ISLAMABAD, 7 June 2004 — Interest rates in Pakistan have started moving up, ending their historic lows, as private sector credit offtake rises, and a higher — seven to eight percent — GDP growth is aimed at.
The recent increase in government paper yields signals that interest rates by commercial banks will start moving up in the months ahead, and there may be no return to the present low-interest environment.
The evidence that the State Bank of Pakistan (SB), the central bank, is beginning to somewhat give up its easy money policy, was seen this week, when it allowed higher yields on government’s long-term Pakistan Investment Bonds (PIBs), and short-duration Treasury Bills (TBs) in open auctions.
SPB raised the yield on PIBs between 41 to 68 basis points (bps). The yield on 3-year duration PIBs rose to 4.35 percent a year as compared to 3.77, and on 5-year PIBs to 5.35 percent compared to 4.9007 percent, and on 10-year bonds to 7.36 percent, compared to 6.4903 percent in the last auction in April. The three, five and ten-year bonds, respectively, carry annual coupons of six, seven and eight percent. SBP raised the yields on the government’s 6-month Treasury Bills (TBs) in the last auction on May 26, by 39 bps.
In this way, it signaled to the financial markets and the banks that interest rates are going to rise, and the central bank is partly stiffening its easy money policy to counter rising inflation, fomenting severe criticism of the government, that for four years had prided on, what it claimed to be “the lowest inflation rates in three decades.”
“The higher yields SBP offered in these two auctions, have made the future-and higher-movement of rates very clear,” a senior banker said. The results of the auctions immediately led to an increase in the yields in the secondary market. “All these events mean only one thing-higher interest rates are now coming” said a senior official of a big foreign bank.
Besides higher PIB and TB yields, a third signal from SBP for higher lending rates came again from the central bank. Effective June 1, it raised the Export Refinance Facility rates from 1.5 to 2.0 percent — the first raise in ten months. SBP provide export refinance to banks at subsidized rates — that successfully boosted exports in the last years. The banks are allowed to add a maximum of 1.5 percent as their own spread.
