In confidential meeting, SBP warns banks at the behest of the Ministry of Finance 

KARACHI: A meeting was called on Tuesday at the State Bank of Pakistan (SBP), where the top 8-10 banks were warned by the central bank on the request of the Ministry of Finance.

According to a source present in the meeting, bank treasuries were called to the SBP after the finance ministry expressed displeasure with the borrowing rates and the current exchange rate. The meeting discussed bank participation in the Treasury Bills (t-bills) and Pakistan Investment Bonds (PIBs) auctions, and participation in money markets, after which the SBP told the banks to start bidding lower in the auctions and talked about the threat of the government imposing a super tax on fixed income earnings in the case banks did not bring down yields.

Banks were also cautioned on their Foreign Exchange (FX) activities. As per sources present, the SBP told banks to bring the exchange rate down in the interbank even if it means to incur losses. The Central Bank told treasurers that it was an issue of national importance and that incurring losses were part of having the privilege of running banking businesses.

The source explains that the SBP is asking banks to sell dollars to customers without being allowed to buy them back from the inter-bank market. This exposes banks to changes in the FX rate, which could also mean potential loss of money for banks.

Moreover, the bank treasurers present in the meeting were warned that if the banks did not comply, bank Presidents would be called in for a one-on-one meeting for a “dressing down” by the SBP. 

Profit reached out to the SBP for a comment but could not get one till the filing of this story.

Can the SBP do this, and what does it have to gain? 

The SBP acting on the behest of the government does draw questions onto the autonomy of the central bank that is to act without government or political pressure. 

Intervening in the market because the Ministry of Finance is not pleased by the money and securities market is not under the SBPs mandate, especially when it is encouraging the banks it regulates to incur losses.

It is important to note that banks are private companies owned and answerable to shareholders who do not expect the bank to purposely engage in loss making activities.

However, as per sources in the treasury departments at banks, they have agreed that banks incur FX losses from time to time when the SBP asks them to. Therefore, the SBP asking them to do so again, may bear results.

Another source adds, “The business is run over the year so you get opportunities to make back the money. In the short term, going short (trading and not getting the chance to buyback in the interbank market) USD is negative trade but it can be recouped over the year.”

It is also important to note that the SBP and government are blaming the banks for the depreciating rupee, despite the strict controls on FX.

“The SBP is basically rationing dollars. Banks send a list of payments to the central bank. They then pick out approximately 10% payments to take place. The rest get carried forward. They’re in control and rationing. How can they claim the market is responsible?” explains the source.

However, in the case of t-bill and PIB auctions, there is some ambiguity whether the SBP will be able to bring down yields. As the SBP cannot directly lend to the government, the government relies on borrowing from banks in auctions. The SBP, however, can indirectly lend to the government through OMOs (Open Market Operations). 

Back in December 2021 when banks were asking for higher yields while lending to the government, in anticipation of a monetary policy rate hike; the SBP injected liquidity through a 63 day OMO injection to calm down markets and to signal that the policy rate would remain unchanged for the next 63 days at the very least.

“This [asking banks to bring down yields] is not how the markets work. Unless the SBP and Ministry of Finance can back it with action, the markets will not respond, like it didn’t respond earlier,” explained a source.

It is pertinent to point out that the market has already informed the central bank about restrictions in participating in t bill auctions. Banks claim to no longer have any more room on their balance sheet for t bills funded by OMO borrowing. “With OMOs at around Rs 4 trillion, that’s as much borrowing-funded market risk that banks can take.”

In case of the imposition of a super tax, banks are likely to bid after adjusting for the tax. “Banks look at the tax effective yields. If taxes go up, banks will account for it,” explains a source.

However, another source explains that it is not quite as simple and that not listening to the SBP and the government is a tough call for banks. “They can find all sorts of ways to hit banks with fines. This is a form of bullying,” says a source.

Another source claims that the banks are likely to be compliant, especially banks that are hopeful for a digital banking license. “They hold leverage over us, banks are desperate for the license, the government and the SBP are desperate for control.”

The previous government threatened banks to bring down yields. The SBP however, had to step in by conducting OMOs to calm the markets. This did not bring out desirable results. 

A comment was sought from the SBP Spokesperson but a response was not \received until the filing of this report. 

 

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Ariba Shahid
The author is a business journalist at Profit. She can be reached at [email protected] or at twitter.com/AribaShahid

10 COMMENTS

  1. Twisting arms of financial institutions can not solve the fundamental issues. Market forces determine the yeild & exchange rate. If they’re unreal, correction will take place on its own.

    • Nadeem sahib do you consider our markets normal and perfect to perform theoretically advocated free market function? I do not think so. By the way, in my opinion, so called free market economies also do not have market determined exchange rate. They do intervene with a luxury of sufficient foreign exchange reserves which we do not have, therefore countries like us use prudential and administrative measure for these adjustments. They do this because their markets are imperfect and market players use these imperfections to their advantage at the cost of whole society. Isn’t it? It is my opinion you may disagree.

      • Rafiq Sahib i totally agree with you, because in developing countries where Balance of payments crises occur ever so frequently prudential and administrative measures become all the more important since enhancing exports or attracting FDI is a long term phenomenon and so is enhancing the tax to GDP ratio. While implementing IMF conditionalities in difficult in the short term without resorting to measures as mentioned above.

  2. Funny. PML-N finance concepts being reapplied through arm-twisting banks. People ahould be careful about their foreign currency accounts being seized as history of PML-N suggests. Miftah’s words and SBP assurances are trash and not worth anything.

  3. FX rates are dependent on Market forces means demand and supply if we want to control it through artificial mrans that can be bounce back after some times. FX rate can be control through redusing defesit balance of trade and increasing foreign remittance that we receive from overseas workers through give them incentives. If we want to control FX rate we need to produce product that can substitue import. Government need to give incentives for the Industries that can provide import substitute. Further e need to encourage Nation to buy local products instead of ban on imported items.

  4. US Mai situation achi nahi hai. Banks kibor rate kaisay Kam karain jab US Mai interest rate bar Raha hai. 0.5 % interest rate hike next week hai US Mai . Aur July Mai bhi 0.5% increase honay Kay chances Hain. Agar dollar ki unlimited supply Rakh dein tu yeh mumkin nahi.

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