Commodity financing accounts for 60 percent of incremental money supply

According to the latest data on monetary profiling of the country, released by the State Bank on May 29, other things assuming constant, commodity financing contributed nearly 60 percent of the additional money supply pumped into the economy during last three weeks.
On April 28, incremental money supply during FY 07 amounted to Rs 412 billion. It rose to Rs 470 billion on May 19, showing an increase of Rs 58 billion during the last three weeks. On the same date, commodity financing of the Government showed a record Rs 50 billion of credit retirement to the banking system. This retirement shrank to Rs 16 billion only by May 19, showing an increase in commodity financing of Rs 34 billion during this period.
This amounted to roughly 60 percent of the increase in money supply during the three weeks for which data were available. At its present level, Credit Plan for the year would expect another Rs 26 billion of commodity financing without violating the year-end credit target for the purpose.
If we go by weekly monetary expansion on account of commodity procurement operations of the Government during the last three weeks, we find an expansion of Rs 10 billion in the first week, Rs 14 billion in the second week and another Rs 10 billion in the third week.
Even if we assume that for the remaining six weeks money supply on this count would accelerate by an average of Rs 10 billion per week, an additional Rs 60 billion of money supply is very much on the cards, especially because of expectations of an all-time high bumper crop and the chalking out of a comprehensive wheat procurement programs by the provincial Food Departments and Passco to ensure provision of support price of Rs 425 per 40 kg to the growers.
It may be of interest to recall that although much higher than the Credit Plan target of Rs 120 billion, budgetary borrowing of the Government (Rs 212 billion) has remained more or less unchanged during the last two weeks. (For more details and explanations see 'Money Week' appearing Monday next).