MONEY WEEK: changes in foreign assets, other items dictate monetary indicators

The week ended on 29th August, 2009, was dominated by changes in banking system's net foreign assets (NFA) and other items-net (OINs), dictating the path of changes in such indicators as broad money and net domestic assets (or loosely domestic credit expansion).
Over the week, NFA posted a net increase of over Rs 116 billion advancing from a position of net depletion of Rs 14 billion on 22ndAugust to a net addition of over Rs 102 billion on 29thAugust. Overall, other liabilities under OINs which overshot other assets by some Rs 112 billion on 22ndAugust, maintained the trend through August 29, with other liabilities overstepping other assets by a sum of Rs 201 billion, representing a hefty increase of about Rs 89 billion between the intervening dates.
The net results were: i) banks net lending activity (represented by net domestic assets (NDA) of the banking system) showed a net asset evaporation of Rs 185 billion during the year to 29th August (compared with an asset loss of Rs 110 billion during the year to 22nd August) mainly because of a huge dampening effect of the OINs; and ii) contraction in broad money (M2) narrowed down by about Rs 41 billion from Rs 124 billion (or 2.42 percent) on 22nd August to Rs 83 billion (or 1.61 percent) on 29th August, mainly because of the aforementioned surge in NFA and also post-Zakat deduction date positive effect on deposits.
The improvement of about Rs 41 billion in money supply over the week was entirely represented by deposit money, which went up by Rs 51 billion, while currency in circulation declined by Rs 10 billion.
Besides the OINs which by and large determined the current low size of the NDA, other two components of NDA, namely, government borrowings and corporate borrowings, represented divergent trends during the week. While corporate borrowings depressed the size of NDA by another about Rs 1.5 billion with overall retirement by the sector during the year so far, rising to well over Rs 92 billion (private sector -Rs 81 billion, PSEs -Rs 11 billion) on 29th August, borrowings by the government elated the size of the NDA by about Rs 16 billion with government's overall indebtedness to the banking system rising to Rs 108.4 billion (budgetary -Rs 112 billion, commodities -retiring Rs 4.7 billion).
The decline in corporate borrowings was shared by PSEs alone which retired an additional Rs 3 billion during the week while private sector, in factm made a net borrowing of about Rs 1.5 billion. Increase of about Rs 15 billion in budgetary borrowing during the week was equally shared by both the central bank (up Rs 7.6 billion to Rs 49.7 billion) and the scheduled banks (up Rs 7.6 billion to Rs 62 billion).
As already stated, NFA and other liabilities under OINs of the banking actually held the sway during the week. NFA, which had depleted by over Rs 14 billion during the previous week, inflated by Rs 116 billion during the week under report to end up at Rs 102 billion as on 29th August. The main contributory factors were workers' remittances, portfolio investments under Special Convertible Rupee Accounts (SCRAs) and Foreign Assistance.
Workers' remittances set up another record to reach $780.53 million in August, 2009, showing an increase of 31.78 percent over August 2008. During the first two months of FY10 (July-August), an amount of $1.525 billion had been sent home by expatriates, showing a major improvement of 25 percent over $1.219 billion remitted by them during July-August FY09.
Simultaneously, foreign investors continued investing in Pakistan's equity market under SCRAs where inflows amounted to $95.3 million in August and were reported at $111.7 million in the first 11 days of September, adding up to $182.7 million during FY10 so far, after adjusting net withdrawals made in the first month of FY10. Foreign assistance from IMF and 'Friends' has also poured in. All these taken together, not only inflated NFA of the of the banking system but also the country's liquid foreign exchange reserves which rose to $14,307 million on 29th August and were roughly hovering around that level by 5th September.
A word about the OINS. The net position of this head is the difference between totals of other assets and other liabilities. Most other assets and other liabilities are well defined but it is the 'other other assets' and 'other other liabilities' appended to each side of the balance sheet which are usually problematic and are largely 'suspense entries' of the nature of liabilities and assets which refer to credit (banks' liabilities) or debit (banks' assets) balances not in customers' names, but relating to customers' funds (as opposed to the reporting institutions' internal funds or to its shareholders' funds).
These include, for example: Accounts holding funds awaiting transfer to customers (but not accounts relating to interest accruing); Returnable application monies for capital issues; Customers' funds awaiting investment which have been transferred to an account not in the name of the customer; Funds transferred from customers' accounts to an account not in the name of the customer to meet acceptances, confirmed credits etc; Funds placed on account to meet travellers' cheques issued by the reporting institution but not yet presented; Funds received from credit/debit card schemes but not yet paid to merchants; Balances awaiting settlement of securities transactions ie, amounts payable in respect of transactions not due until a future settlement date which arise because of the requirement to report investments on a contract basis. (For comments and suggestions [email protected])