KARACHI: Shortage of liquidity forced the State Bank of Pakistan to inject Rs722 billion into the banking system on Friday.

Heavy investment by banks in government papers has resulted in a rise in the liquidity gap, and according to a report of the State Bank, government borrowing from scheduled banks is reaching close to a trillion rupees.

In the first seven months of the current fiscal year, government borrowed Rs977bn from scheduled banks for budgetary support, leaving little space for the private sector to enter the credit market.

The State Bank has been reducing interest rate in the wake of falling inflation. In the previous monetary policy announced last month, the interest rate was reduced by 100 basis points to 8.5 per cent. It was a 10-year low, but the government strategy of heavy borrowing did not allow private sector to benefit from the low interest rate.

Private sector borrowing between July 1, 2014 and Feb 6 last remained much lower than last year when the interest rate was 10pc or above. This year private sector borrowing remained at Rs152bn compared to Rs273bn last year.

Bankers said investment by banks in long-term papers is still attractive despite a cut in the return on Pakistan Investment Bonds.

A recent report shows that scheduled banks’ holding of PIBs, sukuk and treasury bills rose to Rs4.961tr at the end of Jan 31. This massive amount remained stuck up for a long period, leaving the banks without cash.

It seems that the government needs more borrowing since the fiscal deficit is not under control while deficit target for the current fiscal year has further been reduced compared to last year.

In a recent article, former State Bank governor Dr Mohammad Yaqub bitterly criticised the fiscal position.

“The fiscal performance has been described as ‘generally good’ without mentioning that lower budget deficit basically reflects a cut in development expenditure, delay in payments of tax refunds, buildup of circular debt and unfunded losses of the public sector enterprises, larger transfer of SBP profits reflecting excessive government borrowing, and less than full pass through to the consumer of the fall in world oil prices. A correction of the budget deficit for these factors will show deterioration in the budgetary situation,” he wrote.

The repayment of large domestic debt looks impossible, and the government is bound to either print money or re-roll the debt. It shows the deteriorating fiscal position of the country.

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