Concepts – Gross and Net Borrowings and Bond Switches
The government in its interim budget for 2014-15 has projected a fiscal deficit of 4.1% of GDP. The total fiscal deficit is estimated at Rs 5286 billion (Rs 5,28,600 crores).
The fiscal deficit is to be financed largely by market borrowings. The government is budgeted to borrow Rs 4570 billion in fiscal 2014-15 through issue of dated government securities, which will finance 86% of budgeted fiscal deficit of Rs 5286 billion. Net borrowing is gross borrowing less redemptions and buyback of bonds.
Gross borrowing is total borrowing by the government for a fiscal year. The government has budgeted for a gross borrowing of Rs 5970 billion for fiscal 2014-15.
Gross Borrowing – Redemptions and Buybacks = Net Borrowing
Gross Borrowing – Net Borrowing = Redemptions and Buybacks
Rs 5970 billion – Rs 4570 billion= Rs 1400 billion
Buybacks as budgeted = Rs 500 billion
Bond Redemptions = Rs 1400 billion – Rs 500 billion = Rs 900 billion
The government has budgeted for redemption of bonds of Rs 900 billion for fiscal 2014-15. However total outstanding bonds coming up for redemption in 2014-15 is Rs 1567 billion.
How is the government showing lower redemptions for fiscal 2014-15?
The government has budgeted for bond redemptions of Rs 900 billion but bonds maturing in fiscal 2014-15 that are coming up for redemptions is Rs 1567 billion. How is the difference of Rs 667 billion (Rs 1567 billion – Rs 900 billion) accounted for?
The government in fiscal 2013-14 had carried out bond switches with investors (insurance companies and provident funds). The government sold long maturity bonds to investors holding bonds maturing in fiscal 2014-15. The government in turn bought from the investors bonds maturing in fiscal 2014-15 (bond buyback). The total amount of switches was around Rs 300 billion.
In effect the government postponed its debt obligation from one year to over fifteen years (assuming that the government sold bonds of maturities over fifteen years to the investors).
Hence for fiscal 2014-15, the government effectively cut down its repayment obligation by Rs 300 billion due to bond switches.
The government is planning to switch bonds worth Rs 500 billion in fiscal 2014-15 to bring down its debt obligation in the years 2015-16 and 2017-18.
The government by carrying out switches is effectively increasing the burden of government debt on future taxpayers.
The government is repaying the rest of debt of Rs 337 billion (Rs 667 billion – Rs 300 billion) by issuing treasury bills (treasury bills have maturity of less than one year) for Rs 334.5 billion.
If not from bond switches and treasury bills, the gross government borrowing for fiscal 2014-15 would have been Rs 6130 billion (excluding bond switches worth Rs 500 billion), a number that the market would definitely have not liked.