Like the previous week, the week ending October 24 didn't leave much to talk on cumulative change in money supply. The multiplier effect of credit creation is slowly but surely gathering momentum. Credit to corporate sector continues to gather pace, especially for private segment. However, on fiscal side, demonetization of central bank debt is virtually matched by credit created for commercial banks.
The currency-in-circulation, in its post-Eid momentum, that historically takes a month or so to revert back to the system, declined by Rs 10 billion during the week, whereas, unlike the week before, demand and time liabilities increased by Rs 6 billion. In absence of foreign component, the liabilities increased on account of domestic money, either resulting from the reduction in currency in circulation or money created by the multiplier effect or possibly both.
The overall money supply fell by Rs 4 billion taking the year-to-date decline to Rs 8 billion. But stagnant money supply does not undermine the details on assets side. With net foreign assets dropping by Rs 7 billion during the week ending October 24, (July-October inflows: Rs 114 bn) the real excitement lies on the domestic front.
In the government segment, fiscal managers are smoothly curtailing the government's burden on State Bank in their quest to curb demand-pull inflation; government borrowing by the central bank fell by Rs 15 billion to ease the yearly demonetization to Rs 72 billion, as against the borrowing of Rs 270 billion in the same period last year.
And of course, the excess was met by its reliance on commercial banks, from which it borrowed nearly Rs 15 billion, with some activity in commodity operations that may create some deposits to multiply going forward.
In a refreshing sign for the economy, lending to non-government sector jumped by Rs 17 billion in week ending October 24 after having risen by Rs 26 billion in the week before. Within the corporate sector, however, public sector entities, which had filled their appetite by massive borrowing last month, were happy to retire Rs 3 billion owing to reduction in the amount of circuit debt. With the release of amount raised through TFC's, circular debt has been on a decline of late, helped partially by lower creation of debt thanks to the partial withdrawal of power subsidies.
As for the private sector, things look relatively better going forward, with new loans lent out for the second consecutive week, private sector credit has improved by Rs 19 billion - reducing the year-to-date debt retirement to Rs 41 billion. All the economic indicators are leading towards an ease in money supply in coming months, where depreciation in real effective exchange rate in last few months implies that exchange rate would remain stable in coming months despite the risks of security and political noise.
The likely release of IMF's fourth tranche further strengthens the argument. There are talks in finance ministry on the release of $1.6 -1.8 billion from FoDP and the US coalition front. This may add ample liquidity with multiplier of three to generate 60 percent of the central bank's monetary target - a growth of Rs 600-650 billion in money supply this fiscal year.
Moreover, with inflation likely to be in single digit this month amid substantial improvement in current account deficit, especially the decline in non-oil imports, there is a fair chance of 50-100 bps rate cut in the upcoming interim monetary policy review.
However, the relatively flat yields in government paper yields since the last monetary easing imply uncertainty in money market regarding the medium-term direction of interest rates. This makes sense as the burden of fiscal borrowing is likely to remain on domestic sources.
Nonetheless, the stabilisation on external and monetary front is paving the way for hike in credit disbursement for private sector. One hopes that the gradual recovery in global economy will keep creating more orders for the export related industry, hence more demand from private sector. But with UK figures showing recession, hitting lows of 1979-81 slump followed by the dreadful US employment numbers, which shot up to its 26-year high of 10.2 percent last month, the hopes may just dampen any time soon.
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KEY MONETARY AGREGATES
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RS (MM) AS OF
24-OCT 17-OCT CHANGE
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Currency in Circulation 95,604 105,178 (9,574)
Total Demand & Time Deposits (103,451) (109,262) 5,811
Broad Money (M2) (7,582) (3,829) (3,753)
NFA 113,668 120,908 (7,240)
NDA (121,249) (124,740) 3,491
Net Government Borrowing 50,438 44,792 5,646
Borrowing for budgetary support 46,454 46,647 (193)
from SBP (72,183) (57,513) (14,670)
from scheduled banks 118,637 104,160 14,477
Commodity operation 5,612 (238) 5,850
Credit to non-govt sector 28,836 12,206 16,630
to private sector (41,015) (60,376) 19,361
to PSEs 70,654 73,413 (2,759)
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Source: SBP
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