money, it is still hard for most people to get credit in areas like housing, car, consumer and medical loans with banks not giving such loans on the back of high risk weightages applied by RMA.
The Finance Secretary, however, presented a different perspective saying that the fact that banks bought T-Bills shows that the liquidity situation is better.
More Expensive Credit
Unlike in the past where banks bought any amount of government T-Bill as a flat three percent discount rate fixed by the government, the government this time around had to pay up to 4.5 percent discount rate to banks.
Given the current credit tight situation, the RMA had advised the government to go for a competitive bidding for the Nu.3bn it wanted to raise through T-Bills.
One T- Bill of Nu.1.5bn was for 60 days while another T-Bill of Nu.1.5bn was for 90 days
The government, in the end, could afford to get only Nu.1.7bn out of the Nu.3bn it had originally aimed for. It had to reject Nu.1.3bn in bids for T-Bill as the rates quoted for them by banks were too high for the government to bear.
Of the Nu.1.7bn in T-Bills, the Bank of Bhutan took Nu.500mn for 4.50 %, Bhutan National Bank took Nu.700mn at 4.49%, Punjab National Bank took Nu.400mn for 3 % and Bhutan Development Bank took Nu.100mn for 4 %.
Since the government could not raise adequate money from T-Bills, it had to resort to taking loans from banks through the RMA using the government’s ‘Ways and Means’ account. This essentially means that RMA can loan the government money which is equivalent to the average of 2 years of its annual revenue coming to around Nu.2.1bn.
It is learnt that of the Nu.2.1bn available to the government, it has already taken more than Nu.1 bn. The interest rate charged here is one percent more than the last T-Bill and is given for a short time period only.
Cash Starved Government
The government loan also underscores a shortage of cash already visible with several private sector companies yet to be paid their dues by government agencies for months on end.
The era of T-Bills took off when the previous government faced a series of budget deficits where money had to be borrowed internally and externally to make up for the shortfall. A BCCI study and some economists had pointed to this deficit financing as being also partly responsible for the credit crunch and Rupee shortage.
In short, T-Bills were resorted to when the government spent more than the currently available domestic revenue and foreign grants.
A government official said that the Nu.2.5bn in T-Bills which had to be repaid to the banks through the new T-Bill was taken primarily because the Government of India (GoI) at the time was yet to pay around Nu.4bn due for the 10th plan.
Recently, with Nu.930mn paid around Nu.2.9bn is yet to be paid for the remained of the 10th plan.
The Finance Secretary Lam Dorji, however, did not agree with the fact that the T-Bill was linked to late coming of funds from GoI. He said, “We should not blame GoI as T-Bill had to be taken due to our revenue receipts not coming in time and also as part of our cash flow management.”
Recently the GoI released Nu.425mn as part of the first quarterly phase of the first year of the Nu.8.5bn program grant which is part of the larger Nu.45bn GoI grant for the 11th plan.
A finance ministry official said that an incorrect perception has been given by some that GoI is delaying the Nu.45bn grant.
He said, “It is normal for every first year or few months of any five year plan to go mainly in planning, finalizing estimates and preparing the finals works with donors. The real work only happens in the second, third and fourth year like in the 10th plan.”
He said that once the commitment was given, the 11th plan document would go back to the respective agencies where the financial estimates would be finalized, then it would go to the GNHC and finally a technical committee comprising of GNHC, Finance Ministry, Foreign Ministry and GoI officials.
It is only after the financial estimates are finalized for sure that the money for the Nu.28bn project tied grants and Nu.8.5bn for small development projects would be released.
The GoI’s 45 grant compromises of Nu.28bn in project tied grants like schools, hospitals etc. Nu. 8.5bn on program grants which are more flexible like the Nu.2mn every year per gewog and the Nu.8.5bn in SDP focused mainly in local governments and Thromdes.
When quizzed on the Nu.5bn ESP, the finance ministry official said that the ESP had only been finalized recently and the money was expected once all due process was done.