Central bank pumped a huge sum of Rs329 billion, in local banking system which after drying up of foreign financing had appeared to be the only source that was catering the funds-starved government’s budgetary expenditures. Central bank, in its monetary policy decision on Wednesday, said it had no option but to keep injecting “substantial liquidity” in the currency market to help banks cater prevailing demand for money, the main user of which, State Bank said, was the government. It said by the 28th of last month (November), outstanding amount of liquidity injected by central bank aggregated to Rs340 billion. And that excludes issuance of Rs391 billion government securities to settle lingering circular debt and commodity loans, cash-strapped government had borrowed Rs317 billion from SBP as well as scheduled banks during a period ranging from 1st July to 18th November this year. “In this context where government is the main user of the system’s liquidity and banks remain hesitant to extend credit to the private sector, SBP faces a dilemma,” conceded the regulator.
Bank said any effort to scale down liquidity injections could have implications for settlement of payments in the inter-bank market, which was an important consideration given SBP’s mandate of maintaining financial stability. Friday saw SBP injecting another Rs329 billion in the rupee market at 11.59 per cent rate of return. Fresh liquidity money was injected by the regulator through conducting its reverse repo open market operations in market treasury bills and Pakistan Investment Bonds of 7-day maturity.
Scheduled banks still remain risk-averse, as State Bank called them, and prefer investment in risk-free government papers instead of extending advances to growth-oriented private sector. Banks in Friday’s auction offered bids of Rs373.500 billion but SBP accepted bids worth Rs329 billion. Rate of return for SBP’s reverse repo operations is constantly increasing with current operation seeing the regulator central bank setting it at 13.35 per cent against 13.26 per cent and 13.22 per cent of the previous operations. Quotation range for current injection ranged between 11.71 per cent and 11.58 per cent, State Bank reported.
About its money injection operations, central bank said, the same was significantly higher than normal and appeared to have developed characteristics of a permanent nature at this point in time. The bank said marginally increasing trend of these liquidity injections also carried inflationary risk which was not consistent with the objective of achieving and maintaining price stability.
