In a bid to address the liquidity crunch in the money markets system, the State Bank of Pakistan, on Friday, injected a whopping Rs. 1.69 trillion into the money market system via the open market operation – a tool used by a central bank to inject funds based on the liquidity requirement of a bank or a group of banks.
The money was injected into the market for a period of seven days, and the banks are required to pay back the capital on a yearly interest of 12.29 percent.
According to sources privy to the matter, under the conditions of the International Monetary Fund (IMF) Program, the central bank cannot lend money to the government. Hence, the banking regulator indirectly funds money to the government through commercial banks.
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Abdul Rehman Siddiqui, the deputy head of research at BMA Capital Management System, emphasized that “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,”
Analysts also speculate that the commercial banks borrowing money from the central bank acquire it at a cheaper rate and invest in short-term paper at comparatively higher rates. Fahad Rauf, the head of research at Ismail Iqbal Securities, says that the increase in open market operations mostly indicates the need for “financing for the government” because eventually, all the capital goes into “buying government securities,”.
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It is pertinent to mention that many financial analysts believe that central banks routinely inject funds into the money market on a short-term basis so as to maintain policy rates and avoid any financial crisis. The State Bank of Pakistan raised the policy rate by an abrupt 250 bps to 12.25 percent on Thursday.
Prior to this, the central bank on 11 April injected Rs. 3.37 trillion into the money market for a period of seven days.
Noting the rollout of excessive amounts of capital into the money market Ahmed Ali Siddiqui, the head of Shariah Compliance at Meezan Bank, said that “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,”.
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Meanwhile, the total liquid foreign reserves of the country as of 8 April stand at US$ 17.03 billion.
Total liquid foreign #reserves held by the country stood at US$ 17.03 billion as of April 08, 2022. For details: https://t.co/WpSgomENV3 pic.twitter.com/LE9zO1wLxq
— SBP (@StateBank_Pak) April 15, 2022