Govt borrows record Rs3.1tr in T-bills auction

It made the hefty borrowing against the target of Rs600b for the auction

KARACHI: The Pakistan Tehreek-e-Insaf (PTI) government has borrowed a record Rs3.1 trillion from commercial banks to finance the budget deficit as its revenue collection has remained short of the target so far in the current fiscal year.

The government made the hefty borrowing against the target of Rs600 billion through the auction of treasury bills on Wednesday, according to the State Bank of Pakistan (SBP).

The government borrowed the money for a duration of three months by selling three-month treasury bills to commercial banks at an increased rate of return after the central bank hiked the key interest rate by 1.5 percentage points to a 91-month (eight-year) high at 12.25% on Monday.
SBP to raise Rs5.15tr by sale of PIBs, T-bills

Topline Securities CEO Muhammad Sohail said it was a record borrowing. “The cut-off yield (rate of profit) was 12.75%, up 1.5 percentage points from the last auction,” he said.

“The hefty borrowing will contribute to widening of the budget deficit,” Sherman Securities’ analyst Chandar Kumar said while talking to The Express Tribune. “The narrowing down of the deficit has become the biggest challenge for economic managers of the government as revenue collection remains short of the target.”

The budget deficit has already hit an 11-year high at Rs1.92 trillion, or 5% of the total size of national economy, for nine months ended March 2019 due to a continued double-digit growth in defence and debt spending, and sinking revenues, according to the Ministry of Finance.

Earlier, the government was aggressively borrowing from the central bank to finance the budget deficit. However, the International Monetary Fund (IMF) has asked the government to make such borrowing from commercial banks instead of the central bank.

State Bank borrows Rs187b in T-bills auction

“Borrowing from the central bank increases inflation as the central bank provides the financing by printing new currency notes,” Taurus Securities’ analyst Mustafa Mustansir added.

Earlier, the government’s massive borrowing from the State Bank reduced the impact of previous monetary tightening, the central bank reported on Monday.

Banks expect further rate hikes

Experts said the latest treasury bill auction indicated that commercial banks were anticipating a further increase in the key interest rate in the near future.

Banks aggressively bought three-month treasury bills worth Rs3.1 trillion. They bought six-month T-bills worth Rs1.4 billion and submitted no bids for 12-month T-bills, according to the central bank.

“The results suggest the market (commercial banks) expects further hikes in the key interest rate in future monetary policy announcements,” Mustansir said. However, it would be too early to say as to how much rate increase would be made and when, but T-bills’ auction showed the trend, he added. Kumar also endorsed the view, saying the commercial banks’ move indicated that they expected a further rate hike.

“Had they not been expecting a further rate hike, they would have placed higher bids for 12-month T-bills rather than aggressively participating in the three-month T-bills auction,” he said.

The commercial banks’ expectation for the rate hike came in contrast to the Fitch Solution’s forecast that no more rate hikes were likely in the remaining seven months of calendar year 2019.

“Given our expectation for stability in inflation, we at Fitch Solutions forecast the SBP to maintain its benchmark interest rate at 12.25% throughout 2019,” it said.

The State Bank of Pakistan announces the monetary policy after every two months.

Published in The Express Tribune, May 24^th, 2019.

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