The banks' investing trend in government papers did not change despite shortage of liquidity in the system and the State Bank has been maintaining liquidity with frequently injected money. - File photo

KARACHI: The State Bank on Friday injected another Rs123 billion in the banking system after the banks had parked Rs119 billion in government papers a couple of days earlier.

This was the second largest liquidity injection for longer period, which would cover the entire month of Ramazan which was under pressure of heavy withdrawals.

However, the banks' trend to invest maximum in government papers did not change despite shortage of liquidity in the system and the State Bank has been maintaining liquidity with frequently injected money.

On August 19, the State Bank had injected Rs180 billion and out of this Rs126 billion were injected for 17 days protecting the banks from the impact of Eid withdrawals.

It also reflects the government's rising need for cash to carry on its job showing the serious shortage of revenue. However, this is also against the government's announcement at the time of budget that the fiscal policy would not impact monetary policy and it would improve revenue generation and reduce borrowing. But it appears that the fiscal gap is rising with the beginning of new financial year.

Last year, the government borrowed record amount from the commercial banks leaving little room for the private sector to play its role. In the presence of 14 per cent discount rate and inflation over 13.5 per cent, the private sector, especially in the presence of liquidity crunch, could not get loans from banks at 'cost-effective' rates.

The same situation prevails this year so far as the government's borrowing is rising even higher than previous year, while the private sector is out of business.

The private sector made net retirement of Rs87 billion so far that gives a negative picture of the economy and their participation for economic growth.

Analysts said that the only textile sector, which is lucky to have homegrown cotton in bulk quantity, has been performing and improving for several years.

However, even the most successful textile sector has not been investing in new projects or not going for expansion for last four years.

The project financing is almost zero for few years as banks are not interested to extend long-term loans as their non-performing loans (NPLs) are still on rise.

Banks said these NPLs belonged to loans extended 5 to 10 years back.

Now the banks have much better opportunity of investment by putting money in government papers at zero risk of NPLs.

Despite criticism from the State Bank on borrowing from commercial banks, the government seems to have decided to continue to depend on commercial banks without considering the private sector as a key player for economic growth.

Money dealers said the banking system would remain short of liquidity but the situation could improve after Eid when the money would come back from markets to banks.

Hundreds of ATMs card users, who have been complaining that the ATM machines either remain out of order or out of cash, suspect that banks do not provide enough cash in their machines to save some liquidity.

Though the State Bank has warned banks to improve ATMs performance and provide enough cash in the machines but the situation remained the same so far.