KARACHI: The cut-off yield for short-term treasury bills has risen by 126 basis points on the back of inflationary pressures as hopes fade away for cut in the State Bank of Pakistan’s policy rate.

The auction of treasury bills, held on Wednesday, saw a sudden jump in the three-month T-bills, surprising many even though it was not improbable.

On Wednesday, the cut-off yield for three-month T-bills was raised to 21.7 per cent while it increased to 20.44pc in the previous auction on Feb 6.

The market was expecting a cut in interest rate, possibly next month when the monetary policy will be announced. However, a continuous inflationary pressure forced policy-makers to counter it with a higher interest rate.

Cut-off yield on three-month T-bills raised by 126bps

The current interest rate of 22 per cent is hampering economic growth, according to captains of business and industry.

They argue that costly money makes their products or services costlier and uncompetitive in the global market. This explains the decline in borrowings by the private sector to the lowest level since the end of FY23. The last fiscal year was the worst for the economy as the growth rate fell to negative 0.6 per cent.

“Since the State Bank has raised the cutoff yield for three-month T-bills and kept the benchmark six-month T-bills unchanged, we can assume there will be no interest rate cut next month,” said S.S. Iqbal, a money dealer.

The State Bank kept the six-month T-bills rate unchanged at 20.39 per cent and raised just Rs616.5m, compared to Rs310 billion, for three-month T-bills.

The State Bank also increased cutoff yields by 25 basis points for 12-month papers and the rate rose to 20.33 per cent.

The government raised an amount of Rs16.5bn for this tenure.

The bids for T-bills amounted to Rs1292.5bn — the biggest amount of Rs649bn was for three months while bids totaling Rs576.7bn were made for 12 months. But the government remained close to the target of Rs300bn and raised Rs361bn through the auctions.

The rush for government papers reflects the state of banking in the country. Banks are making huge profits out of this investment in government papers.

The government has raised more than Rs4 trillion so far from banks during the current fiscal year. Most of the banks showed an almost 100 per cent increase in their profits in the calendar year 2023.

Although banks are reaping windfall profits, economic growth has been sluggish because money is flowing towards unproductive government papers. The government’s expenditure is high as well, with a better chunk of the money going to debt servicing.

This is the reason that despite generating more revenue than the target, the government is borrowing from banks on a large scale.

Published in Dawn, February 22nd, 2024

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