Govt restructures debt with long-term bonds to cut interest burden

The government has continued its debt re-profiling strategy by retiring costly, short-term loans from commercial banks and issuing new, lower-interest, long-term debt. 

According to a news report, this approach aims to reduce the heavy burden of interest payments to financial institutions and stabilize the country’s debt profile.

As per reports, in the latest round of auctions, the Ministry of Finance repaid Rs200 billion in six- and 12-month Treasury bills maturing on December 12, 2024, which carried high interest rates of 15.09% and 15.29%, respectively.

There were no bids for T-bills maturing on December 26, 2024.

Simultaneously, the ministry raised Rs820 billion by issuing three- to 12-month T-bills at significantly reduced yields ranging from 13.09% to 13.89%, compared to recent highs of around 23%. 

The auction outcome exceeded the pre-auction target of Rs400 billion as banks offered Rs2.19 trillion, approximately 5.5 times the target, enabling the government to secure favorable terms. 

The funds raised have been allocated to retire Rs893 billion in T-bills maturing on October 31, thereby preventing an increase in short-term domestic debt.

Additionally, commercial banks have managed to reduce their borrowings from the SBP by Rs2.7 trillion in recent months, bringing the total down to Rs9.3 trillion from a peak of around Rs12 trillion. 

The shift by banks from short-term T-bills to PIBs is expected to provide more stable earnings over time, moving away from the brief profit surges associated with T-bills.