SBP pumps 4.1 trillion rupees into the financial market


The Central Bank of Pakistan provided a record amount of 4.09 trillion rupees to commercial banks for a short period of seven days to tackle the liquidity crunch as the local financial market dried up after lending most of the money available to the cash-strapped government.

The State Bank of Pakistan (SBP) has reported an injection of 4.09 trillion rupees into the financial market through Open Market Operations (OMO). This was equivalent to just over 20% of the total deposits of 20.27 trillion rupees in local banks.

The data disintegration indicates that the central bank has injected 3.56 trillion rupees into conventional banks at a rate of return of 12.3% for seven days.

It provided another 526 billion rupees to Sharia-compliant banks at a rate of return of 12.33% (for seven days).

“The central bank funds the government indirectly through OMOs (frequently),” said Fahad Raouf, Head of Research for Securities, Ismail Iqbal, while speaking to The Express Tribune.

He explained, “Central bank pays to commercial banks through OMOs and commercial banks lend money to the government by acquiring sovereign debt securities like Treasury Bills and Pakistan Investment Bonds (PIBs) these days.”

The government cannot borrow directly from the central bank under the condition of the IMF to resume the $8 billion loan programme.

Besides, the recent legislation related to the enhanced independence of the SBP has also prevented the government from directly borrowing for budget support from the Central Bank.

The government’s demand for domestic commercial finance has been increasing for some time, in part due to increased expenditures such as paying subsidies on energy products and repaying (former) debts to financial institutions.

“The government’s dependence on domestic debt has increased mainly due to the absence of foreign inflows,” Raouf said.

Accordingly, foreign exchange reserves (held by the Social Investment Bank) depleted 40% to a 22-month low of $10.55 billion in the week ending April 23, 2022.

The government should share its plans for reviving the IMF loan program to clear up the chaos in the financial market. Second, it should gradually withdraw subsidies for petroleum products and energy for end consumers.

He said the government’s reliance on domestic financing will begin to decline once the IMF resumes its loan program (sometime at the end of May) and the governors resume obtaining foreign financing from other bilateral and multilateral sources such as friendly provinces and global financial markets.

The government is expected to start increasing energy prices gradually after the Eid holiday (May 2-5), ahead of the IMF delegation’s scheduled visit to Pakistan on May 7.

Earlier, banks invested Rs989.8 billion in three to 12 month T-bills and three to 10 year PIBs over the previous two days (Wednesday and Thursday).

Commercial banks’ investment to deposit ratio (IDR) – the portion of deposits lent to the government by investing in T-bills and T-bills – rose solidly by 321 basis points over the past year to 73% (15 trillion rupees) in March.

The central bank keeps short-term AMOS for one, three, seven or 21 days on a recurring basis about every week, but the volume of injections is increasing with time.

Central bank data indicated that SBP made an OMO of more than 3 trillion rupees for the first time on March 18, 2022.

The largest amount of 4.09 trillion rupees was injected into conventional and Islamic banks on Friday.

Earlier, OMOs were in the range of Rs 1-2 trillion. They were also in amounts well under a trillion rupees.

The Central Bank conducted 63-day OMOs in December 2021 and January 2022 to signal to the financial market that the key policy rate would remain unchanged during the then two months.

Accordingly, the 63-day period helped reduce the extraordinary lending rates of commercial banks to a reasonable level at that time.

However, 63-day long-term OMO has been absent these days, despite the rise in the lending rate of commercial banks, such as the six-month Karachi (Kibor) interbank rate, to a 13-year high at around 15% with a halt implementation. The yield (rate of return) on six-month T-bills has risen to a 24-year high of 15% also in recent days.

The Social Investment Bank is scheduled to hold its next Monetary Policy Committee (MPC) meeting on May 23 to review and announce a new key policy rate for the next six weeks. The rate is 12.25% at present. Experts expected a 100 basis point rise at the May meeting.

Posted in The Express Tribune, April 30y2022.

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