Federal govt has two ways or revenue generation:

1. Taxes
2. State owned enterprise profits. Within 2 months

December

June – Dec Govt is short of cash

Three ways to generate cashflows.

1. Print Money - Excess cash Inflation IMF

2. Bank borrowing IMF
3. OMO – Open market operations
a. Issue T-Bills and T-Bonds
b. Int. Sukuks – Floaters Variable coupon rate

Every month banks invest in 3 motn, 6 month, 9 month and 1 year t-bill

16, 17, 18

Big five primary dealers

HBL. NBP. UBL. ABL. MCB.

94.5% for 10,000

1 t bill has a denomination of 100,000

94,500 after 3 months you will repay 100,000

95% for 9,000

94% auction mop up

HBL huge investment

SLR (Statutory liquidity reserve) and CRR (Cash reserve requirement)

Reduce the power of bank to advance loans.

10% of your advances should be kept in SBP reserves (SLR)

100,000 10,000 interest free SBP Payments of Auction are made from this account

100,000 5,000 in cash form BANK

t-Bill auction 8000

Balance in SLR 2000 8000

Current deposit balance 80,000 You have to maintain 8000 so means you need 6000 extra to fulfill the
requirement of SLR.

Secondary market resell T-Bill

Money market mutual Funds, Insurance Co, Pension Funds, Small and Medium size Banks, Individual
investor, foreign investor.

HMB t-bill buy secondary market

Cash shortage

KIBOR (Karachi interbank offer rate)

SBP Monthly auction of T bills and T Bonds

Reverse repo Repo

6 months 165 160 170

June 6-moth forward rate 168

Aug 172

US int 1.5% one year loan interest

Pk interest 7% one year deposit interest

USD/PKR 165 spot rate

USD/PKR 174 One year forward rate

I borrow USD 1000 and Invest 165,000 in PK banks

After one year 176550

In US I have to pay $ 15 interest and $1000 loan or $1015.

Interest rate parity theory