The IMF deal is done; but uncertainty prevails. The market demands clarity on the quantum and timings of prior actions. The market is not sure on the level of currency and interest rate movement. The industry is not sure on what new taxes are to be imposed, what exemptions are to be withdrawn, how much energy price is to be adjusted and in how many phases; all these have inflationary implications and impact the interest rate outlook.
The finance ministry and SBP need to communicate with the market. FM office is reportedly mulling having an analysts’ briefing on the IMF programme and future roadmap. The SBP has to tell the story in the form of monetary policy announcement and through movement in interbank currency market.
The T-Bills (22nd May) and PIBs (29th May) auctions are planned in next two weeks prior to the scheduled monetary policy announcement (31th May) by the end of May. Seeing the uncertainty, market may not participate at prevailing rates. In the last auction, 3M paper rates moved up by 24 bps and there was no participation in 6 or 12 month papers.
The buzz is that IMF to be condition on accepting the market rates, already in action, where ministry of finance can only reject the outliers. In effect, banks and SBP are setting the tone of government paper rates- the SBP is advising the MoF on what rates to accept. There is a conflict of interest in this mechanism.
Anyhow, the issue in hand is that the market will bid low amount at higher rates in upcoming auctions as there are varying stance of participants on upcoming rate hike - from 50-200 basis points. Already, the secondary market rates are at 20-25 bps over last auction and around 50 bps higher than the discount rate of 10.75 percent.
One suggestion for SBP is to prepone the MPS, to announce it before the upcoming T-Bill auction next week, while the PIB auction in on May 29 which is two days prior to normal date of bimonthly MPS announcement. In case SBP announced its policy in ongoing week, the market would get the signal of rates for next 2.5 months and may fully participate in upcoming bond auctions.
The other problem is that the interest rate corridors introduced by the IMF a few years back are not functioning optimally. The floor of the corridor is 150 bps below the discount rate - at 9.25 percent today while the ceiling is at 50 bps over discount rate - at 11.25 percent, with discount rate of 10.75 percent. In case of excess liquidity, the SBP can mop it up at close to floor, but the prevailing practice is of mopping up at around discount rate (10.75% today).
Thus the banks do not lose much by foregoing participation in T-Bills ,even 3M papers, close to the MPS, when the market is expecting a rate hike.. In short, both the T-Bills and PIB auctions may flop, and to avert, monetary policy should be announced this week.
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