Foreign inflows in last week a good omen

Although the money supply shrank by Rs 25 in the second week of Aug09, the inflow of Rs 54 billion in net foreign assets (NFA) is a good omen. We might see a continuation in the reversal of NFA flows in the coming months, courtesy our lenders and donors current preferential treatment towards us.
Improved ratings and MSCI Pakistan index expansion might also trigger more portfolio investment flows in our countrys favour. Now, for the first time this fiscal year, NFA flows are in positive territory - up by Rs 14 billion.
With these foreign flows going in the governments kitty and the start of this fiscal years tax collection (82 bn in Jul09), the government pounced upon the opportunity to retire its borrowing from SBP to the tune of Rs 71 billion. It seems plausible for the government to meet its quarter target of net zero borrowing from SBP, with year to date debt of Rs 26 billion.
Liquidity kept on drying from the banking system, as Rs 24 billion was withdrawn on net basis. Barring Rs 12 billion of foreign currency deposits, the toll increased to Rs 36 billion. The total deposits reduction stands at Rs 101 billion (2.5% of deposits) in the first six weeks of this fiscal year. Nonetheless, the money has not been lost to hidden hands this week - currency in circulation declined by Rs 2 billion whereas it increased by Rs 53 billion in first six weeks FY10/. Most of the deposits reduction is probably routed by the government to the central bank on its debt retirement.
The credit to private sector stayed fixed at last weeks level. The halt of a massive decline in the private sector credit to the tune of Rs 69 billion (2.4% of total credit to private sector) is showing signs of crowding in, as the government, after meeting its current needs, might use foreign loans and aid inflows, which are likely in coming months, on development projects.
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