KARACHI, Aug 23: The share of debt maturing within a year is so high in the total domestic debt that it has created rollover risk for the government which is running short of liquidity, said bankers experiencing acute liquidity problem.

The liquidity crunch in the banking system has also intensified the government problems to payback the huge sum of floating debt of worth Rs3.235 trillion within a year.

Due to higher inflation and low return on deposits it has minimised chances for banks to raise long-term deposits. The depositors either prefer to put money for short term or invest in government papers like saving schemes.

Bankers said the share of debt maturing within a year has been increasing and it might be around 55 per cent of the total domestic debt.

However, the State Bank in its earlier report had said the share of floating debt in total outstanding domestic debt had reached 52.2 per cent by end March 2011.

“This implies that the government must rollover the entire floating debt stock of Rs2,854 billion at least once a year,” said the report. The floating debt reached Rs3.235 trillion by end June 2011.

Banking experts said the situation was critical in the wake of liquidity crunch in the banking system since the government is the biggest borrower from the commercial banks.

Banks now depend largely on frequently injected large amount of liquidity by the State Bank. Last week, the SBP injected Rs126 billion for 17 days through open market operation, which covered the entire Ramazan period.

Banks have been experiencing heavy withdrawals due to Ramazan and Eid spending. Traditionally, Ramazan is the time for heavy withdrawal from banks.

However, banking experts said the banks’ failure to attract long-term deposits despite incentives from the State Bank has aggravated the situation and intensified the rollover risk for the government.

The State Bank had already warned in its earlier report that a surge in credit demand from other sectors of the economy, or reduction in liquidity in the banking system can play a role in intensifying the rollover risk.

The credit demand from other sectors of economy has yet not increased but the banks are empty of cash. So for the private sector made net retirement instead of borrowing.

However, the credit demand will suddenly increase from mid of next month as the cotton season will be at peak and cotton traders and ginners would require credit for working capital.

With the arrival of phutti and production of ginned cotton the entire textile sector would accelerate its operation and would require massive working capital.

In the fiscal 2011 the credit demand for working capital substantially increased. The current year could see further enhancement since the cotton has bumper crop this year.