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Govt To Withdraw All Its Deposits From Commercial Banks! Sudden Implementation Will Generate Banking, Economic Crisis

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The government has decided to withdraw all its deposits from commercial banks worth around Rs2 trillion and park it at the central bank under a precondition to win the International Monetary Fund’s (IMF) bailout worth $6 billion in a couple of weeks, The Express Tribune reported.

The report says if the move is executed suddenly, it would create a crisis like situation similar to what India experienced when it demonitised Rs500 and Rs1,000 currency notes to curb corruption. The event had badly impacted masses as they had gone bankrupt.

“A Treasury Single Account has been created (at the central bank), disallowing government(s) money to be parked in commercial bank accounts,” Minister of State for Revenue Hammad Azhar said while presenting the federal budget for fiscal year 2019-20 in the national assembly on Tuesday.

Later on, Special Assistant to Prime Minister on Information Firdous Ashiq Awan told a press conference that the federal cabinet had approved the Cash Management and Treasury Single Account Policy 2019.

However, “No one is aware, including bankers, regarding the roadmap, which the government will follow to implement this decision as the policy paper has not yet been made public,” said Taurus Securities’ analyst Mustafa Mustansir.

He added that the government gave the impression in the budget that it would implement its decision of withdrawing Rs2 trillion deposits from the commercial banks with effect from July 1, 2019. He, however, bet the governments would not do so overnight.

“If it is done in a sudden move, it would collapse several banks and also badly impact the domestic economy,” Mustafa said. In domino effect, it would lead the public to pull out their funds from the banks as government’s sudden withdrawal reports would spark panic. The government has parked such deposits in at least four banks including leading ones in the country.

For instance, government deposits at a provincial government-run bank stand at 56-57 per cent of the total deposits at around Rs600 billion. “If the government withdraws the funds overnight, the bank will collapse,” he said.

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The supposed withdrawal would be done slowly and gradually. “It should take at least a couple of years for sure,” he said.

Currently, commercial banks are lending governments’ deposits to the governments and earning profit through investing in treasury-bills and Pakistan Investment Bonds (PIBs).

“The implementation of the decision would hurt banks’ earnings,” he said.

The decision was taken after the IMF asked the government to make no more budgetary borrowing from central bank, but from commercial banks to use the money available in the system.

Next Capital Managing Director Muzammil Aslam said, “The developments suggest that government deposits would continue to remain available with the commercial banks, but the banks could not use them for lending and investment purposes.” “It would take at least two to five years to transfer the government funds from commercial banks to central bank on a permanent basis,” he said.

If the government does so in a sudden move then the banks may also ask governments to payoff banks’ loan and the ones stuck in the loss making state-owned enterprises since long. In addition to this, banks may charge fee on management of government deposits to avoid collapse, he said.

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