• EDITORIALS

T-bill auction
• R EC O R D ER
REPORT
• A U G 6 TH ,
2018
• E DI TO R I A L

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.

Copyright Business Recorder, 2018