Pakistan's banks short-term debt strategy raises financing risks: IMF

February 04, 2025 (MLN): Pakistan,s banks preference for shorter-duration investments, such as Treasury bills and floating-rate notes, to mitigate interest rate risk is increasing the frequency of domestic debt rollovers, thereby elevating gross financing needs and associated risks, according to the IMF report titled "The Sovereign-Bank (Central Bank) Nexus in Pakistan."

With banks as the primary subscribers of domestic debt, their investment preferences significantly impact public debt management.

Their focus on short-term instruments positions them at the lower end of the yield curve, limiting the effectiveness of debt management strategies, the report added.

While issuing short-term and floating-rate debt helps avoid locking in high long-term costs, it necessitates frequent rollovers, further amplifying financing risks.

High fiscal deficits heighten the sovereign’s exposure to refinancing and interest repricing risks, raising concerns about public debt sustainability, the report noted.

In a stress scenario, this could trigger a vicious cycle of declining demand for government securities, reduced bank capacity to hold debt, shorter maturities, rising interest rates, and potential turmoil in the domestic debt market and financial system, with far-reaching consequences.

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