Govt raises Rs376 billion through PIBs

Lending rate increased by 145 basis points to 32-month high at 13.3%

KARACHI:

The cash-strapped government raised Rs375.8 billion against the set target of Rs100 billion through auctioning three to 10-year Pakistan Investment Bonds (PIB) to commercial banks on Thursday, as lending rate on the long-term bonds remained significantly low – despite a spike – compared to short-term papers.

The lending rate aggressively increased by 145 basis points to a 32-month high at 13.3% on three-year tenure PIB.

The rate, however, remained lower by 1.7% compared to 14.99% on short-term paper (six-month T-bills) auctioned a day ago on Wednesday, according to the State Bank of Pakistan’s (SBP) data.

The commercial banks have incorporated the expected increase in inflation reading in the country into their lending rates.

“The lower lending rate on long-term (three to 10-year) government papers compared to higher rate on short-term papers (three to 12-month) suggests inflation is a short-term phenomenon in Pakistan,” Pak-Kuwait Investment Company (PKIC) Head of Research Samiullah Tariq said while talking to The Express Tribune.

“The commercial banks foresee inflation reading reducing in the long-run,” he added.

The banks had offered seven-times higher amount at Rs716.5 billion to the government against its pre-announced target of Rs100 billion in the auction, as “they wanted to invest maximum amount for a long-term period at increased rate which is set to reduce in the medium- to long-run”, he said.

The government raised the maximum amount through 10-year bond (PIB) at Rs286.2 billion out of the total borrowed amount at Rs375.6 billion in the latest auction.

“The strategy will help the government to not worry about quickly repaying or rolling over the amount as they do in short-term papers (three to 12-month T-bills),” Tariq said.

The breakup further suggests that the government raised another Rs26.9 billion through selling three-year PIB against the set target of Rs30 billion. It raised Rs62.2 billion through five-year PIB.

The PML-N coalition government has continued the practice of the ousted PTI government in the PIB auction, as it accumulated higher amounts through selling long-term (10-year) papers and raised lower amounts through auctioning short-term (three-year) papers.

The government was required to raise higher financing from commercial banks to bridge widening shortfall in budgeted expenditure. Finance Minister Miftah Ismail has projected the fiscal deficit to be around 10% of GDP (gross domestic product) against the previous estimate of 7%.

“The government decision to continue with subsidies, expectations of a higher budget deficit, aggressive purchases of LNG, fuels, urea, wheat, all are leading to expectations of an increase in demand for funds from the government, thereby pushing up borrowing rates,” he said.

The cut-off yield (lending rate) on five-year PIB surged by 120 basis points to a 32-month high at 13% in the latest auction compared to 11.75% in the previous auction held last month.

The cut-off yield on 10-year papers rose by 141 basis points to a 32-month high at 13.2% in the auction compared to 11.74% in the previous auction, according to the central bank.

The central bank received no bids for 15, 20 and 30-year PIBs from commercial banks, while the government had targeted to raise a total of Rs20 billion through the longer-tenure bonds.

The commercial banks have increased lending rate on almost all their financing products ahead of the most likely withdrawal of subsidies on petroleum products and power price, as the government is considering passing-on increase in international energy prices to local consumers.

Experts said that the increase in energy prices would shoot inflation reading to 15-15.5% in a few months around May-August 2022.

The inflation was last recorded at 12.7% in March and was expected to remain around that level in the month of April as well.

The government is expected to increase petroleum products and power prices to fulfill the International Monetary Fund’s (IMF) condition to resume its enhanced $8 billion loan-programme, which is on hold since June 2021.

Tariq said that the resumption of the loan programme would help stabilise the country’s foreign currency reserves, which have continued to deplete rapidly since the start of the current year (2022).

Published in The Express Tribune, April 29^th, 2022.

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