KARACHI, Dec 17: Banks have started shifting their investment to treasury bills, helping the government borrow from commercial banks.

It would help government avoid borrowing from the State Bank.

The treasury bills auction on Wednesday clearly reflected the controlled policy of the State Bank and government’s strategy to divert liquidity from private sector to treasury bills.

The SBP sold treasury bills worth Rs70.543 billion while the target was set for Rs70 billion which means the SBP succeeded in attracting banks’ investment.

However, banks were sill investing for short-term paper of three-month tenure. They bought three-month t-bills for Rs66.337 billion while the rest was invested for six months. No bid was offered for 12 months.

Before an agreement with the International Monetary Fund (IMF), the banks had lost interest in treasury bills, forcing the government to borrow directly from the State Bank which accelerated inflationary pressures on the country.

However, the SBP substantially increased return on t-bills after increasing the policy interest rate by 200 basis points to 15 per cent.

Now the three-month t-bills carry a cut-off yield 13.85 per cent providing safest investment opportunity to banks.

The State Bank has been persuading banks to invest in security papers to help the government raise funds.

As per an agreement with the IMF, the government is bound to bring SBP borrowings to zero level while it had already borrowed over Rs350 billion till October.

Last year the government borrowed Rs688 billion from SBP and central bank held the government responsible for high inflation, now reaching up to 25 per cent.

The banks’ investment in security papers would also solve the problem of higher monetary expansion and monetary inflation.

“If banks find investment in security papers attractive, it will automatically cut credit flow to private sector which is an essential part of the agreement with the IMF,” said a senior banker.

Less credit to private sector means less economic activity, and in turn less economic growth.

The SBP in its annual report predicted economic growth in the range of 3.5 to 4.5 per cent for the year 2008-09.

“Banks are investing in three-month t-bills keeping an option to reinvest after a further possible increase in the policy interest rate that would certainly increase cut-off yield on treasury bills,” said the banker.

Bankers believe that policy discount rate would increase by the next month as targets set by the IMF cannot be possibly achieved.

Bankers said that Pakistan cannot improve its Net Foreign Asset target which is still negative while the IMF wants it to bring a positive picture till the end of this month.

They said many indicators show policy interest rates would be increased and the return on t-bills would also be raised for attraction of banks’ liquidity.