The government borrowing from the central bank for budgetary purpose and central bank''s own refinance schemes are two major factors which push up reserve money (RM) which, given the money multiplier, then multiplies money balances or liquidity in the economy.
For these reasons, the State Bank of Pakistan, in the first instance, has been urging government to minimise its recourse to central bank''s funds. On the home front, the State Bank is giving serious thought to get rid of the time old refinance schemes which have kept reserve money in bondage besides facilitating prospective exporters to misuse these cheap funds to earn interest rate arbitrage or else resort to hoarding especially if finance was provided for durable edibles like rice (cf. Lead story BR 15-06-07).
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.
On June 2, for which the latest monetary data are available, net government position with regard to borrowing from the State Bank improved by Rs 49 billion over the previous week. The net position of the federal government improved by Rs 32 billion while that of the provincial governments strengthened by about Rs 17 billion.
It was mainly the result of improvement in government deposits with the State Bank which improved by 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 the 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 part of which sold to the SBP over the week.
The operation resulted in pushing up money balances in the economy by over Rs 47 billion to a record high figure of Rs 527.5 billion as NFA of the banking system improved by over Rs 68 billion adding also to Pakistan''s liquid foreign exchange reserves nearly $9 million to $13,787.3 million on June 3 which later on rose to $15billion when full proceeds were sold to the central bank promising further improvement in the government borrowing from the central bank.
Let us see what the data speak the next week. Meanwhile, it is time, the State Bank devises ways and means to sterilise the expansion effect of such external flows on liquidity growth.
(For more details see ''Money Week'' appearing on Monday next)