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MONEY WEEK

Liquidity crunch in the inter-bank market

RECORDER REVIEW

During the week ended 26th February 2000, money market was characterised by extremely tight conditions which pushed up the call rate from about 1 percent in the middle of last week to around 10.50 percent. The liquidity crunch was attributable to a considerable fall in deposits and the demand for funds from business and individuals on the eve of Eid-ul-Azha. The State Bank injected considerable liquidity in the market but it could not fully satisfy the banks' appetite for funds.

Money supply was provisionally estimated to have declined by Rs. 7.2 billion to Rs. 1300.9 billion during the week ended 26th February 2000 as compared with the fall of Rs. 4.5 billion in the previous week. The decline was attributable to the contractionary impact of both the private and the government sectors. Component-wise, currency in circulation fell by Rs. 5.1 billion while deposit money depicted a smaller decline of Rs. 2.1 billion during the week.

During the year so far, money supply was estimated to have increased by Rs. 18.9 billion or 1.47 percent.

Total assets / liabilities in the issue department of the State Bank came down by Rs. 5.3 billion to Rs. 356.5 billion. Notes in circulation, on the liabilities side, declined by Rs. 5.4 billion to Rs. 356.3 billion. On the assets side, government of Pakistan securities and approved foreign exchange fell by Rs. 5.00 billion and Rs. 0.2 billion to Rs. 247.3 billion and Rs. 63.5 billion respectively. Gold coins and bullion, however, continued to remain unchanged at Rs. 27.7 billion.

In the banking department of the State Bank, total assets / liabilities went up by Rs. 1.9 billion to Rs. 536.0 billion. On the assets side, items recording increases were balances held outside Pakistan in approved foreign exchange (+ Rs. 2.0 billion), investment in government securities (+ Rs. 0.7 billion), and other assets (+ Rs. 0.2 billion). On the other hand, government debtor balances and loans and advances to scheduled banks for export sector decreased by Rs. 0.3 billion and Rs. 0.8 billion to Rs. 4.9 billion and Rs. 84.7 billion respectively. On the liabilities side, deposits of Federal government and banks rose by Rs. 2.5 billion and Rs. 1.1 billion to Rs. 6.9 billion and Rs. 85.6 billion respectively while deposits of provincial governments and other liabilities declined by Rs. 0.5 billion and Rs. 1.2 billion to Rs. 8.6 billion and Rs. 112.2 billion during the week.

Total assets / liabilities of the scheduled banks came down marginally by Rs. 0.4 billion to Rs. 1692.1 billion. Items recording declines on the assets side were foreign currency held in Pakistan (- Rs. 0.2 billion), advances other than those to banks (- Rs. 0.7 billion), investment in central government securities (- Rs. 0.8 billion) and other assets (- Rs. 2.9 billion). On the other hand, balances with State Bank and investment in treasury bills rose by Rs. 1.9 billion and Rs. 1.1 billion to Rs. 123.6 billion and Rs. 132.0 billion respectively.

Total demand and time liabilities of the scheduled banks declined by Rs. 1.8 billion to Rs. 1138.8 billion. Time deposits (general) came down by Rs. 3.1 billion to Rs. 450.0 billion while demand deposits (general) rose by Rs. 0.8 billion to Rs. 625.7 billion. Borrowings from banks abroad and from Sate Bank also fell by Rs. 0.5 billion and Rs. 0.9 billion to Rs. 22.7 billion and Rs. 194.8 billion respectively. Other liabilities, however, went up by Rs. 1.4 billion to Rs. 271.5 billion.

Bank credit to the private sector declined further by Rs. 1.0 billion to Rs. 768.2 billion as compared with the contraction of Rs. 1.8 billion in the previous week. Earning assets of the scheduled banks also came down by Rs. 0.6 billion to Rs. 1128.8 billion compared with the decline of Rs.3.0 billion in the last week.

Liquid foreign exchange reserves of the country increased by $ 32.8 million to $ 1535.0 million as compared with the rise of $ 3.8 million in the preceding week. Exchange rate of the rupee ruled stable during the week. In the free market, the rate opening at Rs. 54.33 and Rs. 54.36 per dollar for buying and selling respectively continued to be quoted at this level throughout the week. Inter-bank floating rate (selling) and authorized dealers' exchange rate (selling) for currency notes also remained unchanged at Rs. 51.89 and Rs. 52.68 per dollar during the week under review.

Conditions in the money market became extremely tight with the call rate ruling at around 10.50 percent throughout the week. It may be mentioned that this rate is only half a percentage point lower than the official discount rate (Bank Rate). Bids amounting to Rs. 13.88 billion were received for the purchase of MTBs but the State Bank accepted only Rs. 2.75 billion, Rs. 1.00 billion for 3 months at a cut-off yield of 7.29 percent, Rs. 1.00 billion for 6 months at a cut-off yield of 7.45 percent and Rs. 0.75 billion for 12 months at a cut-off yield of 7.90 percent. Sate Bank also conducted two-way Open Market Operations during the week. Rs. 3.2 billion were offered for the purchase of MTBs but the State Bank rejected all the bids. On the other hand, State Bank injected Rs. 15.40 billion in the market through reverse repos; Rs. 4.40 billion for two weeks, at a rate of return of 6.00 percent and Rs. 11.00 billion for one month at a rate of return of 6.50 percent per annum.