All in green - but a long way to go

For the first time this fiscal year, both NFA and NDA are in the greens in a single given week, but the festive driven growth in currency-in circulation reduced the flows in the banking system. Nonetheless, the increase in money supply for the third straight week during the week ending September 12 is a good omen for the economy.
Although, the money supply increased by Rs87 billion (1.7% wow) in the last three weeks, the Rs 35 billion rise in CIC has kept the banking liquidity in check, as only Rs 52 billion was poured in the demand and time liabilities. In two to four weeks time, most of the money gone out of system ie rise in circulation, will be routed back as business and shop owners deposit their money back into the system after Eid. This, with the multiplier effect (3.4 times on FY09 stocks of reserve money) can partially arrest the liquidity problem.
However, with the government's target to bring its borrowings from central bank to net zero for the first quarter will mount pressure on commercial banks to lend more money for the fiscal support, rather than the ailing private sector.
Hence, all hopes of private sector credit revival are on the shoulders of foreign inflows. It is pertinent to note that the exogenous factors which include bleak law and order situation, political chaos and reluctance of private sector to borrow are to a large extent out of the control of monetary flows.
So far, volatile foreign inflows have been, more or less, generating room for both the government and the private sector to borrow more. Net foreign assets of the banking system rose by Rs 29 billion in the second week of September, giving a big push to broad money supply which jumped by a whopping Rs 37 billion during the period.
But this could largely be attributed to the Eid effect, as people took out cash to pay for their festival related purchases. According to State Bank data, currency-in-circulation rose by Rs 18 billion during the week ending September 12, though sharply lower compared to an increase of Rs 27 billion in the preceding week.
Net government borrowing rose by Rs 17 billion, of which most was raised from commercial banks - a hefty Rs 14.9 billion. Despite, this shoving out behaviour by the government, private borrowers managed to take fresh loans worth Rs 13.4 billion during the period - halting the slide in private sector credit to Rs82.2 billion.
But should there be jubilation over this slight recovery in private credit? Perhaps, it will be soon to do so, as a significant part of this fresh borrowing may be, yet again, due to the Eid effect with businesses taking short-term debts to meet seasonal consumer demand.

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KEY MONETARYAGGREGATES AS ON SEP12

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                                                       Rs (mn)

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                                   12-Sep      5-Sep    Change

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Currency in Circulation            86,812     68,543    18,269

Total Demand & Time Deposits     (124,286)  (143,387)   19,101

Broad Money (M2)                  (37,214)   (74,519)   37,305

NFA                               125,918     96,830    29,088

NDA                              (163,131)  (171,350)    8,219

Net Government Borrowing          159,634    142,314    17,320

Borrowing for budgetary support   163,964    146,070    17,894

from SBP                           88,208     85,272     2,936

from scheduled banks               75,756     60,798    14,958

Commodity operation                (3,615)    (4,250)      635

Credit to lion-govt sector        (88,433)  (101,409)   12,976

to private sector                 (68,788)   (82,198)   13,410

to PSEs                           (19,640)   (19,207)    (433)

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