KARACHI: Investment in government papers, mainly dominated by the banking sector, set new record as it crossed Rs10 trillion-mark.
The State Bank of Pakistan (SBP), in its latest report released on Monday showed that banks and non-banks including corporate sector investments in the government papers reached Rs10.3 trillion by the end of August. The major chunk of these investments came in the short-term papers.
Banks’ investment reached to extraordinary levels at Rs7.94tr reflecting their investment strategy to book maximum profits while investing in risk-free instruments and made up for 77.1 per cent of the total investments whereas the rest came from non-banks including insurance companies, funds and corporate sector amounting at Rs2.361tr.
In addition, the World Bank in its latest report commented that the strong short-term deposit mobilisation, due to recent increases in policy rates, has been utilised for investments in government securities.
The banking sector’s strategy changed from investing in long-term instruments ie Pakistan Investment Bonds (PIBs) to short-term Treasury bills.
The high interest rate has been the major driver for this direction as the banking sector is comfortable with high-yield short-term risk-free investment. However, the trend has crowded out the private sector.
The banks invested Rs5.589tr in the short-term T-bills until Aug 31. Moreover, in the auctions held after Aug 31, the continuing trend to invest in T-bills indicates that high interest rates have encouraged banks to park their liquidity in government papers.
Banks’ share of T-bills constituted 87.2pc of the total investments while those of non-banks reached 12.8pc or Rs820.8 billion.
In the high interest rate scenario, the T-bills have elbowed out PIBs as a relatively attractive investment option. The PIBs lost attraction since the returns on the short-term papers have risen to same levels as the return on PIBs while the banks found it hard to mobilise long-term deposits.
Bankers say that while the interest rate is still not stable and is directed by the movements in inflation, mobilising long-term deposits is almost impossible.
Banks also invested Rs62.5bn in Sukuk Islamic bonds while the non-banks’ investment were at Rs8.5bn.
They said that rising short-term domestic debts would remain a major hurdle for the government to stabilise the country’s debt-to-GDP ratio whereas the debt vulnerabilities would prevail.
Investments by the banking sector in government papers has already deprived the private sector to borrow additional funds.