Such a massive injection of liquidity into the banking system was due to several factors. Firstly, it was due to a large budget deficit which the government has been unable to reduce considerably and finance it from domestic non-banking sources. Taxes collected by the Federal Board of Revenue (FBR), fell short of the assigned target by Rs 46 billion during the first quarter. The current fiscal year collection target of rupees 3,103 billion too would be difficult to achieve due partly to certain concessions that have been offered/will be offered to the textile sector and traders agitating for the abolition of withholding tax on bank transactions. On the other hand, the government does not refrain from incurring expenditures which were not included in the budget. For instance, proposed packages for textile sector and Rs 341 billion for the farm sector were not a part of FY16 budget. The IMF is so much irked by the extravagance of the government that an official in Washington has remarked that "it is important for any new packages to fit within the overall fiscal framework, ie, to be consistent with debt sustainability and the authorities' budget deficit targets." It is obvious that the IMF would like to seek explanation from the authorities during the 9th quarterly review under the EFF scheduled for the end of the month. Secondly, the financial institutions are deliberately desisting from financial intermediation between savers and investors and "making hay while the sun shines" by seeking liquidity from the SBP in huge amounts and investing it in risk-free government securities. Such an arrangement allows them to earn huge profits through borrowings from the central bank and without much efforts to mobilise deposits from the public. Thirdly, non-banking sources of financing the budget deficit like NSS are not yielding the desired amounts due to declining rate of returns and lastly the State Bank is not vehemently persuading the government to reduce its dependence on the banking system despite its autonomous status.
The present SBP policy of injecting massive liquidity into the banking system meant largely for financing the government's budget deficit needs to be reviewed at the earliest for stabilising the economy. What the government essentially needs to do is to reduce its budget deficit by containing expenditures and increase revenues and stick to the fiscal deficit target throughout the year. It is also important to raise liquidity from non-banking sources by maintaining interest rates at a reasonable level. The habit of the government to readjust the tax measures and spending priorities during the course of the year is not desirable. The bankers should also get out of their comfort zone in order to engage fully in their traditional functions. State Bank could nudge them into the desired direction through some policy directives. We are afraid that if the present trend of liquidity injection continues, it would damage the credibility of the government, fuel inflationary pressure, reduce flow of credit to the private sector and, increase the debt servicing of the government beyond reasonable limits.