MONEY WEEK: ''The fiscal management'' is key phrase in this situation

The delay in much-needed foreign flows in the form of soft loans and aid s from FoDP for fiscal support is mounting pressure on central bank borrowing to meet excess government expenditure. Half way in the second quarter, the government borrowing from SBP is back in positive, after the fiscal office managed to bring it well within the target at the end of first quarter.
With only one month left before the second quarter ends, the unavailability of these non-IMF foreign flows amid high expenditure on war on terror, fiscal management remains the biggest challenge for the finance ministry. With the development of Eid cattle market, the currency-in-circulation kept on increasing during the second week of November. CIC rose by Rs 8 billion during the week ending November 14, after witnessing an increase of Rs 46 billion in the week before.
Despite the flight of money from the system and the fall in NFA, high powered money creation and flow of credit to the private sector, pushed the demand and time liabilities of banking system higher by Rs 20 billion, increasing the overall money supply by 0.56 percent (Rs 28 bn) during the week.
In spite of all the promises and commitments from different channels, the gradual decline in net foreign assets continued last week, with a fall of Rs 10 billion, taking the decline to Rs 34 billion in the quarter to date.
Not only the fiscal financing but also the growth of private credit, in turn the growth engine of economy is contingent upon these flows as the war is steadily hampering the process of nascent economic recovery - a mood that echoed in the State Bank''s policy statement released last week which also expressed concerns on the virtual absence of non-IMF foreign flows.
The net domestic assets, on the other hand, rose by Rs 39 billion during the week - with government borrowing from the central bank and credit to private sector taking the spotlight. The government borrowing for budgetary support increased by Rs 23 billion owing mainly to Rs 18 billion worth of new money printed by the SBP and partly due to Rs 5 billion raised from commercial banks.
But with Rs 5 billion worth of debt taken for commodity operations retired during the week, net government borrowing stood at Rs 18 billion. Moreover, the Ministry of Finance realised Rs 91 billion for budgetary support against the maturities of Rs 37 billion in the four auctions held so for in this quarter.
On the corporate front, the public sector entities that borrowed heavily owing to high circular debt in the last quarter sat mutekept muted this week with a decline in Rs 6 billion - their debt toll is now down to just Rs 1 billion in the quarter to date as against the hefty borrowing of Rs 50 billion in the previous quarter. However, thanks to high power transmission losses which have reignited the circular debt cycle, the credit to PSEs might jump again in the coming months.
Credit to private sector that has started showing some resilience since the start of this quarter, ticked up further during the period. After a decline of Rs 95 billion in the first quarter of this fiscal year, the private borrowers raised Rs 92 billion in the last seven weeks, implying that the industrial sector, especially export oriented part of LSM, is showing some signs of recovery.
But then again, as discussed above, this might turn out to be fragile recovery in the absence of foreign flows. And the rebound in global commodity prices, especially crude oil, casts further doubts on the continuation of this recovery, while the war related expense is making the job of fiscal managers even more difficult.
The recent monetary policy statement summarised this whole paradox in the following fashion: "Looking forward, the magnitude and timings of expected non-IMF foreign inflows remain uncertain and could increase the challenges of SBP''s liquidity management and government''s budgetary financing".

=================================================================

KEY MONETARY AGGREGATES

=================================================================

                                         RS (MN)      AS OF

                               14-November   7-November    Change

=================================================================

Currency in Circulation          145,875     137,913        7,962

Total Demand & Time Deposits     (35,036)    (55,351)      20,315

Broad Money (M2)                 111,241      82,951       28,290

NFA                               97,084     107,460     (10,376)

NDA                               14,159     (24,509)      38,668

Net Government Borrowing         156,649     138,436       18,213

Borrowing for budgetary support  157,467     134,594       22,873

from SBP                          17,142        (443)      17,585

from scheduled banks             140,325     135,037        5,288

Commodity operation                  926       5,570      (4,644)

Credit to non-govt sector         62,980      43,584       19,396

to private sector                 (2,865)    (27,914)      25,049

to PSEs                           66,648      72,301      (5,653)

=================================================================