950805

New SBP policy

for sale of

special TBs

RECORDER REPORT

KARACHI: The State Bank of Pakistan, in a policy change, has decided to opt for negotiated sale of special issues of Treasury Bills it is holding whenever the excess liquidity in the market results in banks being forced to lend at below their cost.

SBP as the guardian of the banking system wants to ensure that banks get a positive rate of return on their investments. At the same time, it expects the banks to play fair and ensure that the return they earn on sovereign paper is only marginally profitable and they do not try to take advantage of the government's fiscal difficulties.

SBP therefore can enter the market on daily basis, as part of indirect management of monetary aggregates, besides the regular bi-monthly auction of T-bills it holds on behalf of the government. However, it would refrain from being a market player when the interbank rates are above the auction rate.

SBP has to create special issue T-bills, an euphemism for 'note printing' when the government requirements are more than the funds available for borrowing from banks and non-bank sectors.

Government borrowing for budgetary needs from the non-banks such as its public saving schemes encourages household savings. But the money thus raised when utilised for non-productive purposes fuels inflation in the economy as well.

On the other hand, it is said that the government borrowing from the banking system is relatively even more inflationary than borrowing from non-banks as it results in credit expansion in the economy. However, borrowing from banks is relatively less inflationary than the borrowing from SBP by the government. Borrowing from SBP raises the monetary overhang in the economy as a result of higher money supply caused by note printing.

All three forms of borrowing in essence are various forms of deficit financing and until the current account deficit is wiped out by raising the availability of taxes and capital receipts the budgetary problems will persist, say the economists.

Therefore, sources said, the new apporach of SBP to negotiate the placement of special T-bill issues would result in lowering money supply level through conversion into bank borrowing. Additionally if a secondary market for government paper could develop, the banks could place their T-bill with their clients which would further lower the inflationary pressure in the economy, it is explained.

Last Thursday, SBP tested its new policy after rejection of the bids in the OMO mini-auction on Wednesday. It not only worked in getting an additional Rs. 5.8 billion from the banks but also lowered the cost from 12.70 to 12.55 percent.

Banks were quoting overnight rates of 0.5 to 1 percent on Thursday morning. But SBP did not take advantage of their difficulties and offered the special issues for 3 and 5 months REPO at marginally profitable rate to them. The cost of 6 months dollar deposits abroad plus the insurance risk cover cost and tax paid locally constitute the cost of funds to the banks.

SBP stage-managed the operation so effectively that the market was not made dry and the rates hovered between 11 and 13 percent instead of the highs of 15 to 15.45 percent.

SBP T-bill special issues holding is said to be a massive amount of Rs.176 billion. This is reflective of the monetary overhang as a result of lax fiscal and monetary policy practised over the last few years.