KARACHI, Jan 31: The increase in Cash Reserve Requirement (CRR) by the State Bank of Pakistan would suck up over Rs28 billion from the banking system.
The central bank, which raised the discount rate by 50 basis points on Thursday, also increased CRR by 100 basis points to 8 per cent to curtail inflation through less supply of liquidity.
SBP Governor Dr Shamshad Akhtar, who announced the Monitory Policy, said the monetary tightening along with the zero rating of CRR helped in the mobilisation of deposits of above one year maturity and induced banks to offer higher returns.
During August 4 to December 29, 2007 share of these longer-tenor deposits in banks’ total liabilities increased by 1.7 percentage points (Rs71.4 billion) to 13.7 per cent. The shorter-tenor deposits, on the other hand, increased by only Rs22 billion.
The governor warned about the potential risk of a sharp acceleration in the reserve money growth ultimately hits inflation.
She said the potential risk of a sharp acceleration in reserve money growth was mitigated by SBP’s decision to increase the policy rate and gradually reduce commercial banks’ reliance on SBP refinancing facilities.
By January 19, (FY08) the SBP financed Rs237.1 billion of the total net budgetary support. This is in contrast to same period last year when the government borrowings from the SBP were less than one-third of this amount.
If this trend continues, the government is unlikely to meet its annual target of retiring Rs62.3 billion which will cause inflation.
The monetary policy document said that the growth in reserve money for July 1-January 19, FY08, decelerated to 9.6 per cent (Rs116.2 billion) in comparison to 16.6 per cent (Rs166.5 billion) in the same period last year.
“However, impact of these actions was partially offset by government’s heavy reliance on borrowings from the SBP, which has the potential of sharply accelerating reserve money and thus M2 growth,” said the SBP governor.
A higher annualised M2 growth of 19.2 per cent has already increased the supply of broad money from Rs199.8 billion recorded last year to Rs234.4 billion this year during the period under review.
“Attaining the target of 13.7 per cent, set for FY08, will be quite challenging unless immediate corrective policy measures are taken to reduce significantly the excess central bank borrowings,” she said.
Similary, financial inflows necessary to finance the current account deficit have slowed down by 6.9 per cent during the period under consideration.
“The less than expected net inflows in the portfolio investment due to uncertain domestic environment was a drag in this regard,” the governor said.
The future prospects of these inflows such as GDRs, Eurobonds, privatisation receipts etc, necessary for the financing of external current account deficit, depend on how swiftly domestic and international environment appears conducive to launch this initiative, said the monitory policy.
“These developments may result in further widening of external current account deficit to GDP ratio to a much higher level than the targeted 5 per cent.” said the document.
The Pak rupee-US dollar exchange rate has already depreciated by 3.7 per cent during July 1- January 29, 2008. Apart from putting pressure on foreign exchange reserves, this will be an additional contributing factor to inflationary pressures in the coming months, it added.
The monetary policy document said that effective January 1, 2008 State Bank has introduced a new Long Term Financing Facility (LTFF) to facilitate the exporters to increase exports. Under the new scheme banks and DFIs will provide long-term financing of up to 10 years to their borrowers for import of foreign machinery as well as purchase of locally manufactured machinery for setting up of export-oriented projects.
An amount of Rs8 billion has been earmarked for financing for the period between January - June 2008, which is well above the estimated demand received from the banks and DFIs for providing limits under the scheme.
The State Bank will provide 70 per cent refinance to the banks and DFIs on their disbursements under the new scheme. The borrower has the option to borrow for three different tenors, i.e., for up to 3 years, 5 years and 10 years, at the financing rates of 8 per cent, 9 per cent, and 10 per cent, respectively. The financing rates for end-users will remain locked in for the entire period, once the facility has been disbursed by the banks and DFIs. However, banks and DFIs have to keep the disbursements during a year in accordance with the limits sanctioned to them.