Increased liquidity injections aimed at nursing growth

SBP says improved fiscal discipline has resulted in lower government borrowing.

KARACHI: The State Bank of Pakistan has stated that liquidity injections through its open market operations are necessary to keep money supply consistent while keeping inflation low and provide support to economic growth.

The central bank further stated that improved fiscal discipline has resulted in lower government borrowing from the banking system and changed its composition between the commercial banks and SBP considerably.

“The government has in fact been retiring its borrowings from SBP,” said a statement issued by the central bank.

“As a result, liquidity shortage in the system has increased considerably. To meet this, the SBP has been injecting liquidity through its open market operations, consistent with its monetary policy stance.”

It further explained that if the SBP refrains from injecting liquidity in the system, it could retard broad money growth leading to stifling of economic activities.

It stated that the liquidity management operations of SBP aim to achieve monetary policy objectives of price stability so as to provide a facilitating environment for economic growth.  “In particular, the intermediate goal is to contain the overall monetary expansion (M2 growth) within safe limits; consistent with price stability objective.

“In recent times the liquidity injections by the SBP have increased considerably relative to its past trends. Noticing these unusual changes, various market analysts perceive the SBP liquidity management to be favouring the banks in making profit or supporting the government to meet its borrowing needs,” the statement added.

However, the SBP said these perceptions are based on misconceptions and partial analysis of monetary variables. “The SBP considers it important to address these misconceptions to avoid misguided conclusions and expectations on the basis of such analysis.”

Published in The Express Tribune, January 15^th, 2015.

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