MONEY WEEK: private and foreign sectors responsible for monetary expansion in fiscal year 2006

Money supply during FY06 exceeded the targeted expansion of Rs 380 billion by Rs 18 billion due mainly to larger than targeted expansions recorded by the private and foreign sectors (viz., of the banking system).
This was revealed in the latest update of the State Bank of Pakistan (SBP), released on July 20, about monetary/credit developments during FY06 to June 24, 2006 - marking the end of the last working week of the year. The release of data was delayed due to reconciliation efforts of the concerned staff who intensively consulted banks and relevant departments within the central bank to resolve/remove any ambiguities with regard to the data received from banks. Hopefully, because of this effort of the central bank officials, end June figures would not be much different from the last week figures.
According to the update, the money supply during FY06 expanded by Rs 398 billion or 13.4 percent compared with the targeted growth of Rs 380 billion or 12.8 percent.
The end June data for FY05 had placed monetary expansion at Rs 479 billion or 19.3 percent. So far in FY06, the currency in circulation had accounted for nearly 23 percent (over Rs 91 billion) of the additional money supply and deposit money for the remaining 77 percent (about Rs 307 billion). Deposit money was further subdivided into time deposits (Rs 208 billion or about 68 percent of total new deposit money), demand deposits (Rs 87 billion or over 28 percent), Resident Foreign Currency Deposits (RFCDs) (Rs 10 billion or over 3 percent), and other deposits with the SBP (Rs 1.6 billion or over 0.5 percent). The increase in RFCD liabilities is also a reflection of the increased foreign assets of the banking system.
As mentioned in the opening section, the higher than targeted increase in money supply occurred mainly because of more than targeted utilisation of bank credit by the private sector and more than targeted accumulation of foreign assets of the banking system which got translated into the increase in country's liquid foreign exchange reserves at the same time.
According to available details, the private sector credit increased by Rs 352 billion during the year to June 24 against the targeted increase of Rs 330 billion. It may be recalled that last year's end June data had placed the private sector credit expansion at Rs 428 billion. In July-March FY06, trade related loans (including loans under FE-25 loans and the export finance scheme) amounted to 36.5 billion or 11 percent of the total private sector credit (Rs 333.7 billion) during the period, the remaining 89 percent being accounted for by non-trade related sectors.
According to latest available data (July-April involving a total of Rs 304 billion of such credit) providing sector wise distribution of credit, credit to agriculture declined by Rs 0.5 billion during the first 10 months compared with an increase of Rs 16.2 billion in the corresponding period last year.
Among other sectors, expansions of varying magnitudes occurred, including manufacturing (up Rs 131 billion compared with Rs 147 billion last year, including Rs 69 billion to textiles compared with Rs 95 billion last year), construction (up Rs 9.4 billion compared with Rs 9.6 billion), commerce and trade (up Rs 50 billion compared with Rs 37 billion),transport and communications (up Rs 8 billion compared with Rs 21 billion), and consumer finance (up Rs 71 billion compared with Rs 66 billion).
The increase in consumer finance had been most significant during the year so far. Data available on CFS financing for June 30, 2006 indicated that on a year-on-year basis credit under this arrangement (purchase of shares) increased by about Rs 4 billion.
Net foreign assets (NFA) of the banking system, in the meanwhile, posted an increase of Rs 41 billion as against the expected increase of Rs 15 billion only. The reasons of the increase in the NFA may be traced to the successful floatation of dollar sovereign bonds and privatisation proceeds especially of the telecommunication giant- the PTCL. Last year, during this period, the NFA had also scored more or less a matching expansion of Rs 40 billion although end June actual figure was way above at Rs 54 billion.
According to the SBP third quarterly report, though for most of FY06 NFA had exhibited a declining trend (-Rs 81 billion during July-February explained by deteriorating BoP situation with the SBP bearing the brunt because of its commitment to finance the key imports especially oil), it took a sharp upturn thereafter on the back of proceeds received against Euro bonds and PTCL privatisation.
The government also used the rupee proceeds or counterpart of this increase in foreign assets to finance its budgetary borrowings which stood at Rs 94 billion or Rs 4 billion less than that provided in the Credit Plan for FY06 - a factor which was also responsible for lower than projected growth of government borrowing (viz. Rs 111 billion as against CP target of Rs 120 billion) and domestic credit (viz. Rs 357 billion than the target of Rs 365 billion).
A break-up of overall government borrowing revealed that besides budgetary borrowing of Rs 94 billion, the government also borrowed Rs 17 billion for commodity operations against CP provision of Rs 20 billion for the purpose.
Last year's end June, the data showed that government's overall borrowing between July-June amounted to Rs 92 billion, including Rs 68 billion on account of budgetary borrowing, Rs 22 billion on account of commodity operations and Rs 2 billion under 'other' heads. Details of budgetary borrowings during FY06 to June 24 also revealed that of the total amount borrowed Rs 108 billion was on account of the federal government, while provincial governments actually retired some Rs 14 billion.
According to latest update on the position of liquid foreign exchange reserves, such reserves stood at $13,021.4 million (with SBP holding $10,673.1 million and scheduled banks the remaining $2,348.3 million) on June 24 - marking the end of last working week of the year.
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