SBP injects record over Rs14tr into banks through conventional, Islamic OMOs

KARACHI: The State Bank of Pakistan (SBP) pumped a record Rs14.304 trillion into the money market via conventional and Sharia-compliant open market operations (OMOs) on Friday to ease liquidity pressures resulting from increased currency in circulation (CiC) during Eidul Azha and a delay in external inflows.

The central bank injected Rs13.929 trillion into the banking system via conventional reverse repo purchase for seven days at an interest rate of 11.03 per cent, data showed. In addition, it provided Rs375 billion in liquidity for the same period at the rate of 11.11 per cent through a Sharia-compliant Mudarabah-based OMO.

Recent conditions in the country’s money market revealed liquidity strains. In a briefing following the interest rate decision on Monday, SBP Governor Jameel Ahmad informed analysts that the increase in OMO stock was primarily due to two factors: a rise in CiC during Eid, which is a temporary effect, and a time lag between debt repayments and incoming inflows. However, he indicated that OMO levels are expected to decline in the coming weeks.

Awais Ashraf, director of research at AKD Securities Limited, said that the SBP injects liquidity into the market to bridge the government’s financing gap that remains after mobilising funds through deposits, National Saving Schemes, and foreign borrowing.

“In recent years, this gap has widened due to the government’s increasing reliance on the domestic financial system to meet large funding needs, primarily driven by elevated debt servicing costs,” Ashraf said. Ashraf also believes that the recent increase in OMO is primarily due to higher CiC during Eid and a time lag between debt repayments and the receipt of external funds. He anticipates that liquidity strains will ease somewhat due to external inflows and recovery in deposits.

Saad Hanif, head of research at Ismail Iqbal Securities, noted that during the seven-day OMO, the SBP accepted all bids at the lowest quoted rate of 11.03 per cent.

“The full acceptance and the large amount show that the central bank is keeping liquidity easy and is not looking to tighten anytime soon. It is also a sign that the market is expecting interest rates to come down, with banks comfortable locking in at lower yields,” Hanif added. “Overall, it points to a softer interest rate outlook in the near term,”

The SBP kept its key interest rate unchanged at 11 per cent at its latest monetary policy meeting, citing the risk of increasing inflation amid rising geopolitical tensions, volatility in oil and other commodity prices, and the timing and magnitude of domestic energy price adjustments. According to the SBP, the total repayment for FY25 amounted to $25.8 billion, most of which has already been paid or rolled over. The remaining $400 million is set to be settled within the next two weeks, with some inflows anticipated this month.

On Wednesday, Pakistan signed a $1 billion financing agreement for a five-year multi-tranche facility with the Asian Development Bank (ADB). The country also expects to receive $1.4 billion in climate financing from the International Monetary Fund (IMF). Pakistan also plans to repay the first instalment of $500 million in Eurobonds that are due in September this year. The IMF expects that the next review for Pakistan’s $7 billion loan programme will occur in the second half of 2025.