The cost of financing for the cash-strapped government jumped by a further 1 percentage point (ppt) on Wednesday, reaching a record high of 21%, indicating that the financial market expects a further increase in the key policy rate from the central bank next month.
In order to reach its predetermined goal of Rs1.8 trillion, the government generated debt of Rs1.57 trillion by selling three 12-month T-bills at auction to commercial banks.
The cut-off yield, which represents the government’s financing rate, would have risen above the existing financing rate of 21% had the government chosen to borrow more during the auction.
Nonetheless, the government needed Rs1.8 trillion to pay off the banks’ maturing old debt. In contrast to the predetermined objective of Rs70 billion, it did generate an additional Rs307 billion by offering 2- and 3-year Pakistan Investment Bonds (PIBs).
According to financial experts, there are two causes for the increase in the rate of financing for the government: First off, contrary to market expectations of a 200bpt increase, the central bank aggressively increased its key policy rate by 300 basis points (bpts) to 20% during a meeting last week. Second, the sharp increase in interest rates signals that the market expects another increase of 50 to 100 basis points at the upcoming central bank meeting on April 4, 2023.
But, if the government is successful in resuming the IMF plan, one analyst predicted that the central bank will decide to keep the rate at its current level before the upcoming Monetary Policy Committee.
The rupee’s previous three-day winning streak came to an end on Wednesday in the interbank market as it fell 0.45%, or Rs1.25, to the second-lowest level in its history at Rs279.12.
According to the central bank, the rupee-dollar exchange rate also reached an all-time low last Thursday at Rs285.09.