PIBs spree continues

PIBs and more PIBs is the voice coming from every corner of banking treasuries. Having risen over trillion rupees last quarter, government accepted Rs424 billion in long-term papers at the auction’s cut off yields yesterday. Meanwhile, the banks continue enjoy healthy spreads of 2-2.5 percent over the money what could have been invested in one year or even shorter-term papers.
Interestingly, out of this, Rs1.4 trillion PIBs, the major chunk is in 3 years paper at 12.1 percent with an effective maturity of little over two years. The Darnomics is bent on increasing debt maturity by 1-1.5 years by selecting 3-year PIBs over T-Bills at the annual cost of Rs20-25 billion. Does it make sense?
Nonetheless, the government is realising the fact and in the last two auctions, Rs430 billion, out of Rs966 billion raised is in l5 and 10 years papers at 12.55 percent and 12.90 percent, respectively. The apparent rationale for shifting debt profile at the addition fiscal cost of Rs30 billion per annum is to lower the theoretical rollover risk. However, with SBP always there at the service of government to replace debt of commercial banks amidst banks’ never ending appetite for T-Bills, effectively the rollover risk is nil.
One may wonder why the finance ministry is taking this so seriously at the time when all the efforts are to slash fiscal deficit!? It’s the IMF, stupid. Yes, the Fund has been showing concerns on low debt maturity profile and to please the IMF, Dar is probably reluctantly shifting towards expensive debt. This trend may continue this quarter, although the appetite is losing and government may raise another Rs500-600 billion in the remaining two auctions this year.
Banks are happy to indulge in this practice as interest rates are expected to ease in the next fiscal year and then the spread of already issued PIBs over the T-Bills rates would be even healthier. It’s a feast for banks which Dar is letting them enjoy, albeit, with a pinch of salt. It is interesting to see what Dar has to offer at a later stage to balance the cost being incurred now.
It might be to renegotiate on number of issues in the consultation meetings with the Fund’s mission next week. There is a case of real effective exchange rate appreciation and most likely the mission would ask to depreciate nominal exchange rate to attain the equilibrium. Mind you, rupee has already slid by Rs2 per dollar from its peak and the Fund may repeat the ‘do-more’ mantra for building reserves. The IMF may also advise to keep interest rates high for gaining macroeconomic stability. But Darnomics may suggest otherwise. Let’s keep our eyes on the next week.