Incremental money supply during FY07, which reached a record figure of Rs 480.3 billion, or 14.1 percent, in last three years on May 26 2007, surged by another Rs 47 billion during the week ended June 2 to scale up to Rs527.5 billion, or 15.4 percent.
The massive increase in money supply in just one week was caused entirely by an increase of over Rs 68 billion in Net Foreign Assets (NFA) of the banking system as Net Domestic Assets (NDA) or domestic credit expansion actually declined during the week and was provisionally estimated at Rs 377 billion--down Rs 21 billion from Rs 398 billion on May 26.
At the new enhanced level of money supply, NDA was responsible for nearly 71.5 percent of the fresh money creation during FY07 so far compared with slightly less than 83 percent on May 26 while NFA contributed the remaining 28.5 percent compared with only about 17 percent at the close of previous week.
Notwithstanding the decline in NDA of the banking system over the week, the rather slow off-take of private sector credit suddenly picked up, increasing by Rs 16 billion to Rs287 billion during the year to June 2 (Commercial banks Rs 285.9 billion, specialised banks like ZTBL, PPCB, ISBP and SME Bank Rs 1.2 billion).
Although far off from the provision of the Credit Plan (viz, Rs 390 billion), the incremental off-take during FY07 to June 2 appeared moving towards the Rs 300 billion mark by the end of June. Last year, during these times, private sector credit utilisation had risen to Rs 345 billion.
If the NDA declined even though private sector credit had increased, what caused a decline of about Rs 21 billion in NDA during the week? The story was picked up by Business Recorder in its issue of June 16. According to the story, the decline was caused mainly by a massive improvement in the net position of government budgetary borrowing from the central bank over the week, which showed a net retirement of Rs 26.5 billion on June 2, compared to a net borrowing of about Rs 22 billion on May 26, working out into an overall improvement of about Rs 49 billion in the net position.
Further details revealed that on June 2, net position of the federal government had improved by Rs 32 billion while that of the provincial governments stood strengthened by about Rs 17 billion.
The improvement was mainly the result of an increase in government deposits with the State Bank, which improved by about Rs 48 billion over the week--Rs 35 billion in the case of the federal government and Rs 13 billion in the case of provincial governments. The rest of the improvement was accounted for by enhanced payments viz, of Rs 3.7 billion to the SBP by the provincial governments under the head 'Debtor Balances' though in the case of Federal Government the net retirement position of T-Bills and Securities deteriorated by Rs 3 billion.
The phenomenal rise in government funds position with the State Bank was directly the result of credit of rupee counterpart of the sovereign bonds floated abroad or similar dollar receipts with the SBP over the week. The operation resulted in an increase of money balances, amounting to over Rs 47 billion, to Rs 527.5 billion, as NFA of the banking system surged by over Rs 68 billion, resulting in addition in Pakistan's liquid foreign exchange reserves of about $9 million to $13,787.3 million on June 2 allowing them to rise to $15 billion as full proceeds of dollar bonds floated abroad were sold to the central bank. The action may further improve the net position of government borrowing from the central bank by June 9.
In the meanwhile, we urge the SBP to devise ways and means to sterilise the expansion effect of such external flows on liquidity growth to keep RM from rising. It is worth recalling that reserve money grew at a rate of about 20 percent in FY07 to June 2, compared with slightly less than 10 percent in FY06 to June 3, showing nearly a 100 percent surge in the incremental RM.
Expansion in NDA on account of government commodity financing, however, continued unabated amid accelerated procurement of new record wheat harvest. It is worth recalling that on April 28, commodity financing of the government showed a record Rs 50 billion of credit retirement to the banking system.
This retirement shrank to Rs 16 billion by May 19, to Rs 11 billion by May 26 and to Rs 9 billion by June 2, thus showing an increase in commodity financing of Rs 41 billion since April 22. Even if we assume that for the remaining four weeks, or so, money supply on this count would accelerate by an average of Rs 5 billion per week, an additional Rs 55 billion of money supply between April 22 and June 30 is very much on the cards.
Among other components of NDA, credit to PSEs during the week rose by Rs 1 billion to Rs 15.2 billion, of which 83.5 percent (Rs 13.5 billion) was availed by large size PSEs (Wapda, KESC, OGDC, PTC, PIA, Pak Steel) while the remaining 14.5 percent was accounted for by smaller PSEs (Rs 1.9 billion) and by SBP credit to selected financial institutions (Rs 0.3 billion). OINs of banking system were also found to have contributed a net expansion in money supply of Rs 8.4 billion over the week as their negative level improved from Rs 74.2 billion on May 26 to Rs 65.8 billion on June 2. (For comments and suggestions [email protected]).
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