Govt clears some of circular debt thanks to mint
* Banks place Rs 81.6 billion with SBP,as they were flush with liquidity
Daily Times - Leading News Resource of Pakistan
By Mushfiq Ahmad KARACHI: Banks placed an amount of Rs 81.6 billion with the State Bank of Pakistan on Friday at 9.5 percent, as the market was inundated with liquidity. The central bank had introduced a floor of 9.5 percent below overnight interest rates on the advice of the International Monetary Fund sometime ago. This floor protects banks against crashing of overnight interest rates and prevents excessive volatility. The range of overnight interest rate is now 12.5 percent (the discount rate) and 9.5 percent (the floor rate). However, bankers were confused about where this money came from in the market.
“We were expecting that around Rs 10 billion would be placed with the central bank today under the floor arrangement. But this amount was astounding,” said an official of a large foreign bank. “Few people know where this money came from.” A banker said oil companies had withheld tax payments because of circular debt and that was creating problems for the government. “This is why the government came into action, got the central bank to print money and injected it into the banking system for onward payments to the oil sector companies. Companies in the oil sector will then be able to make tax payments,” he said. “Against what the central bank printed this money is, however, not clear. Whether they printed it against Treasury bills or they had dollars is still to be seen.”
He said printing such a large amount of money would send a very bad signal to the multilateral lending agency. Almost all the large banks including Habib Bank, National Bank, MCB Bank, Allied Bank, United Bank, Citibank and Standard Chartered had received some of
this amount. The money will go to Pakistan Electric Power Company, which will then make payments to power producers.
Power producers, in turn, will make payments to oil marketing companies including PSO, which will then make payments to oil refineries. But even after this huge injection of money, the issue of circular debt will be far from over. Banks were also to receive interest payments on term finance certificates issued sometime ago by the government, said an official at a medium-sized foreign bank. “But the problem is that the amount could not be more than Rs 8 billion. This must be something else,” he said.
Another banker said the country might have received money under the Coalition Support Fund that had been long overdue. Banks had placed Rs 16 billion with banks at 9.5 percent on Thursday. IMF executive board is to hold a meeting in mid-May to consider release of $1.2 billion tranche to Pakistan under its standby agreement with the country.