KARACHI: The government raised Rs91.8 billion through the auction of fixed-rate Pakistan Investment Bonds (PIBs) on Tuesday, while the yield on short-duration paper remained unchanged. The amount that was raised was lower than the pre-auction target of Rs160 billion.
The cut-off yield on a three-year PIB stood at 19.3500 percent, unchanged from the previous auction. The bid for five-year was rejected by the government, while no bids were received for 10, 15, 20, and 30 years papers, according to the State Bank of Pakistan’s (SBP) auction result.
Prior to now, analysts predicted that due to the expected fall in inflation, interest rates would remain stable in the months to come. However, since the SBP raised the policy rate during a meeting called in an emergency on Monday, analysts are unsure as to whether the cycle of rate increases would eventually come to an end.
The SBP raised its benchmark interest rate to a record high as the country made a last-ditch effort to resume its bailout programme with the International Monetary Fund (IMF), which is set to expire on Friday.
The SBP Monetary Policy Committee (MPC) decided to raise the policy rate by 100 basis points (bps) to 22 percent.
“The Committee has noted two important domestic developments since the last meeting that have slightly deteriorated inflation outlook and which could potentially increase pressure on the already stressed external account,” it said.
“First, there are certain upward revisions in taxes, duties and PDL rate in FY24 budget as approved by the National Assembly on June 25. Second, the SBP, on June 23, withdrew its general guidance for commercial banks on prioritisation of imports,” it added.
The MPC believes that these actions are required in order to complete the current IMF programme, but they have also raised the upside risks to the inflation outlook.
The Committee believes that while the removal of import restrictions may put pressure on the foreign exchange market, additional tax measures are likely to directly and indirectly contribute to inflation. The latter could lead to domestic prices passing on an exchange rate higher than originally envisaged.
“The MPC views this action as necessary to keep real interest rate firmly in the positive territory on a forward-looking basis. This would help further anchor inflation expectations – which are already moderating over the last few months, and support bringing down inflation towards the medium-term target of 5 – 7 percent by the end of FY25, barring any unforeseen developments,” it said.
The government is compelled to borrow heavily from domestic banks in order to cover its increasing funding needs due to the lack of external financing inflows. The bailout package from the IMF sat idle for months and is set to expire on June 30.
The government was forced to increase its domestic debt as a result of the low revenue and the high expenditure demands. Using T-bills and PIBs, the government obtained loans from commercial banks.