KARACHI, Nov 16: The State Bank on Friday injected Rs4.4 billion into the inter-bank market but the injection was too small to provide relief to the banks experiencing a serious liquidity crunch.
So the banks had to borrow overnight funds from the central bank at a fixed discounting rate of 10 per cent—1.5 per cent higher than the interest rate charged by the SBP on one-week injection through reverse repo of treasury bills. Earlier on Thursday also the banks had borrowed Rs23.6 billion worth of overnight funds from the State Bank.
Senior bankers said heavy withdrawal from the rupee accounts ahead of Ramazan had deepened an ongoing liquidity crisis and forced the banks to resort to heavy discounting on Thursday and Friday.
People withdraw money from their accounts before the start of Ramazan to avoid deduction of Zakat. Central bankers say it is difficult to quantify the withdrawals but the amount runs into billions of rupees. The amount thus withdrawn comes back into the banking system within 6-8 weeks after remaining into circulation throughout Ramazan and even after Eid.
Bankers said banks were so short of liquidity on Friday that despite an injection of Rs4.4 billion, overnight call rate remained almost pegged at 9.90/9.95 against the discount rate of 10 per cent.
The intensity of the liquidity crisis can also be gauged from the fact that the open market operation conducted by the SBP for injecting funds into the market attracted offers worth Rs18.5 billion. Of this the SBP accepted offers worth Rs4.4 billion only and rejected the rest. As usual the central bank gave no reason for the rejection but bankers said the SBP did this to keep the yield on one-week reverse repo of treasury bills at the desired level.
WEEKLY REVIEW: Banks experienced a severe liquidity crisis during this week which is evident from the fact that they had to borrow more than Rs60 billion overnight funds from the State Bank between November 12-16.
As a result, overnight call rate remained pegged at 9.90/9.95 against the SBP discounting rate of 10 per cent throughout the week: On Thursday the call rate even rose past this barrier and was quoted at 10.70/10.90 per cent due to Rs23.6 billion worth of discounting.
WHAT NEXT: Bankers say pre-Ramazan withdrawal is just one of the several factors responsible for drying up the market liquidity.
They say banks still continue to experience huge withdrawals in the wake of the political uncertainty that hit Pakistan after the September 11 terrorist attacks on New York and Washington.
Since then at least four types of people have been making frequent withdrawals from their bank accounts:
(i) Ordinary people who panicked after the September 11attacks that was followed by US-led air strikes on Afghanistan on October 7 and then led to the fall of Kabul to Northern Alliance on October 13.
(ii) Pro-Taliban forces in Pakistan made heavy withdrawals from their bank accounts to finance their activities and to keep cash for meeting any emergency.
(iii) Foreign missions and the US and the UK agencies converted their foreign currency accounts into rupees to use these funds for winning tribal support against the Taliban militia and
(iv) Investors and speculators who withdraw rupee funds from the banks to purchase the dollar that started falling sharply immediately after September 11 for a host of reasons.
Although in normal circumstances money withdrawn from the banks come into the banking system in one way or other after remaining in circulation for some time, the major chunk of withdrawals made after September 11 has seemingly not flown back into the system.
That is evident from the fact that in September-October currency in circulation went up by Rs30.2 billion. Central bankers on record said that this indicates that people are holding on cash.
Senior bankers say the liquidity crunch in the inter-bank market would not ease off unless a big chunk of the currency in circulation flows back into the system. How soon this may happen depends much on how quickly people change their perception about prevailing political uncertainty.