Banks’ investment in govt papers up 9.10pc in January

KARACHI: Banks’ investment in state-owned securities increased 9.10 percent till January 31, 2017, as the government boosted its borrowing to finance a budget deficit caused by low tax revenue and less foreign inflows, the central bank data showed on Thursday.

The outstanding stocks of the government papers  -- market treasury bills, Pakistan Investment Bonds and Ijara Sukuk -- held by commercial banks, increased to Rs6.589 trillion at the end of January from Rs6.039 trillion a year earlier, according to State Bank of Pakistan (SBP) figures. 

Banks invested Rs2.974 trillion in PIBs, Rs3.272 trillion in treasury-bills and Rs342.8 billion in Shariah-complaint paper (Iajara Sukuk).

Commercial banks continued to park cash holdings in safe havens to maximise their bottom lines that are falling due to low interest rate environment over the last few years.

Profitability of some banks for 2016 remained below the expectations of many analysts. This was due to multi-decade low interest rates and maturity of PIBs. Analysts had already predicted that banks could face a hit on their net interest margin in the year 2016 on maturing PIBs. They had to reinvest their maturing funds at lower rates.  

A constant hike in budget deficit compelled the government to rely on bank borrowing to cover its deficit spending. A shortfall in tax and non-tax revenues and absence of the US-supported coalition support funds inflows contributed to the government’s dependency towards bank borrowing that reached 50.9 percent in the first half of the current fiscal year of 2016/17.  

The budget deficit rose to 2.4 percent in July-December FY17, compared with 1.7 percent in the same period of the last fiscal year.        Though, banks’ holding of the government safe assets remained upward, analysts said, it slowed down in a sharp contrast to a momentum it recorded in the last few years.

Government borrowing from the central bank reached Rs1.03 trillion between July 1, 2016 and February 10, 2017. The government repaid Rs64.21 billion worth of its debts to the SBP during the corresponding period of last year.

“The government seems to [be] rebalancing its debt profile towards short-term instruments and the banks [are] also interested to buy short-dated debt at relatively higher yields,” said another analyst.  

“The government’s need for money to finance budget deficit is increasing that is evident from the fact that yields on t-bills are rising, while PIB yields remain slightly flattened.”

Investors’ sentiments about interest rates and inflation have also been shifted. They assume the central bank to continue with its expansionary monetary policy stance in months to come on soft inflation expectations.