Rs558b borrowed via T-bills, target exceeded

Spike in borrowing indicates rising expenditures met with costly financing

KARACHI:

The cash-strapped government has borrowed Rs558 billion through auctioning T-bills to commercial banks, which is 2.5-fold higher against the pre-auction target of Rs225 billion. This spike suggests that the public expenditures are on the rise which is partly being met through the expensive commercial financing.

The heavy borrowing amount partly aims to repay maturing commercial debt worth Rs130 billion this week, while the remaining financing may be used to manage the rising expenditures at the hands of the government.

During the auction, the banks had offered 4.4-time higher financing at Rs994 billion against the government’s target of Rs225 billion, suggesting ample liquidity is available at banks. Despite this, they are charging higher cost of financing.

The finance ministry has secured significant financing despite the cut-off yield (rate of profit) on six-month paper (T-bill) up by 101 basis points, rising to 21.40% in Wednesday’s auction compared to 20.39% in March 20, 2024 auction. Financial experts expressed surprise at banks increasing the cost of financing to the cash-strapped government, especially considering the outlook for a cut in the interest rate from April 2024 and onwards.

Latest data suggests that Pakistan’s real interest rate, the current interest rate minus inflation, has entered into positive territory after 37-months, as the monthly inflation reading reduced to 20.3% in March. Notably, the finance cost remained stable for three-month and six-month papers at 21.66% and 20.90%, respectively.

The breakup of the auction data suggests that the government has raised the highest financing at Rs223 billion against selling 12-month papers at the cut-off yield at 20.90%. Banks preferred to lock the investment at prevailing prices on the outlook for the interest rate cut.

Additionally, the government borrowed another Rs188.5 billion through selling three-month T-billion at the cut-off yield at 21.66%. It acquired another Rs143.4 billion against six-month T-bill at the cut-off yield at 21.40%.

Published in The Express Tribune, April 5^th, 2024.

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