Financial Risk Manager

Pakistan's central bank sold 8.00 billion rupees of Treasury bills in one-day repo contracts at 7.74 percent to mop up liquidity from the money market.

The USD / PKR opened at levels of 80.80 & 80.85 and went as high
as 81.05 and closed at 81.00 & 81.05.

Central bank opted for higher policy rate and first time fiscal stance backed SBP’s tightening bias. This coupled with massive exchange rate adjustments, has held-up remittances and to some extent falling exports. However, the initial tightening discouraged money creation and prompted massive asset price deflation, as cash remained the preferred asset class. This sparked higher unemployment expectation countrywide & deteriorated country’s domestic consumption. The massive fall in domestic demand has resulted into industrial output contraction and hence impacted tax revenue collection. The tax revenue drag has reduced GoP’s fiscal space and compelled GoP to cut development expenditures. Absence of foreign aid, investments and grants has shifted the burden of financing entirely on domestic sources, hence kept benchmark Karachi Inter-Bank Offer Rate (KIBOR) to higher levels in most part of FY09. This resulted into massive decline in private sector credit.

The local banking sector's deposit mobilization in FY09 has been muted thus far with deposits up just 5%YoY by May'09, well below peak growth levels of 20%+ (2006-2007). That said, deposit
mobilization has picked up of late, coinciding with the decrease in NSS product rates - 80% of increase in deposits in 11MFY09 has occurred over Apr-May'09. Systemic cannibalization of bank deposits by NSS products should decline going forward. This is based on expected further rationalization of the discount rate in the monetary policy leading to reduced NSS product rates.