Getting your Trinity Audio player ready...

The State Bank of Pakistan (SBP), Pakistan’s central bank, has injected Rs1.25 trillion into both conventional and Shariah-compliant banks for a period of up to 28 days, aiming to address liquidity shortages and fulfill the financing needs of the financially strained government.

This initiative comes in response to the Karachi Inter-bank Offered Rate (Kibor) experiencing a significant decline of more than three percentage points to 21.38% on Friday. This drop indicates a potential decrease in the government’s dependence on bank borrowing.

The reduced Kibor is linked to expectations of a gradual seven-percentage-point reduction in the SBP’s key policy rate to 15% by December 2024, with the goal of alleviating high-interest payments. The anticipated rate cut is also anticipated to promote increased involvement of the private sector with banks in initiating new projects.

Analysts, such as Mohammad Awais Ashraf, the Research Director at Akseer, have emphasized that banks faced liquidity shortages, prompting the SBP to inject funds through open market operations (OMOs).

The government, grappling with budget deficits fueled by substantial interest payments and personnel-related expenses, has increasingly turned to bank borrowing. Despite higher revenues collected by the Federal Board of Revenue (FBR) in the first six months of FY24, government expenditures have led to a growing reliance on bank borrowing.

Private sector borrowing remains minimal due to elevated interest rates, with businesses choosing to retire existing debt. The SBP has kept its policy rate at 22% since July 2023, impeding private sector expansion.

Read Also: Banking on Agriculture: State Bank of Pakistan strategies for Agricultural Advancement in FY24”

However, projections indicate a potential 700-basis-point cut in the policy rate in 2024, bringing it down to 15%. This anticipated rate cut is expected to stimulate economic activities and alleviate the government’s interest burden.

By Author

Leave a Reply

Your email address will not be published. Required fields are marked *