SBP injects Rs2.9tr into banks via OMO to help ease liquidity strains

KARACHI: The State Bank of Pakistan (SBP) injected Rs2.93 trillion into the money market through an open market operation (OMO) on Friday to ensure adequate liquidity in the banking system.

This operation covered seven- and 28-day periods at an interest rate of 15.04 per cent.

According to the OMO result, the SBP provided Rs2.06 trillion in liquidity for the seven- and Rs871.5 billion for 28-day OMOs, with rates very close to the policy rate. Analysts believe the central bank’s goal is to stabilise short-term funding conditions without signalling an imminent easing of monetary policy.

Saad Hanif, head of research at Ismail Iqbal Securities, noted that the latest OMO underscores the SBP’s efforts to manage liquidity within the financial system.

Despite the injection, substantial maturities of Rs2.48 trillion in seven-day OMO and Rs26.4 billion in 28-day OMO led to a net liquidity outflow of Rs2.58 trillion for the day. However, the situation has evolved with subsequent issuances, pushing the total outstanding OMOs to a significant Rs10.1 trillion, Hanif said.

“This increase in outstanding OMOs indicates a growing reliance on SBP funding to meet the liquidity needs of the banking sector,” he said and added that the ongoing liquidity challenges within the banking system are likely driven by high government borrowing requirements, limited deposit growth, and other structural issues.

“By providing liquidity injections at rates very close to the policy rate, the SBP aims to stabilise short-term funding conditions without signalling an imminent easing of monetary policy,” he noted.

The SBP cut its key interest rate for the fourth consecutive meeting, lowering it by 250 basis points to 15 per cent last week. Since June, the SBP has lowered interest rates by 700bps over four straight cuts.

According to Hanif, the current high level of outstanding OMOs indicates that the banking system requires a careful balance by the SBP to provide necessary liquidity support while maintaining control over monetary policy and inflation expectations.

“Addressing these liquidity issues will likely require coordinated efforts, including better fiscal management to reduce government borrowing needs and strategies to enhance deposit growth and overall market liquidity. Without structural adjustments, the system’s heavy reliance on SBP funding could pose risks to monetary stability and economic growth.”

The latest debt data reveals that the government’s financing needs have decreased due to a budget surplus and record-high profits from the central bank. As of September 2024, Pakistan’s debt-to-GDP ratio fell to 65.7 per cent, its lowest level since June 2018. The domestic debt-to-GDP ratio is at 43.1 per cent, while the external debt-to-GDP ratio is at 22.7 per cent.

By the end of September 2024, the central government’s debt fell by Rs792 billion, reaching Rs69.57 trillion. However, the debt increased by Rs656 billion in the first quarter of the current fiscal year. As of June 30, 2024, the debt was Rs68.914 trillion.

The government’s domestic debt rose to Rs47.536 trillion in the first quarter of FY25, an increase from Rs47.160 trillion at the end of the previous fiscal year. On a month-on-month basis, though, domestic debt declined, recorded at Rs48.339 trillion at the end of August.

Data from the SBP indicated that the government repaid Rs2.039 trillion in loans to banks during the first four months of this fiscal year, compared with borrowing Rs1.952 trillion in the same period last year. Meanwhile, bank lending to the private sector surged to Rs447 billion from July to October FY25, in stark contrast to a net debt retirement of Rs153 billion a year earlier.