MONEY WEEK: monetary expansion beats target amid rise in budgetary/PSEs borrowing, commodity financing, other assets

On June 30, 2006, overall money supply in the economy stood at Rs 885.3 billion. To accommodate the expected growth in GDP and the targeted inflation, an additional expansion in money supply of Rs 460 billion or 13.5 percent was provided in the Credit Plan for FY07.
Based on provisional data released by the SBP on May 22, actual monetary expansion on May 12 stood higher at Rs 478 million showing an increase of 14 percent over June 30, 2006.
A week ago, monetary expansion stood lower at Rs 447 billion (or about 13.1 percent). The increase of Rs 31 billion over the week occurred on account of budgetary borrowing (up Rs 16 billion), commodity financing (up Rs 14 billion), PSEs credit utilisation (up Rs 4 billion) and other items (net) or OINs of the banking system (up Rs 6 billion). The build-up of foreign reserves also contributed an increase of Rs 1.3 billion to money supply. The expansion of over Rs 40 billion in money supply over the week on account of these heads was partly offset by a decline of over Rs 10 billion in the private sector credit.
The increase in money supply during the week was shared between deposit money (up Rs 21 billion, including over Rs 14 billion on account of time deposits) and currency in circulation (up Rs 10 billion).
It may be of interest to note that although during FY07, at one time, time deposits had declined by as much as Rs 1,137 billion by August 5, 2006 (after recording a rise of Rs 218.5 billion during FY06), these deposits made up the losses to the tune of some Rs 129 billion since then with the net decline squeezing to Rs 1008 billion by May 12. The improvement largely was the result of aggressive deposit mobilisation effort by commercial banks who offered competitive returns after the government raised the rates of return on their deposit schemes in the FY07 budget.
As stated in the opening paragraph, the increase in government borrowing during the week occurred on account of budgetary borrowing and commodity financing which respectively increased by Rs 16 billion and Rs 14 billion.
The increase in budgetary borrowing was on account of both the federal government and the provincial governments up Rs 7.5 billion and Rs 8.5 billion respectively. Institution wise, the increase was entirely on account of SBP, while the increase in the case of the federal government was entirely on account of scheduled banks (up Rs 13.4 billion) as their borrowing from the SBP continued declining to stand at Rs 24.7 billion on May 12 compared with Rs 30.7 billion on May 5. The increase in commodity financing was seasonal and almost entirely occurred on account of wheat procurement by the government departments.
Pakistan has, in the meanwhile, successfully raised $750 million in foreign loans after floating its sovereign bonds at the international market which were heavily oversubscribed. As soon as this foreign exchange is received by the State Bank on behalf of the government and the rupee counterpart (roughly Rs 45.5 billion) paid by the SBP to the government is deposited with the central bank, an equivalent reduction in government's budgetary borrowing would occur, other things remaining the same. It would bring down budgetary borrowing somewhere close to year-end target of Rs 120 billion.
While most monetary indicators increased during the week, private sector credit, which until recently had been rising, albeit slowly, posted the first decline of over Rs 10 billion indicating slackening economic activity in the sector. The decline occurred almost entirely in the commercial banks loaning to the sector. To recall, private sector was earmarked Rs 390 billion in the Credit Plan for the year.
As against credit offtake by the private sector, public sector enterprises, which suddenly picked up credit utilisation since mid of April, reached well over Rs 10 billion on May 12, 2007 (after recording an increase of Rs 4 billion during the week) compared with the whole year target of Rs 5 billion only. The increase during the week occurred entirely on account of heavy weights like Wapda, KESC, OGDC, PTC, PIA, and Pakistan Steel showing their poor revenue generation to meet their current and development expenses.
In line with the increase in NFA of the banking system, the liquid foreign exchange reserves, which were $13,733 million on May 5, rose to $13,782.8 million on May 12. The increase during the week occurred almost entirely in reserves with the SBP. On receipt of $750 million from the government, as mentioned earlier in this review, the reserves would jump somewhere close to $14.5 billion on May 19 or so.
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