November 20, 2003	Thursday	Ramazan 24, 1424

KARACHI, Nov 19: The State Bank on Wednesday injected Rs15.95 billion again into the cash-starved banking system, confirming key signals of higher consumer spending during this Eid.

The central bank pumped in Rs15.95 billion into the system for two weeks as the banks cried for paying to their depositors who have made a bee-line for withdrawing money from their accounts to spend on Eid shopping. The SBP made this injection of money — the fourth one during this Ramazan — through reverse repo of treasury bills at a specially called open market operation.

Senior executives of leading local and foreign banks told Dawn that the central bank had to make a fourth injection into the banking system because of never-ceasing cash withdrawals from the banks.

The central bank injected Rs13.75 billion in the cash-starved banking system on Thursday last — also for two weeks — but that failed to satiate banks appetite for liquidity. Even before that the SBP had injected Rs11.3 billion into the banking system on November 10 — Rs5.1 billion for one week and Rs6.2 billion for two weeks. Prior to that it had pumped in Rs7.35 billion into the inter-bank money market — Rs5.85 billion for one week and Rs1.5 billion for two weeks — in the first-ever injection of funds during this Ramazan.

Sources close to the SBP say that a record four injections of cash into the banking system within a fortnight indicates that money withdrawals from bank deposits during this Ramazan is higher than in the previous years. Comparable figures of cash injections in previous Ramzan were not readily available, but the sources said those were lesser — both in frequency as well as in terms of the amount injected.

Senior executives of major local and foreign banks also confirm that this year cash withdrawals are higher than previous Ramazan. “This indicates that consumer spending is up — and people are spending more on pre-Eid shopping,” said treasurer of one of the five major local banks. He said cash withdrawals were being made this year not only from the branches of major cities but also from smaller cities and towns.

Treasurer of a leading foreign bank said the branches of his bank located across Pakistan, including those in NWFP, were reporting heavy withdrawals everyday.

The bulk of this withdrawn money eventually flows back into the banking system after changing hands at various stages. The SBP being the banker of the banks makes cash injections every year during Ramazan to help the banks overcome this temporary liquidity crisis. But this year the cash crisis has become more acute than the previous years — and that too in the backdrop of a generally high level of liquidity available with banks before Ramazan. “So the higher consumer spending theory seems to be one of the plausible explanation for this,” said an official of the SBP who declined to be named.

But he added that a Rs26.6-billion investment by the banks in long-term Pakistan Investment Bonds earlier this month was also one of the factors that led to this liquidity crisis. “Besides, this year the money withdrawn on the first of Ramzan to avoid deduction of Zakat might also not have returned to the system as yet,” said the official.

If that is the case does it not provide yet another clue to a higher consumer spending? Bankers and central bankers say it is premature to answer this question in the affirmative but people might also be holding cash for one reason or the other. “But to some extent this seems true,” conceded treasurer of a large local bank.

A pickup in retail sales of a vast variety of household items — from clothes to crockery to furniture to kitchen ware and electronic gadgets like TV and refrigerators — does indicate that pre-Eid consumer spending is up during this year. It is difficult to have a smart estimate the extent of increase in consumer spending but a recently-conducted Dawn survey found that retail sales are up 15-20 per cent in most of the markets in Karachi.

ANOTHER INDICATION: That may well apply on other major cities as well. But how one will explain higher cash withdrawals from bank branches in not-so-well-off parts of the country particularly in NWFP? “The explanation lies in the ongoing US-sponsored crackdown against suspected pro-Taliban forces and Al-Qaeda links in the northern areas,” says a foreign banker without elaborating the point. The undercurrent of his statement is clear, however.

The forces that are supervising this crackdown do need to make under-the-table payments to their contacts in the northern areas — and they may be withdrawing money from local bank accounts. It is very difficult to check the authenticity of such things, but bankers say they have observed a correlation between any major crackdown in the northern areas of Pakistan or in the areas bordering Pakistan-Afghanistan and cash withdrawals from the banks. “We had also seen this when the Taliban government was toppled in December 2001,” said a banker. Bankers say it is possible that money is withdrawn at such occasions not only by the forces that launch a crackdown, but also by those who feel unsafe or who are directly being hit.