Over the next three months (October-December), the government hopes to raise more than Rs 7 trillion by offering a variety of short- and long-term sovereign bonds to financial institutions. This is in response to the disruption inflicted on by the floods and the requirement to raise additional funds to deal with their aftershocks.
By issuing long-term, 3-year, and 5-year Pakistan Investment Bonds (PIBs)?on Wednesday, the government raised Rs 218.3 billion in additional funding, above the previously stated objective of Rs 175 billion.
After a considerable period of time, the PIBs cut-off yields—the interest rate commercial banks charge the government for borrowing money—fell by eight basis points on the 3-year bond and by 30 basis points on the 5-year bond. The government was able to borrow more money than planned thanks to the drop because there was still a strong demand for funding.
As economic activity has now significantly reduced due to the floods, rehabilitation efforts have not only raised the demand for finances but may also result in a decrease in tax income collection.
As a result, the government will rely more on domestic debt, leading to a bigger budget deficit.
According to experts, commercial banks lowered their cut-off rates downward for the most recent PIB auction. On Monday, the central bank maintained its benchmark policy rate at 15% for the upcoming seven-week period.
In addition to the fact that banks believed the rate had peaked at 15%, which could be reduced down in upcoming monetary policy statements, it also meant that banks had locked their maximum assets in long-term PIBs at the current fixed rate of return.
The banks bid Rs 662 billion in the most recent auction, compared to the government’s objective of Rs 175 billion.
By selling the 3-year PIBs, the government exceeded its objective of Rs 60 billion and raised Rs 80 billion. At the auction, the bond’s cut-off yield decreased to 13.83% from 13.92% at the previous auction, which was conducted on September 14, 2022.
By selling the 5-year PIBs, the government was able to secure an additional Rs 110 billion in top to the intended Rs60 billion. In contrast to the previous auction, where the cut-off yield for the bonds was 13.39%, 13.09% was used in this auction.
In the most recent auction, the government received no offers for the 15, 20, and 30-year bonds despite raising an additional Rs 28 billion through non-competitive bids. Meanwhile, ten-year PIB bids were also rejected.
In addition, the government has set a goal of raising Rs 7.025 trillion over the next three months through the issuance of Sukuk (Shariah-compliant bonds), three-year to 30-year PIBs at fixed and variable rates, and three-month to 12-month T-bills.