KARACHI: The State Bank of Pakistan (SBP) has injected 3.085 billion rupees of liquidity into the money market through an open market operation (OMO) for a period of seven days at 12.28%, has it she reported on Saturday, mainly due to higher government borrowing needs to finance the budget deficit.
“The growing size of OMO indicates a greater need for government funding as this liquidity ends up being used to buy government securities,” said Fahad Rauf, head of research at Ismail Iqbal Securities.
He added that since the previous week’s OMO was already large, it would not have much impact on the money supply.
The government meets its financing needs by borrowing from commercial banks, as it cannot borrow from the central bank under the International Monetary Fund’s $6 billion loan program.
“This [large OMO] is due to the reduction of NFA [net foreign assets] of the banking system. The government must resort to OMO since SBP borrowing is prohibited under the IMF program,” said Abdul Rehman Siddiqui, Deputy Director of Research at BMA Capital Management Limited.
In addition, a surge in international commodity prices and rising imports put pressure on the external sector. Debt service and foreign exchange transactions offset the impact of foreign currency inflows. This led to a decrease in NEAs of the banking system.
The NEA position of the banking system remained negative during the nine months of this financial year. They were negative at minus 1.09 trillion rupees between July 1, 2021 and March 25, 2022, according to the latest monetary aggregates data from the SBP. However, the NFA of the banking system stood at 676 billion rupees during the same period of the previous financial year.
Domestic assets of SBP and scheduled banks rose to Rs 1.643 billion in July-March for FY 2022 from Rs 604 billion a year ago. Government borrowing for budget support increased to 905.5 billion rupees in July-March of FY2022 from 738.2 billion rupees a year earlier.
Analysts said banks were making huge profits by investing in treasury bills. The SBP has injected money into the system through OMOs which are money-making opportunities for banks wishing to invest in government papers to lend to it.
The SBP also conducted a Sharia-compliant Mudarabah-based OMO on the same day, injecting 283.6 billion rupees for seven days at 12.35% into Islamic banking institutions.
“It appears that commercial bank liquidity is tight due to heavy investment in government securities. So to cover that, the SBP provided them with liquidity,” said Ahmed Ali Siddiqui, Head of Shariah Compliance at Meezan Bank.
“The SBP introduced a Sharia-compliant OMO facility for Islamic banks last year. This will improve the liquidity management framework for the Islamic finance industry,” Ahmed said.
Islamic banks have invested in Sukuk (Islamic bonds) at competitive rates. Therefore, they need short-term liquidity from the SBP, Ahmed said.
Rauf did not believe that the massive injection of liquidity into the money market would ease the pressure on yields on market treasury bills and Pakistan investment bonds.
“Not really… the duration of the OMO is 7 days unlike the 63 day OMO that SBP introduced to depress short-term yields,” he said.
Pakistani bond and currency markets came under severe pressure amid growing political uncertainty in the country. 3- and 5-year bonds were near 2.5 years, at 12.7% and 12.5%, respectively. Since March 8, 2022, yields have increased by around 130 basis points.
The SBP raised the key rate by 250 basis points to 12.25% on Thursday.