KARACHI, Aug 24: The government borrowed Rs103 billion through long-term Pakistan Investment Bonds or PIBs in the last fiscal year against the revised target of Rs75 billion.
But bankers say this year the government borrowing through PIBs may not reach such a high level because that needs a big rise in their yields.
Data released by the State Bank show that in fiscal year July -June 2003-04 the government raised Rs103 billion domestic debt through PIBs of different tenures. In other words the government raised roughly 85 per cent of domestic debts through these long- term bonds. The government mobilized Rs121.6 billion net domestic debt in the last fiscal year.
Senior bankers say that the government may find it difficult to raise an exceptionally large amount of debts through PIBs during this fiscal year. "The reason is that corporates expect a big increase in the PIBs yield-something that the government is trying to block," said head of treasury of a leading local bank.
The government plans to raise Rs60 billion through PIBs during the current fiscal year. But much would depend on whether the government allows the yields on PIBs to move up in response to the market forces.
In the first auction of PIBs of this fiscal year held on August 17 the State Bank scrapped all the bids of Rs4.3 billion for three-year; five-year and 10-year bonds. Top bankers close to SBP say the central bank did this on behalf of the government that was averse to raising the yields on the bonds.
The government is trying to block an inevitable increase in PIB yields as part of its strategy to keep interest rates low to boost economic growth to targeted 6.6 per cent during this fiscal year.
But in doing so it is making the task of containing inflation increasingly difficult for monetary authorities. The State Bank had last increased the weighted average yields on PIBs of three- year; five-year and 10-year in May.
In June it had also allowed the weighted average yields on 15-year and 20-year bonds to rise. But sources in the SBP say the Ministry of Finance had viewed the May 29 increase in PIBs yields a bit more aggressive than called for.
That was precisely why in the PIBs auction held on August 17 the Ministry of Finance asked the central bank to scrap all the bids. The central bank had raised the yields on PIBs in May and June in the backdrop of rising inflation. Inflation measured by the CPI or Consumer Price Index had shot up by 7.1 per cent year-on-year in May and by 8.45 per cent in June.
In July CPI inflation soared to 9.3 per cent ringing alarm bells in the corridors of monetary policy makers. "But we find it extremely difficult to combat inflation by aggressively increasing interest rates because it is bound to slow down the pace of economic growth," said a senior monetary source.
He declined to comment when asked whether it was the Ministry of Finance blocking the interest rates rise at the desired pace or the central bank itself was reluctant to do this.
"The central bank does not operate in isolation. We have to work with the government and often our objectives are the same," he said without elaborating. Senior corporate executives say they find it very difficult to invest in long-term bonds at a time when the government is trying to keep their yields at levels that are not realistic.
"Who will invest in say 10-year bonds when the government is not willing to pay a return closer to their coupon rates?" asked an official of a large state-run entity. He was referring to the fact that the SBP had rejected bids demanding 7.85-8.25 per cent yields on 10- year PIBs in August 17 auction.
The coupon rate of the bond is 8 per cent. "All this is happening at a time when inflation is eroding the purchasing power of money by 9.3 per cent in a year," he remarked sarcastically.
