Cash withdrawals from banks are currently higher than last year as consumers with an increased disposable income enjoy a pre-Eid shopping spree, senior bankers say.

These withdrawals that can be quantified with limitations — and that too after a lag of time — form part of a huge Eid economy. Its size is guesstimated between Rs500 billion and Rs1 trillion, depending upon which proxies are used for estimation, and whether spending out of a large informal economy is taken into account.

“Pre-Eid cash withdrawals have been on the rise since the second half of 2015 primarily after law and order had been restored in Karachi,” says a senior executive of one of the top five banks. “Higher economic growth in GDP and increase in people’s disposable income have also been a key factor in boosting these withdrawals.”

Economic growth in fiscal years 2016 and 2017 rose to 4.7pc and 5.3pc respectively from 4pc each in fiscal years 2014 and 2015.

“Only slow down the pace at which money keeps coming back into the banking system”

“Regardless of income distribution disparities, a higher economic growth in these two years has made millions of mid-income families and small business richer.”

They have more money to spend now and Eid is one such mega event that prompts all families (except the very poor) to make a draw down on their savings and spend freely to celebrate the festive occasion.

Whereas a large number of individual account holders make cash withdrawals during Ramazan for pre-Eid shopping and for holding fresh currency notes for giving Eidi; more financially literate and tech-savvy people pay for Eid shopping via their credit or debit cards and withdraw one-time additional cash from banks only for Eidi.

Small businesses owned by individuals, families or groups of friends also withdraw additional money from banks on Eid to meet Eid-related expenses, senior bankers say adding that in Eid shopping they find similarities between such businesses and households.

Though this is definitely not the case with large companies, public sector enterprises and government departments too, withdraw more money from banks during the month, than in normal days, to pay salaries and bonuses to their employees ahead of Eid.

This is the third consecutive year in which people obtain fresh currency notes from banks ahead of Eid under a SBP-supervised SMS service. The central bank launched this system back in 2015 and millions of people get tens of billions of rupees worth of fresh currency notes every year.

Still, that forms only a tiny part of the overall withdrawals from bank deposits as under the SMS service banks supply fresh currency notes up to a certain limit; which exactly is the purpose of the service — providing people with crispy fresh notes just enough for presenting Eidi or cash gifts to their loved ones.

From a banking point of view, accelerated withdrawals from bank deposits in Ramazan do not mean erosion in the deposit base.

Currency is always in circulation. One man withdraws money only to pay the other and that other man pays it to yet another. So, the money circulates. “It’s just a case of when all of this money, or to be exact a large part of it, comes back into the banking system,” says treasurer of one of the top five banks.

“Pre-Eid withdrawals only slow down the pace at which money keeps coming back into the banking system because people and small businesses tend to hold more cash during Ramazan. The bulk of money withdrawn from banks eventually returns to banking system though it might take a little longer than usual.”

There is a general perception though that this temporary increase in currency in circulation, however, has an effect on the economy at large and on the banking system.

A surge in currency in circulation adds to inflationary pressure. And at times, it creates liquidity shortages in the interbank market if the banking system is not already wallowing in excess liquidity.

Contrary to general perception, an in-depth 2010 SBP analysis of price movements between 1991 and 2008 found “no evidence of systematic acceleration in overall CPI, food and non-food price levels in the month of Ramazan.”

A senior central banker who conducted the analysis opined that this “could be explained by price hikes well before the start of the holy month and government activism in regulating prices of essential food items in Ramazan.” Nevertheless, his research found significant effect of Ramazan on prices of fruits.

Mindful of the ramifications of a possible liquidity crunch due to excessive withdrawals the State Bank of Pakistan remains vigilant in Ramazan to keep banks’ liquidity at appropriate levels.

If interbank liquidity falls below a certain level it injects short term funds into interbank market through an open market operation (OMO).

This explains why the SBP pumped in a few billions of rupees into the interbank market four times during this Ramazan (till June 21), first for one day at the beginning of June and then for one week each time on three other dates.

“However, the amount of money injected in each of these three OMOs was not too large (below Rs1.5bn each time) because we felt the market was fairly liquid enough to stand pre-Eid withdrawal pressure,” a central banker told this writer.

Published in Dawn, The Business and Finance Weekly, June 26th, 2017