KARACHI: The State Bank of Pakistan (SBP) injected Rs623 billion into the banking system on Friday, helping scheduled banks stave off liquidity crunch.

The banks have been running short of cash mainly because of massive investment in the government securities and lending to the government for budgetary support.

The SBP’s latest report showed the government borrowed Rs870bn from the scheduled banks in the first seven months (July-Jan) of this fiscal year, compared to just Rs103bn a year earlier.

The liquidity shortage has been increasing with each passing week; it rose to Rs623bn on Friday. The SBP injected the liquidity for another seven days.

Meanwhile, the State Bank announced that the government would borrow Rs1.05 trillion through market treasury bills during Feb-Apr. The government needs such a large liquidity to pay back the money it has borrowed through T-bills. The maturity amount during the Feb-Apr period will be around Rs1.052tr.

The fiscal position is far from satisfactory as revenue shortage is being met by imposing fresh taxes, which was termed as “mini-budget” by the opposition in Parliament. The finance minister refused to withdraw fresh measures to boost revenue.

On the other hand, the circular debt has been rising which means the government would be requiring more money in the coming days. The worst part of fiscal scenario is the huge debt servicing for domestic debt for which the government has no money; more borrowing is the only option.

The government raised Rs623bn at a rate of 8.15 per cent which is not attractive for the investors.

Monetary easing has substantially reduced the interest rate from 10pc to 8.5pc during the last four months which has threatened banks’ earnings from government papers.

The PIBs, however, are still very attractive for investors because of higher rates. During Feb-Apr, another Rs150bn will be raised through auction of PIBs. The coupon rates for three-year, five-year and 10-year papers are 11.25pc, 11.50pc and 12pc, respectively.

Bankers say that due to prevailing low inflation there is no chance for tightening of monetary policy, instead another easing could be possible. This would force the banks to stick with the high-yield risk-free PIBs.

During the last seven months, banks’ investment-to-deposit ratio has increased.

“We expect CPI (consumer price index) will remain stumpy in the remaining part of this fiscal year amid lower international oil prices,” said a report of InvestCap Research.

“Lower inflation may compel further softening of monetary policy, which is due in March 2015. We anticipate that banking sector will prefer longer duration government securities to lock in better yields as long as monetary easing continues.”

The hike in deposits was translated into an expanding investment and advances portfolio which inflated by 29pc and 8pc respectively, said the report.

Published in Dawn, February 14th, 2015

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