KARACHI: The State Bank of Pakistan (SBP) has reported that liquidity management operations are to achieve monetary policy objectives of price stability so as to provide a facilitating environment for economic growth.
According to a SBP statement, the intermediate goal is to contain the overall monetary expansion (M2 growth) within safe limits; consistent with price stability objective.
This is ensured by management of day-to-day liquidity in the banking system with a view to keep the overnight money market repo rate within the interest rate corridor specified by SBP Repo and Reverse Repo rates. This requires liquidity injections or mop-ups at appropriate periods in time.
In recent times, the liquidity injections by the SBP have increased considerably relative to its past trends. Noticing these unusual changes, various market analysts perceive the SBP liquidity management to be favoring the banks in making profit or supporting the government to meet its borrowing needs. These perceptions are based on misconceptions and partial analysis of monetary variables. The SBP considers it important to address these misconceptions to avoid misguided conclusions and expectations on the basis of such analysis.
While assessing the liquidity conditions and analyzing the open market operations, it is important to keep in view the overall growth of money supply in the system and its composition. Liquidity injections are considered counterproductive only when given the inflationary outlook and monetary policy stance, they are contributing towards excessive monetary expansion. Further, a lopsided contribution in growth in money supply complicates monetary management. For instance, despite a contraction in net foreign assets, high monetary growth led by government borrowing reflects external as well as fiscal imbalances, which had been the case during last few years.
