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Banks face liquidity crunch: Govt raises only Rs28 billion

April 18, 2013

—Dawn Illustration

KARACHI: The State Bank could hardly raise Rs28 billion for government on Wednesday through treasury bills which is much below the target of Rs175bn.

Bankers said that the market had been facing severe shortage of liquidity and that was a deliberate attempt by the central bank, signalling banks to stop rush for government papers.

The State Bank has not been pumping enough money to keep the market liquid since banks are facing shortage of over Rs600bn.

The State Bank used to inject Rs500bn or more each week keeping the banks liquid, but still short of liquidity.

Currently banks are short of liquidity by Rs70 to Rs80bn and were unable to invest in government papers.

The State Bank gradually reduced liquidity injections in the last three months which created a gap, forcing banks to avoid lending to government, said a senior money market player in the banking industry.

This change in the SBP’s stance came after five years. Earlier, the Central Bank had been encouraging banks to invest in government papers which loaded the government under huge debt and interest payments which sharply increased by over 60pc in the first quarter of the current fiscal year.

The treasury bills calendar issued by the State Bank showed that earlier it was planned that Rs175bn would be raised on April 17 auction of treasury bills.

The total bids just stood at Rs59bn and most of the bids were meant for three months.

Out of Rs28bn, the government raised Rs27bn for three months. No bids were offered for 12 months.

Bankers said the maturity of t-bills due on Thursday amounted to Rs148bn while the government raised just Rs28bn through auctions.

There is a huge gap between the matured amount and the amount raised by the State Bank, creating further liquidity crunch that may affect the money market.

It was also interesting that banks were anticipating higher interest in the coming months despite low inflation.

“This time the interest rate would not be driven by Consumer Price Index (CPI) or Sensitive Price Index (SPI). We believe the shortage of liquidity would raise demand and that would push the interest rate in the next monetary policy,” said S S Iqbal, a money market expert.

The CPI is well below the policy interest rate of 9.5pc while analysts believe the CPI could see a further fall this month. In March, the CPI was 6.6pc on year-on-year basis.

It seems strange that the interest rate could go up under the falling inflation, but bankers insist they chose to invest in 3 months papers, anticipating that interest rate may see a hike in the next monetary policy.