Nov 10 - 16, 2008

During recent T-Bills auctions, SBP has accepted bids 3month T-Bills worth Rs. 53.57 billions at cut-off yield of 13.5313% (up by 97 bps from previous yield), which is more than SBP's Discount rate. According to historical data, for the last 10 years, there were only 3 occasions when the 3-month T-Bills rates have crossed discount rates by 240 bps on average. It is interesting to note that the SBP discount in all those occasions was increased within 2 to 3 weeks.

This indicates very high likely hood that further monetary tightening is being considered by SBP. The market analysts are expecting further hike of 200 bps or more. Some analysts expect the announcement very soon i.e. in this month of November 2008.


The world is moving towards fighting deepening recession by reducing discount rates and making life easier for investors, manufacturers and buyers, but Pakistan seems more concerned about its liquidity problem. Pakistan will be one of the countries which have taken the painful step of increasing the discount rates to confirm to the IMF conditions.

The government of Pakistan badly needs IMF assistance followed by strict terms and conditions which Pakistan has to accept. The acceptance to IMF terms is being witnessed in Government actions, where they are implemented phase by phase to avert any political mismatch.

Firstly the Government removed subsidies from oil products, and then reduced subsidies on electricity and now moving forward to reduce developmental expenditure and increase SBP discount rate. The last two measures will hamper economic growth which may fall bellow 3%.


The effects of the discount rate hike are wide spread as this will obviously push KIBOR rates upwards, resulting in higher banking spreads but will definitely the quality of assets as those will now be discounted at higher market rates.

The recent banking sector spreads have hiked by 29 bps to 7.49% and the spread fresh loans has increased by 127 bps to 5.69% in September 2008. The banking sector will benefit the move in one way that it will be enjoying higher rates of return but on the other hand growing recessionary pressures will hamper their business activities. They will loose retail sales and will face credit and default risk problem from corporate ventures.

7-Jan 11.18 3.72 7.46 8-Jan 11.26 4.19 7.07
7-Feb 11.29 3.82 7.47 8-Feb 11.23 4.17 7.06
7-Mar 11.29 3.92 7.37 8-Mar 11.26 4.17 7.09
7-Apr 11.3 3.92 7.38 8-Apr 11.33 4.18 7.15
7-May 11.32 4.02 7.3 8-May 11.55 4.21 7.34
7-Jun 11.33 3.98 7.35 8-Jun 11.96 5.18 6.78
Average 11.29 3.9 7.39 Average 11.43 4.35 7.08

6-Month KIBOR rates are hovering at above 15% rates and are expected to touch 16.5% during the current month. This will increase cost of doing business as the market rates are linked to KIBOR rates.

This may also have elevated negative impacts on money market mutual funds too as their Mark to market losses will increase. This is evident from recent SECP move where TFCs have been ordered to be discounted by 5-30 percent depending on their ratings. The move has resulted in around Rs. 100 million losses for each income fund in the industry.


The continuously hiking interest rates, reducing liquidity with individuals and higher cost of doing business have hampered economic activities in Pakistan pushed inflation to the skies.

CPI inflation rates are floating at and above 25%, food inflation at more than 32%. The inflation is said to be demand pull inflation in Pakistan and the reduction in monetary aggregates will pull the inflation down wards.

The monthly data for monetary aggregates released by the SBP indicates that growth in monetary aggregates is declining. Broad Money (M2) growth has come down from the high of 19.9%YoY in Nov'07 to 15%YoY in Jun'08. On the other hand, Currency in Circulation (CiC) growth has declined marginally from its high of 18.1%YoY in Feb'08 to 16.9%YoY in Jun'08. The analysis based on demand pull inflation, the inflationary pressures will easy with the reducing monetary aggregates.

But in some analysts opinion some part of the inflation here is cost push. Our manufacturing and production industry is not much mature. It heavily relies on borrowing which is the real cause of increasing interest payments. While on the other hand reducing commodity prices in international market will easy raw material prices which will ease inflationary pressure, but before taking any impact of expected discount rate hike.


Due to expected discount rate hike and resulting discounting asset values, we expect the inflation pressure to continue in Current Year 08 and will ease during 2Half of financial year 2008-09.

The loan from IMF and friends of Pakistan will release liquidity in the markets and the markets will start functioning towards their previous normal growth but the process will take a good amount of time.

State Bank of Pakistan seems on its toes to address liquidity problems and has taken some bold measures like reducing CRR to 5% and reverting 100% export refinancing.

The future doesn't seem bleak but needs some time & energy and better planning at Government front to quicken the reconciliation process to its normal.