SBP (State Bank of Pakistan) has announced its plan to repurchase Market Treasury Bills (MTBs). It has already issued a buyback auction target of Rs 500 billion for December 2024 against a large number of maturities in December.
The SBP engages in open market operations (OMOs) by purchasing and disposing of Treasury Bills. It is one more useful fiscal and monetary tool. A further powerful monetary instrument SBP has up its sleeves that will both expand the money supply and ease the tighter conditions in the interbank market is the buyback of short-term government notes. In addition to providing guidance to the market, the liquidity pumping can indicate that the central bank might consider exploring a reduction in its policy rate.
In future, it might also be used to repurchase less liquid, small-scale long-term government bonds in order to pay off outstanding debt and ensure that the market’s minor offerings of securities maintain acceptable issue sizes for benchmark tenors that are now in place. Here, there is an example. Suppose in the past a 10-year bond insignificantly issued for a small sum of funds, say Rs 103 million.
To reduce significant maturities and start the Pakistan Investment Bonds (PIBs) operations, it may be necessary to purchase back on a single day in order to lower the risk and cost of rollovers.
Although it is too soon to say; it is unclear whether or not policymakers are considering lending to the private sector in order to spur growth, given that 71% of scheduled banks’ funds are invested in government securities.
The real growth that is being choked and clogged by bank and financial institution investments in GOP papers that restrict access to the private sector is undoubtedly a source of great concern for the administration.
Because there are so few direct taxpayers, there are likewise few sources of liquidity. The pattern of tax collection resulting from a small number of taxpayers is quite concerning because indirect tax collection accounts for the majority of the increase in tax collection. As a result, the percentage of taxes collected through direct collection is declining, and the graph of tax to GDP ratio is tilting downward rather than upward. Higher expenditure compared to reduced receivables is the root of the imbalance.
Despite this, the amount allocated for spending is insufficient to revive the domestic economy. Remittances are the main source of income. Despite any significant incentives for Pakistanis living abroad, they are the main sources of revenue.
The exporters have received a lot of rebates and incentives, but against expectations, the rate of increase in exports and tax contributions has been much slower and lower.
As a result, the SBP liquidity injection (OMO) has diversified to include investments with government papers as collateral.
Financial derivative assets, or derivatives, are the other source of liquidity in the banking system.
In June $ 571 million amount through interbank market intervention has already been published by SBP.
Normally, exchange rates between local and foreign currencies are used when a central bank buys foreign currency in the interbank market.
Returning to the original topic, it is a wise move for the Ministry of Finance to use its excess cash for buybacks, which will also lower the rollover risk. The administration may at some point also give orders to purchase back PIBs. Looking at the maturities in December, it’s evident that they totaled approximately Rs 4.6 trillion. Further to elaborate this writer’s point of view on bank lending to the private sector. If we examine the advances against deposit ratio (ADR), we see that it has a steep falling slope and is currently 38.37%.
If left unchecked, this rate of decrease in ADR could continue at the end of the current fiscal year’s third quarter, since interest accrued by the banks will start to settle.
Yet, if drastic steps are not taken to fuel the economy, there is a risk. It might significantly exceed the target for the budget deficit. However, if the decision has been made by the fiscal and monetary policymakers to increase economic activity, then the SBP will have to combine its monetary responsibilities to make the policy effective.
By increasing and doubling the corridor gap, it can be used to effectively control money market overnight repo rates and push the banks to extend more credit to the private sector.
As a result of the improved economic stimulation, job creation, and increased tax revenue, the benefit will increase in return.
The economy is in a difficult situation, and the journey is bumpy, to say the least. However, this is a crucial component of structural reform and, therefore, the need of the hour.
Copyright Business Recorder, 2024
The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper
He tweets @asadcmka
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