Last week there was a sense of panic in the money and stock markets after growth-on-steroids was reported for monthly imports and inflation figures for November 2021. In a Treasury bill auction last week, banks lent to government at 11.5 percent for 6M paper against policy rate of 8.75 percent. The usual premium of six-month market paper is around 50 bps (0.5%) to policy rate. The market is incorporating 200 bps (2%) increases in the policy rate.
Are market participants (i.e. commercial banks) showing greed since the government cannot knock SBP’s door for borrowing? That may be, however, the auction numbers are primarily an outcome of poor treasury management at MoF. The government kept on rejecting (most) offerings in 6-month and 12-month papers while putting (almost) all its eggs in 3-month papers. The market was expecting rate hike taking into account the current account slippages and inflation outlook. The rates offered by banks in September, October and November auctions were much lower than what they have finally raked in during December’s auction. This has led to an opportunity loss for the government in terms of paying higher debt servicing cost.
Market offered cumulatively Rs4.37 trillion in the five auctions during September to November. Government accepted almost half of the amount. But majority was in 3M papers – Rs1.91 trillion which was 75 percent of Rs2.69 trillion being offered. In 6M, the government accepted 23 percent (Rs234 bn) of offered amount, and 7 percent (Rs55bn) in 12M papers.
Government got has locked itself into a liquidity trap. With higher amounts in 3M papers, the maturity coming in December are amounting to Rs3.3 trillion and the target is Rs3.35 trillion. With abnormally high imports and inflation numbers amid (an almost) resumption of IMF progarmme, the debt office seems to have gotten cold feet. The debt managers took a sharp U-turn and accepted very high rates. The rates are up by 229 bps, 300 bps and 391 bps higher than previous cut-offs in 3M, 6M, and 12M papers respectively. The story is similar for PIBs.
Did the government not have knowledge of IMF conditions? Was the government oblivious to rising commodity prices in September and October? Did the government not expect inflation to rise in November? Did the government not know that these 3-month papers shall soon mature (in three months!) and that these must be rolled over due to zero net borrowing condition from the central bank under the IMF programme? Did they not know that IMF always asks for improving the debt maturity profile and advocate market led price discovery?
If the government did not anticipate any of this, it should think of strengthening the debt office. However, this is not happening for the first time. Every time, Pakistan goes to IMF programme, the same film is replayed. Such mistakes did happen in 2014, 2019, and 2021. The problem is that successive governments never took IMF programme seriously and seldom attempted to instill reforms in letter and spirit. Economies do not mend way by mere illusion of reforms.
Nonetheless, the charge sheet is against the mismanagement at the government debt office. There are around forty banks and non-banks in the treasury business in Pakistan’s capital debt market with (on average) two traders at each desk. All these treasurers are dealing in government papers and bonds. And a skeleton staff at ministry invariably attempts to take the market heads on. The office bearers naively think that they are smarter than the market. It’s about time, the finance minister, who himself hails from the banking industry, builds the much-needed capacity debt office.
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