SBP injects Rs4.1tr into financial market

Seven-day OMO to address liquidity crunch in dried up market


Salman Siddiqui April 30, 2022
A Reuters file image of SBP logo

KARACHI:

Pakistan’s central bank has supplied a record Rs4.09 trillion to commercial banks for a short period of seven days to address the liquidity crunch, as the domestic financial market has dried up after lending most of the available funds to the cash-strapped government.

The State Bank of Pakistan (SBP) has reported injecting Rs4.09 trillion into the financial market through open market operations (OMO). This was equivalent to slightly over 20% of the total deposits of Rs20.27 trillion at domestic banks.

Breakup of the data suggests that the central bank has injected Rs3.56 trillion into the conventional banks at a rate of return of 12.3% for a period of seven days.

It has supplied another Rs526 billion to Shariah-compliant banks at a rate of return of 12.33% (for seven days).

“The central bank is indirectly financing the government through (frequent) OMOs,” Ismail Iqbal Securities Head of Research Fahad Rauf said while talking to The Express Tribune.

“The central bank pays to commercial banks through OMOs and commercial banks lend the money to the government through acquiring sovereign debt securities like T-bills and Pakistan Investment Bonds (PIBs) these days,” he elaborated.

The government cannot directly borrow from the central bank under the International Monetary Fund (IMF) condition to resume the $8 billion loan programme.

Besides, recent legislation regarding SBP enhanced independence has also barred the government from directly borrowing for budgetary support from the central bank.

The government’s demand for domestic commercial financing has been on the rise for some time now, partly due to increasing expenditures like payment of subsidies on energy products and repayment of maturing (previous) debt to financial institutions.

“The government’s reliance on domestic debt has gone up mainly due to absence of foreign inflows,” Rauf said.

Accordingly, the foreign exchange reserves (held by the SBP) have depleted 40% to a 22-month low at $10.55 billion in the week ended on April 23, 2022.

The government should share its plans about revival of the IMF loan programme to clear the mess in the financial market. Secondly, it should gradually withdraw subsidies on petroleum products and power provided to the end consumers, he said.

The government reliance on domestic financing would start reducing once the IMF resumes its loan programme (sometime around end of May) and the rulers restart acquiring foreign funding from other bilateral and multilateral sources like friendly counties and global financial markets, he said.

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

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

The commercial banks’ investment to deposit ratio (IDR) – the portion of deposits lent to the government through investment in T-bills and PIBs – surged aggressively by 321 basis points over the past one year to 73% (Rs15 trillion) in March.

The central bank holds the short-term OMOs for one, three, seven or 21 days on a frequent basis almost every week, but the size of injections has been growing large with the passage of time.

The central bank’s data suggested that the SBP made an OMO of over Rs3 trillion for the first time on March 18, 2022.

It injected the biggest amount of Rs4.09 trillion to conventional and Islamic banks on Friday.

Earlier, the OMOs used to be in the range of Rs1-2 trillion. They were also of amounts much lesser than Rs1 trillion.

The central bank conducted a couple of 63 days OMOs in December 2021 and January 2022 to signal the financial market that the key policy rate would remain unchanged over the then two months.

Accordingly, the 63 days OMO had helped bring down commercial banks’ abnormally high lending rate to rational level at that time.

Such long-term 63 days OMO has, however, remained absent these days, despite commercial banks’ lending rate like six-month Karachi inter-bank offered rate (Kibor) shot to a 13-year high at around 15% and cut-off yield (rate of return) on six-month T-bill spiked to a 24-year high at 15% as well in the recent days.

The SBP is scheduled to hold the 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 stood at 12.25% at present. Experts have anticipated a 100 basis point rise in the May meeting.

Published in The Express Tribune, April 30th, 2022.

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