Govt demand for credit picks up

Dealers said interest rates could increase as the government continues to demand for short term credit from the domestic market but are confident interest rates would not be allowed to pickup significantly as the government’s policy is to stimulate economic activity through private sector participation.

"The three month and six month Treasury bill rates have been inching upwards for quite some time. This is an indication that the government is demanding for short term credit. We expect market interest rates to pickup as well, but it would not be a significant change," a dealer said.

At this week’s Treasury bill auction to primary dealers, the rate on the three month bill moved up to 8.26 percent from 8.17 percent a week ago. The six month bill rate moved to 9.06 percent from 9 percent while the rate on the twelve month bill closed relatively flat at 9.47 percent from 9.46 percent a week ago.

Primary dealers had submitted bids amounting to Rs. 22.2 billion of which the Public Debt Department of the Central Bank accepted bids amounting to Rs. 13.5 billion.

Dealers said the money market continued to be high on rupee liquidity at Rs. 21 billion last Thursday.

"We are still not seeing credit pick up much. We are still looking for quality lending and there is hardly much coming our way," a dealer said.

The dollar was trading around the Rs. 114.45/50 on Thursday. Dealers said a large importer bill through a foreign bank had put buying pressure on the dollar. "We expect the Central Bank to intervene and restore some balance," a dealer said.

According to available data, the budget deficit had reached 8.4 percent of GDP for the first ten months of 2009. There were concerns in the market that the government could miss the 7 percent IMF target for 2009. This year, the deficit target is 6 percent, and the Central Bank and other analysts have warned that unless there was fiscal discipline private sector credit growth could come under threat.

The IMF later on Thursday said that the budget deficit target has been overshot significantly, by 1 to 1.75 percent of GDP, and was therefore delaying the second tranche of the US$ 2.6 billion standby facility until it can evaluate the final numbers for government revenue and spending for 2009.

These figures would be included in a report being prepared by the Treasury which is expected to be released in a few weeks time. The IMF also wants to see what the new budget for 2010 would be like before making a final decision.

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