Bank deposits improved by 3% to Rs22.82 trillion in September 2022, compared to the previous month, as crackdown on the illegal Hawala and Hundi (reference) system operators forced informal businesses and ordinary people to pull out investment made in US dollars in the black market and deposit the money in bank accounts.
“Some people (and some informal businesses) were buying US dollars in the black market and selling them at comparatively higher rates in the open market,” said Arif Habib Limited economist Sana Tawfik while talking to The Express Tribune. It came after the Hawala and Hundi system operators managed to reorganise in the recent past.
Also recently, the US dollar was being sold in the open market at a price that was higher by Rs10-12 compared to the inter-bank market. “The increase in dollar value in the open market came in the wake of diversion of foreign currencies to the illegal market (from the open market).” That situation led to a temporary slowdown in the growth of bank deposits earlier. “The deposits should continue to grow amid the government’s crackdown on the black market,” she emphasised.
State Bank of Pakistan (SBP) Governor Jameel Ahmed also highlighted such developments at an analyst briefing held on Monday this week. Bank deposits stood at Rs22.15 trillion in August 2022, the research house reported while quoting the central bank.
The flow of remittances sent home by overseas Pakistanis has historically remained a big reason for the continuous growth in bank deposits. Remittances through the official channels slowed down 6.3% to $7.7 billion in the first three months (Jul-Sept) of current fiscal year compared to the same period of last year, the SBP reported on Tuesday this week.
The central bank on Friday also injected over Rs1 trillion into the banking system through a seven-day and 63-day open market operation (OMO). The prime objective of the short to long-term OMOs is to improve the bank liquidity.
“Increased rupee liquidity will help banks to focus on improving the foreign currency deposits…and increase lending to the government in these testing times when floods have wreaked havoc across the country,” she said.
Bank credit to the private sector (advances) surprisingly improved by 1.5% to Rs11.08 trillion in September 2022 compared to Rs10.92 trillion in August.
The growth in advances came despite economic slowdown in the country. “The government’s resolve to charge from banks an additional tax if they fail to increase the advance-to-deposit ratio (ADR) to 50% or more forced banks to find avenues to increase lending to the private sector,” Tawfik said.
Businesses, however, have largely remained reluctant to borrow at prevailing higher interest rates to run their businesses. Despite a slight growth in advances, the banks’ advance-to-deposit ratio dropped to 48.6% in September compared to 49.3% in August.
Banks’ investment (lending to the government) also fell by 3.8% to Rs17.48 trillion in September compared to Rs18.18 trillion in August.
With this, the investment-to-deposit ratio (IDR) of banks shrank to 76.6% in September compared to 82.1% in August. The IDR dropped after some of the bank investment matured and the government returned the amount to them. The government keeps on making fresh borrowing from banks and retires the old debt.
The analyst said the government’s reliance on bank borrowing is about to fall following the resumption of IMF loan programme. “Increased foreign inflows will help the government to reduce reliance on the domestic debt.”
She noted that banks had reduced their interest rates on financing to the government in the previous week after a gap of a couple of months. The rate reduction was the outcome of resumption of foreign inflows.
Published in The Express Tribune, October 15th, 2022.
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