Govt keeps treasury bill returns higher over policy rate

Karachi witnessed the government's decision to maintain treasury bill rates close to unchanged during an auction held on Wednesday, despite their returns outperforming the State Bank's policy rate of 11.5 per cent. This marked the final T-bill auction prior to the announcement of the next monetary policy on October 26. The government raised a total of Rs685.5bn through the auction, with Rs417.6bn from competitive bids and an additional Rs267.9bn from non-competitive bids.

Investors, primarily banks, sought to deposit their maximum liquidity in government papers due to limited domestic lending options. Financial experts noted that investors were wary of risks during the ongoing Gulf war and political instability in Pakistan. Domestic investors had been eagerly awaiting government initiatives to stimulate the economy, with the IMF predicting a growth rate of 3.5pc for FY27, while the finance minister expressed hopes for a 4pc growth.

The lack of domestic investments has created a significant issue for the nation, as policymakers struggle to reengage them in the economy. The World Bank reports that poverty has been on the rise in Pakistan, with 48pc of the population now living below the poverty line. A Karachi businessman commented, "We are attempting to safeguard the money we have already invested.

The government has no idea how to stimulate a dormant economy sentiment." The government's dependency on bank money has led to a mounting domestic debt, with the latest auction indicating the government's needs and banks' readiness to invest in securities. The investors' bids amounted to Rs2.6 trillion, a decrease from the previous auction on October 1, which saw Rs2.7tr.

The first quarter has already concluded without new borrowing, and private sector borrowing, at Rs1.4tr in FY26 and Rs1tr in FY25, indicates limited long-term investments. Bankers reported that a significant portion of the borrowed amount by the private sector was for working capital. The largest increase of 75bps was observed in the benchmark six-month treasury bills, rising from 11.70pc to 12.45pc in the previous auction on September 16.

In the current auction, the six-month T-bills experienced a 6bps decline to 12.39pc, still 89 basis points higher than the policy rate. The State Bank maintained a return on T-bills nearly 99 basis points above the interest rate at the previous auction, which remained consistent on Wednesday.