SBP injects Rs3.553tn into money market

KARACHI: State Bank of Pakistan (SBP) has injected Rs3.553 trillion worth of liquidity into the money market via open market operation (OMO) to help ease liquidity constraints of banks, the central bank said on Friday.

SBP injected funds for a seven-day

period at 12.31 percent, the OMO result showed.

The central bank also conducted Shariah-compliant Mudarabah based OMO on the same day, pumping Rs499.9 billion liquidity for seven days at 12.32 percent into the Islamic banking institutions.

The SBP conducts OMOs on a frequent basis, increasing the size of the cash injections into the money market as it wants to ensure liquidity remains reasonably ample to meet banks’ requirements.

Moreover, the government needs funds as it relies on domestic borrowings to meet higher spending needs.

The government meets its funding requirements via taking loans from the commercial banks as it is committed to zero borrowing from the central bank to comply with its obligations under the amended State Bank of Pakistan Act and IMF programme conditions.

It is dependent on bank borrowing to finance the budget deficit as the foreign financing is squeezing.

The budget deficit rose to Rs2.56 trillion or 4 percent of gross domestic product in nine months of this fiscal year.

According to latest SBP data, the government borrowing from banks for budgetary support rose to Rs1.586 trillion during July 1, 2021 to April 29, 2022, compared with Rs642.6 billion in the same period of last fiscal year.

Banks use funds generated through OMOs to invest in government securities.

The SBP is not providing the banks with liquidity for two months to reduce rates on the treasury bills and Pakistan Investment Bonds.

The cut-off yields on six-month paper in an auction held on April 27 spiked to 15 percent.

The government also increased the rate of returns on Pakistan Investment Bonds to 13 percent.

The government is selling the bonds and bills at higher yields as its funding needs are growing.

The rise in the interest rates is not expected to help attract hot money inflows due to the falling rupee, deteriorating external sector, political uncertainty in the country and increasing US interest rates.

Analysts expect a surprise rate hike by the central bank to help alleviate pressure on the rupee.

However, interest rates are already high where Karachi interbank offered rate is close to 15 percent, much higher than the policy rate which is 12.25 percent.

The next policy review meeting is scheduled for May 23.