MONEY WEEK: Is external account a silver lining?

With inflation persistently in double digits amidst rising fiscal deficit, economic growth is being checked by and large. The only macroeconomic variable showing some sign of sanity is balance-of-payment - exports are growing at an expectedly higher pace, remittances are touching billion dollars a month mark and reserves are at a record high with a stable currency for few months.
But the theory says that high fiscal deficit and its monetisation increases money supply as a result, the external account comes under pressure. The expectations usually make market players act in advance and put strains on the forex reserves and the rise in domestic demand fuels inflation.
However, in the past few months, it has not sent havoc in currency pricing. There are some positive shocks which make it possible. Rise in cotton and rice prices enabled exports to grow by 19 percent in the first half against the SBP expectation of single digit growth. But in volume terms, the story is dismal - exports declined marginally as LSM index witnessed a decline in July-November period.
Similarly, the IMF emergency support funding (ENDA) of $450 million allowed use of funding for budgetary support and eased the fiscal position. Even in the third quarter, the unused IMF bridge facility to the tune of Rs350 billion disbursed in May will be used for further fiscal support in the third quarter.
Nonetheless, with Pakistan off-track with the Fund no further multilateral aid/loan funding is in the offing to fill the revenue deficit which is likely to be over 3 percent. This makes the budgeted foreign fiscal funding questionable. So a strain on the fiscal side and its impact on the external account is a likely outcome in the fourth quarter.
While analysing the structure of external accounts and its performance vis-à-vis last year, the silver lining seems to be fading away. "Despite 101.1 percent yoy decline in the July-December FY11 current account deficit, the overall external account has deteriorated", highlighted SBP's first quarterly report.
FDI is on a continuous fall as a result capital and financial accounts recorded a surplus of $887 million in 1HFY11 in contrast to $3 billion in the corresponding period last year.
SBP reports warned that situation looks grimmer going forward as floods related receipts will fall in coming months, increase in energy commodity prices will strain the import bill and failure on economic reforms progress could continue to weigh upon external capital and financial accounts receipts.
"...The current account deficit is likely to deteriorate in H2-FY11.....The financing of CAD will be challenging as inflows under financial accounts are likely to be significantly lower".
But all is not gloom; there is influx of liquidity in the emerging economies as a result fiscal stimulus and quantitative easing in the developed part of the world. By promptly addressing the political and economic problems we have great opportunities to attract foreign capital.
Just as the SBP governor relied on the promise of political leadership, to make the right economic decisions, while keeping the discount rate unchanged, will the market rely on politicians? Well, the market interests rates are expected to go up on government financing pressure despite keeping discount rate at 14 percent partially answers the question. Keep your fingers crossed on rupee-dollar parity for coming few months
MONEY AGGREGATES:
Government kept on retiring its borrowing toll of SBP to hold on to its promise of not letting central bank's borrowing to exceed September end's level. With retirement of Rs11 billion for the week ending September 22 it slashed Rs205 billion in the past six weeks with receipt of coalition support fund $625 million and dividend of Rs 40 billion from SBP profit.
Private sector credit slightly ticked up by Rs13 billion to reach Rs146 billion year to date. However, this might not be an indication of a trend as seasonal working capital needs are about to end and net retirement is a likely outcome in this and coming quarter as long term investment is far and few.
Overall NDA is down by Rs21 billion while NFA is up by Rs12 billion making overall broad money to decline marginally by Rs9 billion for the week ending January 22 to 453 billion.

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KEY MONETARY AGGREGATES AS ON JAN 22

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                                        Rs (mn)

                                   22-Jan    15-Jan      Change

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Currency in Circulation           250,513    273,555   (23,042)

Total Demand & Time Deposits      189,844    178,975     10,869

Broad Money (M2)                  444,871    453,901    (9,030)

NFA                               139,023    126,930     12,093

NDA                               305,848    326,970   (21,122)

Net Government Borrowing          287,819    298,208   (10,389)

Borrowing for budgetary support   344,581    355,182   (10,601)

from SBP                          123,637    133,007    (9,370)

from scheduled banks              220,944    222,175    (1,231)

Commodity operation               (59,338)   (59,554)       216

Credit to non-govt sector         172,151    154,506     17,645

to private sector                 146,784    134,014     12,770

to PSEs                            24,558     19,676      4,882

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Source: SBP

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