Private sector credit surged by Rs 14.5 billion during the week ended on April 2, 2005, to Rs 362.5 billion, crossing the year-end target of Rs 350 billion by a margin of Rs 12.5 billion. It appears that the private sector was busy cashing in the last opportunities of availing credit 'on sale'. Indeed, it has never been that inexpensive in Pakistan as in the last couple of years or so.
Since last few weeks, besides commercial banks' accounting for well over 99.9 percent of private sector credit, specialised banks also started showing credit expansion in negligible amounts, after experiencing credit retirement till the end of February, which, taken together, contributed Rs 0.5 billion by the end of this week.
However, bank credit extended to PSEs and SBP credit given to NBFIs still continued squeezing in size. Government borrowings rose by over Rs 1 billion to Rs 11.3 billion but their composition between budgetary borrowing and commodity operations changed, with the former declining by Rs 0.4 billion and the latter rising by Rs 1.4 billion.
The composition of budgetary borrowings as between federal and provincial governments also changed with funds availed by the former increasing by Rs 18.6 billion and those by the latter declining by Rs 19 billion due mainly to transfer of funds from federal govt to provincial governments.
The negative impact of other items (net) on domestic credit heightened by Rs 7.5 billion causing credit contraction by the same amount. All in all, banking system's net domestic assets rose by Rs 6.6 billion to Rs 270.3 billion. Inflow of net foreign reserves of the banking system this week was higher than outflow by Rs 0.6 billion causing increase in money supply by the same magnitude.
This, added to the growth in money supply on account of domestic credit, gave increase in money supply on the week-end of the order of Rs 7.3 billion with total money supply during the year so far rising to Rs 322.6 billion.
Segregated into components, the growth of money supply showed that currency in circulation declined by Rs 6.1 billion to Rs 92.3 billion on April 2, 2005 while share of deposit money increased by Rs 13.3 billion to Rs 230.3 billion. Reserve money decreased by Rs 4.1 billion to Rs 121.4 billion.
The causes of the foregoing developments with regard to money supply and domestic credit are explained by the under-mentioned major changes in the balance sheets of the State Bank and the scheduled banks:
THE STATE BANK: Total assets/liabilities of the Issue Dept declined for the fourth successive week by Rs 6.4 billion to Rs 704.4 billion on 2nd April, 2005, accounted for in main by the following: Assets Side: Holdings of GOP securities (down Rs 5.9 billion).
Liabilities Side: Notes in circulation (down Rs 6.5 billion). Increase of Rs 22.1 billion (to Rs 620.6 billion) in total assets/liabilities of the Banking Dept was explained in main by the following changes: Assets Side: Investments in govt securities (up Rs 20.2 billion.
LIABILITIES SIDE: Deposits of Provincial govts (up Rs 17.6 billion), and of banks (up Rs 2.4 billion).
THE SCHEDULED BANKS: Their total assets/liabilities rose by Rs 28.4 billion to Rs 3371.1 billion accounted for in main by the following: Assets Side: Advances other than to banks (up Rs 13.9 billion), Investment in central govt securities/Treasury bills (up Rs 4.5 billion). Other assets (up Rs 7.9 billion). Fixed assets (up Rs 4 billion).
LIABILITIES SIDE: Total demand/time liabilities (up Rs 12.7 billion), capital & reserves (up Rs 2.4 billion), other liabilities (up Rs 9.1 billion).
During the week ended April 2, 2005, private sector credit surged by another Rs 14.5 billion to Rs 362.5 billion. Export credit maintained its rising trend reaching Rs 20.8 billion on April 2, 2005. Private sector credit under general advances and export finance rose despite apparent rise in lending rates (incl KIBOR and call money rate) and, in fact, crossed the target set for it in the Credit Plan with quarter of a year yet to go.
Government borrowings, for both budgetary purposes and commodity operations, have yet to see the zenith and their present low levels owe to reasons other than the rise in TB rates. Inflation expectations, therefore, remain there as these were at the end of the first six months. By and large, a lenient interest rate policy pursued by the SBP is to blame.
The central banks, particularly independent central banks, know pretty well that their main concern is the stability of domestic currency, both in terms of purchasing power locally and exchange parity vis-à-vis foreign currencies.
Affirming the stance in its latest monetary policy statement the State Bank had stated that based on 'balance of risks', it would 'shift from an accommodative to neutral monetary policy...to suppress the current accelerating trend in core and non-food inflation, wring out inflationary expectations from the system' and 'discourage speculative and non-productive financing' while 'easing supply of loan-able funds to credit-worthy' borrowers 'at nonnegative real lending rates'. Let the readers be the judge if it stuck to its policy statement or was it a 'pipe dream'.
During the year so far the benchmark weighted average yield on 6-month TBs rose from 2.5229 percent on July 21, 2004, to 5.5070 on March 30, 2005. The weighted increases in the benchmark yields ranged between the lowest of 0.0935 percent on August 18, 2004, and the highest of 0.6464 percent on February 2, 2005, and averaged 0.37 percent for eight auctions during the year to March 30, 2005.
Visibly, the increases had been too small to be effective as a policy tool. The State Bank kept the benchmark yield low enough (perhaps to help the government keep debt servicing low), left abundant liquidity in the market and never synchronised interest rates to obtaining price inflation.
Similar increases occurred in the case of 3- and 12- month TBs, though increase on the last auction was the most pronounced with cut-off yields rising to 6.39 percent and 7.25 percent from 5.01 percent and 5.95 percent, respectively.
Elsewhere, weighted average lending rates of banks for fresh borrowing (excluding zero mark-up) increased from 5.14 percent in June 2004 to 6.34 percent in February 2005 giving an average increase of 0.15 percent during the eight-month period.
This means that borrowers at the margin hardly felt any pinch for increases in interest rates. Specialised banks were the costliest among all scheduled banks, partly explaining why they could not lend more.
The most closely watched inflation gauge worldwide, ie, the CPI, left consumer inflation rising at an annual rate of 9.06 percent (overall), 12.49 percent (food), 6.76 percent (non-food) and 7.29 percent (core) in the first nine months of this year.
These were 4.47, 6.48, 3.14, and 3.57 percentage points higher than inflation recorded in the respective areas in the whole of FY04. On a year-on-year basis, CPI inflation at 10.25, 13.33, 8.15 and 8.49 percent for the respective areas was higher than even the annualised inflation.
Liquid foreign exchange reserves continued declining for the third week in succession after reaching close to $13 billion on March 12, 2005. During the week ended April 2, 2005, the reserves declined by further $48.2 million to $12,766 million (incl $10,015.0 million with SBP). In the currency market, the rupee came under slight pressure in the open market versus dollar during the week ended April 2, 2005 shedding five paisa for buying and selling at Rs 59.70 and Rs 59.80 respectively.
In the interbank market, the trading did not deviate much from the band of Rs 59.39 (buying) and Rs 59.41 (selling) throughout the week. The rupee resisted any sharp fall in either of the markets despite payments for oil and other foreign bills as the SBP directly financed the bill for oil imports, exporters continued selling dollars and remittances continued pouring in.
In the meanwhile, the rupee gained 35 paisa in relation to euro for buying and selling at Rs 77.10 and Rs 77.40 compared with Rs 77.45 and Rs 77.75 respectively at the end of the previous week. (For comments and suggestions: [email protected])
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