KARACHI: The investment in government papers, mainly dominated by the banking sector, set a new record by crossing Rs10 billion mark.
The State Bank of Pakistan (SBP), in its latest report published on Monday, showed that banks and non-banks, including corporate sector investments in government documents, reached Rs10.3 billion at the end of August. Most of these investments occurred in short-term documents.
The banks' investment reached extraordinary levels at Rs7.94tr, reflecting their investment strategy to obtain maximum profits while investing in risk-free instruments and accounted for 77.1 percent of total investments, while the rest came from non-entities. banking, including insurance companies, funds and corporate sector amounting to Rs2,361tr.
In addition, the World Bank in its latest report commented that the strong mobilization of short-term deposits, due to recent increases in interest rates, has been used for investments in government securities.
The strategy of the banking sector changed from investing in long-term instruments, that is, Pakistan Investment Bonds (GDP) to short-term Treasury bills.
The high interest rate has been the main driver of this direction, since the banking sector feels comfortable with high-yield investment in the short term and without risks. However, the trend has displaced the private sector.
The banks invested Rs5,589tr in the short-term T letters until August 31. In addition, at auctions held after August 31, the continuing trend of investing in T letters indicates that high interest rates have encouraged banks to park their liquidity on government papers.
The participation of banks in T-bills constituted 87.2 percent of total investments, while those of non-banks reached 12.8 percent or 820.8 billion rupees.
In the scenario of high interest rates, T-bills have ruled out GDP as a relatively attractive investment option. The GDP lost attraction as the yields of the short-term papers have increased to the same levels as the yields of the GDP, while the banks found it difficult to mobilize long-term deposits.
Bankers say that while the interest rate is not yet stable and is driven by inflation movements, mobilization of long-term deposits is almost impossible.
The banks also invested Rs 62.5 billion in Islamic Sukuk bonds, while non-bank investments were Rs 8,500 million.
They said that the increase in short-term domestic debt would continue to be a major obstacle for the government to stabilize the country's debt-to-GDP ratio, while debt vulnerabilities would prevail.
The investments of the banking sector in government documents have already deprived the private sector of requesting additional funds.
Posted on Dawn, October 15, 2019
Source: https://www.dawn.com/news/1510910/investment-in-govt-papers-reaches-record-rs103tr