Government considers channeling cash resources to SBP from commercial banks

KARACHI: The government has planned to transfer its cash resources to the central bank from commercial banks in a bid to slash public debt servicing cost – a proposal that haunts banking system on the prospect of liquidity crunch and profit erosion, bankers and analysts said on Wednesday.

The State Bank of Pakistan (SBP) acknowledged the proposal under consideration, but it said there has been no implementation as such. “Some news are circulating on social media regarding government plans to introduce treasury single account (TSA),” the SBP said in a statement.

“While the proposal to introduce TSA is being examined by the government of Pakistan in consultation with SBP as part of its agenda to reform public financial management, however, no decision has yet been made to implement the TSA.”

In the first phase, federal government deposits (Rs0.9 trillion) will be transferred to the SBP under single account, which may be followed by transfer of provincial deposits of Rs1 trillion.

The SBP has already convened a meeting with various banks to discuss the operational modalities of the TSA, under which the banks would transfer all federal government deposits – in the first phase – to the central bank at the end of every working day, while the same amount would be transferred back to the respective banks for operational purposes and day-to-day banking activities of the government. SBP asked banks to provide feedback by the end of this month on the viability of the proposal.

A head of Treasury department at a large bank, who is privy to the meeting, told The News that the government wants to park its consolidated funds of Rs1.8 trillion, which is currently at commercial banks, into the SBP’s account in an effort to scale down its net borrowing from the SBP.

The government’s borrowing from the SBP rose to Rs3.773 trillion between June 1, 2018 and April 5, 2019 from Rs2.322 trillion in the corresponding period a year ago. Analysts feared a flight of capital and a hit to banks’ profitability based on spreads.

“This is a negative development for banks in terms of systematic risk as total government deposits with commercial banks are around Rs1.9 trillion or 13.7 percent of total deposits, around which, Rs0.9 trillion are federal government’s,” brokerage Topline Securities said.

Growth in banks’ deposits was the decade-low of eight percent year-on-year in 2018, settling at Rs13.354 trillion. The central bank, however, assured all the stakeholders of taking them onboard. “Any decision in this regard will be taken after due consultation with all the stakeholders and assessing its impact on the banking industry,” the SBP said.

“It will, therefore, be premature to form any opinion about the proposed policy decision and thus the market players should avoid engaging in any speculative activities based on this proposal which is still under examination.”

A banker said the new scheme would suffice to secure the International Monetary Fund’s (IMF) approval for the new program as limiting the government budgetary borrowing from the SBP is one of the primary preconditions of the IMF to obtain financing.

The government is in talks with the IMF to get an economic assistance. The IMF said a treasury single account is an essential tool for consolidating and managing governments’ cash resources, as well as minimising borrowing costs.

“The establishment of an effective TSA significantly reduces the debt servicing costs,” the IMF said in a report. Analysts said it would not be practical to transfer federal and provincial deposits in two phases, which may prolong the process.

Bank of Khyber has the highest government deposits of 63 percent of its total deposits, followed by Bank of Punjab 56 percent, Askari Bank 33 percent and National Bank of Pakistan 29 percent. “We believe that armed forces funds are not part of treasury single account and hence impact on Askari Bank Limited may not be as much,” Topline Securities added.