T-bill return surges to record high at 16%

T-bills’ auction came as government was to repay the maturing papers worth Rs1.028 trillion to the commercial banks

ISLAMABAD:

The cost of commercial bank financing has hit a record high at 16% on fresh lending to the government at a time when the country is facing high inflation and busy fighting the widespread flood devastation.

The high cost of borrowing forced the government to raise Rs817 billion through the sale of its debt securities – three to 12-month treasury bills – to commercial banks, which was lower than the pre-auction target of Rs1 trillion.

The T-bills’ auction came as the government was to repay the maturing papers worth Rs1.028 trillion to the commercial banks.

The cut-off yield (cost of government borrowing) could have gone further high had the government decided to raise a higher amount. Banks offered a total of Rs1.290 trillion in financing at a cut-off yield of up to 17.50%.

“Soaring inflation in the country encouraged banks to charge a higher cost (as inflation reduces the value of money),” said Arif Habib Limited (AHL) Head of Research Tahir Abbas while talking to The Express Tribune.

The inflation reading hit a 47-year high at 27.3% in August 2022. The cut-off yield went up 26 basis points to 15.99% for three-month T-bills in the auction on Wednesday compared to 15.79% in the previous auction held on August 24, 2022.

The yield on six-month bills remained unchanged at 15.84%. It rose 4 basis points to 15.97% on 12-month bills.

Abbas predicted that the government would face no difficulty in repaying the maturing debt worth over Rs1 trillion this week, despite raising a lower amount of Rs817 billion in the latest auction.

“Resumption of IMF loan programme worth $6.5 billion has provided alternative options to the government for repaying the maturing debt and finance its fiscal deficit,” he said.

Besides, it had raised larger amounts than the targets in some of the previous auctions, he said.

Rupee at 1-month low

Pakistani currency remained volatile for the fourth successive working day, as it dropped afresh 0.90% (or Rs2) to a one-month low at Rs223.42 against the dollar in inter-bank market on Wednesday.

The rupee is weakening due to the strengthening of US dollar against global currencies. Increase in demand for dollar for making import payments also hammered the rupee’s strength in the inter-bank market.

“US dollar surged to a 24-year peak against the yen and a 37-year high versus sterling as Japan’s dovish monetary policy and Europe’s economic problems contrasted with a relatively stronger US economy and a hawkish Federal Reserve determined to bring down inflation to its 2% inflation target,” Topline Securities CEO Muhammad Sohail remarked.

“The rupee is weakening due to political uncertainty, loss of confidence, higher forex needs due to flood related requirements, a backlog of letters of credit payments, higher Afghan trade, and slower inflows,” ministry of finance former advisor Dr Khaqan Najeeb observed.

Published in The Express Tribune, September 8^th, 2022.

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