The federal government Wednesday borrowed over Rs 2 trillion from domestic banking sector through the sale of short-term bonds to meet its financial needs. Since the Monetary Policy Committee has increased the policy rate by 25 basis points (bps) to 10.25 percent for next two months, banks aggressively participated in the auction for government of Pakistan Market Treasury Bills (MTBs) held Wednesday.
However, banks, sensing further monetary tightening, preferred to invest in short-term government papers, ie, 3-month bills. Economists said the short revenue collection has compelled the federal government to finance higher fiscal deficit through borrowing from both domestic and external sources.
However, in case of domestic sources, during the first half of this fiscal year (FY19), the government borrowed significantly from the SBP to retire its bank debt. Some Rs 3 trillion have been retired by the federal government viz commercial banks in July-Jan of this fiscal year.
The State Bank of Pakistan (SBP) conducted the auction for MTBs on February 13, 2019 for the sale of 3-month, 6-month and 12-month T-bills. Overall, the SBP received bids amounting to Rs 2.245 trillion with a realized value of Rs 2.191 trillion. Most of bids were received for 3-month tenor as banks and financial institutions are expecting further increase in key policy rate in coming months and reluctant to invest in long-term papers. The received bids included Rs 2.237 trillion for 3-month and Rs 7.3 billion for 6-month, however no bid was received for 12-month MTBs.
The federal government accepted bids worth Rs 2.158 trillion with a realized value of Rs 2.107 trillion. The borrowed amount is 21 times higher than the actual target of Rs 100 billion set for this auction by the federal government. Following the surge in key policy rate, the cut-off yield of 3-month MTBs increased by 25 basis points to 10.5500 percent up from 10.3013 percent. An amount of Rs 2.106 trillion was raised through the sale of three months T-bills. For the 6-month, bids worth Rs 1.187 billion were accepted at a cut-off yield of 10.5999 percent.
The federal government has planned to borrow some Rs 3.85 trillion from banking sector through the sale of PIBs and MTBs in three months, ie, Feb-April of 2019 as less than expectation revenue collection, slow foreign inflows and rising expenditures have compelled the government to enhance its reliance on domestic sources to meet its financial requirements.