October 8, 2020 (MLN): The State Bank of Pakistan, yesterday, issued a notice wherein the Finance Division, Government of Pakistan directed all Federal Government Ministries, Divisions, Attached Departments and Subordinate Offices (MDAS) to close their banks accounts with the commercial banks/financial institutions and transfer the balance funds to the Federal Government’s Central Account No. I (non-food) with SBP.

From what it appears, the directives have been issued in relation to the deposits held by the Federal Government, which according to a report by Next Capital, stood at Rs. 1.37 trillion in August 2020 i.e. 8.5% of total deposits and 6.6% of M2 including Govt, Trusts, NGOs, and corporate bodies. Moreover, the total deposits witnessed an increase of 18% in September 2020 as compared to the same month of last year. Provincial deposits stood at Rs. 1 trillion at the end of August 2020, the report added.

For those who haven’t guessed yet, the government is effectively putting the highly controversial ‘Treasury Single Account’ (TSA) policy into action. While the concept is highly unpopular amongst the banking sector for pretty obvious reasons, the fact of the matter is that the government might actually benefit a lot via its implementation.

TSA is a banking arrangement for the consolidation of government financial resources in one bank account or multiple bank accounts linked to one main account through which the government transacts all its receipts and payments. This measure is meant to strengthen the fiscal position of the Government as the transfer of these deposits to the SBP will provide effective control to the government over its cash balances, resulting in the consolidation of resources in a single account which in return is expected to minimize borrowing costs of government.

Furthermore, the decline in the number of bank accounts held by the government will result in lower administrative and transaction costs for maintaining these accounts. It will also help in improving the Public Finance Management through timely availability of cash to meet obligations and will help in the management of the government’s cash flows efficiently in a way that benefits debt management, and monitory policy.

However, this policy brings with it a great setback for the banking sector, as mentioned earlier. TSA is known for reducing banks’ profitability, as banks would no longer be able to benefit from floats, payment inefficiencies and delays, for instance, by investing in government securities that generate interest income, thus paving the way for liquidity crunch for commercial banks.

In particular, banks whose deposit base comprises largely of government deposits are likely to suffer the maximum brunt. As seen in the graph below (Figures: Arif Habib & Next Capital), the highest govt deposits in absolute terms are held by NBP, as it accounts for nearly 27% of its deposit base.

However, it is BOP that will be impacted the most, as nearly half of its total deposits are held by the State. On the other hand, banks like MCB and BAFL will be least impacted as merely 6% and 4% of their deposits respectively are accounted for by the Government.  

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