SBP cuts 200 bps in banks' Cash Reserve Requirement to inject liquidity

[Naveed Yaseen]

RECORDER REPORT
KARACHI (October 09 2008): The State Bank of Pakistan on Wednesday night announced that it was cutting the Cash Reserve Requirement (CRR) by 200 bps to 7 percent in two phases to provide some relief to the banks to overcome their liquidity shortage. Reduction in the CRR for all deposits up to one-year maturity is by 100bps to 8 percent from 9 percent effective October 11 and by another 100bps to 7 percent effective November 11.

As a result of this cumulative decrease of 200bps in CRR, overall Rs 61 billion will be released into the banking system. However the central bank has made it clear that this is a temporary measure aimed at accommodating extraordinary liquidity requirements of the banking system and, therefore, should not be construed as a change in the monetary policy stance.

The SBP said that the liquidity situation will be monitored on a continuous basis and the change in the CRR may be reviewed accordingly. October to December is a peak advances season, which is going to be driven by textile mills for the procurement of cotton; the move for one percent reduction in CRR is to provide additional liquidity to banking system for cotton procurement.

Banking sources said that second phase picking season of cotton crop is going to start from mid-November, and SBP was also expecting some liquidity shortage at that time, therefore to avoid more liquidity shortage the SBP has decided to reduce the CRR rate another 100 bps in November.

"SBP has been monitoring closely the recent developments regarding the overall and bank specific liquidity position and after a measured assessment, it has decided to reduce the CRR by 200 bps,' governor, State Bank of Pakistan, Dr Shamshad Akhtar said.

She said that active and calibrated liquidity management is part of a prudent monetary policy management necessary to achieve financial as well as overall macroeconomic stability. "As a result of global financial crises central banks across the globe have now further stepped up their interventions in the financial markets to shore up confidence and to ease the liquidity situation," she said.

However, the domestic macroeconomic situation differs across countries and regions, therefore macroeconomic stability in Pakistan continues to be under stress on account of both domestic and external vulnerabilities. The SBP assessment of risks to inflation outweighing the risks to growth still holds and therefore it remains committed to checking the snowball impact on inflation expectations of persistently high fiscal and external current account deficit and overall aggregate demand pressures in order to achieve price stability over the medium term, she added.

The fiscal stress continues to be high due to all time record borrowings of Rs 689 billion from the SBP in FY08, while the government borrowings have continued to rise unabated in FY09 also, Akhtar said. This excessive recourse to the banking system borrowings is straining the credit availability for the private sector and is also causing complications for effective liquidity management, she said.

With considerable slowdown in private as well as public financial inflows, the financing gap has widened and consequent outflow of foreign exchange has drained the rupee liquidity from the system straining the domestic money market; the Net Foreign Assets (NFA) of the banking system have depleted by Rs 166.5 billion during 1st July- 20th September FY09.

Demand for credit from both the government and the private sector has further tightened the liquidity conditions, governor said and added "the market expectations that the government is planning to pull out the public sector/government deposits from the commercial banks is causing further anxiety in the market from the liquidity perspective".

She said that pressures of the market liquidity conditions are reduction in total deposits of the banking system and an increase in the currency in circulation, which increases around the Eid festival period putting temporary pressure on the interbank liquidity.

The strains in liquidity some individual banks face is because of their weak deposit mobilisation campaigns and low interest rates they offer on deposits in view of maintaining their high profitability. Additional complications have arisen because of the government and public sector organisations' excessive borrowings from the banking system.

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