SBP allocates Rs1.25 trillion to stabilize bank lending

KARACHI:For a maximum of 28 days, Pakistan's central bank has pumped Rs1.25 trillion into conventional and Shariah-compliant banks, ostensibly to make up for a cash crunch and satisfy the government's finance needs.

In addition, the six-month benchmark interest rate used by banks to lend money to one another, known as the Karachi Inter-bank Offered Rate (Kibor), fell more than three percentage points to 21.38% on Friday from its most recent top of 24.70%.

Given that it is borrowing primarily to cover the interest costs of debt, the reduction in the Kibor indicates that the government's reliance on bank borrowing may decrease dramatically.

Second, by lowering interest rates, the private sector will be more inclined to approach banks for the funding they require to launch new ventures and grow current ones.

Mohammad Awais Ashraf, the director of research at Akseer, claimed that banks were lacking in liquidity and could not meet the government's need for borrowing, which was necessary to close the budget deficit.

Due to this circumstance, the central bank was compelled to use open market operations (OMOs) on Friday to infuse cash totaling Rs1.25 trillion.

The government is facing the budget gap mainly due to colossal interest payments and the cost of salaries for its employees and pensions for the retired people.

Ashraf recalled that the central bank had injected Rs8.5 trillion into the banking system at the outset of December 2023, which signaled that the deposits with banks were insufficient to meet the government’s high borrowing needs.

Banks had already lent around 85% of total deposits to the government by December 2023. According to the central bank, the government has planned to borrow around Rs8 trillion from banks between December 2023 and February 2024.

Ashraf pointed out that government borrowing from banks had continued to grow since July 2019 when the International Monetary Fund (IMF) asked it to stop borrowing from the central bank.

Under the mechanism, the central bank injects funds into banks through OMOs and then banks lend to the government through the purchase of debt instruments such as T-bills and Pakistan Investment Bonds (PIBs).

The government’s reliance on domestic commercial borrowing has remained high, though the Federal Board of Revenue (FBR) collected higher revenues in the first six months of FY24 as compared to the IMF’s targets. Growing expenditures of the government have prompted it to borrow from banks.

The demand for credit from the private sector is next to nothing because of interest rate spike. Rather they are retiring their old debt.

The central bank has left its policy rate unchanged at the peak of 22% since July 2023, discouraging the private sector from borrowing to set up new factories or extend the existing production lines.

The government has restricted private sector growth in an effort to slow down the soaring inflation recorded at 29.7% in December 2023.

The Ministry of Finance, in its Economic Outlook for December 2023, said “private sector has retired Rs45.5 billion in the first five months (Jul-Nov) of the current fiscal year as compared to borrowing of Rs86 billion in the same period of last year”.

Muhammad Sohail, CEO of Topline Securities, stated recently on social networking site X that the interest rate in Pakistan has already decreased by 3%. He stated that the six-month Kibor, the benchmark interest rate, had dropped from its most recent peak of 24.7% to 21.5%. Even if the State Bank has maintained the policy rate at 22% since July 2023, there's a good chance it may decrease in the upcoming months. "In 2024, we anticipate a 700 basis point reduction in the policy rate, from the current 22% to 15%."