Depleting reserves neutralise money supply

Incremental money supply, which dropped to Rs 79 billion, or 2.3 percent, on October 28, remained unchanged at that level on November 4, despite an increase of Rs 7.5 billion in government borrowing and an increase of Rs 11.6 billion in private sector borrowing, leading to a surge in domestic credit of Rs 6 billion.
This was stated in the latest monetary and credit data released by the State Bank late on November 20. The lower increase in domestic credit, despite an overall increase of about Rs 18 billion in government and private sector borrowing, was occasioned by a decline of about Rs 13.5 billion in 'Other Items' (Net) of the banking system, changes in which bring about matching changes in domestic credit.
The foregoing change in domestic credit should have caused about Rs 6 billion increase in money supply during the week ended on November 4, but the money supply remained unchanged at the previous week's level of Rs 79 billion. The reason was that at the same time economic agents--the government, the private sector and the PSEs--purchased foreign exchange worth net Rs 6 billion from the banking system, which depressed the Net Foreign Assets (NFA) of the system, on the one hand, and depressed the cash balances of the economic agents, on the other, thus neutralising the expansion impact of domestic credit on money supply.
Although there was no change in incremental money supply during the week under report, a compositional change did occur. While currency in circulation, other deposits with SBP (both being central bank liabilities) and scheduled banks demand deposits declined by Rs 6.9 billion, Rs 0.1 billion and Rs 1.8 billion, respectively, scheduled banks time deposits improved by about Rs 9 billion.
While the decline in economic agents cash holdings, their other deposits with the central bank and their demand deposits with the scheduled banks partly reflected their net purchases of foreign exchange, its depressing effect on money supply was annulled by a matching increase in time deposits resulting from commercial banks aggressive drive to woo the depositors by offering better returns on various types of term deposits. (For more details see 'Money Week' appearing Monday next).