SBP injects record Rs3.58tr into banks

In a bid to alleviate the liquidity crunch faced by commercial banks and assist the financially strained government, the State Bank of Pakistan (SBP) has injected a staggering Rs3.58 trillion for an unusually extended period of 77 days. This infusion of liquidity comes at a stable rate of return of 21.02%, indicating that the SBP may maintain the benchmark policy rate at the historically high level of 21% in the upcoming monetary policy statement scheduled for June 12, 2023.

Speaking to The Express Tribune, Arif Habib Limited Economist Sana Tawfik highlighted the aggressive lending by banks to the government, aimed at bridging a larger fiscal deficit this year due to lower-than-expected tax revenue collection. In a testament to the government’s financing needs, it borrowed a massive Rs2.28 trillion by selling debt securities (T-bills) to commercial banks on May 31, surpassing the pre-set target of Rs1.8 trillion.

This significant borrowing exerted pressure on banks, resulting in a liquidity crunch, prompting the central bank to inject Rs3.58 trillion on Friday. However, the aggregated demand for liquidity from the private sector has dwindled due to the high cost of financing, which was deliberately made expensive to curb soaring inflation and address twin deficits.

Tawfik attributed the government’s aggressive borrowing to the historically high key policy rate set by the central bank. The current rate of 21% is a substantial jump from 13.75% in June 2022, leading to an unprecedented level of interest payments on debt.

Renowned economist Hafiz A Pasha warned in a mid-May article that debt servicing burden is likely to exceed the initial target by Rs1.3 trillion, reaching a record level of Rs5,200 billion, equivalent to 6.2% of the GDP by the end of 2022-23. He further cautioned that there is a risk of a significant deficit in the last quarter of the fiscal year, pushing the annual deficit to above 7% of the GDP.

Tawfik explained that the government’s injection of a larger amount of liquidity on Friday was in anticipation of increased lending to the government by commercial banks in June and July. The government’s borrowing had dried up liquidity in banks, prompting the central bank to intervene and provide the necessary funds.

She noted that banks were lending money to the government by purchasing government debt securities such as T-bills and Pakistan Investment Bonds (PIBs) at a historically high rate of return of 22%. The central bank supplied liquidity to commercial banks at approximately 21%, while commercial banks financed the government at 22%, resulting in a net gain of 1% for the banks between borrowing from the central bank and lending to the government.

One of the key factors contributing to the government’s increased domestic borrowing is the absence of foreign lending since the IMF loan program stalled in November 2022.

Published in The Express Tribune, June 3^rd, 2023.

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