Economic Survey Reveals Excessive Injections of Cash by SBP in Open Market During July-March FY23: A Flood of Money

A Deluge of Cash: SBP’s Excessive Injections in Open Market During July-March FY23 Revealed by Economic Survey

Pakistan’s interbank money market faced a liquidity crunch during the period of July-March FY23, according to the Economic Survey 2022-23 released by the Economic Advisor’s Wing of the Finance Division. This is in stark contrast to the previous year, where the situation was vastly different. The State Bank of Pakistan (SBP) played a significant role in this scenario, injecting a substantial amount of cash into the banks.

The survey reported that the average outstanding Open Market Operations (OMOs) nearly doubled, reaching an all-time high of PKR 6,520.5 billion during the review period. This marked a significant increase compared to PKR 2,641.8 billion in the same period the previous year. The impact of the government’s increased reliance on scheduled banks for financing, in the absence of central bank borrowing, also had a profound effect on the liquidity conditions of commercial banks.

Turning to T-Bills, the market offered a total amount of PKR 28,808.9 billion in primary auctions during the July-March FY2023 period, slightly higher than the offered amount of PKR 26,426.5 billion during the same period last year. The government raised PKR 15,514.6 billion (54 percent of the offered amount) through T-Bill auctions, compared to the accepted amount of PKR 12,959.5 billion (49.0 percent of the offered amount) in the previous year. The majority of acceptance for T-Bill tenors was observed within the 3-month range, indicating market expectations of a potential tightening of the monetary policy stance.

Moving onto Pakistan Investment Bonds (PIBs), the government showed a preference for floating rate long-term debt instruments. Fixed-rate PIBs accounted for approximately 33.0 percent of the offered amount, while floaters constituted around 67.0 percent. With higher yields demanded by the market in relation to prevailing cut-offs, the government accepted only PKR 968.9 billion from fixed coupon PIBs (16.6 percent of the accepted amount). Floaters played a significant role in raising medium-to-long-term debt, allowing the government to raise PKR 4,861.4 billion through floating rate PIB issuances (83.4 percent of the accepted amount). Among the floaters, 2-year quarterly coupon PIBs emerged as the most favored instrument, contributing around 44 percent of the accepted amount.

The SBP’s aggressive tightening approach to monetary policy, in response to persistent high inflationary pressures, saw the policy rate increasing by 8.8 percent to 21 percent over the past 12 months. The impact of this tight stance was evident in the rise of the Weighted Average Lending Rate (WALR) from 10.6 percent in March 2022 to 18.0 percent in March 2023. Similarly, the Weighted Average Deposit Rate (WADR) offered on fresh deposits rose from 5.1 percent to 8.1 percent during the same period. Consequently, the banking spread, representing the difference between lending and deposit rates along with the cost of intermediaries, increased from 5.5 percent to 9.9 percent between March 2022 and March 2023.

The Economic Survey sheds light on the significant injection of liquidity by the SBP into the open market during July-March FY23, highlighting the consequential effects on the money market and the government’s financing dynamics. The government’s reliance on scheduled banks for financing, in the absence of central bank borrowing, amplified the impact SBP’s injections had on the liquidity conditions of commercial banks.

The monetary policymaker’s aggressive stance was met with mixed reactions from industry analysts, with some approving of the move as a drastic attempt to manage inflation, while others criticized the move as damaging to the economy’s growth prospects.

According to industry analysts, such injections can weaken the Pakistani rupee against the dollar, and further stoke inflationary pressures in the economy. However, others believe that such moves are necessary to maintain macroeconomic stability, given the rising fiscal deficits and external pressures facing the country.

The Economic Survey’s findings highlight the need for policymakers to balance the short-term measures taken to tackle inflation with long-term measures aimed at boosting economic growth. In the midst of the economic challenges facing Pakistan, government officials, industry analysts, and policymakers need to work together to develop effective policies and find sustainable solutions to the country’s economic woes.

In conclusion, the SBP’s excessive injections in the open market during July-March FY23, as highlighted by the Economic Survey 2022-23, have had a significant impact on Pakistan’s money market and the government’s financing dynamics. While the monetary policymaker’s aggressive tightening approach has been met with mixed reactions, it remains to be seen how effective such measures will be in managing the various economic challenges facing the country.

(Reference: https://www.around.pk/2023/06/09/a-deluge-of-cash-sbps-excessive-injections-in-open-market-during-july-march-fy23-revealed-by-economic-survey/)

A Deluge Of Cash: SBP’s Excessive Injections In Open Market During July-March FY23 Revealed By Economic Survey – Around