There has been an exercise of re-profiling the government’s central bank debt – conversion of short term government debt to long term floating PIBs. It’s a smart move, and it is as per the direction of the IMF. Last time the re-profiling exercise was done in 2014 – peaking interest rates and was in fixed rate PIBs; and the main beneficiaries were commercial banks at the cost of heightened debt servicing cost. This time around, interest rates are close to its peak- but due to floating rates, the debt servicing will come down along with falling rates. And more importantly, there is no bonanza for commercial banks yet.

Last year (FY19) government debt from central bank increased by a massive Rs3.1 trillion to reach Rs6.7 trillion and those were mainly market treasury bills (MTBs). Almost all of the stock of SBP’s holding of MTBs is now converted into PIBs, as government PIBs are increased by Rs7.5 trillion in FY19 while MTBs for replenishment of cash are down by Rs3 trillion. Add reduction in MTBs (Rs3.0tn) in FY19 and flow of FY19 (Rs3.1tn) – totaling Rs6.2 trillion are probably being converted into PIBs.

“…The adjustment scenario envisages a reprofiling of the short-term debt held by the Central Bank, discontinuation of Central Bank financing, and a gradual decrease of foreign currency-denominated debt to reduce rollover and exchange rate risks”, stated IMF. A performance criterion is to eliminate further direct financing of budget from the central bank. “…to support debt sustainability and avoid crowding out of private credit, we will immediately launch a liability management operation of the stock of government credit held by the SBP to transform it into short- and long-term tradeable instruments at various maturities (one, three, five, and ten years) and at interest rates close to market levels agreed with the SBP’, noted the report.

What happened lately is exactly as agreed to the IMF, and it is the right thing to do. This way stoppage to further issuing of central bank debt can be managed without creating severe domestic liquidity problem. All the short term T-bills with maturity of 3-12 months are now replaced with maturity of 3-5 and 10 years. Had this not happened, SBP borrowing could not be stopped as within six months, almost all of the debt would have matured. The SBP now has ample time to bring macroeconomic stability before retiring existing debt.

The question is what is this costing the government. The conversion took place at market rates and since rates are floating, the impact of issuing close to peak rates is not going to be sticky. Yet, the rates of PIBs would be higher than short term debt, and this will further increase already high debt servicing cost. But this will increase SBP profits which the central bank will give back to central government – the practice is that SBP after cutting administrative and other expenses, as approved by SBP’s broad, reroutes the profit to government as non-tax revenues.

Hence, the fiscal deficit will remain unchanged as increase in debt servicing will be netted by higher profits from SBP. Commercial banks’ treasury managers must not be happy with this move as their bonuses might not be too fat and commercial banks’ profits might not be too high. The government lost to commercial banks last time when under IMF the maturity re-profiling was done.

Now there should be no urgency of having higher PIBs stock from commercial banks, and if government has to do that, it should be done at floating rates while banks are keen to have on fixed rates in days of higher rates.