The government has raised financing 7.5 times lower than the target, reaching Rs64 billion through the auctioning of sovereign debt securities (T-bills), while managing to stabilise the rate of return at around 20.4%.

Commercial banks demanded a significantly higher rate of return (interest rate) to lend money to the cash-strapped government. This was prompted by concerns that the central bank might raise the policy rate to a new record high level following recommendations from the International Monetary Fund (IMF) to maintain a tight monetary policy to tackle future challenges.

However, the government only managed to raise Rs64 billion against the target of Rs480 billion. This strategy helped in maintaining the cut-off yield (interest rate) at stable levels, indicating to the market that there is currently no consideration to increase the policy rate in the near future.

Commercial banks had offered Rs1.15 trillion in financing at the T-bills auction held on Tuesday.

The central bank has maintained the policy rate at a record high of 22% since late June 2023 despite announcing four monetary policies in the past seven months. State Bank of Pakistan (SBP) Governor Jameel Ahmad stated that the IMF has recommended only maintaining a tight monetary policy but did not suggest what the policy rate should be. He mentioned, “The current policy rate remains appropriate to control the inflation reading.”

Market experts believe the policy rate has peaked at 22%. They anticipate the central bank will make its first rate cut in March 2024. While speaking to The Express Tribune, Optimus Capital Management’s Research Analyst, Maaz Azam, mentioned that the government raised lower financing due to commercial banks’ demand for higher interest rates. However, it is expected that borrowing will increase in the next auction when low inflation rates may allow banks to charge a lower rate of return.

Read Govt borrows Rs599b via T-bills auction

Azam predicted that the market would witness a sharp drop in inflation to 24-24.5% in February compared to around 28.3% in January. Further declines to 20-21% are expected by March 2024. This reduction in inflation may prompt the central bank to cut its benchmark policy rate in February or March 2024.

Previously, the central bank had increased the policy rate cumulatively by 15 percentage points from September 2021 to June 2023, raising it to 22%.

Azam explained that the government borrowed an additional Rs300-350 billion through the auctioning of Pakistan Investment Bonds (PIBs), meeting its immediate financing requirement to repay maturing domestic debt on Tuesday.

The bank borrowed the higher financing by selling PIBs at a variable rate of return, which would move along with the policy rate. The rate of return on the PIBs would also decrease when the central bank cuts the policy rate in the near future, helping the government manage the rate of return at an affordable level.

The government sold the PIBs at a rate of the policy rate plus 1.4 percentage points, which currently stands at around 21.4%. However, the rate of return is expected to decrease as the market foresees the policy rate declining by 7 percentage points by the end of December 2024, from 22% to 15% at present. Azam stated that the government also borrowed less in anticipation of the new IMF loan programme expected after March 2024, aiming to reduce its reliance on expensive domestic debt.

Published in The Express Tribune, February 8th, 2024.

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