KARACHI: Eid spending turned into heavy withdrawal from banks which created a cash crunch in the banking system, forcing the Central Bank to inject a large amount of liquidity on Monday.

Most of the bank branches were found jam packed. Customers were in long queues to withdraw money as banks will remain closed for the next six days.

Monday was the last day before Eid to withdraw money while Eid spending was still continuing.

The State Bank on Monday injected Rs64.1 billion into the banking system.

It pumped large liquidity into the banking system during the holy month of Ramazan.

A separate report of the State Bank shows that during Ramazan SBP injected Rs26.2bn on July 8, Rs106.3bn on July 11, Rs146bn on July 18 and now Rs64bn on Monday.

The latest injection of money was made for 11 days, possibly due to long six days banks closure.

The trend shows the banks needed the continuous supply of liquidity from the Central Bank.

However, huge remittances being sent by the overseas Pakistanis and donations from abroad substantially increased deposits of the banks in June which has been declining in July due to heavy withdrawal.

The deposits of the banks rose to Rs8.082 trillion in June from Rs7.803 trillion in May.

Heavy withdrawal of cash from the banking system shows high spending for Eid shopping.

This spending reflects both the concentration of wealth in few hands as lavish spending was commonly observed while inflation also played a key role to extract maximum cash from the customers.

The main inflation for June was 8.2 per cent on year-on-year basis but the prices in July were too high to push the inflation for this month much higher than expectations.

The banks might need more borrowing from Central Bank next month after Eid holidays but many believe that the money will ultimately reach banks from markets as most of the money was spent in markets.

However, the government needs borrowing for budgetary support from the banking system requiring more injections of liquidity.

The government will borrow Rs700bn in the first quarter of FY-15 through auctions of treasury bills.

At the same time, the government has planned to borrow Rs300bn during the same quarter through Pakistan Investment Bonds (PIBs).

In the second quarter of last fiscal year, the government set a new record by borrowing through PIBs which was over 1.7tr.

It has been a critical question for analysts and experts that why the government preferred borrowing costly money through PIBs instead of getting cheaper money through treasury bills.

The return on treasury bills is below 10pc while the three-year PIBs yield is about 12.5pc.

The wide gap in the rates would cost heavily to the government when investment will mature. Pakistan’s debt and liabilities profile shows the debt increased to Rs10.8tr in March 2014 from Rs8.8tr in March 2013.

In the first 18 days of new fiscal year, the government borrowed Rs61.5bn for budgetary support while it borrowed Rs62bn from commercial banks.

Published in Dawn, July 29th, 2014