The funds-starved government because of its ever-burgeoning bank borrowings, is impounding the local money market with excess liquidity keeping the central bank busy. The government does not get tired of bringing excess money in circulation through seeking extensive budgetary support from the banking system and making a mockery of its own fiscal disciplinary rules. Meanwhile the central bank is busy trying to suck up access liquidity from the market.
There are some who claim that the central bank is using the mop-up operations as “an excuse” to gather funds to cater to the government’s soaring budgetary requirements.
The State Bank of Pakistan (SBP) through conducting increased mop-up operations had to take care of Rs375.15 billion in excess liquidity from the money market. “We conduct operations to mop up or inject money when there is excess or shortage of liquidity in the money market,” SBP chief spokesman, Syed Wasimuddin told Pakistan Today. The SBP spokesman was positive when asked whether or not the government’s ongoing spree of budgetary borrowings from central and scheduled banks was impounding the money market with excess liquidity.
According to SBP latest data show that the cash-strapped government’s aggregate borrowings from the banking system has skyrocketed by 75 per cent going from Rs312.716 billion to Rs7 29.382 billion during the first 11 months of the outgoing financial year 2010-11. “The government borrowings constitute one of the reasons for excess liquidity” in the local rupee market, the spokesman conceded.
And perhaps as a side-effect, these continued public loans from the banks were pushing the regulator, namely the State Bank, to conduct more and more Open Market Operations. “The government borrowings necessitate the mop up operations,” Wasimuddin said. The details of open market mop-up operations shared by the SBP with the media reveal that the State Bank conducted at least 14 open market operations during a three-month period ranging from April 22 to June 13, to mop up surplus liquidity from the money market. The State Bank mopped up Rs41.150 billion on April 23, Rs28 billion on April 25, Rs11.300 billion on April 26, Rs7.5 billion on April 27, Rs82 billion on April 29, Rs34 billion on May 4, Rs76.2 billion on May 6, Rs17.5 billion on May 7, Rs6 billion on May 11, Rs25.5 billion on May 13, Rs7.5 billion on June 6, Rs4 billion on June 10 and Rs34.5 billion a couple of days ago on June 13. The bank mopped up over Rs375.15 billion in total.
The State Bank mopped up Rs169.95 billion in the month of April, Rs159.2 billion in May and Rs46 billion in June against the respective offers of Rs243.25 billion, Rs224.45 billion and Rs73 billion. Increased offers from the banks are also indicative of the fact that there is surplus money in the rupee market, as during the period under review the banks, responding to SBP’s mop-up operations, came up with offers worth Rs540.7 billion.
Furthermore, said period saw the State Bank injecting Rs146 billion in the money market only, which is 61 per cent or Rs229.2 billion less than what the bank mopped up from the market. According to detail provided by the central bank to Pakistan Today, the SBP’s total outstanding amount under repo mop-up operations accumulated to Rs99.5 billion.
Maturity dates for the said amount are: June 16 and August 2, 2011. The regulator may be conducting more operations during remaining days of the outgoing quarter that would end on June 30. A widely-held perception suggests that the SBP has done away with the “inflationary” practice of printing new banknotes to fund the government’s ever-increasing budgetary expenditures. But, A.B Shahid, an analyst, does not buy this impression. “The State Bank has printed banknotes worth at least Rs 300 billion,” he claimed.