SBP to raise Rs4.75trln through MTBs, PIBs in three months

KARACHI: The State Bank of Pakistan (SBP) will auction Rs4.750 trillion worth of Market Treasury Bills (MTBs) and Pakistan Investment Bonds (PIBs) in May-July 2019 to help the government finance the budget deficit.

The central bank would sell Rs4.100 trillion of three, six, and 12 months debts through treasury bills, the auction target calendar issued by the SBP showed on Monday. The SBP also plans to offer Rs300 billion worth of three-, five-, 10 and 20 years PIBs. Furthermore, the SBP would auction Rs350 billion of 10-year floating rate PIBs.

The government continued to borrow heavily from the banking system, especially from the central bank to meet its spending requirements. The shortfalls in the tax collection and lack of appropriate external funding compelled the government to move on the SBP’s financing.

The government also borrowed from the SBP to repay a bulk of its maturing debt held by the commercial banks.

The budget deficit rose to 2.7 percent of gross domestic product in the first half of the current fiscal year from 2.3 percent a year ago. The government borrowed Rs3.475 trillion from the SBP and retired Rs2.131 trillion of its borrowing from scheduled banks (on cash basis) during July 1 – April 26, FY19.

The SBP, in its March’s monetary policy statement, said the budget deficit target for this fiscal year was likely to be breached due to shortfalls in revenue collections and escalating security-related expenditures.

“So far, a significant portion of the fiscal deficit was financed through borrowings from SBP, which if continued, will not only complicate the transmission of monetary policy but also dilute its impact and prolong the ongoing consolidation efforts,” it said.

The SBP foresees fiscal deficit to be 6.0 to 7.0 percent of GDP in FY19. Banks continued their cautious bidding behaviour in the previous auctions, as they kept on placing a majority of bids in the 3-month T-bills in anticipation of further increase in interest rates and inflation. Similarly, the demand for longer tenor instruments, fixed rate PIBs, also remained muted.

The floating rate PIBs attracted higher amount of offers compared to fixed rate in all tenors combined; though majority of the offers were placed at higher margins than the previously accepted cut-off. The SBP raised the key policy rate by 50 basis points to 10.75 percent in March. The consumer price index (CPI) inflation fell to 8.8 percent in April from a month ago.

Central bank forecasted inflation to fall in the range of 6.5 to 7.5 percent in FY19. The IMF estimated the budget deficit increase to 7.2 percent in FY19 and then peaking at 8.7 percent during FY20, before coming down to eight percent of GDP in FY21. The fund’s fiscal monitor had put Pakistan’s net debt-to-GDP ratio at 67.2 percent in FY18 and estimated it going up to 72.7 percent during current fiscal and 75.3 percent by end of next year (FY20).