The Great Injection
Not to confuse with the severe impact of the Great Depression of the 1930s and the Great Resignation of 2021.
In March 2022, bank deposits in Pakistan recorded a 14 percent YoY increase to PKR 20.47 trillion. Since then, what led the State Bank to pump money into commercial banks in early April (PKR 3.37 trillion, equivalent to slightly over 16 percent of March deposits) and late April (PKR 4.1 trillion, equivalent to 20 percent of March deposits)?
Before the author answers that, let's explore some attributes of financial injection by the nation's central bank. All financial injections have two elements in common:
Printing money (which causes inflation)
Increase in liquidity.
Are Recent Financial Injections Manipulation?
One word, no. Below, the author discusses why recent financial injections were crucial, if not essential. Although thinking of the two financial injections of April as manipulation lacks (conclusive) evidence, one can (partially?) blame the previous PMLN regime of 2013 for keeping PKR artificially high by pumping $7 billion into the market for this misconception among the masses.
Indirect Government Borrowing
The IMF has imposed a condition on Pakistan to secure the next tranche of its stalled 08 billion-loan program (previously 06 billion). The prerequisite is that no direct Government borrowing from the State Bank must occur till September 2022. Hence, as a result of complying with the condition, no fresh, direct borrowing from the State Bank has occurred. The Government has no other viable option but to borrow from commercial banks. It also leads the State Bank to inject money into commercial banks through open-market operations. As of April 28, 2022, the Government raised PKR 614 billion from commercial banks at an interest rate close to 15 percent (pictured below):
Commercial Banks’ Liquidity Crunch
The term 'liquidity' alone refers to the characteristic of a financial asset of yielding purchasing power, whether instant or delayed. A liquidity crunch is an adverse phenomenon - wherein financial assets offering instant purchasing power, i.e., cash and near monies (assets readily convertible to cash), are in short supply.
Indirect Government borrowing from commercial banks implies the depletion of commercial bank reserves. It creates a liquidity crunch for commercial banks.
The Role of Eid
The liquidity crunch can escalate with the near arrival of Eid if no financial injection occurs. Festive seasons, in general, across the globe, are marked by increased deposit withdrawal from banks, such as in the UK in 2021 Christmas. Yes, ATMs slow down in Pakistan for the same reason as Eid approaches. Hence, the recent injection of PKR 4.1 trillion to ease liquidity ahead of the festive season of Eid. Last year, record cash withdrawals valued at PKR 827.2 billion took place in Pakistan during Ramzan and Eid-ul-Fitr holidays.