Although auction of T-bills and other government papers looks like a routine affair, it reveals certain developments in the financial sector and fiscal position of the government. In Pakistan, T-bills are issued for tenors of 3, 6 and 12 months to raise funds for the Federal Budget and the contribution to each tenor tells a different story. For instance, during the last fiscal year, no bids were received for 6 and 12 months tenors in most of the auctions or were rejected since the asking yield by the banks was on the higher side. In the latest auction conducted on 1st August, 2018 by the SBP, T-bills for 3-month, 6-month and 12-month maturity were offered with a tentative target of Rs 600 billion. Overall, the State Bank received bids amounting to Rs 987 billion with a realized value of Rs 970 billion for the sale of 3-month T-bills while not a single bid was submitted for the sale of 6-month and 12-month varieties. Of the received bids, the federal government accepted bids amounting to Rs 926 billion with a realized value of Rs 910 billion at a cut-off yield of 7.75 percent. The maturity amount for this auction was Rs 518 billion and the borrowed amount was about Rs 300 billion higher than the tentative target of Rs 600 billion set for the auction.
It is quite evident from the above that the disinterest in 6- and 12-month T-bills that had surfaced in the last fiscal year, ending 30th June, 2018 continues and the appetite of the government for financing the Federal Budget through bank borrowings also continues to grow. This is clearly reflected in the data. The expenditures of the government are so much in excess of the government revenues that it had to borrow massively from domestic banking and non-banking sources and external sources. Since there was a considerable shortfall in receipts from the latter two sources, the government has to rely on the banking system to bridge the fiscal gap. Also, the government continues to overestimate the receipts and underestimate the expenditure in its budget documents with the result that the amount to be raised through the banking system is usually much higher than the original target. For instance, fiscal deficit for FY18 is estimated in the range of 7-8 percent of GDP as against the target of 4.1 percent. The gap between the target and actual budget deficit for the current year is also going to be quite high. In order to bridge the fiscal shortfall, the federal government has already raised some Rs 4.35 trillion through the sale of MTBs in three auctions in the first four weeks of this fiscal year. The hunger for funds is so acute that the federal government intends to borrow an amount of Rs 5.7 trillion through the sale of MTBs and Pakistan Investment Bonds (PIBs) in the next three months, i.e., August-October, 2018. This amount will be raised through the sale of T-bills (Rs 5.55 trillion), while an amount of Rs 150 billion will be generated through PIBs. In fact, the government borrowed so much from the SBP for budgetary support last year that even the limit of zero quarterly borrowing from the central bank, as laid out in the SBP Act, was not met and the same story is likely to be repeated this year. So far as banks' keen interest in 3-month T-bills is concerned, it is quite clear that they are expecting more increase in the key policy rate due to higher inflation outlook and rising current account deficit. Sensing further monetary tightening in the coming months, banks are not inclined to lock in their liquidity resources in longer term MTBs and continue to invest in 3 months T-bills in anticipation of higher rates in future. Such a scenario could only be reversed by reducing the budget deficit to sustainable levels, say 3 to 4 percent of GDP, and raise the needed resources from domestic non-banking and external sources. This is probably the only option to contain the debt servicing cost of the country at lower levels and release more financial resources for the needs of the private sector.
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