KARACHI: Liquidity crunch was visible in the banking system as State Bank on Friday injected over Rs300 billion to support banks and to keep them alive for investing in government bonds and treasury bills.

The banks invested heavily in the long-term government bonds last week reflecting stability in the economic system, including a sustainable interest rate with single digit inflation.

The State Bank reported that it has injected Rs308bn for seven days into the banking system.

Bankers said the banks had been facing liquidity shortage after a huge investment in the government bonds while deposits of the banking system witnessed poor growth during the last three months.

In last week’s auction of Pakistan Investment Bonds, banks invested record Rs530 billion. This was after a long time that banks invested over Rs110bn for 10 years.

The banks invested Rs288bn for three years, Rs128bn for five years and Rs113bn for 10 years.

“Banks are also facing poor growth of deposits which created a wide gap of liquidity into the banking system,” said a senior banker.

Bank deposits grew from Rs7,529bn in December 2013 to Rs7,599bn in February 2014, an increase of just Rs70bn.

Analysts said the saving rate in the country is lowest in the region, reflecting very high rate of unemployment, falling income and concentration of wealth in fewer hands.

They said that the low income under persistent high inflation has made Pakistan consumption-based economy, thus reducing the savings rate.

During the last fiscal year, the previous government blatantly borrowed through private banks and a record amount of Rs960bn was raised during FY13.

However, new government in this fiscal year relied heavily on State Bank and banks remained open for private sector as well as long-term government bonds.

Bankers said the liquidity crunch would remain there while the liquidity gap would rise further in the next three months till the end of this fiscal year.

During the last fiscal year, liquidity gap rose to as high as Rs600bn.

The government reliance on State Bank to meet its budgetary support created a space for the private sector to benefit from the banking money.

During the last nine months, credit off-take by the private sector was more than double compared to the same period of last year.

The private sector since July to March 21, borrowed Rs304bn from banks compared to just Rs118bn during the same period last year.

Bankers said the government would require another Rs500bn in the next three months to meet its fiscal expenses, particularly in the wake of a serious fall in revenue generation during this fiscal year.

While the government has slashed its development spending, the fiscal deficit is still high.

The State Bank in its recent report projected the fiscal deficit in the range of 6 to 7pc of the GDP.

“This high fiscal deficit and low revenue generation requires banking money to meet government spending,” said a senior banker.