It led to noticeable withdrawals of money from the banking system experiencing liquidity crunch. Post-Eid illiquid money markets saw volatile call money rates surge to 40 per cent before settling back to 20 per cent later in the week.
Many experts contacted by Dawn for comments termed the statements by Governor of State Bank of Pakistan Dr Shamshad Akhtar and the newly-appointed advisor to Prime Minister on finance Shaukat Tareen timely, strong and well-worded. While others considered these very people partially responsible for the situation: Madam Governor for letting banks indulge in imprudent consumer financing ( the policy initiated by Dr Ishrat Hussain) and Shaukat Tareen for patronising brokers by introducing a new brand of badla — the CFS (continuous funding system).
As the currency market turned volatile, the SBP intervened to ease liquidity by injecting $20-100 million (different sources quoted different amounts) in the currency market and lowering the limit of cash reserve requirement (CRR) for banks from nine to seven per cent. The two per cent phased lowering of CRR is expected to release an estimated Rs60 billion to the banking system for credit expansion.
Experts felt that in the short-run the government can cut cash reserve requirements and statuary liquidity requirement (SLR) but in the long-run change in discount rate could be used to manage the market.
However, the government is currently more focused on mobilising funds from friendly countries to come out of the financial distress.
All financial managers including the finance minister, secretary finance, financial advisor and SBP Governor are attending the annual meetings of the World Bank and the IMF in Washington. Some officers of the ministry of finance said the meetings could provide an opportunity to ‘pursue the donors’.
Several bank branches in Karachi confirmed that they were approached by customers with queries of all kinds. There were reports of withdrawals from few not-so-strong small banks but the activity was within manageable limits.
As of June 2008, according to figures given out by the State Bank, there are in all 24.816 million depositors in the country in all the banks combined. Approximately two-thirds of these people primarily use banks to draw their salaries. Many of the rest, with their savings parked in banks, demonstrated some uneasiness in the post-Eid week.
Several bank branches in Karachi confirmed that they were approached by customers with queries of all kinds. There were reports of some withdrawals from certain banks but the activity was within manageable limits.
“People remember the co-operative and financial companies’ fiasco of 1980s and 90s. They have not forgotten nor forgiven how the government breached their trust by freezing their foreign currency accounts in 1998. If they get swayed by rumour mongers it is because they have sour memories”, said a depositor.
There were some reports of more than normal activity at the branches of banks with locker facilities. “Generally people expressed anxiety but the level was not high enough to motivate them to take their valuables out of lockers. Besides, in the current law and order and security situation what other options are available”, a bank manager asked. He argued that people would not touch their lockers even when they made uncomfortable by rumours.
“Let the fog of suspicion created by the whispering campaign settle and sanity prevail.The banking sector has a strong foundation. It would be wrong to confuse the liquidity crunch in the money market or falling value of rupee with the fundamentals of the banking sector,” an ex-banker close to ruling party said.
The financial and corporate circles differ on factors responsible for the current pass and also on the most appropriate measures to sustain the confidence level in the banking system.
Some blamed economic policies of demand-led growth of the previous government. Others held brokers-bureaucrats-politicians nexus responsible for creating a bubble economy by diverting the country’s financial resources to speculative capital market.
Yet another group blamed the imprudent financial conduct of the present and the last government and their reliance on the State Bank for their liquidity needs. They said they have drained liquidity from the market.
The government borrowing rose by over 100 per cent in the first 11 weeks of the current fiscal year to a total of Rs173.23 billion from July 1 to Sept 13.
Pakistan is already struggling with a high inflation rate at more than 25 per cent and a widening current account deficit. Foreign exchange reserves are fast depleting. The rupee lost about 23 per cent in its value since the start of the year.
Pakistan’s rating by Standard & poor has been revised to CCC-plus, a few notches above default level. The S&P said: “Pakistan’s worsening external liquidity may imperil its ability to meet about $3 billion in upcoming debt payments”.