SBP allows DFIs to participate in OMOs

As per a notification filed by the State Bank of Pakistan – ‘DMMD (Domestic Market & Monetary Management) Circular No. 11 of 2022’ – The State Bank has allowed all Development Financial Institutions (DFIs) to participate in Open Market Operations (OMOs). The circular clearly mentions that the permission has been granted specifically to facilitate DFIs in their liquidity management. 

OMOs are regulated primarily on the basis of State Bank’s ‘DMMD (Domestic Market & Monetary Management) Circular No. 12 of 2017,’ which allows ‘All Scheduled Banks and Primary Dealers’ to take part in OMOs. The circular add’s DFIs to the two considering that such institutions are government owned and operated, and require OMOs (Repos and Reverse Repos) to manage liquidity. 

OMOs are one of the Monetary Policy Tools used by the State Bank of Pakistan to inject or withdraw funds in and from the economy as per its liquidity requirements, via the purchase or sale of eligible financial instruments. The State Bank, essentially conducts OMOs to keep the Money Market Overnight Repo Rate (MMORR) close to the SBP Target Policy Rate. As per Circular no. 12 2017, in case of OMO (Injections), SBP lends funds to Scheduled Banks or Primary Dealers against eligible collateral to address liquidity shortage in the system. In OMO (Mop-up), SBP sells Market Treasury Bills (MTBs) to banks against funds to remove surplus liquidity from the system.

Predominantly, SBP conducts four types of OMOs to manage the system’s liquidity:

1. Injection – Reverse Repo: (To tackle short market positions)
2. Mop-up (Withdrawal) – Repo (To tackle long market positions)
3. Outright Sale or Purchase (long-term liquidity management.)
4. Bai-Muajjal (Islamic mode – Deferred Payment)

OMOs pertain to deals against collateral ‘eligible securities,’ which are Market Treasury Bills (MTBs) or Pakistan Investment Bonds (PIBs). In case of Injection, MTBs are purchased by the SBP (Reverse Repurchase agreements) to insert liquidity into the markets, whilst Mop-ups pertain to the SBP selling MTPs (Repurchase agreements) to banks to remove excess liquidity from the system. 

The Eligible institutions as per the 2017 circular were Banks and Primary Dealers (PDs) known as ‘Eligible counterparts,’ however, with the release of circular no. 11 – Banks, PDs, and DFIs are all eligible to participate in OMOs. Officially, there is no restriction on the SBP with regards to the tenor of the OMOs. However, generally SBP conducts OMOs (Repos and Reverse Repos) of shorter tenors (i.e 7 to 14 days).

Development Finance Institutions (DFIs) are government owned financial institutions that indulge in the process of investing in private sector developmental projects to achieve economic growth while remaining financially sound. In Pakistan, DFIs are investment institutions mandated to promote investment opportunities in the country and enhance economic trade between Pakistan and the international world. Pakistani DFIs are essentially formed as joint ventures between the national government and international investors in order to spur economic prosperity in the country.

DFIs provide a range of financial products and services to tailor a diverse range of opportunities for distinct sectors. They provide consultation & advisory services as well as, complement the banking sector to act as a channel to bridge the gap between supply of financial products & services and strategic areas for target long-term economic development.

Following is a list of DFIs in Pakistan:

1.   Pak Oman Investment Co. Limited
2.   Pakistan Industrial Credit & Investment Corporation
3.   Saudi Pak Industrial & Agricultural Investment Company Limited
4.   Pak. Libya Holding Company Limited
5.   Pak Kuwait Investment Company Limited