April 27, 2006	Thursday	Rabi-ul-Awwal 28, 1427

KARACHI, April 26: Banks facing short of liquidity on Wednesday offered historically low amount against the sale of SBP’s treasury bills. The State Bank set a target of Rs3 billion for the sale of treasury bills but failed to attract banks for investment. Only two banks came forward with a meagre amount of Rs600 million. Allied Bank offered Rs500 million while Citibank offered Rs100 million. Primary dealers said the bids offered were historically low in terms of volume.

Banks did not come up with the bids for three and six months maturity papers and the only bids the SBP received were for one year maturity. The SBP rejected Rs100 million and accepted Rs500 million for one year.

The banks have been facing an acute shortage of liquidity for more than a month. The SBP has been regularly injecting but maintaining a calculated shortage required for its policy regarding monetary growth.

The liquidity scarcity created by the SBP forced the banks to avoid participating in the auction. The participation could send them to the discount window for higher borrowing.

Banks’ borrowing through the discount window was the highest in April as compared to the borrowing in a single month in 2005 and 2006. They borrowed over Rs160 billion in April, while the State Bank injected over Rs50 billion in the same month.

“These figures of injection and discounting show the gravity of situation created by the SBP itself. The central bank could have created liquidity had it left liquidity in the money market,” said an analyst

Analysts said the SBP was not interested in offloading its huge stuck-up treasury bills, although it had received a substantial amount from the government to retire T-bills stocks.

However, the shortage of money will result in an increase in the interest rate and can cause inflationary impact, as costly money will bring costly products. The tight monetary policy, which kept the banks short of liquidity, has already hiked the interest rate by 196 basis points during the current fiscal year.

“We do not see a negative impact on economic growth as a substantial amount of cash is flowing towards the private sector, and monetary growth despite remaining within the target has risen to 9.8 per cent,” said the analyst.

The cash required by the private sector is growing rapidly and exceeding the target, but the cash in hand has squeezed preventing banks from participating in the T-bills auction.

Analysts say inflows in banks are either lend as advances or the SBP sucks up liquidity through open market operations. They believe that the SBP would continue injecting liquidity because of its own policy and the banks would keep seeking help from the discount window.

On the other hand, the banks left no chance to lend as much as possible, pushing the advance deposit ratio over 77 per cent. The ratio is the highest in the banking history of Pakistan.