KARACHI – The rupee blockade in the face of non-performing loans (NPLs) and the government’s focus on borrowing from the scheduled banks has created a liquidity crunch in the local money market. The State Bank of Pakistan (SBP), for this reason, had to inject over Rs 92.35 billion into the banking system in only 16 days during the current month.
The central bank injected Rs 32.6 billion, Rs 19.95 billion, Rs 33.85 billion and Rs 5.95 billion on the sixth, 15th, 17th and 21st of January respectively. The State Bank instilled this money in the inter-bank market by offering four, six, seven and eight days reverse repo in the Government of Pakistan Market Treasury Bills and Pakistan Investment Bonds at a rate of return ranging from 12.81 to 12.85 percent.
The offers in the respective four auctions amounted to Rs 45.6 billion, Rs 33.7 billion, Rs 42.5 billion and Rs 28.25 billion, aggregating to over 150 billion. Contrarily, the State Bank had injected only Rs 34.1 billion in December for MTBs and PIBs of six-days reverse repo. “We only inject the money when they (banks) need it,” SBP chief spokesman Syed Waseemuddin said.
Analysts believe that an increasing trend in the real inter-bank overnight borrowing rate was indicative of the fact that the inter-bank market was falling short of the rupee. Analysts viewed that inter-bank rates of 12.7 and 12 percent on last Saturday and Thursday were “extremely high”, hinting that there was a slight shortage of liquidity in the money market.
Liquidity crisis, analysts viewed, was natural given the fact that no fresh liquidity through public savings and other means was coming to the banking system. Money in circulation is already blocked in the face of NPLs and government borrowings.
“The money circulation process is not completing and is ultimately blocking in the face of banks non-performing loans,” Azfar Bin Shahid told Pakistan Today. Citing reasons for ever-increasing NPLs, the analyst said that soaring inflation had eroded purchasing power of the buyers that had reflected negatively on the demand for saleable stocks, a major chunk of which was lying unsold. “The borrowers are not able to generate the capacity to repay the bank loans,” A B Shahid said. He said that market players might find carrying out currency swap deals hard and would depend on the central bank to cater their dire rupee need.
Market dealers are also said to have been wary of the rupee shortfall due to higher outflows mainly going to the funds-strapped government that is now said to have shifted its borrowing focus to the banks other than SBP. The rupee in the inter-bank market appears to be strong nowadays due to a record inflow of workers’ remittances that amounted to $5.3 billion during first half of the current financial year. The country’s foreign exchange reserves have also hit an all time high of Rs 17.28 billion during the week ending on January 15. The recent inflow of $633 million under US’ Coalition Support Fund is another indicator that augurs well for the rupee and its dealers in the country. Analysts foresee that reimbursement of a further $500-700 as war expense during the second half of FY2010-11, would further rid the crises-hit country of its woes emanating from currency exchange rate and balance-of-payment.
Govt borrowing pushes money market towards liquidity crunch
