Pakistan to initiate PKR 500 billion debt buyback program on Monday

For the first time, the Pakistani government will initiate a buyback of PKR 500 billion ($1.8 billion) worth of Treasury Bills (T-Bills) on Monday.

This move, under the newly announced Buyback & Exchange Program, aims to purchase both T-Bills and Pakistan Investment bonds from the secondary market, offering an exchange crucial for the program's success, especially in light of current liquidity levels in banks.

The debt buyback auction on Monday will target the buyback of T-Bills maturing in December 2024. The government had previously sold half of these securities at cut-off yields of 19.97%, and the other half at 21.43%. With current yields now below 15%, market participants may find the incentive to sell the higher-yielding securities attractive.

Nukta spoke to Shahbaz Ashraf, the Chief Investment Officer of FRIM Ventures, an investment firm for further insights on the development.

Why did the government announce this plan?

With 1-year T-Bills declining from 23% to around 14% and 10-year bonds dropping from 17% to 12.7%, this suggests a faster-than-expected easing of interest rates. The buyback is expected to enhance liquidity in the money market, further reducing yields and improving the government's debt profile.

How will it impact the broader economy?

By repurchasing its own debt, the government aims to optimize its debt structure, potentially lowering its overall debt burden. Analysts note that this strategy reflects confidence in the country's fiscal position, benefiting both short-term money market operations and long-term fiscal sustainability. Additionally, lower yields may signal greater investor confidence and could encourage more private-sector investment, which would stimulate broader economic growth.

Notably, the State Bank of Pakistan (SBP) reported a record profit of PKR 3.4 trillion ($12.24 billion) for the fiscal year 2023-24, up significantly from PKR 1.1 trillion the previous year. A portion of this profit could be allocated to support the buyback program.

With 60% of revenue currently allocated to debt servicing, this program aims to repurchase expensive debt at more favorable rates, reducing interest expenses and providing the government with greater fiscal flexibility. However, analysts suggest that frequent and sustained buybacks will be necessary to achieve meaningful interest expense savings. The government is also expected to reduce its reliance on open market operations through this initiative.