The interest rate on commercial banks’ fresh financing to the cash-strapped government slightly dropped 29 basis points from historical high above 15% in the recent past, as the Ministry of Finance borrowed significantly less than its set target on Wednesday.

The cut-off yields dropped in the range of 5-29 basis points on three to 12-month T-bills. The government raised Rs300 billion through auctioning the T-bills to the financial institutions against a set target of Rs500 billion for the auction.

Market talks, however, suggested that the central bank urged commercial banks to rationalise down the abnormally high rate at a formal meeting held at the State Bank of Pakistan (SBP) the other day.

The central bank was also considering holding a 63-day long open market operation (OMO), meaning it would supply required funds to commercial banks for 63-day to keep their rate of financing to the government on the lower side, the talks speculated.

The central bank cannot directly finance the government under new laws, but do so through OMO of small tenures (usually three or seven-day). Accordingly, the central bank lends to commercial banks and they supply the funds to the government to help it overcome the shortfall in budgeted expenditure.

“The government strategy to borrow less than the set target helped it acquire the new loan on slightly lower cut-off yields,” Ismail Iqbal Securities Head of Research Fahad Rauf said while talking to The Express Tribune. It accepted bids of only low cut-off yields from commercial banks and scrapped bids of higher yields.

The government borrowed only that amount that was must to repay the previous maturing T-bills. The data suggested the government was due to repay Rs279 billion against maturing T-bills on Thursday (May 19), he said.

He, however, argued the government has to show some tangible movement on resource mobilisation to maintain the cut-off yields on the lower side. Like, it has to resume the IMF stalled loan programme, acquire fresh loan packages from friendly countries and/ or raise fresh foreign debt from global capital markets and foreign commercial banks. “Otherwise, the commercial banks’ cut-off yields will go up again,” Rauf said. A couple of weeks ago, the cut-off yield on the benchmark six-month T-bill spiked over 15% in the previous T-bill auction.

The government may borrow around Rs3 trillion in the ongoing quarter (Apr-Jun) of 2021-22 to finance budgeted expenditure against Rs2.58 trillion borrowed in the first nine months (Jul-Mar) of the fiscal year.

The need for increased financing has emerged following the government decision to continue paying subsidies on petroleum products and electricity. The government has paid over Rs100 billion a month in the subsidies since February.

The data suggests commercial banks have lent Rs15.2 trillion to the government in total through investing in T-bills and Pakistan Investment bonds (PIBs) to date. Accordingly, the banks’ investment to deposit ratio (IDR) spiked 5.14-percentage points to 75.5% in April compared to the same month of the previous year.

The government has targeted to raise a total of Rs5.25 trillion through different instruments from commercial banks over the next three-month starting Wednesday (May 18), according to the central bank auction calendar launched the other day.

Auction results

The breakup of auction data suggested that the government raised the targeted Rs200 billion through three-month T-bill at a cut-off yield of 14.49% which was 29 basis points lower than the previous auction held on April 27.

It raised another Rs50 billion against a set target of Rs200 billion through selling six-month T-bill at cut-off yield at 14.70% which was also 29 basis point lower than the previous auction.

It further borrowed Rs50 billion against the set target of Rs100 billion through auctioning 12-month T-bill at a cut-off yield of 15.75% which was five basis points lower than the previous one.

Commercial banks offered slightly over Rs1 trillion in financing that was double the government set target of Rs500 billion for the auction.

Published in The Express Tribune, May 19th, 2022.

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