SBP injects Rs743b into banks

Conducts OMOs to encourage banks to provide required financing to govt

Salman Siddiqui August 14, 2022
Commercial banks have continued to increase the rate of return on financing to the government keeping in view the high demand for budgetary financing. PHOTO: file


Pakistan’s central bank has injected almost Rs743 billion into commercial and Shariah-compliant banks for up to 63 days at a return of 15.11% in an attempt to encourage the financial institutions to provide financing to the government at stable rates.

Commercial banks’ borrowing from the central bank has, however, gone down significantly into billions of rupees from trillions ahead of the scheduled heavy return of funds by the government over the next one month.

Data breakdown suggests that the State Bank of Pakistan (SBP) has provided almost Rs546 billion to commercial banks for 63 days and another Rs158 billion for seven days via open market operations (OMOs).

Similarly, it provided Rs1.10 billion to Shariah-compliant banks for 63 days and another Rs38 billion for seven days.

Earlier, the commercial banks borrowed in the range of Rs1.19 trillion to Rs1.86 trillion for 63 days a couple of times from May to July 2022 and acquired funds multiple times in the range of Rs2 trillion to Rs3.56 trillion for seven days from late February to May 2022.

“Commercial banks have reduced borrowing from the central bank ahead of the maturity of their heavy investment in government debt securities including T-bills and Pakistan Investment Bonds (PIBs) in August and September 2022,” AHL Research economist Sana Tawfik said while talking to The Express Tribune.

The government was set to repay over Rs4 trillion to commercial banks by September 20, 2022, she estimated. “So, commercial banks need not to make additional borrowing from the central bank as borrowing carries some cost (15.11%).”

Commercial banks will reinvest the funds to be received from the government in the sovereign debt securities – T-bills and PIBs, through which the government borrows from banks.

The central bank cannot directly finance the government for its budgetary requirements under the new regulations. Therefore, it injects funds into commercial banks through OMOs and then the commercial and Shariah-compliant financial institutions extend the funds to the government.

The rate of return on central bank lending to the financial institutions has remained stable at 15.11%, which is close to the historic high of 15.15% touched in the first week of August 2022.

She elaborated that the rate of return “usually remains slightly higher compared to the central bank’s key policy rate, which currently stands at 15%”.

The six-month Karachi Interbank Offered Rate (Kibor) – at which commercial banks provide financing to each other – is also hovering at high levels close to 16% these days.

She recalled that commercial banks have continued to increase the rate of return on financing to the government keeping in view the government’s high demand for budgetary financing and prevailing multiyear high inflation reading in the country.

“By doing so (charging high returns), commercial banks have continued to ignore the central bank’s moves to stabilise the rate of return on financing to the government including longer-tenure OMO operations and SBP key policy rate,” Tawfik said.

“The central bank’s key policy rate has become an ineffective tool, as commercial banks have continued to charge significantly higher returns on financing to the government.”

She, however, strongly believes the rate of returns is set to get stable at around current levels after IMF has agreed to revive its $7 billion loan pgoramme for Pakistan by the end of August 2022.

“The resumption of IMF programme would reduce government reliance on domestic debt, and the programme would resume foreign financing to Pakistan.”

The 63-day OMO also indicates the central bank would keep its key policy rate unchanged at 15% in its next monetary policy meeting scheduled for August 22, 2022.

“Most commercial banks, however, expect another hike of around 100 basis points.”­­

Published in The Express Tribune, August 14th, 2022.

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