KARACHI, Oct 12: The State Bank bought back all the government paper offered by banks on Friday reflecting a serious cash crunch issue, which is directly linked to the government’s reckless borrowing from the scheduled banks.

In an Open Market Operation, when the central bank sells treasury bills, it is taking money from the banks, therefore mopping up fund from the money market. Similarly when it buys backs government paper, then it is injecting liquidity.The State Bank on Friday injected Rs603 billion into the banking system for seven days and the bankers said the liquidity crunch could turn into liquidity crisis.

Other SBP reports showed the government’s first quarter borrowing from the scheduled banks was almost 75 per cent of the entire borrowing it made during last fiscal year. The first quarter borrowing crossed Rs518 billion, while it was Rs273 billion during the same span of time of last year.

While the country is heading towards general elections the government is not willing to take the risk of pushing inflation up, as it is in single digits for the first time in four years, through borrowing from the central bank.

Analysts said so far the strategy has worked but is unsustainable since the government has borrowed half a trillion from banking system in first quarter indicating it’s liquidity need for the future.

The anemic economic growth and no foreign inflows have escalated the fear that the fiscal deficit might touch 8 per cent of GDP this year which would require massive borrowing to meet the expenses of the government.

A senior banker said that banks are already short of liquidity, the only source would be printing of notes which would aggravate inflation again at the end of this fiscal.

The government avoided to borrow from the State Bank during the first quarter, instead, it retired the SBP debt of about Rs271 billion.

Bankers said after emptying the private banks, the government will no option but to approach the State Bank for printing notes which would lead to a double negative impact, as it will push inflation higher and banks would find it difficult to get back their money from the government.