The government on Wednesday raised Rs1.715 trillion through the auction of sovereign debt securities (T-bills) to commercial banks, which was more than double the target of Rs800 billion, as its requirement remained high for bridging the fiscal deficit.
The cut-off yields (commercial banks’ interest rate on financing to the government) on three and six-month T-bills fell by two basis points and 15 basis points respectively compared to the previous auction.
It was the last auction of current fiscal year ending on Thursday (June 30). The government borrowed the maximum amount available at a relatively lower cost to “finance the fiscal deficit”, Pak-Kuwait Investment Company Head of Research Samiullah Tariq said while talking to The Express Tribune.
“The government is likely to utilise the amount to pay off dues to the independent power producers (IPPs).”
The fiscal deficit is expected to surge significantly due to the payment of subsidy on petroleum products and electricity in the past four months (March-June) as the previous PTI government froze energy prices for the domestic consumers in February despite the uptrend in the international market.
The current PML-N led coalition government withdrew the subsidies to win back the IMF loan programme, which was a must to avert default on international payments.
Commercial banks offered Rs2.370 trillion in financing to the government against the ministry’s target of Rs800 billion.
“Banks had ample liquidity to participate in the auction following huge liquidity supply by the central bank through its longest 77-day OMO (open market operation) conducted for the first time in history last week,” said BMA Capital Executive Director Saad Hashemy.
In addition to that, the central bank also injected huge liquidity through a couple of 63-day OMOs in recent weeks.
The Ministry of Finance borrowed almost all the amount offered for the three-month T-bills and accepted a very little amount for the six-month and 12-month T-bills.
“The availability of liquidity allowed commercial banks to offer funds at a lower cut-off yield for the three-month period,” he said, adding that the yield inched down by two basis points from the 11-year high of 15.25% recorded in the previous auction.
The cu-off yield would have been significantly lower on the three-month T-bill if the government had raised lower amount than the raised one in the latest auction, he said.
The Wednesday’s auction results suggest the cut-off yield have peaked out at current level. “They would maintain at current level or would start reducing from here in the auctions to come,” he said.
Hashemy said revival of IMF loan programme for Pakistan very soon would support bringing down cut-off yields and cut the size of central bank’s injection of funds into commercial banks through longer-tenure OMOs.
The flow of foreign funding from IMF and other multilateral and bilateral lenders would reduce requirement for domestic debt being raised from commercial banks. “The government’s reliance over domestic debt spiked after flow of foreign financing chocked amid stalling of IMF loan programme,” he said.
Tariq said the results of T-bill auction suggest that the central bank may increase the key policy rate by 100 basis points on July 7. Earlier, State Bank of Pakistan (SBP) has increased the rate by 675 basis points since September 2021 to 13.75% at present.
Auction results
The government borrowed Rs1.732 trillion against a set target of Rs200 billion through auctioning three-month T-bill. It raised the fund at cut-off yield at 15.23% compared to 11-year high at 15.25% in the previous auction held on
June 15, 2022.
It lifted only Rs4 billion against set target of Rs300 billion through selling six-month T-bills to commercial banks. It raised the meager amount at cut-off yield at 15.80%, which is 15 basis points lower compared to 14.95% recorded in the previous auction.
It borrowed another Rs6 billion against the set target of Rs300 billion through auctioning 12-month T-bill at the cut-off yield at 14.94% which remained unchanged compared to the
previous auction.
Published in The Express Tribune, June 30th, 2022.
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