It is generally expected that investment of funds in longer dated maturities would yield comparatively higher dividends. Exception to this usual behaviour was observed when lower cut-off rates were offered on 12 months paper, compared to the six months treasury bills by the State Bank of Pakistan, in the T-bills auction conducted on 26th August, 2009.
Besides, the amount accepted by the State Bank at Rs 43.25 billion was much lower than the target of Rs 60 billion and aggregate bids of Rs 83 billion. It was interesting to note that primary dealers, anticipating a cut in the interest rate, were almost desperate to invest in relatively longer term paper. They offered Rs 70.52 billion for 12 months tenors, but the Ministry of Finance (which now decides and not the State Bank) was also careful and accepted only Rs 30.5 billion at a cut-off yield of 12.44 percent.
However, nearly all the bids were picked up for three and six months paper. Against an offer of Rs 2.55 billion for three months, Rs 2.48 billion were accepted at a cut-off yield of 12.38 percent. For six months paper, offers of Rs 10.2 billion were received and the State Bank accepted an amount of Rs 9.60 billion at a cut-off yield of 12.55 percent. The weighted average yield in the auction on 3 months, 6 months and 12 months paper was 12.36 percent, 12.44 percent and 12.42 percent, respectively. The inflow of aid from multilateral sources provided the room to the MoF not to adhere to the target and temporarily restrict its reliance on bank borrowing.
The auction on 26th August reflects very clearly the expectations of the market. As the monetary policy is projected to ease in the next few months, largely due to a deceleration in the inflation rate, money market players would obviously like to invest higher amounts in 12 months paper, compared to shorter tenors, with a view to earning better yields on relatively longer term basis. The government, on the other hand, is not tempted to borrow heavily, for one year, through the sale of T-bills for the same reason and would prefer to mobilise the needed funds through short dated maturities.
Another inference could also be drawn from the auction on 26th August. While it is true that the market expects the rates to ease in the coming months, the decline in the interest rates is now projected to be lower than expected earlier, with the result that rates for 6 months treasury bills were only slightly higher than 12 months.
This is in line with the latest signals coming from the State Bank. While the State Bank, earlier, seemed to be positioning itself for a substantial cut in the discount rate, it now appears to be heading towards a modest rate cut, due largely to the inability of the government to narrow its fiscal gap and the IMF pressure to ensure monetary stability before thinking about a bigger rate cut. The State Bank/government's acceptance of a much lower amount than offered also shows that the authorities this time are very careful in maintaining the existing liquidity conditions and ensuring that the banks/market are not short of funds during the month of Ramazan and Eid.
Rs 16 billion were also injected in the system by the State Bank, only a few days back, to serve the same purpose. It may be mentioned that the State Bank had sold T-bills amounting to Rs 181 billion in the last three auctions, as against the target of Rs 170 billion when the market was more liquid.
While the State Bank is trying to manage the liquidity in the economy and avoid undue price pressures so far as possible, its policies are certainly constrained by the fiscal behaviour of the government. It is sad to note that instead of taking major policy decisions to reverse the deteriorating trend in public finances, the government is content with announcing popular measures, which could only have a limited impact. For instance, in order to enforce austerity and improve the image of the government, the Cabinet approved on 26th August that the ministers and officials like secretaries would only undertake those foreign visits, which were obligatory and for which participation was unavoidable and also such visits would be curtailed to the minimum.
Obviously, such a measure was in response to the increasing criticism in the media on expensive foreign visits, by dignitaries, which had become very frequent. In all probability, the directive will either be ignored or would only have a marginal effect on the overall fiscal position of the government. In our view, it is time to take bold measures for the sake of fiscal prudence. Such an effort would not only reduce the need of the government to borrow from various sources, including through the sale of T-bills, but would also channelise a higher level of savings for productive sectors of the economy, reduce interest rates and ease price pressures on the economy.
Net foreign inflow in 2007-08 was $10.8 billion. It came down by more than half in 2008-09 to $5.1 billion. It is now projected at $7.4 billion for 2009-10. The difference between the current year projection and the last year inflow is $2.3 billion - exactly the amount sought from Friends of Democratic Pakistan. This signifies the dependence of the budget on overseas funds.
The breather provided by the International Monetary Fund - lending for budgetary needs, instead of purely for balance of payment support, is the first for any member state of the Fund - appears to be support for our crucial role in the war against terror. This allows the government to shirk from undertaking severe stabilisation measures involving drastic belt tightening. We appear to be digging ourselves deeper into a hole. The only outcome of all this would be loss of economic sovereignty.
Comments
Comments are closed.