MONEY WEEK: monetary contraction reaches Rs 94 billion as NFA depletes by another Rs 13 billion

Monetary contraction which amounted to Rs 85 billion on November 08 rose and reached Rs 94 billion according to SBP data for the week ended 15th November 2008.
In the meanwhile, NFA (net foreign assets) of the banking system continued following its downward slide with overall depletion during the year so far reaching Rs 346 billion, showing an additional decline of Rs 13 billion over the week with country's reserves declining to $6.638 billion (SBP $3.460 billion, DMBs $3.177 billion) compared with $6.736 billion at the end of last week. Overall NDA (net domestic assets) of the banking system, comprising banks loaning, investment and other asset building activities in the government and non-government spheres, was marginally higher at Rs 252.4 billion compared with last week's total of Rs 248.2 billion Other asset building activity of the system, however, showed a net overall decline of Rs 147 billion compared with last week's net decline of Rs 140 billion.
This movement in other assets depressed likely monetary expansion of about Rs 400 billion on account of government and non-government sectors during July 01 and November 15 (2008) by Rs 147 billion during the year so far (about Rs 7 billion during the week under report) to reduce it to the size of the NDA of the banking system viz., 252.4 billion.
Factors leading to massive decline in NFA were discussed in detail last week. This time we look into how this depletion was accounted for on the monetary side starting from changes in currency in circulation which enjoys the seed position in the system. Between July 01 and November 15 (2008), it grew from a little less than a trillion rupees (Rs 982 billion) on 30th June 2008 to more than Rs 142 billion above the trillion mark reaching Rs 1142 billion on 15th November.
At this level, it showed a net increase of Rs 162 billion during the period under report compared with Rs 107 billion in the corresponding period last year. Another component of money supply, namely, 'Other Deposits with SBP' also posted a net increase of about Rs 0.85 billion compared with a net decline of about Rs 2 billion in the corresponding period of previous year. As regards the accounts of deposit money banks, called scheduled banks in Pakistan, the major component is demand and time deposits including Residents Foreign Currency Deposits (RFCDs) which showed a net withdrawal of over Rs 255 billion despite the fact that RFCDs showed a net increase of Rs 23.6 billion during the period under report.
This compared with a much smaller decline of a little over Rs 3 billion (in the face of a similarly smaller increase of Rs 13 billion in RFCDs) in the corresponding period of last year. It emerges that to the extent of at least Rs 255 billion (net), it was the private sector who made use of their deposits with the banks to buy foreign exchange for whatever good or bad purposes.
These purposes must be deemed 'good' if the purchased foreign exchange was for genuine imports and meeting any foreign debt obligations. But we already know unscrupulous elements in trade and industry do resort to over-invoicing of imports and under-invoicing of exports which renders such transactions as 'bad' in the eyes of both the regulators as well as well wishers of the economy.
In the meanwhile, overall government borrowing from the banking system increased to 211.5 billion which included Rs 206.7 billion during the latest week ending November 15 (Rs 195 billion at the end of last week) borrowed to bridge the revenue/expenditure gap with borrowing for procurement of essential commodities remaining more or less constant at last week's level of Rs 7 billion. Government retirement of debt under other accounts also remained unchanged at about Rs 2 billion.
In the corresponding period last year ending at November 17, 2007, the government had borrowed a smaller amount of Rs 137 billion entirely for budgetary support as commodity operations showed a net retirement of Rs 18 billion with other heads also showing a net retirement of a little over of Rs 1 billion.
These purposes must be deemed 'good' if the purchased foreign exchange was for genuine imports and meeting any foreign debt obligations. But we already know unscrupulous elements in trade and industry do resort to over-invoicing of imports and under-invoicing of exports which renders such transactions as 'bad' in the eyes of both the regulators as well as well wishers of the economy.
In the meanwhile, overall government borrowing from the banking system increased to 211.5 billion which included Rs 206.7 billion during the latest week ending November 15 (Rs 195 billion at the end of last week) borrowed to bridge the revenue/expenditure gap with borrowing for procurement of essential commodities remaining more or less constant at last week's level of Rs 7 billion.
Government retirement of debt under other accounts also remained unchanged at about Rs 2 billion. In the corresponding period last year ending at November 17, 2007, the government had borrowed a smaller amount of Rs 137 billion entirely for budgetary support as commodity operations showed a net retirement of Rs 18 billion with other heads also showing a net retirement of a little over of Rs 1 billion.
The mix of government borrowing for budgetary purposes from the State Bank and the scheduled banks remained heavily, and in view of inflation implications dangerously, tilted towards the State Bank (over Rs 376 billion as on 15th November as against Rs 368 billion on 8th November) as scheduled banks net lending remained negative to the extent of Rs 170 billion- the same as on the end of previous week.
Within non-government sector, credit expansion by scheduled banks also remained unchanged at previous week's level of Rs 188 billion (Rs 136.6 billion by private sector proper and Rs 51.6 billion by PSEs). At the end of previous week, this composition amounted to Rs 128 billion and Rs 60 billion respectively meaning that while private sector availed more credit during the week, the PSEs in fact retired. In the corresponding period last year, private sector had borrowed Rs 87 billion while PSEs availed a small amount of Rs 2.7 billion. SBP credit extension to NBFIs, another component of private sector credit, showed a negligible retirement during the current week while in the comparable period last year NBFIs availed some Rs 0.3 billion from the central bank. (For comments and suggestions [email protected])