Australian Govt, RBA May Be in Talks to Expand Overdraft to Manage Borrowing

• Published on
• 16 Apr 2020, 12:48 PM

By Sophia Rodrigues

The Australian government’s debt manager and the Reserve Bank of Australia may in talks to enhance overdraft facility to enable smooth management of the government’s huge funding task when conditions turn volatile.

As the debt manager to the Australian government, the Australian Office of Financial Management has a huge challenge over the next few years – attracting investors at the best possible rate to the government’s record debt issuance.

Westpac’s head of rates strategy Damien McColough estimates gross issuance of Australian government securities of A$275.4 billion in the next fiscal year and borrowing to top A$850 billion by then.

But with interest rates at record lows and thus no longer as attractive to investors, and economic outlook less rosy, the road ahead is unlikely to be an easy one. The AOFM, therefore, needs to prepare for situations when market conditions may not be conducive to absorb new issues.

One way to do this is to have the capacity to meet cash needs by temporarily borrowing from the RBA, thus delaying borrowing from the market until conditions improve.

Currently, the AOFM has a small overdraft facility with the RBA to be used to meet any emergency cash shortfall. This could be expanded into a bigger one or a new facility could be created.

WAYS AND MEANS ADVANCES

In countries like the UK and India, such a facility is called “Ways and Means Advances” where the central bank extends short-term cash to the government, if needed, so they can delay tapping the bond market.

The RBA could set up a similar type of facility with the AOFM.

In the UK, such a facility has existed since many, many years but its use has been very limited. A few days ago, this facility has been temporarily extended and now the UK Debt Management Office can borrow unlimited amount from the Bank of England, with the only condition being the borrowing is repaid by the end of the year.

The temporary measure is aimed at providing “a short-term source of additional liquidity to the government if needed to smooth its cashflows and support the orderly functioning of markets, through the period of disruption from Covid-19.”

In India, the W&M facility is very widely used. Periodically, the Indian government and the Reserve Bank of India decide on a limit. When 75% of the limit is drawn, the RBI may trigger new bond issuance. In India the RBI is also the government’s debt manager.

All cash advances up to the WMA limit is provided at the benchmark repo rate, and any overdraft on that is charged two percentage points above the repo rate.

In Australia, the overdraft facility is a very small one and used only in very rare shortfall situation. As opposed to overdraft, the AOFM has always had fixed term deposits with the RBA. The average amount in such deposits has been A$22 billion in the last two decades. At the end of March it was around A$30 billion but this could quickly dissipate amid elevated government spending.

--Contact: sophia@centralbankintel.com