Govt keeps treasury bill returns higher over policy rate

KARACHI: The government maintained treasury bill rates almost unchanged in an auction held on Wednesday, yet the returns on all tenors of T-bills were higher than the State Bank’s policy rate of 11.5 per cent. This was the final auction of T-bills prior to the announcement of the next monetary policy on October 26. The auction resulted in the government raising Rs417.6 billion through competitive bids and an additional Rs267.9 billion through non-competitive bids, totalling Rs685.5 billion.

However, investors, primarily banks, sought to deposit their maximum liquidity in government securities due to the limited options for domestic lending. Financial experts suggested that investors are cautious about taking risks in light of the ongoing Gulf war and the political instability in the country. Domestic investors had been anticipating government initiatives to stimulate the economy for the past three years.

The International Monetary Fund had projected a growth rate of 3.5pc for FY27, but the finance minister expressed hope for a 4pc growth during a statement made on Tuesday. The lack of domestic investments has created a significant challenge for the country, as policymakers have been unable to reinvigorate the economy. According to the World Bank, poverty has been on the rise in Pakistan, with 48pc of its population now living below the poverty line.

A businessman from Karachi commented, “We are attempting to safeguard the money we have already invested. The government has no clue on how to invigorate a dormant economic mindset.” The government heavily relies on bank money, and borrowing amounts have been increasing annually, contributing to a substantial domestic debt. The latest auction mirrored both the government's requirements and banks' desire to invest in securities.

Investor bids amounted to Rs2.6 trillion, a decrease from Rs2.7 trillion in the previous auction on October 1. The first quarter has already concluded without any new borrowing from the private sector. In FY26, the private sector borrowed Rs1.4 trillion, while in FY25, the figure was Rs1 trillion. Bank officials stated that most of the funds borrowed by the private sector were intended for working capital, implying no long-term investments.

At the previous auction, the largest increase of 75 basis points was observed in the benchmark six-month treasury bills, with the rate rising to 12.45pc from 11.70pc following the auction on September 16. At the current auction, six-month T-bills experienced a decline of 6 basis points, settling at 12.39 per cent from 12.45 per cent in the prior auction, still 89 basis points above the policy rate.

The State Bank kept the returns on T-bills nearly 99 basis points higher than the interest rate at the previous auction and maintained the same at Wednesday's auction.