MONEY WEEK: tight domestic liquidity deprives private borrowers

Ever since the release of last IMF tranche and Saudi component ($200 mn) of FoDP, foreigners have been busy taking the money out of the system as the amount has now reached Rs 92 billion on net basis. The IMF''s last release of over $700 million in December was used for bridged fiscal support.
The only notable foreign money injection thereafter was $350 million released by US Coalition Support Fund. Last week''s IMF delegation''s visit was a second round of fourth review to assess the progress by December-end and to have policy level dialogues with the new Finance Advisor. The core issue which has delayed the decision on fifth tranche is about the VAT bill and its approval in national and provincial assemblies. This has been done, albeit, Sindh has its own desires.
The IMF is likely to take up the fifth tranche case in its board meeting by the end of this month or early next month, after the submission of Letter of Intent by the government.
Pakistan may seek a relaxation in fiscal slippage to 5.5 percent from the earlier targeted 4.9 percent while asking for some more time for phasing out the electricity subsidy. The release of IMF tranche, materialisation of pending CSF and the Kerry-Lugar bill are imperative to incur the much needed development expenditure and to spend money on poverty eradication. On domestic liquidity, fiscal and quasi-fiscal appetite is virtually having all of the shrinking pie. Banks'' reluctance to entertain private sector is visible from the latest T-Bills auction results.
The government has a target to raise Rs 460 billion from T-Bills during the fourth quarter. The overwhelming market response on the first auction indicates an even higher participation in three-six and twelve-month papers. Money market players bid for staggering Rs 221 billion on April, 7 while SBP accepted just Rs 71 billion against the targeted Rs 65 billion. The interest is tilted towards 12-month paper - where the participation was Rs 137 billion versus an acceptance of Rs 54 billion.
Along with higher interest in long-term paper, cut-off yields are down by 7-10 bps. This is in line with the declining trend in the secondary market. This trend neither necessarily warrants the ease in domestic liquidity market, nor is it a rational exuberance for a cut in policy rate. It''s rather, depicting that the players are likely to remain in long term government paper.
The food inflation is still a pain for SBP, as 1.80 percent month-on-month increase in the heavy weight food index took the year-on-year headline number to 12.91 percent despite a high base. With nine-month inflation at 11.28 percent, full year inflation is expected to be less than 12 percent. This, no doubt is a much better number than the 20.8 percent of last year, but is still on the higher side.
MONEY AGGREGATES:
Even after retiring Rs 35 billion on SBP account, the government ought to offload another Rs 150 billion in compliance with IMF''s quarterly target next week. Following suit of last two quarters, the government may transfer around Rs 70 billion from SBP profits. The delay in IMF fiscal support money would force the Finance Ministry to search for new avenues to balance its account with SBP.
Government''s balance with scheduled banks remained in red for first ten weeks of third quarter; however, quarterly borrowing is already in green after Rs 36 billion was generated in the week ending March 27. This ought to be one avenue for equating the borrowings from the central bank.
The devil of energy circular debt is back in full swing, with a number close to Rs 200 billion trapped, the public sector entities borrowed Rs 12 billion for the week ending March, 27. This once again left little for the private creditors. Private sector borrowed a mere Rs 15 billion in the first eleven weeks of this quarter versus Rs 188 billion in the previous quarter. A seasonal shift is partly responsible for this trend as historically low working capital borrowing remained during January-March But this abysmally low number depicts the sorry picture of domestic liquidity.

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KEY MONETARY AGGREGATES

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Rs (mn)                                      AS OF

                                   27-Mar    20-Mar    Change

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Currency in Circulation           142,460   167,587  (25,127)

Total Demand & Time Deposits      154,919   125,314    29,605

Broad Money (M2)                  298,726   294,259     4,467

NFA                                60,044    48,575    11,469

NDA                               238,680   245,685   (7,005)

Net Government Borrowing          250,719   236,797    13,922

Borrowing for budgetary support   316,579   301,323    15,256

from SBP                          106,990   128,500  (21,510)

from scheduled banks              209,589   172,823    36,766

Commodity operation               (65,076)  (63,556)  (1,520)

Credit to non-govt sector         212,444   214,224   (1,780)

to private sector                 123,999   138,378  (14,379)

to PSEs                            87,668    75,067    12,601

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