Wednesday, June 29, 2022

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Govt bears interest rate hike burden in billions of rupees

The sharp hike in interest rate to severely hit the Government most as analysts estimate one percentage increase translates to Rs. 20 billion per annum.

Maturing public debt is Rs. 2 trillion this year and 10% increase in interest rate fuels debt servicing cost by a further Rs. 20 billion per 1% hike.

Several financial analysts said that the public debt (Treasury Bills and Bonds) is estimated at Rs. 9 trillion, the average maturity of which is four and half years.

On that basis the value of such maturing public debt is Rs. 2 trillion per annum and a 10% increase in interest rate adds a Rs. 200 billion extra per annum.

This works out to Rs. 20 billion per 1% increase in interest rate. Since the policy rate hike, the interest rate has risen by 12%, they added.

On the basis of 4 and 1.2 average maturity the additional cost of debt servicing is a staggering Rs. 900 billion.

On 3 April in the tightest ever monetary policy stance the Monetary Board decided to double policy rates by 700 basis points (7%).

It justified the move saying a substantial policy response is imperative to arrest the build-up of added demand driven inflationary pressures in the economy.

Another reason for the rate hike was the escalation of adverse inflationary expectations, to provide the required impetus to stabilise the exchange rate and also to correct anomalies observed in the market interest rate structure, Central Bank said.

Since then, the benchmark 364-day Treasury Bill yields have doubled to 24% as of last week from 12% as at end March. From a year ago however it is a near five-fold increase.

“The Government is to increase taxes such as VAT and Income Tax to raise the revenue to GDP ratio.

However, any additional revenue garnered from this move gets negated due to the higher cost of debt servicing following the hike in interest rate,” analysts opined.

The next monetary policy review announcement by the Monetary Board is due on Thursday 19, Central Bank revealed. .

Some analysts expect a further tightening stance. If this happens the Government’s debt servicing cost will soar further, analysts warned.

The sharp fall in the value of the rupee helped swell the amount of outstanding loans and advances to the private sector in March, as the banks revalued their foreign currency assets and liabilities at the weaker rupee stood at the end of the month compared to a month earlier.

This gave a sudden boost to the private credit numbers stood at end-March, which otherwise had been anaemic and lacklustre, as the banks grew skittish over the deteriorating economic conditions and their consequences on their borrowers’ solvency and thereby the asset quality.

The latest private sector credit growth numbers published by the Central Bank for March showed that the licensed commercial banks’ outstanding private sector credit growth had swollen by an unprecedented Rs.478.0 billion, marking the biggest expansion in private credit in a single month

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