KARACHI: The State Bank of Pakistan on Friday injected Rs419 billion worth of government bonds through a reverse-repo open market operation, to inject liquidity into the interbank system.

The cash-starved government has been borrowing heavily from the banking system and the State Bank has been injecting liquidity to save the banking sector from a cash crunch, according to analysts.

According to SBP data, the government borrowed a provisional RS1,143 billion from the banking sector in 2011-12, out of which it borrowed Rs507 billion from the country’s central bank and Rs636 billion from the banking sector.The trend of borrowing from the banking system seems to continue in the current fiscal year as the government on Wednesday borrowed Rs360 billion through a Treasury bill auction.

The government has changed its policy during the last couple of years and borrowed mostly from banks instead of the State Bank, after severe criticism from the IMF to have zero net borrowing from the central bank by the end of each quarter.

However, the practice of borrowing from banks has gravely impacted the economic growth as it has crowded out the private sector, which requires the support of banking liquidity.

State Bank in its previous quarterly report also said that banks ignored the private sector and it remained limited to borrowing for working capital, short term borrowing.

Since there has been tight liquidity in the banking system due to lending heavily to the government during FY-12, the State Bank has been injecting about Rs300 billion each week to shield the banks from a cash crunch.

Bankers said the situation for banks was becoming a cause for concern as the investment policy of banks made it easy to earn profit but blocked expansion and increased deficiency was resulting in piling up of non-performing loans.

They said large banks which have been the main investors of the government papers, have lost enthusiasm to improve their banking products and skills.

Banking analysts indicated in their research reports the severity of the situation referring State Bank’s earlier data showed that the banks invested about 95 per cent of their liquidity in to government papers, leaving no option for the private sector to borrow from the banks in the country.

Economists believe that in order for the situation to improve, the economy needs to grow at atleast 6 per cent per annum. Pakistan’s gross domestic product was 3.7 percent in FY-12.

The State Bank’s statement issued on Friday showed that Rs419 billion were injected at the rate of 11.68 per cent. This injected money would be recycled for investment in to the government papers at slightly higher rates.

Auction calendar for treasury bills shows that the government plans to raise Rs1.5 trillion in the first quarter of the current fiscal, FY-13.