May 24, 2003	Saturday	Rabi-ul-Awwal 21,1424

KARACHI, May 23: The stock of the government debt raised through treasury bills has almost doubled in nine months to March 2003 — thanks to a record four per cent cut in the benchmark six-month bills yield. But indications are that the trend may not continue through next fiscal year as the T-bills rates appear to have bottomed out.

Bankers say the fall of weighted average yield on six-month bills from six per cent in June last to just two per cent in March this year led to larger government borrowing from banks.

Consequently the stock of the government debt raised through treasury bills swelled to Rs403 billion by March 2003 from Rs208 billion at end-March 2002. But this does not mean that the government borrowed excessively to finance any gap in its income and expenses. Far from it. The government borrowed more through treasury bills from banks at cheap rates to retire more expensive SBP credit. That is why the government borrowing from the central bank through creation of special T-bills went down to Rs102 billion by March this year from Rs208 billion a year-ago. And its borrowing through ad hoc treasury bills fell to zero from Rs123 billion.

Senior bankers say the government was tempted to borrow more from the banks at cheap rates as the State Bank allowed the T-bills yield to nosedive on the back of growing liquidity.

With the government debt raised through T-bills now totalling Rs403 billion its share in overall domestic debt of the government shot up to 23 per cent by March 2003 from 12 per cent a year ago.

At end-March this year total domestic debt was Rs1,727 billion slightly up from Rs1,699 billion a year ago.

FUTURE OUTLOOK: Senior bankers say since the State Bank may have to change its monetary policy stance early next year — or even before that — the yield structure of the treasury bills will not remain all the same. Since November last the SBP has kept the monetary policy unchanged after following a loose policy for some time to kick-start the economy. But sources close to the central bank say inside deliberations have started on the future course of the policy. Indications are that with the exchange rate stable and inflation under control — and some key economic fundamentals showing signs of recovery — the SBP may go for a slight easing of the policy.

“If that happens,” says head of a foreign bank, “there will be even greater pressure on banks to make more cuts in their lending rates.” But he believes that if at all the monetary policy is eased off further the State Bank will now ensure that T-bills rate do not fall to unmanageable lows eroding the profitability of the banks.

Senior bankers say during last one and a half years the State Bank has taught the banks a good lesson on how to behave when it comes to picking up signals from the central bank. They say the reason why the SBP had to allow the T-bills to fall sharply was not only that it wanted the government to accumulate cheaper debt.

“Another reason — possibly more important was to force the banks to do some credit

Borrowing thru TBs marketing and learn to employ surplus funds more efficiently rather than keep investing them in T- bills,” says treasurer of a leading foreign bank. This explains why on earth the SBP let the weighted average yield of benchmark six-month bills fall from 12 per cent in July 2001 to only two per cent in March this year — a reduction of eight per cent in 21 months.

Now that the banks have learnt the lesson the hard way—and have grown mature enough — further easing of the monetary policy — even without major cuts in T-bills rate will drive them to lower lending rates and look out for more borrowers. And that is exactly what the central bank wants from the banks.

Senior bankers say with the economy showing recovery and with the government set to spend more on development projects there will be enough room available for banks to lend more to both the public and private sector. That again will ensure stability in T-bills rate even in case the monetary policy is eased further.