SBP conveys regret over autonomy bill

Having shown what the sources called indirect regret over the recent legislation envisaged to make it more autonomous, the central bank is reported to have ended up in a situtaion to go nowhere.
The State Bank on one hand is deeply concerned over the federal government’s excessive budgetray borrowings from the banking sector that not only render the private sector crowded out but also make the banks risk-averse, while on the other the regulator finds itself in what sources called “horns of dilemma” over the liquidity issue facing financial markets.
“Liquidity has now taken the central position amongst all the key economic issues,” agreed the participants of the 2nd Discussion Forum held by the centra bank here at its head office on Thursday, Mar 15. Sources privy to the meeting said the State Bank itself seemed to be in a horns of dilemma over the liquidity issue the country’s financial markets are currently faced with.
While much of the cash is being sucked up by the funds-starved government from the banking system, the latter remains at a higher risk of plunging into a liquidity crunch where small banks would be more likely to fail, a situation that keeps the State Bank on its heels, pumping billions into the system almost every week.
Friday also saw the SBP pumping over Rs320.45 billion into the banking system at 11.55 per cent rate of return.
Moreover, official data reveal that the central bank as of February 29 raised over Rs3.815 trillion for the resource-constrained federal government through auctioning risk-free government securities including Market Treasury Bills, Pakistan Investment Bonds and Ijara Sukuk.
This fiscal indiscipline, coupled with huge under-materialisation of the budgeted financial inflows, renders the monetary policy ineffective, implicitly, it was agreed in the SBP meeting.
Despite this alarming situation, the sources said, the State Bank insisted on continued funding of the government’s widening fiscal deficit through injecting huge sums to be lent by the banks indirectly to the soverign borrower.
“The SBP said it will continue to fund government borrowing… as in case of no or stoppage of the injection, there would be extensive use of discount window,” the sources said.
The bank even was intent to pump amounts in coming months higher than that of the current Rs350 billion, they said. “The government needs more funding to bridge for non-materialisation of the planned inflows,” the sources said.
Also discussed in meeting was the formation of the bond market, as the launching of e-market platform was due anytime soon, for corporate as well as the government debt was accepted to lessen the rate, speculation and impact on interest rates.
Further, the SBP indirectly conveyed its regret over the SBP Autonomy Bill passed in the Senate after few “unwanted amendments” were made. “The bill largely stays biased towards SBP’s autonomy,” they claimed.
A rollover risk of Rs800 billion, the meeting observed, was piling up each quarter that wuold continue to be funded through increasingly higher borrowings.
The State Bank had no leverage to say no to the government’s borrowings and believed that its refusal would result in a forced majeure through the Parliament.
Also, the SBP took up positively the suggestions with respect to more transparency through more frequent and timely data releases, interaction with other policy departments, credit off-take improvement either through segment wise interest rates (dual interest rate policy one for the government and one for the private sector) to phase out crowding out of investment and building more distribution channels, said the sources.
They said the regulator mentioned comfort with the current account position so far, however, with rising risks are directly proportioned to oil prices and repayments, while another IMF program is not likely in the medium to short term.
The SBP continued to put its faith in materialisation of any foreign funding on account of Coalition Support Fund, 3G auction, Eurobonds, etc, said the sources, adding that the country’s foreign exchange reserves have already contracted by $3.0 billion.