15 January 2005	Saturday	04 Zilhaj 1425

KARACHI, Jan 14: Banks had to turn to the State Bank to borrow overnight funds for the fifth consecutive day on Friday despite Rs9.3 billion injection by the central bank on Thursday.

Banks had to borrow Rs6.1 billion overnight funds from the central bank on Friday to overcome shortage of cash. Banks are short of cash as people are withdrawing money from their accounts to buy sacrificial animals.

Bankers say for the past few years they have seen withdrawal of Rs12-15 billion on Eidul Azha adding that current withdrawals suggest that a similar amount would flow out of the banking system for a while.

The bulk of the money withdrawn from banks ultimately returns to the banking system after six to eight weeks. But when such withdrawals start, the inter-bank market runs short of cash.

The crisis deepens if outflows of other natures are taking place simultaneously. This exactly is the case with the current liquidity crunch the market has been facing since Saturday last when it had to borrow Rs4 billion overnight funds from the SBP.

In addition to the pre-Eidul Azha withdrawals, a larger than targeted selling of treasury bills by the State Bank last week and ongoing dollar selling by it for financing oil imports have created a liquidity shortage.

On January 5, the State Bank sold Rs27.45 billion six-month treasury bills, against the target of Rs10 billion, to raise the weighted average yield by 43 basis points to 4.16 per cent.

This additional T-bills selling of Rs17.45 billion added to the liquidity shortage caused by dollar selling by the SBP for financing oil imports. Since November, the central bank has been selling around $400 million to banks each month to finance oil import bills of their clients. It had started this to stabilize the rupee that had lost 5.5 per cent value against the US dollar in July-October.

When the central bank sells dollars to banks it gets rupees in return. So a $400 million dollar selling sucks in a little less than Rs24 billion from the inter-bank money market every month.

The practice has helped the rupee recover about 3.2 per cent of its lost value in the last two months on the one hand, and the monthly outflow of Rs24 billion in its wake has enabled the SBP to keep the market sufficiently tight keep the rupee stable.

That is why, the SBP has not made frequent rupee funds injections into the market even at times when the market has to borrow overnight funds from its discount window at a high rate of 7.5 per cent.

But on Thursday, the central bank injected Rs9.3 billion anticipating that the market might become tighter with Eidul Azha-related outflows continuing - and in the absence of any major inflow before the Eid.

Bankers say Rs90 billion plus inflow through maturity of treasury bills that was earlier due on January 20 would now be available after the Eid, as Eid holidays are starting from that day.

This means that the inter-bank market, already having braved a long session of liquidity crisis would not be able to overcome it before January 24 when the market would reopen after Eid.

The liquidity crisis is so serious, that banks have borrowed Rs22.9 billion overnight funds from the SBP from Monday through Friday -- and not a single day has passed without such borrowing.

This tight liquidity condition has helped the rupee gain 16 paisa or more than 0.2 per cent of its value against the US dollar in five days. Bankers said the rupee closed at 59.42 a dollar on Friday, up from 59.50 on Thursday and 59.58 on weekend.