The government plans to secure Rs3.88 trillion from banks through treasury bills and conventional bonds in the first quarter of 2024 to address its budget deficit, as disclosed by the State Bank of Pakistan on Thursday.
As per the central bank’s auction calendar, the government aims to raise Rs2.250 trillion through long-term paper auctions. Additionally, it intends to secure Rs1.630 trillion from commercial banks through market treasury bill auctions.
The recent auction schedule indicates a reduction in the government’s borrowing requirements, potentially attributed to the optimistic prospect of obtaining foreign funding from friendly countries.
The primary avenue for government borrowing involves fortnightly auctions of market treasury bills and conventional and Sharia-compliant bonds in local currency.
The borrowed funds are utilized to finance government operations, with analysts noting a significant increase in the burden of servicing domestic debt due to record-high interest rates. The majority of government revenue is allocated to servicing the substantial markup payments on domestic debt.
While the government continues its borrowing practices, banks are strategically allocating a significant portion of available liquidity to risk-free securities, particularly government papers. This trend is driven by the higher returns generated from investments in these securities.
In response to escalating inflation, the State Bank of Pakistan (SBP) implemented a policy rate hike of 600 basis points, from 16 percent in December 2022 to a record high of 22 percent in June 2023. T-Bills yields in 2023 observed an increase ranging from 415 to 439 basis points.
However, in the last three months, yields have exhibited a decline of 270 to 358 basis points from their peak in September, signaling market anticipation of a policy rate cut in 2024.
Similarly, the yield on three-year Pakistan Investment Bonds rose by 92 basis points to 16.56 percent in 2023 but has since decreased from its peak of 21.16 percent in September.
