Borrowing binge squeezes liquidity from money market

Excessive budgetary borrowing by cash-strapped federal and provincial governments have created what sources in central bank have confirmed a severe liquidity crunch in the local money market.

Rupee Scarcity

The scarcity of rupee in the banking system is believed to have been so compelling that the State Bank of Pakistan (SBP) has only been injecting liquidity into the money market during the whole quarter of this financial year, 2011-12. The SBP press communiqués show that between 17th July and 28th October, the central bank pumped a huge sum of over Rs3.204 trillion into the rupee-starved banking system. The SBP injected this huge amount through conducting some 25 reverse repo operations, the annual rate of return for which ranged from 11.47 to 13.24 per cent. It was some four months back, when the regulator had conducted its last mop-up operation and had mopped up the excess liquidity worth Rs34.500 billion from the money market at 12.04 per cent annual rate of return. Since then the commercial banks have constantly been short of money due to, what a central banker said, excessive government budgetary borrowings from them. “The liquidity crunch is due to the government borrowing from the commercial banks,” a central bank informed Profit.

Govt borrowing

According to the SBP data, during the first three and half months of the current fiscal year, the funds-starved government’s borrowing from the scheduled banks increased significantly by 2.757 per cent or Rs258.349 billion to Rs267.720 billion. SBP, during the same period, July-October, in FY11, had calculated the government loans from the commercial banks at Rs9.371 billion only. Whereas the government’s borrowings from the State Bank have shrunk to almost zero as it still maintains a credit balance of Rs45.751 billion in its deposits with the SBP. During this period last year, the resource-constrained government had withdrawn Rs181.899 billion from the central bank. The sources at SBP indicated that the government, by relying heavily on commercial banks for its ever-increasing budgetary expenditures, was responding positively to the constant warnings from economic observers against borrowing from State Bank that are inflationary in nature.

Borrowing shift

Though easing, inflationary pressures in the country are still haunting the poverty-stricken masses with critics asking the regulator for rational behind its recent “unexpected” 150 basis points cut in its interest rate for October-November (FY2011-12). However, when contacted the SBP chief spokesman Syed Wasimuddin said the reverse repo operations were always aimed at catering the rupee shortfall in the banking system. “The shortage is due to more withdrawals from the banks,” the spokesman replied without elaborating withdrawals by whom. Friday again saw the State Bank injecting over Rs216.60 billion into the money market at 11.47 per cent rate of return. The analysts believe that the government’s borrowing shift from the central to the commercial banks was not only depriving the growth-oriented private sector of bank finances but also making the banks’ risk averse. The State Bank statistics reveal that from 1st July up to 14th October the private sector loans from the banks remained downward as during the period under review the private borrowers’ credit balance with the banks increased to Rs81.144 billion against Rs41.824 billion of the corresponding period in FY11. The economic observers expect a significant upset in the government fiscal targets for FY12 amid depleting financing from abroad, with the International Monetary Fund (IMF) still in no mood to release the remaining $3.1 billion of its $11.3 billion Standby Agreement of 2008.