ISLAMABAD: The State Bank of Pakistan (SBP) has told the Monetary Policy Committee that the federal government prefers shorter term borrowings to finance its budget deficit - a claim that appears contrary to the facts.
The central bank’s claim bring into question credibility of the data that is used by the MPC for making the most critical decision about the country’s monetary policy.
The “MoF (Ministry of Finance) is showing a preference for shorter tenors and tends to cap the one year MTB (Market Treasury Bills) yields,” according to the minutes of the last Monetary Policy Committee.
The market treasury bills (MTBs) and Pakistan Investment Bonds (PIBs) are instruments that the federal government uses to raise money from the commercial banks for budget financing. The federal government has estimated to borrow around Rs3.3 trillion this year, including from the external sources.
The data maintained by the Ministry of Finance about the borrowings tell a different story than what the central bank told the Monetary Policy Committee on January 28 when it met and decided to keep the interest rates unchanged at 13.25% with 7-2 majority.
SBP chief spokesman Abid Qamar told The Express Tribune, “The MPC minutes mention that in terms of the residual maturity of marketable GOP securities the share of maturities with tenor up to three months has risen to 25.3% as per the then latest available data (ie Jan 22, 2020) as compared to 20.8% in Nov 21, 2019. Moreover, the share of maturities between 3-12 months decreased from 40% to 36.1% during the same time period. Please note that data used for this includes all fixed rate marketable government securities (excluding floating rate PIBs).”
In June last year, the size of marketable treasury bills was Rs4.9 trillion and almost 100% borrowing were against three-month tenor papers, according to the Ministry of Finance statistics. The MTBs borrowings increased slightly over Rs5 trillion and the three-month treasury bills share dropped to Rs1.7 trillion or 33% by December 2019 - 28 days before the MPC met, showed official statistics. This figure has further dipped to Rs1.4 trillion or 25% of total borrowings through short-term securities.
The total size of the treasury bills borrowings has increased to Rs5.6 trillion including Rs284 billion worth of treasury bills that are bought by the SBP.
The SBP stated that the residual maturity of the government securities with tenor up to three months has risen to 25.3% after declining to 20.8% in November 2019.
The federal government borrowings against 12-month tenor treasury bills were nil in June 2019, which increased to Rs2.7 trillion or 52% of the total treasury bills issued to raise money as of end December, showed the official statistics. These numbers do not suggest that the government preferred three and six month’s borrowings. The six months tenor bills borrowings from the commercial banks amounted to only Rs4 billion in June 2019 that surged to Rs746 billion or 15% of the total short-term borrowings by December, according to the official statistics.
The MPC minutes noted that the federal government was adhering to the overall auction targets.
The SBP also has issues with the government borrowings through mid and long-term PIBS. The SBP informed the committee that the government was mostly adhering to the auction target amounts but the five and 10-year bond yields were being capped.
The official statistics showed that the government debt obtained by floating PIBs stood at Rs3.74 trillion in June 2019 that has increased to over Rs5 trillion - up by 35.5%. The government’s borrowings against 10 years fixed and floating rates PIBs amounted to Rs1.8 trillion in June 2019 or 47% of the total PIBs. This ratio has increased to 51% of total PIBs or Rs2.6 trillion. The borrowings against 10-year tenor floating rates PIBS increased from Rs355 billion in June to Rs932 billion in December.
The central bank noted that the participation has declined in the last two months preceding to January as low issuances by the finance ministry was hindering the price discovery process.
But in its first Fiscal Operations Report (July-December 2019) submitted to parliament this month, the Ministry of Finance said that “the cost of borrowing through long-term government bonds declined by 2% to 3% annually”. It added the government was able to borrow well below the SBP’s policy rate of 13.25%.
The report showed that the federal government floated five-year tenor PIBs at 10.9% rate in December - below the June pricing of 13.9%. Similarly, the 10-year PIB were floated at 11% rate in December - down from June’s level of 13.7%.
Federal authorities said that initially both the International Monetary Fund (IMF) and the SBP wanted that the Ministry of Finance should invest at least from one year to long-tenor securities without caring for the cost.
The finance ministry did not take the advice, which helped it save debt servicing cost, estimated at Rs2.9 trillion by Pakistan and at Rs3.1 trillion by the IMF for this fiscal year. The borrowings against the three years fixed PIBS were Rs674 billion or 17% in June, which increased to Rs1.3 trillion or 26% of the total PIBs by December. The finance ministry report to the parliament showed that its cost of three-year PIBs reduced from 13.7% to 11% in six months despite increase in discount rate.
Published in The Express Tribune, March 15th, 2020.
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