Commercial banks have increased their cost of financing to the cash-strapped government by a fresh 1 percentage point (ppt) to a record high of 21% on Wednesday, signalling that the finance market anticipates a further hike in the central bank’s key policy rate next month.
The government raised debt worth Rs1.57 trillion, through auctioning three 12-month T-bills to commercial banks against its pre-set target of Rs1.8 trillion.
Had the government decided to borrow more through the auction, the cut-off yield (financing rate for the government) would have spiked beyond the current financing price of 21%.
The government, however, required Rs1.8 trillion to retire the maturing old debt to the banks. It did, however, raise another Rs307 billion by selling 2-year and 3-year Pakistan Investment Bonds (PIBs), against the pre-set target of Rs70 billion.
Financial experts said that the surge in the rate of financing to the government is seen for two reasons: Firstly, the central bank increased its key policy rate by an aggressive 300 basis points (bpts) to 20% in a meeting last week, against market expectation of a 200bpts rise. Secondly, the aggressive surge in the rate of financing suggests the market anticipates another hike of 50-100 bpts in the next central bank meeting scheduled for April 4, 2023.
An expert, however, said the central bank will opt to hold the rate at the current level if the government succeeds in reviving the IMF programme, before the next Monetary Policy Committee.
Meanwhile, the rupee dropped 0.45%, or Rs1.25, to the second lowest level in its history at Rs279.12 against the dollar in the interbank market on Wednesday, ending the previous three-day winning streak.
The rupee-dollar exchange rate also hit an all-time low at Rs285.09 last Thursday, according to the central bank.
Published in The Express Tribune, March 9th, 2023.
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