Pakistan’s central bank has pumped a significantly large sum of Rs4.77 trillion into the banking system for up to four weeks to allow conventional and Sharia-compliant banks to meet the cash-strapped government’s funding needs.
Market discussions indicate that the State Bank of Pakistan (SBP) provided huge liquidity despite excess funds with commercial banks, as increased liquidity would encourage them to lend more to the government at reduced interest rates.
Second, the central bank has been signaling to markets through heavy monetary easing that it may consider cutting its policy rate earlier than expected, possibly in December.
Pak-Kuwait Investment Company (PKIC) head of research Samiullah Tariq said the provision of new funding is directly linked to banks’ lending to the government through the purchase of government securities such as Pakistan Investment Bonds (PIBs) and bonds. “One of the primary objectives of the central bank is to reduce the cost of borrowing to the government,” he said.
The government’s reliance on bank loans has increased mainly due to interest payments on debt estimated at Rs 8.3 trillion for the current financial year. This is slightly below the Federal Board of Revenue’s full-year tax collection target of Rs9.4 trillion.
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This means that most of the revenue will go to debt servicing, leaving almost nothing for development projects and economic activities.
However, the potential reduction in the policy rate from a record high of 22% will reduce debt servicing costs and create room for growth spending.
The Finance Ministry, in its economic outlook for October 2023, said that “debt servicing costs rose by 45% in the 1st quarter (July-September) to Rs 1.4 trillion. On the spending side, “the primary concern is rising public debt servicing costs, with the SBP raising its policy rate to 22% and a weaker PKR (Pakistan rupee) fueling rising servicing costs.”
The central bank provided new financing at a rate of return of slightly more than 22% to commercial and Sharia-compliant banks.
A top analyst said the other day that revenue collection rose nearly 28 percent to Rs 2.75 trillion in July-October 2023, but remained low compared to the government’s requirements, increasing its reliance on borrowing.
Moreover, its reliance on domestic commercial debt continued to remain high due to small external debt inflows.
Commercial banks’ outstanding debt provided to the government stood at Rs 23.23 trillion as on 31 October 2023. It represents 88% of the total deposits of Rs 26.39 trillion in banks, showing that the investment-to-deposit ratio (IDR) hovered around a new top.
On the other hand, the advances-to-deposit ratio (ADR) – banks’ credit to the private sector, shrank to around 45% in October compared to 50% in June, as the additional tax on banks in case the ADR fell below. 50% withdrew. It created room for banks to invest more in government securities and lend less to the private sector.
The latest SBP numbers released on Friday showed that outstanding bank lending to the private sector stood at Rs 11.89 trillion at the end of October 2023. At the same time, bank deposits rose nearly 18% to Rs 26.39 trillion in October to compared to Rs 22.41 trillion in the same month last year.
PKIC’s Tariq said the recent crackdown on currency smugglers and hoarders has prompted businesses and people to park money in banks. In addition, banks offered a higher rate of return on fixed deposits, which also encouraged many to put savings in fixed deposits.
Published in The Express Tribune, November 12u2023.
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