SBP helps govt keep macro-economic indicators in check

The central bank is giving the best of its monetary management inputs to help the cash-strapped federal government which is finding it hard to keep the deteriorating macro-economic indicators in check. The money market happens to be the hot spot for the cat and mouse play the state and commercial banks are engaged in to benefit their respective sides.

The points in question pertain masterly to the central bank’s open market operations (the banks’ cautious participation therein) and the recent record devaluation of the rupee. After injecting billions in the apparently liquidity-scarce banking system for months, the banking regulator started a couple of months back mopping up liquidity from the money market to cater the ever-burgeoning budgetary financing needs of the funds-starved government.

The analysts came up with different views when asked as to what created such a huge amount of liquidity in the banking system that made the SBP start mop-up operations for several consecutive weeks.

Mohammad Sohail, senior analyst and CEO of Topline Securities, said the SBP wanted to absorb the extra funds the banks possessed. The latter, however, were not giving money in the treasury bills auctions as they expected the interest rate to increase. The central bank raised the discount rate by 50bps in its last monetary policy statement to 9.50 percent.

Asked what made the banks to bid in SBP’s frequent mop-up operations, Sohail said the mop-ups were for one or two weeks.

During last two OMOs, the banks did not offer sizeable amounts that made the State Bank reject the bids partially in second last and wholly in last OMO. The banks, the analyst said, could re-invest their funds at higher rate now when the SBP had hiked the policy rate.

Another analyst, wanting not to be named, said the SBP’s mop-ups may be backed by the International Monetary Fund that recently approved $6.64 billion EFF for Pakistan. “May be it is on the will of IMF to take artificially created liquidity out of the system,” the analyst viewed.

Asfar Bin Shahid said the SBP had followed a policy of cutting its discount rate for too long, a stance questioned by the IMF mission as well on its last visit to Pakistan. The profit-conscious banks, he said, stopped over-investing in progressively low-yielding T-bills. “Now the banks’ holding of T-bills is just about equal to their official reserve requirements.”

But, the economist said, because public borrowing needs were still high, the SBP had been forced to mop up market liquidity through OMOs.

AB Shahid viewed that given the high market risk, the banks were not too keen on lending to the private sector. To them, a safer, in spite of Pakistan’s heightened sovereign risk, venue for lending was the sovereign.

“But the lowering of the discount rate reduced their earnings because the MUP spread came down substantially,” he said. He said the lower rates on savings greatly diluted the incentive for saving.

The analyst said the Pakistanis, who were earlier sending money to relatives in Pakistan for depositing in banks, compared to the rates earned by deposits in US dollars and Pound Sterling the return on Pak Rupee deposits was far higher even after discounting it for the depreciation of the Rupee, were not doing that any more.

“Those excess foreign exchange inflows have slowed down and contributed to the slide in forex reserves,” he added. According to official numbers, the country held $ 10.37 billion on Sept 13. Ironically, the State Bank’s $5.11 billion reserves have gone down than that of the commercial banks $5.25 billion.

The State Bank tends to quote alarmingly poor dollar reserves as a major reason for the falling rupee value. However, the economic observers point a finger at the SBP when analyse attributable factors for the historic rupee depreciation.

The State Bank is perceived to have been conducting frequent mop-up operations to raise money for buying dollars from the volatile open market given the country’s fast depleting foreign exchange reserves. This week, Wednesday, the rupee traded against the greenback at a record low of Rs 107 both on the open and interbank market.

Reasoning the historic fall, the analysts cite factors like Haj season, six-month forward booking of dollar by the banks, contracting dollar reserves of Pakistan etc. There are, however, economists who see the State Bank actively intervening, though behind the curtain, in the money market, thus causing the rupee depreciation.

AB Shahid opines that the SBP, through mop up operations, has continuously been intervening in the forex market to buy dollars and pay rupees in counter-value. This, he said, was because of the continued decline in the bank’s own forex reserves.

“This factor is causing a steady slide in the exchange value of the rupee,” the economist said.

All said and done, one thing is for sure that this is the resource-constrained government which is responsible, though indirectly, for the record depreciation of the rupee. Whatever the SBP has been doing covertly or overtly on the currency market was aimed at raising some liquidity, in the face of dollars and rupee, to cater the cash-strapped government’s ever increasing budgetary expenditures, much of which constitute the unproductive non-development spending.