The cash-strapped government on Wednesday raised Rs315 billion less than half the auction target of Rs650 billion, at a historically high cut-off yield of 16.99%.
The increased loan rate shows that the financial market expected that the central bank’s key policy rate would increase by 100 basis points in the upcoming monetary policy announcement.
By offering its three-month T-bills for sale at a cut-off yield of 16.99%, the government was able to borrow 311.57 billion rupees (out of a total of 315 billion). The price remains unchanged from the last auction. In the last auction, this rate marked a historical high.
The government raised another Rs4.27 billion by selling its six-month T-bills at a cut-off yield of 16.82%. For the 12-month treasury bills, however, the government rejected the bids after finding the cut-off yield to be abnormally high.
However, the amount raised falls short of the auction’s stated target of Rs 650 billion. The government planned to use the funds generated to pay off the debt payments, which totaled Rs685 billion, and the remaining money was to be used to close the country’s budget deficit. Commercial banks had offered a total of Rs626 billion in financing in the auction.
Pak-Kuwait Investment Company (PKIC) Head of Research, Samiullah Tariq said, “The government opted to borrow less than the target to avoid paying a higher cost (cut-off yield).”
He recalled that the government had exceeded its initial target of Rs300 billion by raising Rs600 billion at a special auction last week (January 3).
According to Tariq, banks wanted to borrow more money from the government at a higher interest rate because they thought the central bank’s current policy rate of 16% will rise to 17%.
“The central bank is expected to increase the rate to control high inflation readings (24% in December 2022) in the country. Curbing inflation remains the single largest objective of the State Bank of Pakistan (SBP)…to attain sustainable economic growth in future.”
Economists’ forecast says that inflation will reach a multi-decade high of 35-40% if the government imposed some of the tougher requirements imposed by the International Monetary Fund (IMF) to restart its $6.5 billion loan program. However, analysts predict that the inflation readings could reach 50% if the government does not restart the IMF loan program and permits the nation to stop making its foreign payments.
The central bank injected Rs. 1.70 trillion into commercial banks during the first week of January for a maximum of 73 days. The government cannot borrow money from the central bank directly under the new regulations; instead, money is injected through open market activities (OMOs). To meet the government’s financial requirements, they were carried out in sections on various days between January 1 and January 6 for a minimum of 3 days and a maximum of 73 days.