KARACHI, Feb 18: Instead of sucking money out of the banking system, the State Bank is pumping liquidity directly into the economy through a process which is tantamount to printing of currency for the government. The State Bank’s balance sheet shows a stock of Rs515 billion of treasury bills which means that these T-bills were not sold to the banks. Money was provided to the government directly from the SBP itself. This effectively has the same impact as that of printing additional currency notes. Banking experts said that the money that was created in this manner finally reaches the banking system after it has been spent by the government since the government borrows money to spend it on public sector projects etc.
This additional money is then being used by the banking system for lending to the private sector and to consumers which is resulting in record high credit off-take causing monetary growth as well as inflation.
Banks have been using all of this available liquidity to lend as is evident from the banking system’s advances to deposit ratio which has reached over 77 per cent of total banking system deposits. Out of the remaining 23 per cent, banks keep 15 per cent with SBP as SLR (Statutory Liquidity Requirement) and 5 per cent cash as CRR (Cash Reserve Requirement) which means that banks have only 3 per cent remaining liquidity to invest elsewhere.
The current situation can only be remedied if the T-bills were retired by the government by paying back the money or the SBP sells these T-bills to the banking sector. It is unlikely that either of these two things will happen since the government is not likely to be in a position to repay the amount of Rs515 billion. On the other hand the banking system is obviously not in a position to absorb an additional Rs515 billion of T-bills when it has little excess cash to invest.
The situation is, therefore, expected to continue in the same vein. This does not, however, bode well for the economy since it is creating inflation and monetary growth and both are picking up pace despite a tight monetary policy being followed by the State Bank. Analysts said this was a misuse of SBP’s balance sheet whether it was a direct fault of the government which requires huge financing or SBP which looks unable to find option to deal with the T-bills trap. Inflation is the prime concern for the SBP and the government but both of them are involved in its increase rather than a targeted decrease. The CPI remained higher than the target of 8 per cent while some independent economists have doubt over the inflation figure and believe the CPI is not less than 9 per cent. “It looks as if the tight monetary policy is being hampered by the SBP itself,” said an analyst. Most of the analysts found the situation alarming regarding the inflation and monetary growth. They said the SBP cannot sell the huge Rs515 billion T-bills in the market especially keeping the interest rates ceiled.
Higher interest rates may attract banks to invest but they themselves have little liquidity (just 3 per cent of the deposits). However, the SBP does not like to increase the interest rates which would ultimately slow down the economic growth.
“The government is equally responsible for this situation as its rising spending compelled the SBP to go beyond the limitation,” said the analyst. Further, the government wants to see higher flow of liquidity into the economic system to keep the heat of the economic activities high enough to get a 7 per cent GDP growth. The tight monetary policy might hit the growth.
The situation is also the outcome of the IMF absence. IMF never allowed the SBP to keep huge T-bills stocks in its balance sheet. Some economists said since the country has come out from the IMF programme the government has started taking liberty to misuse the balance sheet of the SBP.
“Its good that we have come out from the IMF’s harsh conditions attached with its loans, but it kept checking on important sectors of the economy. We should avoid taking advantage of the liberty from the IMF as it might invite IMF back into Pakistan,” said an economist.
