KARACHI: The State Bank on Friday injected Rs585 billion into the banking system, which showed that there was a liquidity crunch.

The State Bank reported that the amount was injected for seven days. The banks accepted the entire money offered by the SBP.

The banks are facing a widening liquidity gap as their investments in the long-term government papers reached an abnormally high level during the current fiscal year.

In the current month alone, the SBP has so far injected a large amount for fourth time, indicating the growing needs of banks.

The increasing liquidity shortage has also made an impact on the exchange market as borrowers of US dollars have reduced while several banks are liquidating their dollars to generate stock of local currency. Dollar fell to Rs100.55 on Friday while it has lost Re1 in the last 30 days.

Banks’ temptation for long-term high-yielding government papers has been rising with each auction.

In the last auction on Wednesday, banks invested Rs151bn in the Pakistan Investment Bonds while the target was just Rs50bn for the auction.

The State Bank’s another report shows that the government has accelerated efforts to borrow maximum from scheduled banks. Since the beginning of the current fiscal year, till the first week of December, the government borrowed Rs419bn from scheduled banks which was absolutely a reverse situation compared to last year.

During the same period last year, the government instead of borrowing, retired banks’ debt of about Rs43bn.

The sharp borrowing affected the private sector’s borrowing trend and it fell drastically low compared to the last year.

The private sector credit off-take could hardly improve in FY-14 after five years, but it fell to Rs56bn in the first five months.

During the same period of the previous year, credit for the private sector was Rs196bn.

Published in Dawn, December 20th, 2014