Interest rates likely to persist
The government borrowing touched Rs1.73trillion that is up Rs577billion compared to Rs148billion last year indicating source of borrowing is getting increasingly skewed towards central bank against scheduled banks in the country.
However, looking at the State Bank’s hands off policy in the recent monetary policy may carry a near term risk of a discount rate hike remains limited and a rate hike at this stage may have limited impact on controlling inflation.
It is believed that a possible return to IMF for a loan programme after elections could act as a catalyst for interest rate hike by 50100bps in the post election times.
Meanwhile, the government’s strategy to offload its deficit financing burden to the banking sector also faced challenges in 2012 to date, where the 4th quarter of the financial year in particular saw unmet targets in T bill auctions.
It may be noted that out of a combined target of Rs995billion from 7 auctions, only Rs920billion were raised by the government while keeping cut off rates roughly flat. It is noteworthy to see that participation in the longer end of the curve increased in 4th quarter which helped cover some of the shortfall in T bill targets. A combined Rs62.5billion worth of Pakistan Investment Bonds (PIBs) were sold against Rs40billion target while Rs78.4billion Sukuks were sold against target of Rs50billion.
The key highlight of FY12 was the spike in open market operations conducted by the central bank, in order to control market liquidity and facilitate borrowing from commercial banks. From the highest injected amount of Rs85billin in fiscal 2011, OMO injections crossed the Rs350billion mark in second quarter of fiscal 2012. The weekly OMO subsided to Rs100 150billion in 4th quarter of fiscal 2012 vis à vis lower accumulation in T bill auctions.
The financial analysts are of the view that a rate hike at this stage while providing incentive to banks’ to invest in government securities, may increase the subsequent OMO injections which itself is an inflationary form of finance.