Inflation is coming down, current account is in surplus but State Bank of Pakistan still needs to inject liquidity into the system to keep the wheel turning. The outstanding amount of liquidity injection through reverse OMO operations was at a record Rs 611 billion by the end of 1QFY13. Monetary Policy Statement (MPS) was cognizant of the imperative of injecting more liquidity as it stated "This is because some base money creation is essential to avoid an economic depression". The gravity of the issue can be felt by witnessing a further injection of Rs 100 billion within two days after the announcement of MPS. With Eid-ul-Azha ahead, one may see further increase in the cash withdrawals for animal buying transactions.
Total size of the cattle market will likely hover between Rs80-110 billion based on the supposition that 20 to 30 percent of households (with seven persons) will spend Rs 17,000 each on buying cattle this year. Historically it takes couple of months for this money to come back and it would be a teething task for the central bank to manage system liquidity during this time.
The importance of NFA remains paramount and in the absence of forex flows - net inflow is at a mere Rs16 billion in first 11 weeks of this fiscal - the overall liquidity deficit persists.
On the face of it, DMMD circulars 20, 21 and 22 of 2012 issued by the SBP with the announcement of the monetary policy to efficiently manage the liquidity will not help in resolving the market quench, unless the overall need for money is less or banks show a dramatic success in deposit mobilisation. The daily minimum requirement of Cash Reserve Ratio is down from four percent to three percent while the CRR average is to be maintained at five percent, but with an enhanced average maintenance period from one to two weeks.
The market participants fear that the big banks will continue to keep CRR at four percent. Small banks may benefit from SBP move but its impact would not be significant. Yes, it may reduce the volatility in interest rates, but it wouldn be having a significant impact on liquidity generation.
Moreover, the SBP is discouraging the frequent SBP overnight reverse repo and repo facilities by applying a spread of plus/minus 50 bps on using either of the two facilities for more than seven times in a quarter for every subsequent use. The small banks may use it given the dearth of liquidity and the upcoming Eid season.
According to various surveys, consumer confidence is weakening, business confidence is shaky and the aggregate demand is collapsing. The writing is very much on the wall that unless the foreign flows start materializing and/or government put some restraints to fiscal borrowing from the system, liquidity management is going to remain a daunting task for SBP in the coming months.
And inflation dragon could be out again as there are talks on revision of wheat support price to Rs1,250 per 40 Kg from Rs1,150 now. It could have a cascading effect on food inflation which has been tamed lately.
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