B Mirror Desk : Government borrowing costs may rise in the last quarter of this fiscal year due to increasing yields on sovereign securities, as anticipated rate hikes loom. Economists and bankers suggest that yield pressures could intensify, even though the borrowing target for the April-June period is not expected to see a significant increase.
On Tuesday, the government announced its auction schedule for the fourth quarter of the fiscal year 2024-25, planning to borrow Tk 1.42 trillion through the banking sector, marking an almost 8.0 percent rise.
Typically, banks in the country depend on repo borrowing to address immediate liquidity needs and finance their investments in government securities. However, the central bank has declared the termination of the 28-day repo facility effective April 10.
Bankers have observed that following the issuance of this circular, yields on both treasury bills and bonds began to trend upward in the recent auctions held on Sunday and Tuesday.
The cut-off yield for the 15-year Bangladesh Government Treasury Bond (BGTB) increased to 12.28 percent from 11.36 percent, while the yield on the 20-year BGTB rose to 12.54 percent from 12.05 percent, as indicated by the auction results.
Additionally, the results reveal that the cut-off yield for the 91-day T-bill climbed to 10.90 percent from 10.75 percent, and the yield for the 182-day T-bill increased to 11.25 percent from 10.90 percent.
Syed Mahbubur Rahman, Managing Director and CEO of Mutual Trust Bank, stated that yields may rise due to liquidity pressures in the market. However, he emphasized that “banks with robust liquidity positions would not encounter significant challenges and would invest accordingly.”
Md. Shaheen Iqbal, the deputy managing director of BRAC Bank, which focuses on small and medium enterprises, stated to FE that there is a direct correlation between the cessation of repo operations and investments in government securities. He anticipates that this could lead to an increase in treasury yields, thereby raising the costs associated with government borrowing.
From July to December of the current fiscal year, interest payments from the government totaled Tk 625.6 billion, which represents over 55 percent of the budget allocation. Out of this total, Tk 535.38 billion was allocated for domestic borrowing, making up approximately 58 percent of the budget estimate.
Mr. Iqbal warns that if the central bank decides to eliminate another repo facility in July, it could further constrict market liquidity. The central bank is considering phasing out an additional repo option starting in July to enhance interbank transactions.
He notes that the current outstanding amount under the repo facility in the banking sector is about Tk 700 billion. The removal of one of these instruments could significantly decrease this figure, potentially halving it to Tk 350 billion.
At present, there are three available repo tenures: 7-day, 14-day, and 28-day, with the 28-day repo set to end on April 10.
Domestic borrowing is primarily composed of three key elements: instruments from the National Savings Directorate (NSD), treasury bills and bonds, and Sukuk (Islamic bonds). The government secures 62 percent of its required funds from the banking system through treasury bills and bonds, 36 percent from NSD instruments, and the remaining 2 percent from Sukuk or shariah-compliant instruments. Prize bonds, which are government-issued lottery bonds, do not yield any interest payments.
According to data from the central bank, by the conclusion of the fiscal year 2023-24, the total outstanding government borrowing was Tk 5.81 trillion through treasury bills and bonds, Tk 3.41 trillion from NSD instruments, and Tk 190 billion from Sukuk.
