Search
Business

Falling T-bill returns may signal trouble ahead

Ibraheem Sohail

Dec 24

Foreign investors are disinvesting in Pakistan’s Treasury bills (T-bills) as returns have been shrinking steadily over the past few months. The returns on T-bills have been declining as The State Bank of Pakistan (SBP) has been slashing interest rates.

 

Interest rates reached a staggering 22 per cent last year as the SBP desperately tried to control the ever-rising inflation rate. However, with inflation rates sitting at a comfortable 4.9 per cent, the SBP has cut back its policy rate to 13 per cent. This has resulted in a nine per cent fall in the returns to T-bill holders.

 

Foreign investors purchased a large volume of T-bills when interest rates were high, bringing millions of dollars into Pakistan. As per Dawn News, however, the falling interest rates have resulted in foreign investors withdrawing 64 per cent of their investments from Pakistani T-bills.

 

The cumulative outflows from T-bills stood at 550 million dollars, which will undoubtedly ring alarm bells in Islamabad. The government cannot credibly rely on T-bills to fund the federal budget if investors choose to withdraw their money in such large volumes.

 

With investors unwilling to buy T-bills, the possible measures taken by Islamabad to plug the gap between expenditures and inflows in the federal budget might cause issues for businesses. Business owners could face the consequences in the form of higher taxation as the government might find itself strapped for cash.

 

More concerningly, the government might resort to borrowing funds from local banks, which could crowd out private investments. This is because the private sector might not be able to secure loans if the government is borrowing vast amounts of funds from local banks.

 

Rising taxes could reduce profit margins for businesses, while a decline in the availability of credit might hurt business growth as businesses will be unable to secure funds to expand their operations.

 

The rupee might experience devaluation, with foreign investors finding alternative destinations for their funds where returns are higher than those of Pakistan. A weaker rupee is unable to procure a high level of imports. While this does reduce the trade deficit, which Islamabad can hail as a victory, it spells bad news for manufacturers who rely on imported goods to produce final goods.

 

The declining value of the rupee for these manufacturers translates into lower profit margins as their input costs have risen. These business owners will have to make the tough choice of either passing on the higher costs to customers to maintain their profit margins or absorbing the higher prices, reducing profitability instead.

 

While falling interest rates have reduced rates, the SBP and the Government of Pakistan could still take steps to reduce T-bill outflows. Authorities could ease restrictions on the repatriation of T-bill returns in order to incentivise foreign investors to reinvest once their T-bills mature.

 

Moreover, attempting to increase political stability will portray Pakistan as a low-risk destination for foreign funds. As it stands, though, Islamabad is making an active effort to reinstate political stability as talks with Pakistan Tehreek-e-Insaaf (PTI) have begun.

 

Outflows from T-bills of such a large magnitude are concerning, and it will be interesting to see what the SBP does now to counteract these rising outflows.

Related


Read more