The government has targeted raising over Rs7 trillion by selling various short and long-tenure sovereign bonds to financial institutions over the next three-month period (October-December). This is in response to the devastation caused by the floods and the need to generate more financing to address its aftershocks.
On Wednesday, the government borrowed Rs218.3 billion against the pre-announced target of Rs175 billion by selling long-term – 3-year and 5-year Pakistan Investment Bonds (PIBs).
The PIBs cut-off yields (commercial banks’ interest rate on financing to the government) fell by eight basis points on the 3-year bond and 30 basis points on the 5-year bond after quite a long gap. The drop created room for the government to borrow more than its set target as demand for financing remained high.
Rehabilitation efforts being made after the floods have not only increased demand for funds but may also cause a drop in collection of tax revenue as economic activities have since slowed down.
Accordingly, the government’s reliance on domestic debt will surge and cause an increasing fiscal deficit.
Experts said that commercial banks have revised down their cut-off yields in the latest auction of PIBs. The central bank has left its key policy rate unchanged at 15% for the next seven-week period on Monday.
While banks considered the rate to have peaked at 15%, which may be revised down in future monetary policy statements, it also means that the banks have parked maximum amounts in the long-tenure PIBs at the prevailing fixed rate of return.
In the latest auction, the banks had offered Rs662 billion against the government target of Rs175 billion.
The government raised Rs80 billion against the target of Rs60 billion by selling the 3-year PIBs. The cut-off yield on the bond dropped to 13.83% at the auction from 13.92% during the previous auction held on September 14, 2022.
The government also borrowed another Rs110 billion against the target of Rs60 billion by selling the 5-year PIBs. The cut-off yield on the bonds was slashed to 13.09% in the auction from 13.39% in the previous auction.
The government also raised another Rs28 billion under non-competitive bids, but rejected bids for the 10-year PIBs, while receiving no bids for the 15, 20 and 30-year bonds in the latest auction.
On the other hand, the government has set a target of raising Rs7.025 trillion through the sale of three-month to 12-month T-bills, three-year to 30-year PIBs at fixed and variable rates and Sukuk (Shariah-compliant bonds) over the next three-month period.
Meanwhile, the Pakistani currency broke its 13-day long winning streak, as it inched down by 0.04% (or Rs0.09), to close at Rs217.88 against the US dollar in the interbank market on Wednesday.
Earlier, the domestic currency had cumulatively gained 9.14% (or Rs21.96) in the past 13 working days.
Experts said that the slump in flows of worker remittances from overseas Pakistanis and a slide in export earnings forced traders to buy the foreign currency at an increased price to pay for imports.
They said the rupee would consolidate around the current levels in the short-run and may resume an uptrend in case Finance Minister Ishaq Dar agrees with the IMF to ease conditions and the country witnesses an early inflow of the pledges made by creditors and the global community in relation to flood relief efforts.
Published in The Express Tribune, October 13th, 2022.