Status Quo Ahead

The government has made a comeback for all those who were wondering what banks’ next avenue of choice would be. With a complete and partially rejected auction up its sleeve, the financial system’s investment portfolio seemed a little threatened at first sight, if one did not take into account the entirety of about Rs690bln that has been borrowed from scheduled banks in the half year ending December.
However, it seems like the finance ministry modus operandi regarding resources that it needed to garner during the last month was a little out of order. Or maybe, December has not turned out to be a month of pride in terms of tax collection and the officials to sit back and snore. In any case, the recent T-bill action has brought fresh gossip to be consumed by all. Lo and behold after months of struggling participation in 3m-bills, (less that Rs20bln on average since August-11), the recent auction has brought out an interest of no less than Rs52bln with government accepting around Rs21.4bln. What is most interesting is that the government has been able to chastise the financial system by making it offer more and that too at a much lower price; the latest cut-off for 3m-T-bills is 11.78 per cent versus the previous 11.82 per cent at which the government picked up a measly Rs200mln in the previous auction.
Moreover, the participation is concentrated in 6m bills, Rs97bln of which Rs70bln was accepted. The government and the private sector have given each other tacit assurances through this bill, by pricing it higher at 11.83 per cent versus 11.67 per cent in the previous auction. The story goes that a confused financial system once sought a signal as to whether there could be a discount rate increase ahead. They placed their bets on maintain (participation in 6m) while enquiring about a rate hike possibility by engaging the yearlong ignored 3m T-Bill. To which, the government removed the need for anticipation by aligning its acceptance with a maintain vote for the policy announcement in January.
The 12m T-Bill although sidelined for the moment, holds immense importance as far as the future of bank participation has to be determined. In the first half of the current fiscal year, banks have generously poured in about Rs920bln in the respective bond that is going to mature in the first half of FY13. This can be expected to strain liquidity in the banking system and level of participation in the upcoming months. A possible solution could be OMO- injections by the SBP that may pose problems for the latter in terms of necessitating greater printing of money to finance its deficit.
During the previous bout of discount rate reductions, the SBP was often attacked for giving in to the political whims unnecessarily. Many predicted that the discount rate was being aimed to be as low as 9-10 per cent as the government wished to lower its servicing costs. However, in the current scenario, with currency depreciation, and imminent IMF payment, the SBP will face the challenge of keeping itself and the currency afloat while also steering liquidity in the financial system.
Thus, the private sector might as well sigh and think of out of the box solutions to rejuvenate its growth. With the liquidity short and NPLs standing at 16.7 per cent, highest in the last one year, very little can be done to persuade banks to lend more to increase investment.
Alas, another SBA or a more intense war on terror can be the economy’s next saviour, if at all.

The writer is an economic analyst and freelance financial journalist. She can be contacted at sakina.husain@gmail.com



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