KARACHI: Investors have once again preferred short-term investment in government papers, anticipating a cut in interest rate in the near future on the back of falling inflation.

Banks invested Rs75 billion, almost 84 per cent of the entire amount, in three-month treasury bills in the auction held on Wednesday while the government raised almost entire amount offered.

The investors offered Rs89.8bn and the government borrowed Rs89.6bn through the auction.

For more than six months the investors are glued with the short-term papers fearing a change in the interest rate but the rising inflation trend prevented the State Bank from doing so in FY14.

However, the year-on-year inflation fell in July to 7.9 per cent from 8.2pc in June. Experts and analysts predict that the inflation would follow the declining trend in the coming months which could pave way for a change in the interest rate next month.

In the last fiscal year, the government avoided borrowing through treasury bills and the borrowing remained much lower than the preceding year; however, the government preferred to borrow costly money through Pakistan Investment Bonds (PIBs). The selling of three-year PIBs set new record in the second half of FY14.

The costly borrowing has increased debt servicing, compelling the government to borrow more from the market. According to State Bank’s data, the government’s domestic debt was Rs8.8 trillion till March 2013 which has now jumped to Rs10.82tr, a rise of Rs2.2tr.

The cycle of borrowing and servicing has great impact on fiscal deficit which had been a focal point for the previous as well as the present government. The deficit rose as high as 8.4pc in FY13. It did fall in FY14 but the over 6pc fiscal deficit could still hamper the economic agenda of the government and projects designed for developments. The government slashed development allocations in FY14 as the revenue generation was not enough to meet the fiscal gap.

As for the Wednesday’s T-bill auction, the investors bought Rs6.2bn six-month Rs8.3bn 12-month papers.

With the beginning of this fiscal year, the government is facing serious political turmoil that would certainly hit the economic growth and could force the government rely more on borrowed money.

Despite improvement in the external front, particularly the growth in the foreign exchange reserves, the inflows have been declining that could also affect the fiscal gap.

Published in Dawn, August 7th, 2014