April 3, 2003	Thursday	Muharram 30, 1424

KARACHI, April 2: Yield on six-month treasury bills has fallen below the crucial mark of 2 per cent from more than six per cent at the start of the fiscal year in July last. This heavy fall in the T-bills yield has hit the banks hard — and most of them fear that the central bank would not come to their rescue.

The cut-off yield on six-month bills went down to 1.71 per cent on Wednesday from 2.1 per cent in the last auction held in March. Senior bankers said the yield fell drastically because most banks priced their bids at very low rates. “They did so because they knew that the auction target of Rs5 billion was too small in an excessively liquid inter-bank market,” said treasurer of a local private bank. The auction attracted Rs35 billion bids — some of which were speculative — and thus cheaply priced.

Some bankers said had the State Bank set a larger target banks would not have priced their bids too cheap and the decline in the T-bills yield would not have been so pronounced.

The sharp decline in the T-bills yield has started hitting the banks. So many of them blame the central bank for this state of affair. They say the SBP should not have allowed a rapid fall in the T-bills yield and it should have provided a sort of floor for the interest rate. But central bankers say the T-bills rate has been on the fall because the banks have failed to place surplus funds in other more profitable avenues of investment. They say that the anchor of the SBP monetary policy is its discount rate — and that has been stable at 7.5 per cent since November last.

But bankers say the discount rate has become irrelevant now because of the very big spread between this rate and the T-bills rate. They say since the month-on-month inflation has started showing an upward trend the central bank must keep the monetary expansion within limits. That is why they believe that it is time for the SBP to stabilize the interest rates rather than leaving it on the course of decline. Sources close to SBP say some senior central bankers share this view — and that is why they wanted the auction target to be fixed at a higher side. But the target was finally fixed at Rs5 billion primarily because some senior SBP officials were of the opinion that the natural decline in the T- bills rate should not be halted at the moment. Because the exporters need to be supported through lower export finance rates after the levy of war risk surcharge in the wake of US invasion of Iraq.

The export finance rate is so linked with the T-bills rate that when the bills become cheaper the export financing also becomes less costlier. For the current month the export finance rate is four per cent. And it will fall further in May because the T-bills rate has come down.

The exporters believe that the policy will work. “We really need more support now as exporters have started feeling the pinch of the Iraq war,” said a leading textile exporter, Rafiq Ibrahim. He said keeping the export finance rate low and the exchange rate stable was very much necessary at a time when growth in exports was at risk in the wake of war. “Our exports through Dubai has already slowed down,” he told Dawn. Many exporters reach the markets of the Middle East as well as South Africa through Dubai.