SBP injects massive Rs3.085tn into money market

KARACHI: The State Bank of Pakistan (SBP) has injected Rs3.085 trillion worth of liquidity into the money market via open market operation (OMO) for a seven-day period at 12.28 percent, it reported on Saturday, primarily on account of higher government borrowing needs to fund the budget deficit.

“The increasing size of OMO indicates more need of financing for the government because this liquidity eventually goes into buying government securities,” said Fahad Rauf, the head of research at Ismail Iqbal Securities.

He added that as the previous week’s OMO was already large, it would not have much impact on money supply.

The government is meeting its financing requirements by borrowing from commercial banks, as it cannot borrow from the central bank under the terms of the International Monetary Fund’s $6 billion loan programme.

“This [large OMO] is because of reduction in NFA [net foreign assets] of the banking system. The government has to resort to OMO's since SBP borrowing is disallowed under the IMF programme,” said Abdul Rehman Siddiqui, the deputy head of research at BMA Capital Management Limited.

Moreover, a spike in international commodity prices and rising imports put pressure on the external sector. The debt servicing and the foreign exchange operations offset the impact of foreign inflows. This led to a decrease in the NFAs of the banking system.

The NFAs position of the banking system remained negative during the nine months of this fiscal year. They were negative at minus Rs1.09 trillion between July 01, 2021 and March 25, 2022, according to the SBP’s latest monetary aggregates data. However, the NFAs of the banking system amounted to Rs676 billion in the same period of last fiscal year.

The domestic assets of SBP and scheduled banks rose to Rs1.643 trillion in July-March FY2022 from Rs604 billion a year ago. The government borrowing for budgetary support increased to Rs905.5 billion in July-March FY2022 from Rs738.2 billion a year earlier.

Analysts said banks are making huge earnings by investing in treasury bills. The SBP pumped money into the system through OMOs that are money making opportunities for banks wanting to invest in the government papers to lend to it.

The SBP also conducted Shariah-compliant Mudarabah-based OMO on the same day, injecting Rs283.6 billion for seven days at 12.35 percent into the Islamic banking institutions.

“It seems that commercial banks’ liquidity is tight because of investing heavily in government securities. So, to cover this, the SBP provided liquidity to them,” said Ahmed Ali Siddiqui, the head of Shariah Compliance at Meezan Bank.

“The SBP introduced a Shariah-compliant OMO facility for the Islamic banks last year. This will improve the liquidity management framework of the Islamic finance industry,” Ahmed said.

Islamic banks have invested in Sukuk (Islamic bonds) at competitive rates. Hence, they need short-term liquidity from the SBP, Ahmed said.

Rauf didn’t think that the large liquidity injection into the money market to ease pressure on the yields of Market Treasury Bills and Pakistan Investment Bonds.

“Not really…the tenor of the OMO is 7 days unlike the 63 day OMO that SBP introduced to bring down the short-term yields,” he said.

Pakistan bond and currency markets came under severe pressure amid rising political uncertainty in the country. The 3-year and 5-year bonds were at almost 2.5-year high of 12.7 percent and 12.5 percent, respectively. Since March 8, 2022, yields have been up around 130 bps.

The SBP raised the policy rate by a sharp 250 bps to 12.25 percent on Thursday.