MONEY WEEK: monetary expansion decelerates due to private sector credit decline

Money supply throughout FY09 remained subdued, mostly at levels much lower than the outstanding level as on the last day of FY08 mainly because most economic agents surrendered their money balances to the monetary authority to buy costlier foreign exchange to finance either their import of goods and services, or to pay off their maturing foreign liabilities, or to just dis-invest their investments held against foreign exchange.
Only in recent weeks, a marginal surge took place in money supply amid circumstances exhibiting moderate conservation of net foreign assets (NFA) of the banking system and an increase in private sector credit. It was at its highest at Rs 61 billion plus on January 3, 2009.
However, monetary expansion decelerated once again during the week under report, to stand at Rs 43.5 billion on January 10, 2008. The current deceleration was not because of any further draw-down of NFA but because of a deceleration in the growth of credit or net domestic assets (NDA) of the banking system, driven by a major squeeze in credit off-take in the non-government sector (a squeeze of Rs 23 billion was witnessed by the private sector proper and Rs 3 billion by the PSEs), with government sector borrowing remaining more or less unchanged at previous week's level.
All other causative factors exhibited positive contributions to money supply: NFA improved by about Rs .5 billion; OINs (other items net) of the banking system showed a lesser build-up of other liabilities, which stood depressed by Rs 3 billion.
Although government sector borrowing remained unmoved, items composing the government sector exhibited minor upward/downward changes: budgetary borrowing was up by Rs 3.5 billion (entirely on account of the State Bank whose holdings of government debt increased by about Rs 9 billion while those of the scheduled banks shrank further by another Rs 6 billion) as borrowing under commodity operations of the provincial and Federal governments' procurement agencies/departments happened to have offset the increase in budgetary borrowing by more or less a matching reduction in it.
Squeeze in credit utilisation in the non-government sector of about Rs 26 billion during the week is a matter of concern, especially in view of the ongoing global recession. Is it because of lack of interest in the corporate sector to use bank credit for their day to day requirements--a demand side factor--or because of lack of liquidity in the banking system to facilitate loans and advances to the private sector--a supply side factor.
The State Bank should continue monitoring and analysing developments in the use of credit by the all-important production sector, the economy, and take necessary corrective measures as they become due rather than delaying them too much in a recession situation when it is hardly warranted, considering that we are a developing country.
In the external sector, it was heartening to see that, driven by various factors, further erosion of the rupee and the hard-earned foreign assets of the banking system has been somewhat halted since last few months/weeks. On the one hand, liquid foreign exchange reserves of the country improved, mainly on the back of IMF's financial assistance. These reserves increased from $6.7 billion, as of end October 2008, to over $9 billion as of end-November, 2008 and further to over $10 billion as on January 9, 2009--the latest week-end for which an update is available.
Besides IMF support and other favourable factors, reserves also improved because of a larger inflow of workers' home remittances, which grew from $3.066 billion in July-December 2007 (FY08) to $3.639 billion in July-December 2008 (FY09).
On monthly basis, during the last two months, these grew from $620 million in November 2008 to $674 million in December 2008. On the other hand, in terms interbank floating average exchange rate, the rupee improved to Rs 78.9238 for the month of December 2008 per US $ from Rs 79.9239 per US $ for the month of November 2008 and Rs 80.4331 per US $ for the month of October 2008.
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