KARACHI: The government on Wednesday increa­sed the returns on the long-term Pakistan Investment Bonds (PIBs) up to 42 basis points despite no change in the policy interest rate. It raised Rs84.3 billion through action of PIBs (fixed rate).

Higher returns encourage the banks to increase their investment in the long-term government papers.

The government raised Rs28.75bn for three-year tenure against bids of Rs42.75bn. The cut-off yield for these PIBs was increased by 42 basis points, highest increase in the auction. The cut-off yield rose to 9.41 per cent compared to 8.99pc in the previous auction.

The government raised highest amount of Rs35.55bn for five-year PIBs at the return rate of 9.9pc. The rate was increased by 31 basis points compared to previous rate of the five-years PIBs.

For the benchmark 10-year PIBs, the government raised Rs20bn at the cut-off yield 10.289pc; an increase of 24 basis points. The cut-yield was 10.05pc in the previous auction.

Bankers said the cut-off yield was increased due to higher inflation which makes the returns negative or extremely low. The average CPI in the eight months — between July and Feb­ruary decreased from last year’s 11.71pc to 8.25pc this year.

The month of February witnessed the inflation high as it edged up to 8.7pc from 5.7pc in January.

Banks are increasingly investing into PIBs which are risk-free and high-yielding. The total investment in PIBs is more than Rs14 trillion.

Experts be­­lieve that 10.28pc returns on 10-years PIBs is highly att­ractive for foreign investors.

The present government has stopped borrowing from the State Bank as per the agreement with the Inter­national Monetary Fund and is compelled to borrow from the local market.

However, some bankers said the government is encouraging for long-term investment for which it has been offering higher yields. The long-term bonds would help the government to avoid outflow of liquidity each year with the maturity of the bonds.

Since the foreign investments are also expected to buy PIBs, the government would get more liquidity needed to meet its fiscal deficit. In term of rupees the foreign investment in PIBs reached Rs21.6bn so far.

Analysts said if the inflation comes in the range of 7-8pc for the next two years, the current PIBs rates would be highly attractive for both the domestic and foreign investors. Since most of the investments in PIBs are made by the banks, the financial circle believes the banks would find it more attractive with low inflation.

Presently the banks are facing over liquidity like situation as deposits have gone up during the current fiscal year. The banks find it hard to use the liquidity for higher yields. Bankers say the lending to private sector has increased but the size of liquidity available with the banks are much larger which means the government could raise more through PIBs.

Published in Dawn, March 4th, 2021