Rubbishing the prevailing anti-SBP analysis as ‘perceptions’, the State Bank of Pakistan (SBP) Tuesday said the prevailing liquidity stress in the money market was because of the federal government’s retirement of its budgetary borrowings from the central bank.
The banking regulator has been under fire from various quarters for pumping billions of rupees into the cash-starved money market through Open Market Operations (OMOs).
In a rare clarifying statement, the central bank rejected all such claims saying the liquidity injections were aimed at keeping the monetary expansion in check.
Citing reasons for the prevailing shortage of cash on the rupee market, the State Bank said improved fiscal discipline had resulted in lower government borrowing from the banking system besides changing its composition between the commercial banks and SBP considerably.
“The government has in fact been retiring its borrowings from SBP,” the bank said. As a result, it said, the liquidity shortage in the system had increased considerably. “To meet this, the SBP had been injecting liquidity, through its open market operations, consistent with its monetary policy stance,” said the SBP.
If the SBP refrained from injecting liquidity in the system, it could retard broad money growth leading to stifling of economic activities and thus a recovery in growth.
“Hence the quantum and frequency of liquidity injections through OMOs of SBP, even when they seem excessive in isolation, are in fact necessary to keep money supply consistent with keeping inflation low and provide support to growth,” it said.
Terming its current operations as a part of its “liquidity management” moves, the same, the SBP said, aimed at achieving monetary policy objectives of price stability so as to provide a facilitating environment for economic growth.
In particular, the intermediate goal is to contain the overall monetary expansion (M2 growth) within safe limits; consistent with price stability objective.
This is ensured by management of day to day liquidity in the banking system with a view to keep the overnight money market repo rate within the interest rate corridor specified by SBP Repo and Reverse Repo rates.
“This requires liquidity injections or mop ups at appropriate periods in time,” said the central bank. In recent times, the liquidity injections by the SBP have increased considerably relative to its past trends.
Noticing these unusual changes, various market analysts perceive the State Bank’s liquidity management to be favouring the banks in making profit or supporting the government to meet its borrowing needs.
“These perceptions are based on misconceptions and partial analysis of monetary variables,” the regulator maintained. It said the SBP considered it important to address these misconceptions to avoid “misguided conclusions” and “expectations” on the basis of such analysis.
While assessing the liquidity conditions and analysing the open market operations, it is important to keep in view the overall growth of money supply in the system and its composition, the bank advised. The liquidity injections, it said, were considered counterproductive only when given the inflationary outlook and monetary policy stance, they were contributing towards excessive monetary expansion. Further, the State Bank said, a lopsided contribution in growth in money supply complicated the monetary management.
For instance, it said, despite a contraction in net foreign assets, high monetary growth led by government borrowing reflected external as well as fiscal imbalances which had been the case during last few years.
From the recent monetary aggregates data it can be observed that the overall monetary expansion (M2 growth) was not excessive, the State Bank observed. In fact, it added, it had decelerated compared to past few years.
More importantly, the composition of money supply was reflecting the positive changes occurring in the real economy, it said. For instance, the growth in M2 was being contributed significantly by an expansion in net foreign assets of SBP owing to improvement in external sector.
Moreover, the regulator said, the growth in private sector credit, albeit lower than last year, had a reasonable contribution in monetary expansion.
When govt borrows more than the prescribed limit & when SBP looses its independence & cannot say " enough is enough "…this happens. The action of SBP as being justified by gov SBP in the short term seem ok, but it will have irreparable damage to economy & the country in general in the long run, but who cares ? every govt that comes, comes with their own short term vision, they do not care what will happen after they leave, it is the baby for the next govt to handle. Such perception & action by subsequent govt has made this country pauper…..taking loan to pay loan….what sort of logic is this ? begging each & very country to come & invest but not allowing their own family to do same.
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