Mainly, first few months of each fiscal year are usually considered for the repayment of commodity loans, particularly for rice, fertiliser and sugar, borrowed by government or government-owned institutions. However, so far retirements under these commodities have been extremely low in current fiscal year, sources said.
According to State Bank of Pakistan (SBP) statistics, by end-November 2009 outstanding bank loan for commodity procurement had reached Rs 334.9 billion as the federal and provincial governments were unable to release required funds to procurement agencies--Trading Corporation of Pakistan (TCP) and Pakistan Storage and Services Corporation (Passco)--besides provincial food departments. The sharp increase in borrowing was largely visible during the last quarter of FY09, mainly acquired for wheat procurement, with smaller amounts for rice and fertiliser.
More specifically, the government had announced the high wheat support price prior to sowing season in 2008 which not only resulted in record wheat crop, but also increased bank credit requirements by the procurement agencies, they said, and added that "major rise came from provincial food departments, particularly the Punjab".
Sources said that outstanding loans for wheat stood at approximately Rs 250 billion by the end of November, while sugar financing dues ranged between Rs 25 billion and Rs 27 billion. Similarly, fertiliser and rice loans also amount to Rs 60 billion.
Sources said that around 9 million tons of wheat was procured by Passco and provincial food departments in 2009 and on the face of surplus wheat in the market, it is unlikely that procurement agencies will be able to offload the entire stock before March 2010 when procurement of the next (2010) harvest is expected to begin.
In case of rice, Passco had procured 432,534.9 tons of rice in the previous year at the minimum guaranteed price ranging from Rs 700 to Rs 1500 per 40 kg. Right now, Passco is trying to offload a significant portion of procured rice in the domestic market. However, traders are being offered substantially low price to purchase rice.
The SBP said that slow payment of commodity loans is probably due to delays in settlement of price differential claims with the government that have adversely affected the repayment capacity of few public entities. In addition, demand for wheat from government stocks remained weak due to substantially higher issue price relative to international prices.
Currently, the provincial food departments have been unable to aggressively offload their stocks of wheat, which was procured at high prices, in domestic market in recent months, which demand lower price. Another cost driver was the Punjab government's provision of wheat at a very subsidised rate in the month of Ramazan.
All these factors led to the build-up of huge price differential claims and since these claims have not been paid by the government, provincial food departments face liquidity shortages in settling bank loans, sources said.
Likewise, the price differential claims of TCP for fertiliser, rice and sugar also contributed in the outstanding banks' exposure in commodity finance. In addition, TCP receivables from a few public entities including utility stores and food departments have also built up in recent months. Sources said that government is already facing circular debt problems reported in the energy sector and delay in the retirement of the commodity operation loans may create another circular debt crisis in the country.
The central bank recently has also asked the government to settle billions of rupees commodity financing on priority basis to avert another circular debt crisis. Since a large part of these loans has been availed by the TCP and Passco, it needs to be settled before it creates another circular debt problem.
If the government defers payments of the differential claims, it is also expected that in the coming months a large volume of bank debts would remain unsettled.