ISLAMABAD, 29 January 2007 — Several sectors are vying to attract Rs.300 billion liquidity. But cash holders are in a wait-and-see mode, searching for high yield bargains.
Banks, financial markets, real estate, government-operated national savings schemes (NSS), and small-to-medium businesses and transport are eyeing sizeable chunks of the cash.
At the same time, State Bank of Pakistan (SBP) — the central bank — has announced to continue its tight money policy (TMP) in order to check rising inflation.
This Rs300 billion liquidity is in addition to the normal cash available in an economy growing at a rate of more than six percent a year. The liquidity is rising as overseas Pakistanis are sending increasing amounts of home remittances.
The SBP projects home remittances inflow to rise to $5.0-5.5 billion during the current fiscal 2007. At the present exchange rate it converts to Rs300 billion. Overseas Pakistanis working in the Gulf, Saudi Arabia, UK and North America have already remitted to Pakistan $2.568 billion during the last six months of 2006 compared to $2.055 billion in the like period of last year.
SBP says foreign inflows, including FDI and payments made by foreign investors for purchase of privatized state-owned enterprises (SOEs) and portfolio investments are also causing an inflationary impact because when converted into rupees, they tremendously expand liquidity.
“Large forex inflows will also imply that monetary policy has to be kept tight in order to mitigate the risks of excessive expansion in the domestic liquidity,” SBP’s monetary police statement for six months to June 30 unveiled this week says.
The average deposit rate is a poor 3.14 percent, which, according to SBP, is no help to increase savings. The average lending rates have gone beyond 11 percent. Karachi Inter-Bank Offered Rate (Kibor was in the range of 12 to 14 percent. The banks are enjoying a 7.5 percent spread, largely at the expense of savers, but partly due to rising lending rates. The central bank further raised the daily cash reserve requirements to keep a strong grip over liquidity.
