Abnormally high money supply growth lately is the reflection of ballooning government borrowing. The state does not have any further room to run stimulus from both monetary and fiscal side. Massive injection through government spending in a short period is a telling sign. Both monetary and fiscal ammunitions are exhausted and there is not any more space. The SBP should go for a pause for the time being to unwind the deficits.
The monetary aggregate (M2) growth this fiscal year to-date is 20 percent as against the nominal GDP growth of 10 percent. Intuitively, the supply of goods is increasing at a smaller rate than the future demand. The government borrowing demand from domestic banking sources has increased abnormally in days of COVID while the lockdown has slowed down the economic growth. This stimulus (read fiscal deficit) has to be unwound sooner or later. It is better to keep this in check. The fiscal deficit in last quarter could well be more than double of first nine-month.
The is a sharp shift in government borrowing demand. The budgetary borrowing from the banking system was Rs190 billion in first eight months of this fiscal (1st Jul 2019 to 28th Feb 2020) and the number was Rs1,743 billion in three months thereafter (1st March to 29th May).
There is a clear case of private sector crowding out (or the borrowing demand to shift from private to public sector). The private sector credit in eight months this fiscal was Rs250 billion and the incremental borrowing is reduced to mere Rs38 billion. There is no new demand other than the government in the banking system lately.
The other problem is that money going out of the system (currency in circulation) is growing with additional government borrowing. The CIC grew by Rs473 billion in the first eight months and thereafter the increase is a whopping Rs948 billion – in the last three months the cash economy grew massively. There is a big opportunity cost of this cash. Wheat procurement and Ehsas programme disbarments have created additional cash into the economy.
Budget is just around the corner. With no new taxes, deficit can only be controlled through spending freeze. Which head of expenditure gets the axe, will be known in a few days time. What is already known is that these are tough times, and the deficits are running high.
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