KARACHI - The increase in the size of the commodity financing by the banking system to the provincial governments for the wheat procurement may create a short-term liquidity dearth in the money market, an analyst said on Saturday. The State Bank of Pakistan has injected Rs69 billion into the banking system through its frequent 16 Open Market Operations over the last three months for commodity operations. The net retirements as of March 20, 2010, however, amounted to Rs56b, showing a due amount of Rs15b to the banks by the borrowers in terms of commodity financing. It may be mentioned that credit to the government for commodity financing operations recorded an exceptional rise during FY09 as banks advances to the government for commodity operations reached Rs210 billion during FY09 compared to Rs 28.7 billion in FY08. Muzzammil Aslam, in a report stated that apart from the delay in foreign inflows, SBP is also worried about commodity financing carry over balances from last year, which is persistently raising the risk of shortage of liquidity for the upcoming wheat crop season. According to research analyst, the government is exploring other possibilities to ease liquidity constraints either by issuing OGDC US$500 million worth convertible bonds or to release US$800 million amount from the Etislalt on account of PTCLs privatization. He predicted that the release of the next IMF loan tranche will also improve the liquidity situation. However, it is very important for the government to assume its responsibility and retire the commodity financing through selling its wheat stock. As per the report findings, despite reversal of macro economic imbalances caused by much contained current account deficit, enhanced foreign exchange reserves and exchange rate stability, the central bank seems reluctant to ease its tough monetary policy stance due to liquidity shortages and the risk of resurgence in global inflation. Although inflation remained in double-digits and is relatively higher in comparison to its trading partners, exchange rate stability is pointing towards strength achieved off late through structural reformation. In the opinion of analyst, the solution to the liquidity issue is the reimbursement from the Coalition Support Fund, the Friends of Democratic Pakistan fund, and Kerry-Lugar arrangements. The sum of these flows arrives at Rs382 billion or US$4.5 billion - enough to finance the deficit and resolve inter-corporate debt. Our inflation call for the full-year still stands at 10-11 per cent and we expect inflation to taper off in the months to come on account of stability in food and other commodity prices. In the upcoming policy, we are not ruling out monetary easing by 50-100bps, but by and large we expect 250bps cut in 2010, predicted Muzzammil Aslam research analyst JS Global.