AS banking transactions become digitalised and the documentation drive gains steam, pre-Eid withdrawals from bank accounts no longer remain the hassle they were in the past.

Back in 1990s and 2000s, there would be a substantial time lag between net pre-Eid withdrawals and their eventual return into the banking system.

“The time lag still exists but it has narrowed. Whatever goes around comes around, a bit more speedily now. Prolonged cash holding is no longer an easy option as parking money in the parallel economy has become riskier,” bank executives and central bankers explain.

Whatever goes around comes around, but a bit more speedily now

Businesses that wallow in hefty cash flows during Ramazan due to enhanced sales of goods and services have started using bank accounts to manage their day to day liquidity. This keeps overall bank deposits at comfortable levels thereby requiring a less frequent injection of funds into the interbank money market by the State Bank of Pakistan (SBP).

“If you compare net liquidity injections into the interbank market during Ramazan or ahead of Eid, with the ones made a decade ago, you will find a downward trend — if not in volume, certainly in relation to banks’ overall deposits,” insists a senior SBP official.

From May 21 to June 01 — the first three weeks of Ramazan — the SBP has thrice injected funds via reverse repo of treasury bills, for four days on the first occasion and for seven days each at the latter two auctions of the bills. The pumped in amount, on gross basis, on all the three occasions comes to little more than Rs1.85 trillion.

“You must also remember that fund injection during Ramazan is not necessarily meant to help banks overcome their liquidity shortages,” explains the treasurer of a large local bank. “It could also be meant to help banks buy more government debt securities in the upcoming auctions; as is the case this time.”

Six days after the injection of Rs210 billion on June 1, for example, banks on June 6 bought more than Rs1.3tr worth of treasury bills.

Bankers say currency in circulation or money outside the banking system normally shows an upward trend during Ramazan due to withdrawals from the banking system. But eventually a large part of that money returns after changing hands.

Previously when households and companies withdrew money to finance Ramazan-related expenses, their purchases involved a lower degree of documentation.

“Changes in taxation laws, growth of high-end documented networks of retail outlets, greater use of internet in banking and business and delivery of services through branchless banking now encourage speedier money management.

“Withdrawals are more about transfer of funds from one account to another rather than currency in circulation. That’s why the time lag between withdrawal of money from and its return into the banking system is shorter than before,” says a senior official of the National Bank of Pakistan.

This highlights the growth of digital banking for business transactions resulting in the lesser use of hard cash.

The latest SBP report on payment systems, January-March 2018, shows a growing trend in the use of retail e-banking channels for facilitating retail payments.

Over the last few years, the introduction of an SBP-supervised SMS service for facilitating pre-Eid delivery of fresh currency notes has added to the digitalisation portfolio.

Though this service has a neutral effect on withdrawals from, and deposits into, bank accounts it goes a long way in containing sale of fresh currency notes on a premium in the open market by vendors in connivance with unscrupulous bankers. This practice prevailed before the introduction of the scheme in 2015.

Under this scheme, 2.3 million customers have already gotten fresh currency notes and it is expected that by June 14, the deadline set for this purpose, their number will rise to the targeted level of 2.7m. In that case, it will show a 50pc increase over the number of customers that benefited from the scheme during last year, according to a SBP press release.

Meanwhile, for past two years Ramazan-related increase in home remittances has not been as important a source of keeping forex rates stable as it previously was because of the enormity of forex shortage in the country. Bankers and executives of exchange companies say that this year, too, the situation has remained unchanged.

Data for July-May FY18 home remittances will have been released after the publication of this write-up, hopefully showing a moderate rise in inflows.

“But keep in mind that Ramazan began from 17 May this year whereas last year it had begun 10 days earlier, so part of the possible increase in July-May data must be seen in the light of a base effect,” reminds an executive of Habib Bank.

As the general elections approach, one should expect a rise in remittances from supporters of political parties among overseas Pakistanis. And, of course, one can also expect some channelling back of funds earlier sent abroad (which finds its way back home before every election), bankers and forex companies’ officials say. Both factors may inflate home remittances for the period.

Published in Dawn, The Business and Finance Weekly, June 11th, 2018