Govt to raise Rs4.05tn via treasury auctions

KARACHI: The government aims to raise Rs4.050 trillion through the auction of Market Treasury Bills (MTBs), Pakistan Investment Bonds (PIBs), and Sukuk in May-July period to meet its financing needs, the central bank said on Tuesday.

The government will borrow Rs4.050 trillion from the auctions of MTBs, while it also plans to fetch Rs900 billion via the sale of fixed and floating rate PIBs, according to an auction calendar released by the central bank on Tuesday.

The State Bank of Pakistan would sale Rs300 billion worth of fixed-rate PIBs and Rs300 billion worth of floating rate PIB. It would also auction Rs150 billion worth of three-year and Rs150 billion two-year PIB.

The SBP would also sale Rs225 billion worth of variable rental rate five-year Government of Pakistan Ijara Sukuk and Rs75 billion worth of fixed rental rate domestic Islamic bonds.

Treasury bill yields are hovering around 24-year high in the secondary market as investors expect hawkish signals from the central bank in its next policy meeting to curb surging inflation.

The expectations for a surge in consumer prices index inflation because of an expected increase in fuel prices any time soon, fueling investor belief that the central bank could aggressively hike interest rates at its upcoming monetary policy review due on May 23 in a bid to tame soaring price pressures.

The State Bank of Pakistan expects the inflation to average between 9-11 percent this fiscal year.

The SBP raised the policy rate by 250 bps to 12.25 percent at an emergency meeting held on April 7. The limited funding sources due to lack of foreign exchange inflows also compelled the government to push up yields.

The government raises funds fortnightly by auctioning T-bills, conventional and Shariah-compliant bonds to plug budget holes, which increases its borrowing from the domestic debt market.

The banks invested heavily in T-bills and PIBs due to receiving lucrative returns on such papers by the government.

Analysts said the reduction in the fiscal deficit is one of the important economic challenges the new government is facing. However, the government’s inability to take difficult decisions with regard to removal of fuel subsidies will expose the country’s financial stability and energy chain to significant strain.

Pakistan will need to increase fuel prices to curtail the pricing arbitrage for smuggling and also to reduce the local purchasing power to cool off demand.

Also on the fiscal side, massive financing needs to fund the price differential claims (PDC) will keep upward pressure on KIBOR which beyond this point will be destructive to the local economy; increasing the corporates’ default risk which are already heavily leveraged due to a surge in working capital requirements, according to report from Alfalah Securities.