The State Bank injected Rs690 billion into the banking system on Monday to meet the liquidity gap created after massive investment in government papers.The central bank injected this large money for four days at the rate of 8.79 per cent.The liquidity gap has been widening as the banks did not stop investing into the government papers despite shrinking returns.Bankers said this liquidity was injected to keep the banks able to invest in the government papers.

This is surprising that the government has been a main borrower from the central bank for last many years but this year instead of borrowing, the government is retiring the debt.The borrowing from central bank has been an issue for both the government as well as State Bank as this borrowing is inflationary in nature. Now the government is borrowing from the private banks.

Only last year the government borrowed Rs464 billion from the State Bank which was widely criticised by the economists and analysts as inflation remained in double digits.“Whoever advised the government to borrow only from scheduled banks supported the State Bank which is now helping the government to borrow from banks by injecting huge liquidity,” said a senior banker.

The government so far retired Rs140 billion to the State Bank during the first six months of this fiscal year against a borrowing of Rs147 billion in six and half months of last fiscal year.Bankers said the liquidity gap into the banking system has been widening from Rs20 to R30 billion each week.“If the gap keeps increasing with the same pace the liquidity gap could reach as high as Rs1 trillion at the end of the current fiscal,” said the banker.

S.S. Iqbal, a banking analyst, said the liquidity scarcity directly hits economy which needs banks’ money for growth. The private sector credit offtake was even lower than previous year.During the six months the credit offtake by the private sector was just Rs52 billion while it was Rs190 billion during the same period of the last year despite slashing of interest rate by 4.5 per cent during the past 15 months.

The worsening law and order situation encourages banks to invest in government papers instead of extending loans to the private sector.“This is only half truth. Banks have no money to lend to private sector,” said Nishat Ahmed, a businessman dealing in electronic items. He said banks were required helping businesses instead of dumping their money into government’s accounts.