The State Bank of Pakistan (SBP) made a significant move on Thursday, injecting Rs575.8 billion into the financial market through an open market operation (OMO) reverse repo purchase. This decision aimed to ease short-term liquidity pressures in the banking system. The SBP carried out this transaction for an eight-day tenor, accepting bids from three different offers, all with interest rates ranging from 13.07% to 13.10%. Ultimately, the entire amount was accepted at an interest return rate of 13.07%. This maneuver is a routine measure by the SBP to maintain liquidity in the inter-bank market, ensuring smooth financial operations.
Experts, including Maaz Azam from Optimus Capital Management, emphasized that this action is in line with the central bank’s regular steps to stabilize the banking system, helping prevent potential cash flow issues that could hinder economic activities. Such measures aim to maintain a steady flow of money, especially in times when the market faces liquidity challenges.
In recent months, the private sector’s credit activity has seen a noticeable surge. Throughout 2024, weekly credit to the private sector had remained stable at around Rs8,500 billion. However, as the year progressed, particularly from October onwards, private sector borrowing spiked, reaching a record high of approximately Rs10,500 billion by December 22. This rise reflects the government’s increased pressure on banks to extend more credit to businesses, driving economic growth. The banking sector’s advance-to-deposit ratio (ADR), which tracks lending against deposits, has improved significantly, rising to 49.7% by December 6, 2024, compared to 47.8% in November. This marks a sharp recovery from the low of 38.4% in August 2024.
Despite this positive trend, a closer look at banking behavior reveals an interesting pattern. While advances have grown by 27.6%, deposits have dropped by 1.6% over the same period. The surge in credit activity is also reflected in the yields on short-term bonds, which showed a slight decline. For example, the three-year bond yield dropped from 12.50% to 12.49% in just two days. This indicates that banks are directing more funds toward purchasing government bonds instead of lending to the private sector, diverting money back into government hands rather than supporting private businesses.
The SBP’s outstanding injections of liquidity have varied throughout the year. They reached a peak of around Rs13 trillion in August but later stabilized at approximately Rs11 trillion by December. This approach showcases the SBP’s efforts to balance liquidity and interest rates in order to promote stable economic growth, even amid difficult financial circumstances.
Alongside these monetary measures, Pakistan’s foreign currency reserves also experienced notable shifts. As of December 20, 2024, Pakistan’s total liquid foreign currency reserves stood at $16,371.5 million. Of this, the SBP held $11,853.5 million, while commercial banks held $4,518 million. During the week leading up to December 20, the SBP’s reserves decreased by $228 million, mainly due to the government’s external debt repayments. Despite this decline, the Pakistani rupee showed some improvement in the inter-bank market, gaining 0.04% against the US dollar on Thursday, closing at Rs278.37.
In international markets, the US dollar remained near a two-year high, trading at 108.15 against a basket of currencies, and is expected to finish the month with a notable increase. This global strengthening of the US dollar has implications for local currency exchange rates, influencing trade and financial strategies.
Another key market trend was observed in gold prices, which saw a rise both domestically and globally. In Pakistan, the price of gold per tola increased by Rs1,400, reaching Rs274,000 by Thursday. This increase mirrors the global rise in gold prices, which climbed to $2,628 per ounce, reflecting a $14 gain on the day. The local gold market had been closed on Wednesday due to a public holiday, but the upward trend in global prices continues to influence local rates.
In conclusion, the State Bank of Pakistan’s actions reflect a proactive strategy to manage market liquidity and support the economy. The surge in private sector borrowing indicates a positive shift in business confidence, but it also requires careful monitoring to ensure that credit growth remains sustainable. As the central bank navigates a delicate balance between liquidity management and economic stimulation, the coming months will be crucial in determining the long-term impacts of these financial decisions. Meanwhile, fluctuations in foreign currency reserves and gold prices highlight the dynamic nature of Pakistan’s economic landscape in the face of global and domestic challenges.
