Forex loans and bond issue to keep borrowing within budgetary target: treasury bills stocks hit Rs 705 billion

The stock of debt of the federal government from the banking system continues to rise in the current year in the hope that counter rupee generated from inflow of expected dollar loans and forthcoming forex bond issue flotation would retire this debt and also keep the bank borrowing within the budgetary target of Rs 140.01 billion.
Government borrowings, which is on a constant rise, and as of May 12, has spiked to Rs 212 billion against its target of Rs 120 billion. This is countering the SBP's efforts to curb inflation.
Money Supply (M2) has, so far, breached its fiscal target of 13.46 percent hitting 13.99 percent as of May 12 mainly due to external flows. Had the central bank not taken proactive measure of mopping up of commercial flows, the M2 figure would have busted badly.
T-bills outstanding stock, which was Rs 468 billion as of June 2006 has risen to Rs 705 billion. Similarly, against year-to-date (YTD) Pakistan Investment Bonds (PIBs) maturity of Rs 33.4 billion, the SBP has sold PIBs worth Rs 71.2 billion through last four auctions, with another Rs 15 billion PIB auction due in this fiscal year. Hence, against last June stocks, through T-bills and PIB auctions, so far roughly Rs 275 billion in excess has been drained out of the system, with two more T-bills auction due before June-end, the maturing T-bills amount is Rs 41.8 billion and with PIB maturity of Rs 9 billion.
The Asian Development (ADB) has already provided loans amounting to Rs 700 million - already exceeding the budgetary estimate of $500 million - and further $200 million expected before June-end.
The World Bank was envisaged to provide $700 million this year, but thus far has not disbursed this amount due to non-fulfilment of certain conditionalities attached with the loan; like revision of the electricity tariff. After the recent increase in power tariff, Islamabad is confident that this amount will be released within the next seven weeks. According to informed sources the World Bank board has approved a loan of $350 million this week and disbursement is awaited.
Yesterday's successful floatation and acceptance of $750 million in the Eurobond issue is expected to retire government debt by Rs 45 billion along with privatisation proceeds (Rs 15 billion) will reduce government's bank borrowing by Rs 60 billion, which would also help to bring the M2 growth figure within its target level.
The State Bank of Pakistan (SBP) in its fortnightly Treasury Bills auction, held on Wednesday, maintained its target amount by accepting Rs 7.95 billion against its target of Rs 8 billion. The market's offered amount was Rs 16.1 billion and the realised amount is Rs 7.322 billion.
Interest was again seen in 12-month paper due to better yield offered in longer term paper. The gap between three-month and six-month versus 12-month paper is of 42.5 basis points and 21 basis points, respectively. Discount rate is 9.5 percent.
In three-month, previous cut-off yield of 8.6869 percent was maintained and the accepted amount was Rs 500 million, in six-month by maintaining previous cut-off yield of 8.9017 the accepted amount was Rs 50 million and in 12-month, the SBP did not hesitate to inch up yield and against previous cut-off yield of 9.1 percent it accepted Rs 7.4 billion at a cut-off yield of 9.1119 percent.
"The central bank preferred to stay within the target, though it could have lifted additional Rs 6.35 bullion by raising the yield by a mere 2.4 basis points", says a chief dealer of a foreign bank.
SBP hesitancy, he said that is understandable, since liquidity conditions are already tight. On last Wednesday alone, there was discounting of Rs 9 billion by banks from the SBP window to square off their books. For the last four weeks, tight liquidity condition has persisted and frequent use of SBP discount window by banks was observed, he added.
Throughout the current fiscal year, SBP's monetary stance has been very clear. It has kept the market conditions tight for the last four continuous weeks. In the last quarter of this fiscal year, the average overnight borrowing has jumped to 8.75 percent from FY 8.5 percent. In May, average overnight borrowing cost may have risen to 9.25 percent.
While the SBP has announced fifth PIB auction, due on June 5, which is re-opening of old scrip, with target amount of Rs 15 billion. So far, trading activity in PIBs has been very thin. Though there are queries only from the foreign investors, but none has shown any keenness, which is disappointing.
In real sense except for one or two corporates offering tiny amounts, only State Life Insurance Corporation (Slic) has so far shown interest in long-term government paper ie beyond 10 years. Slic is already holding over 90 percent of the long-term PIB stock.
Market gurus believe that Slic still has room to invest in long-term PIBs (due to absence of bond auction in the previous two years) and should be able to gulp additional Rs 50 billion worth of PIBs.
Meanwhile, the Pak rupee has maintained its strength with foreign exchange reserves hitting a new all-time high of Rs 13.8 billion. As the FY forex reserves target for June-end is thought to be Rs 14.5 billion, the rupee is unlikely to ease against the dollar, as another $1 billion could be added to the forex reserves portfolio due to Eurobond and privatisation receipts.
The Pak rupee could follow the regional currencies trend, which has gained substantially in current fiscal year against the dollar. The Philippine peso gained 13.14 percent, Thai bhat was up by 9.25 percent, Indonesian rupiah was stronger by 6.07 percent, Malaysian ringgit gained 7.75 percent and Indian rupee has so far gained Rs 11.56 percent.
Japanese yen was weaker by 6.33 percent, Sri Lankan rupee lost 6.63 percent, erratic moves were witnessed in Bangladesh taka due to political uncertainty, which in last six months has seen high of 70.6 and low of 63.50 per one dollar and is currently trading at 69.05, while Pak rupee which has lost 1.08 percent in the current fiscal year could narrow its losses.