State Bank of Pakistan injects Rs1.25 trillion into banks to
avoid liquidity shortages
The State Bank of Pakistan (SBP) has injected Rs1.25
trillion into both conventional and Shariah-compliant banks for a period of up
to 28 days, aiming to alleviate liquidity shortages and fulfill the financing
needs of the financially strained government. This action follows a notable
drop of over three percentage points in the Karachi Inter-bank Offered Rate
(Kibor), a crucial benchmark interest rate, reaching 21.38% on Friday. The decline
in Kibor is seen as a potential indicator of reduced government reliance on
bank borrowing.
The move is in response to liquidity shortages faced by
banks, prompting the SBP to utilize open market operations (OMOs) to inject
funds. Analysts, including Mohammad Awais Ashraf, the Director of Akseer
Research, emphasize the importance of this intervention as the government
grapples with budget deficits driven by substantial interest payments and
personnel-related expenses, leading to an increased dependence on bank
borrowing.
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Despite higher revenues collected by the Federal Board of
Revenue (FBR) in the first half of FY24, the government's expenditures have
contributed to the augmented reliance on bank borrowing. Private sector
borrowing remains subdued due to elevated interest rates, leading businesses to
focus on retiring existing debt.
The Karachi Inter-bank Offered Rate (Kibor) drop is
attributed to expectations of a gradual seven-percentage-point reduction in the
SBP's key policy rate to 15% by December 2024. This strategic move aims to
mitigate high-interest payments and encourage private sector engagement with
banks for new projects.
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The SBP has maintained its policy rate at 22% since July
2023, impeding private sector expansion. However, projections suggest a
potential 700-basis-point cut in the policy rate in 2024, down to 15%. This
anticipated rate cut is anticipated to stimulate economic activities and
alleviate the government's interest burden.
Source: Profit Pakistan