Last week, the SBP injection through Open Market Operation was reduced to Rs 22 billion after a long spell of tight market conditions. SBP has been injecting liquidity for almost a year, which was on a constant rise. It was in August 2009 that the SBP had to inject Rs 22 billion due to rising demand for rupee, which kept on rising.
It was on November 27 that injection amount touched an all time high of Rs 160.7 billion. Prior to that, interbank market had been a witnessing liquidity constraint since the beginning of FY 2008 and the Central Bank was frequently using its monetary tool to cool down the rupee demand. Therefore, the credit for effective cash management certainly goes to SBP. But what has prompted a fall in OMO injection money?
What has caused a slump in the rupees demand? Is it that the country has received enough of overseas funding through FDI? Did the banks manage to increase their deposit portfolio or succeed in reducing their lending to customers that helped reduction in commercial banks advance/deposit ratio? Is it due to a fall in currency in circulation to Rs 1.294 trillion from Rs 1.35 trillion?
But, by the end of June 2009, currency in circulation was Rs 1.2 trillion (Approx). It is still a very big increase of almost Rs 100 billion and, therefore, it is not very commendable. Or is this just a good example of cash management that despite no change in the economic conditions the Central Bank successfully managing its cash flows. One of the factors that helped in the reduction of OMO injection is the spill-over effect of cooling of kerb market, as some parts of money ended up with bank deposits.
Logistic money of roughly Rs 30-35 billion helped the cause. Equity investment of $150 million created Rs 12 billion. One more entry that I would like to point out is the $/Rupee, Buy/Sell Swap that surged to USD 2.370 billion from USD 1.9 Billion that means a jump of swap amount by $470 million. It also helped SBP in raising liquidity of Rs 40 billion.
So let's be fair and give the credit to SBP for managing cash flow in an effective and efficient manner. Liquidity issues cropped up in the beginning of FY 2008. The then SBP chief Dr Shamshad Akhtar and her team decided to use central banks monetary tool.
In October 2008 Monetary Policy Statement, Cash Reserve Ratio (CRR) was slashed by 200 basis points (bps). The policy further exempted the time deposits of 1-year tenor and above from Statutory Liquidity Requirement (SLR). The decision helped in the injection of Rs 60 billion liquidity through CRR and exemption on time deposits of one-year tenor and above from SLR injected liquidity of about Rs 120 billion.
Cumulative release of liquidity after the slash in CRR if the previous cut of 1 percent is included, was of 300 basis points. So, overall, Rs 270 was roughly injected in the system. In real sense, liquidity position never attained a comfortable level due to quite a few factors, including rising NPLs, increased purchase of government securities to adjust fiscal deficit.
High level of advance to deposit ratio, which was supposed to lower down to 70 percent as per commitment made in October 2008 MPS. The regular delays in the adjustment of domestic petrol price to bring it at par with international oil price and hike in food support price continued to contribute negatively to the overall liquidity position.
Although outstanding power sector bills of Rs 175 billion were adjusted through TFCs, it helped in shifting banks advances head to investments portfolio and reduced banks advance to deposit ratio. It did provide some breathing space, but liquidity in real sense was never available, as the funds are blocked. NPLs of Rs 430 billion are also a blocked amount.
The current fall in the SBP injection money through OMO is due to quite a few factors. Rs 30-35 billion logistic money was received. Foreign money for share subscription and portfolio injection generated Rs 13 billion. A good chunk of money that was given to rural framers in late September and October saw late inflow.
SBP injection amount may have dipped but another circular debt of Rs 115 billion has piled up. Though, SBP has so far successfully managed to overcome the liquidity issue by effectively using its monetary tool, many obstacles down the road.
"Accounting adjustments" has now become a global practice. The European and American authorities have given official permission to these accounting changes. I am not sure if the auditors have made permanent changes in their audit rules or this global practice is a temporary solution.
The European and the US central banks can afford the luxuries of printing notes and have no limits of deficit. Greece is a good example of softer Western approach. Despite having no space for breach of fiscal deficit, they have allowed a Euro 45 billion 3-year loan at below 5 percent against a Greece bond that was trading at 7 percent.
Will the State Bank of Pakistan ever be able to do away without the injection? Economy's survival under donors' harsh terms and conditions is not an easy task. It is just like a patient that cannot survive forever on cortisone. The economy desperately needs a better solution.
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