The monetary assets are growing faster but not in the right direction. Currency-in-circulation is outpacing the spike in the demand and time liabilities, stressing the liquidity in the market. The overall monetary assets grew by 8.7 percent in a little over 10 months this fiscal year compared to eight percent in the corresponding period last year.
The dismal tale of net foreign assets continued as stocks kept on shrinking. The fall in NFA was Rs188 billion in 10 months, which is not as bad as it was in the previous year, but is still far from satisfactory levels. And the situation is not likely to improve anytime sooner unless political stability results in foreign inflows.
Nonetheless, all the deficits are plugged in by government borrowing from the banking system and it is increasingly being channeled through the commercial banks. Though it’s putting reigns on direct monetization by much lower borrowing from the central bank, which stood at Rs69 billion year to date (last year: Rs305 billion), the toll is increasingly falling on commercial banks. This is not only crowding out the private investment but it is contributing to inflationary pressures by virtue of persistent reverse open market operations.
Government borrowing from the scheduled banks stood at Rs857 billion vis-à-vis Rs679 billion in the corresponding period last year. Credit extended to the private sector was mere Rs119 billions in the first 10 months of this fiscal which is almost half to what it was in the similar period last year. Mind you, private credit was much lower to its historic peak in the last year.
So whoever comes in political power after elections should keep a close eye on this poor economic indicator and should formulate such polices that incentivize both domestic and foreign investment. It’s an immense challenge and is imperative for sustained economic growth and employment generation for over two million entrants per year to the job market.
Credit to public sector entities, which was on a decline in the previous two years, has turned green owing to implicit election campaign by the outgoing government to attain some popular vote. The bottom line is that macroeconomic stability is sacrificed by running popular policies at the tail end of government tenure to gain some political millage. That was the case in 2008 and is same in 2013. The repercussions have to be borne by economy at large in the coming years.