In April 2024, the amount of money borrowed by the government through treasury bills witnessed a substantial decline compared to the preceding month of March.
During March, approximately 22.2 billion cedis were borrowed through five auctions. However, this figure experienced a significant drop to 13.2 billion cedis in April which had four auctions, marking a drastic 68% reduction in the amount borrowed through treasury bills.
Furthermore, interest rates on all treasury bills declined during this period. For instance, the benchmark 91-day treasury bill saw a decrease from nearly 27% (26.9988) at the start of March to 25.54% by the end of April.
Reasons Behind the Decline
Several factors have been attributed to the considerable drop in government borrowing from treasury bills. One key factor is the government’s diminished interest in heavy borrowing from this avenue, primarily because it had raised sufficient funds in the first quarter of the year.
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Kodzo Dziwornu Letsa, Trade Analyst, Fixed Income, Currency & Commodities, told The Accra Times that the government is now borrowing just enough to cover maturing treasury bills “Using last week’s auction as an example, gov’t raised GHS 3,110.79 across all tenors as compared to a target of GHS 3,341.45, recording a shortfall of about 7%, in comparison to total maturing T-bills of about GHS 3,268. Comparing the raised volume of GHS 3,110.79 and the maturing volume of GHS 3,268, there’s a shortfall of about GHS 157.21 which I believe the government covered with funds from previous auctions which were over-subscribed”.
Additionally, there has been a decrease in demand for treasury bills. Despite the government’s reduction in the amount, it intended to borrow through these bills since April, it still struggled to meet its targets in all auctions except one. Market observers speculate that this decline in demand could be partially attributed to a new directive from the Bank of Ghana.
In its recent Monetary Policy Committee Meeting in March, the Bank of Ghana adjusted the Cash Reserve Ratio (CRR) percentage for banks based on their Loan to Deposit ratios. This directive might compel banks to reduce their purchases of treasury bills to bolster their reserves in compliance with the new requirement.
Another plausible reason for the significant decrease in government borrowing through treasury bills is the International Monetary Fund (IMF) bailout programme. As part of this programme, the government is expected to refrain from excessive borrowing and work towards lowering interest rates.
Anticipated Continued Decline in Interest Rates
Market observers predict a continued decline in interest rates on treasury bills for two primary reasons. Firstly, the reduction in government borrowing and secondly, the introduction of pricing guidance. These guidelines mandate that investors can only quote interest rates within a specified range, thereby preventing them from quoting higher rates.
“Over the past 3 months, we’re seeing T-bill rates steadily drop. We can attribute this to Gov’t’s new strategy of issuing a Pricing Guidance to the primary dealers on the fixed income market to further advice investors on what rates the government is looking to mop up funds at. It comes as no surprise as rates have been dropping by 25 basis points on the average for all tenors (i.e, 91, 182, 364-day T-bills) because the government literally decides on these clearing rates as opposed to rates being settled on by market forces (demand and supply)”, Mr. Letsa further stated.
The government stands to benefit greatly from the declining interest rates, as it borrows at rates significantly lower than those at which maturing treasury bills were sold.
However, the looming threat to this declining trend in interest rates is the pressure on the government during election seasons to complete various projects. Any decision to resume heavy borrowing for infrastructure projects could potentially lead to an increase in interest rates once again.
