KARACHI: In a historic move, the government has announced plans to buy back treasury bills (T-bills) worth Rs500 billion on Monday. This initiative is designed to reduce costly domestic debt and lower interest payments, particularly after securing a relatively low-cost $7 billion loan package from the International Monetary Fund (IMF).
This buyback signals to financial markets that the government is in a strong cash position, enabling it to lower interest rates and manage domestic debt more effectively. The Ministry of Finance intends to use these surplus funds to create fiscal space that supports economic growth.
Muhammad Awais Ashraf, Director of Research at AKD Securities, explained, “A 1% reduction in interest rates could save the government around Rs470 billion annually.” Currently, the rate of return on 1-year T-bills has fallen significantly—from a recent peak of 23% to 14%—following the central bank’s interest rate cuts, as inflation dipped to single digits in August for the first time in three years.
Pakistan’s total debt stands at Rs69.6 trillion, with Rs47.7 trillion in domestic debt. Approximately Rs31 trillion of this domestic debt is held by commercial banks through investments in T-bills and Pakistan Investment Bonds (PIBs).
The buyback will also alleviate some pressure on commercial banks, which have increased borrowing from the central bank to a record Rs12 trillion. These banks have profited by lending to the government at higher rates.
Topline Securities CEO Muhammad Sohail described the decision to repurchase T-bills as a major development, reflecting an improved cash position for the government and offering various positive implications for the economy. The sharp drop in yields—from 23% to around 14% for 1-year T-bills and from 17% to 12.7% for 10-year bonds—suggests an accelerated easing of interest rates. This strategic buyback is expected to enhance liquidity in the money market and improve the government’s debt metrics.
By repurchasing its own debt, the government aims to optimize its debt profile and potentially lower the overall debt ratio. This move demonstrates confidence in fiscal stability, benefiting both short-term monetary operations and long-term sustainability. Lower yields could enhance investor confidence, encouraging private-sector investment and stimulating economic growth.
In under three months, T-bill yields have fallen by nearly 500 basis points, driven by strong central bank profits and improved fiscal discipline, which have enhanced government cash flows and market liquidity. On Friday, the government invited bids for a Rs500 billion buyback auction of Market Treasury Bills (MTBs).
The auction will focus on repurchasing Rs100 billion of T-bills issued on June 13, 2024, maturing in December 2024, and another Rs100 billion of T-bills issued on December 14, 2023. Additionally, the government plans to repurchase Rs150 billion in sovereign bonds issued on June 27, 2024, and another Rs150 billion in bonds from December 18, 2023.
Ashraf noted that government liquidity has significantly improved, following the central bank’s record profit of Rs4 trillion for the fiscal year ending June 30, 2024, of which Rs2.7 trillion was transferred to the government. He added that this buyback could prompt further cuts to the key interest rate to support economic growth, with predictions suggesting a drop to 14-15% by the end of the fiscal year in June 2025.
The buyback may also encourage commercial banks to provide new financing to the government in future T-bill auctions at reduced interest rates. Additionally, increased financing availability could lead banks to offer more loans to the private sector, raising their advance-to-deposit ratio (ADR) above 50% to avoid additional taxes.
