Qudsia Bano

In a bid to manage the rising liquidity pressures, the State Bank of Pakistan (SBP) significantly ramped up its Open Market Operations (OMOs) in the first half of the Fiscal Year 2024 (H1-FY24). This move, experts suggest, could signal imminent shifts in the country's monetary policy, reports WealthPK. During H1-FY24, the central bank’s OMO injections surged to unprecedented levels, underscoring the acute liquidity needs of the interbank market. Despite efforts to manage liquidity, including the retirement of loans for commodity operations and an increase in deposits, the demand for liquidity continued to climb, particularly in the first quarter.

Talking to WealthPK, Dr. Ahmed Faraz, senior economist at the Pakistan Institute of Development Economics (PIDE) explained, “The increased liquidity requirements in the interbank market, driven by the government's extensive borrowing from the commercial banks to finance the fiscal deficit, have necessitated these substantial OMO injections. This highlights the underlying liquidity pressures within the financial system.” In the first quarter of H1-FY24, the central bank’s response to these pressures involved longer-tenor OMOs, with maturity periods of 60 days and above. This approach was influenced by market expectations of rising interest rates, which prompted the central bank to provide more extended liquidity support. “Reliance on longer-tenor OMOs indicates that the SBP was addressing a market anticipating higher interest rates," said Faraz. “However, as the market sentiments shifted in the second quarter, anticipating that interest rates had peaked, the central bank adjusted its strategy to shorter-tenor OMOs, aligning with the market's expectations of potential monetary easing.” This strategic shift in the OMO approach was reflected in the overnight (O/N) rate, which moved closer to the policy target rate in the second quarter.

The alignment suggests that the central bank's interventions were effective in stabilizing short-term interest rates amid the fluctuating market conditions. Experts believe that these developments could be a precursor to broader monetary policy adjustments. "A substantial increase in OMO injections and the shift in their tenor reflect the SBP's proactive stance in managing liquidity," commented Dr. Farooq Nadeem, Senior Economist at the Standard Chartered Bank. “However, it also hints at potential changes in the monetary policy framework, particularly if inflationary pressures persist or if economic conditions warrant further intervention,” said Nadeem. Despite immediate measures, concerns remain about the long-term implications of sustained government borrowing and its impact on the banking sector's liquidity. Emphasizing the need for a balanced approach, he said, “While the OMOs are crucial for short-term liquidity management, there must be a concerted effort to address the underlying fiscal imbalances driving these liquidity pressures.”

Credit: INP-WealthPk