Market has yet again made the policy rate irrelevant. The cut-off in the latest T-Bill auction reached at 15.25 percent for 3M and 15.5 percent for 12M while the policy rate is at 13.75 percent. Such high rates were the case in 1990s. The rates didn’t go up to this level in 2008-09 when the headline inflation peaked at 25 percent and yearly averaged at 21 percent. Today, the inflation is expected at around 15% (peaking at 20%) for FY23 and the latest reading is below 14 percent.

SBP in its latest monetary policy statement took notice of the diversion of policy rate and cut-off rates and had warned of appropriate action in case of misalignment. It acted on the same by issuing 63-day open market operations (OMO); yet the market is not listening. Is SBP losing credibility and losing the control on the monetary direction?

The issue is that government wants money as much as it can to fund its growing financing needs (due to energy subsidies) while banks are not willing to lend. The external avenues are virtually blocked without the IMF. The growth in currency in circulation (CIC) is unabated. SBP lacks innovation (or out of box thinking) to bring the rates back into the box.

SBP blames it on fiscal slippages. Yes, there is no doubt on the fiscal gap. But the crisis is also of balance of payment. And the twin deficits in terms of GDP were high in 2008-09 as well. Inflation was higher. Yet the market rates were under control. Now things are not at all working as per SBP’s plans.

There are certain things that SBP can manage such as outright purchase of papers from the secondary market and efforts to reduce the currency in circulation. However, all SBP is doing is offer longer tenor OMOs and warnings through words. Actions speak louder than words. The market needs serious actions to re-establish the writ of the institution.

Banks want to move away from government papers. How much OMOs can they have on their books? The toll of OMOs injection (conventional and Shariah) is standing at whopping Rs4 trillion (25 percent of banking deposits). Banks seem to be done with taking this exposure. Those have concerns for their own balance sheets. Is there no other avenue of financing available at all?

Why is SBP not doing anything concrete to bring the CIC back to normal range? The CIC to M2 ratio is currently at 30 percent as compared to 22 percent a decade ago. Bring back the CIC to 22 percent can increase the banks’ deposits by Rs2 trillion. Even a fraction of this can bring the market rates down significantly.

Then the amended law of SBP allows the central bank to outright purchase from the secondary market. There is some definitional issue with the IMF on this. Can SBP not resolve this? Can the bank not negotiate on this with the IMF? These are not fiscal issues. It is a matter to be dealt by the SBP.

Anyhow, the ground situation is that government raised Rs751 billion in the auction against the target of Rs750 billion. Predominately, the amount is raised in 3M where Rs556 billion are being raised at 15.25 percent and the rest are distributed in 6M and 12M papers.

The only hope for the market rates to stabilize or to come down is the agreement with the IMF and for that the government has to take tough steps. SBP’s assumptions for the future directions and gaps are based on the IMF programme being restored. There is no contingency plan (on the face of it) which SBP or the government has. And that is making market jittery, and will remain like this till the IMF is back or actions are being taken (beyond 63 days OMOs) to enhance the liquidity in the system.