MONEY WEEK: build-up of reserves and private sector credit account for 82 percent of incremental money supply during fiscal year 2007

Fresh build-up of reserves and private sector's additional credit utilisation during FY07 to June 16 accounted for nearly 82 percent of incremental money supply during the year so far.
Fresh build-up of reserves, or what we roughly call the net foreign assets (NFA) of the banking system, accounted for well over 31 percent of the fresh money creation while private sector's net off-take of credit since 30th June 2006 to 16th June 2007 accounted for over 50 percent of additional money supply. Together the two sectors were responsible for 81.85 percent of new money creation amounting to over Rs 567 billion up to June 16 compared with 85 percent of targeted fresh money creation amounting to about Rs 460 billion.
Although it appears marginally below the target, the tyranny is that whereas private sector was expected to contribute 87 percent of the projected fresh money creation, it contributed only slightly more than 50 percent of actual incremental money supply so far.
On the other hand, NFA, which was expected to add only about Rs 10 billion or 2 percent to fresh money balances during the year, had contributed 31.4 percent of the actual incremental money supply in the year. Since actuals emerging in both the areas are far different from projections, SBP must come up with cogent explanations in its Annual Report as to why they could not visualise the correct, or roughly correct, size of the projections at the beginning of the year. This is by and large the most important factor in proper monetary management.
Within private sector bank credit, as much as Rs 284.4 billion were provided by the commercial banks while a small amount of Rs 1.6 billion was disbursed by the special purpose banks like ZTBL (agriculture), IDBP (industry), PPCB (co-operatives), and SME Bank (small and medium size businesses).
According to available information on distribution of scheduled banks incremental credit to the private sector (for the first 10 months of the year), over 80 percent of all fresh credit (viz., Rs 259 billion up to end April) was owed by Businesses (including agriculture- about 4 percent, manufacturing- over 43 percent, electricity- about 6 percent, construction- over 4 percent and commerce & trade- about 8.5 percent), almost negligible by Trust Funds, about 17 percent by Personal Loans and 3 percent by other type of loans.
Within manufacturing, the largest beneficiary up to end April was food products using over 30 percent of all fresh credit to manufacturing followed by other non-metallic (over 13 percent), chemicals (9 percent), textiles (over 7 percent), basic metals (over 7 percent), machinery etc (6.6 percent), and electrical machinery (about 4 percent of total fresh credit to manufacturing) besides a host of other smaller manufacturing sectors accounting for the remaining portion of credit.
Personal loans accounted for nearly 17 percent of all fresh credit extended to the private sector during the year to the end of April of which 91 percent comprised consumer financing. Over 77 percent of all consumer loans were accounted for by three sub-sectors including house building (about 26 percent), car financing (over 23 percent) and consumer durables (over 28 percent).
Among other components of domestic credit expansion or DCE during FY07 to June 16, PSEs retired a small amount so that their net credit utilisation remained still above Rs 12 billion on June 16 as at the end of the previous week. Other Items (Net) or OINs of the banking system exerted a contraction impact of Rs 81 billion because of larger other liabilities than other assets including a similar impact of Rs 14 billion exerted during the current week. (For comments and suggestions [email protected]).