SBP injects Rs8tr to ease liquidity woes

Pakistan’s central bank has injected over Rs8 trillion into conventional and Shariah-compliant banks for up to four weeks, addressing the liquidity crunch in the financial system to ensure smooth banking operations in the country.

Commercial banks’ dependence on financing from the central bank has gradually increased due to significant borrowing by the government from these banks.

This borrowing from the central bank and subsequent lending to the government has seemingly led to slightly negative profit margins for commercial banks. Data indicates that the central bank has provided the Rs8 trillion at a return rate slightly exceeding 22%, higher than the profit margins earned by commercial banks, which currently range from 20.3% to 21.7% through lending to the federal and provincial governments.

Speaking to The Express Tribune, Optimus Capital Management, Head of Research, Maaz Azam explained that conventional and Shariah-compliant banks are borrowing expensively for short-term loans (up to four weeks) from the central bank, while making comparatively cheaper loans to the government for longer tenors (three to twelve months). This strategy helps banks maintain positive profit margins on a net basis.

Azam warned that commercial banks’ profit margins could turn negative if the central bank maintains its policy rate at the current record high of 22% in the long run instead of cutting it as expected by the market.

Market expectations are for the central bank to reduce its policy rate (interest rate) in March or April 2024 following a decrease in the inflation rate to 23.1% in February 2024, with further anticipated slowdowns in inflation in the coming months.

Azam observed that while the central bank injected over Rs8 trillion into banks on the day, the outstanding injection through Open Market Operation (OMO) remained stable at slightly below Rs10 trillion as of today.

He noted that the central bank’s injection and mop-up operations occur simultaneously on a daily basis, maintaining the outstanding injected financing stable in the range of Rs9.5-10.2 trillion for the past two to three months. However, over a four-month period, the central bank’s outstanding financing to commercial banks through OMO has increased to around Rs10 trillion today from Rs8 trillion in November 2023.

To recall, banks have lent a record 93% of their total cheaper deposits at Rs27.54 trillion to the government in January 2024, significantly contributing to an 82% increase in profits to a record high of Rs550 billion in the calendar year 2023.