Is SBP losing its marbles?

Sometimes there isn't a conspiracy. It is just plain old boring incompetence.

Dec 1, 2021

In the Nov 19 debt auction, bids for 6 month tenors were all below 10.2 percent and they rejected them all. Today they lifted Rs111 billion at 11.5 percent.

I will let the internet speak on this one. Ali Khizar’s MPS comes early, carried a punch. I have broken the paragraphs down into a separate lines, as Ali is raising very valid points and I didn’t want to highlight the whole paragraphs. Each line merits contemplation.

The monetary policy decision is today. The committee meeting has been preponed by a week in light of recent developments in the currency movement.
The question is: what are the unforeseen developments that could not have waited for (even) a week?
There are no visible uncertainties due to monetary policy in the capital market (both money and stock) to pressurize SBP to call the meeting earlier.
And there is no primary auction in the next week which could have enticed SBP to call the meeting earlier.
In fact, day before yesterday, a T-bill action took place and almost all market (competitive) bids were rejected.
Had the SBP not announced policy review earlier, there could have been some interest in 3M papers. The government accepted mere Rs500 million in the 3M paper at the previous auction’s cut-off yield.
The government was lucky to get Rs55 billion in non-competitive bids in 3M. Government got nothing in the 6M and 12M papers.

Let’s revisit the timeline

Nov 16: SBP announced that the next MPC will be held on Nov 19 instead of Nov 26.
Nov 18: SBP T-Bill auction. All 6M bids are rejected at 10.2%.
Nov 19: “Preponed” MPC is held.
Nov 20-Nov 25: No auction etc. is planned or held for this period.
~~Nov 26: MPC as per the original TL~~
Dec 1: T-Bill auction. Rs.110 billion 6M bids are accepted at 11.5%

The bolded bullet is highlighting that bringing forward the MPC from Nov 26 to Nov 19 isn’t achieving anything. However, by making the announcement on Nov 16, SBP laid the groundwork for the failure of the November 18 auction.

Unless SBP was planning a reduction in policy or if the planned increase in policy rate was less than the market expectation, the smart thing would have been to accept all the 6M and 12M bids on November 18. And yet, SBP rejected all the bids. Afterwards, after making an unexpected higher than anticipated increase in the policy rate on Nov 19, SBP accepted all the bids for the exact same amount in the subsequent auction on December 1.

It appears that SBP didn’t want the highly profitable commercial banks who have the majority of their assets tied up in government lending to incur even a small loss on revaluation of the 6M T-bill.

The below comment is in jest, but it is easy to run with it.

Uzair Younus عُزیر یُونس @UzairYounus

@2paisay TV shows pe debate: "kya yeh aik sochi samjhi saazish hai jis k tehat banks mein doston ko nawaza gaya, aur mulk ko maqrooz kya gaya?"

How much will this SBP tactic, if one can call it a tactic, would cost the Government of Pakistan?

The 6M auction amount is the same as was planned for November 18 i.e. Rs.111 billion. But now GoP will be paying 1.2% extra on this amount (11.5%p.a. instead of 10.2% p.a.)

Thus, GoP will be paying Rs.666 million (Rs.111 billion x 1.2% for 6 months) as an additional interest expense to the commercial banks.

Any other time and this would be scandalous considering that one, there was no reason to bring forward the MPC, and two, there was no reason to reject the bids if the plan was for an unexpected rise in the policy rate.

Who is going to bear this additional cost of Rs. 666M?