Monetary hoodwinking

The growth in money supply remained restricted in the first five months of this fiscal year to 2.36 percent (Rs209 bn) as compared to 3.91 percent (Rs299 bn) in the corresponding period of last year. But, that is not happening for the right reasons, as SBP’s net foreign assets have depleted much faster in the year to-date; the net outflow of Rs234 billion under that head is far more than an outflow of Rs65 billion in the same period of previous year.
It’s not a good omen and that is explained by the fast depletion of SBP’s forex reserves, which are halved since the start of this fiscal year to stand at $3 billion as on November 29. The worse is over though, as major chunk of IMF payments are done, and some CSF money ($300 mn) and second tranche of IMF ($540 mn) is expected in a few weeks. Plus, other multilateral flows are going to supplement these. In a nutshell, one can expect an improvement in the flow and in the money supply.
Nonetheless, a bit of fall in NFA is compensated by higher growth in Net Domestic Assets (NDA), which are up by Rs443 billion (5.16%) in the first five months vis-à-vis Rs364 billion (5.12%) of last year. The reasons behind NDA growth, however, depict a marginally healthier picture than what was seen last year. Net government borrowing stood at Rs383 billions year to-date as compared to Rs416 billion of last year. Some semblance of recovery is evident from a slight recovery in private credit, which increased by Rs128 (Rs51 bn last year) since the start of this fiscal year.
However, in the process of providing space for private lenders in banking system, the onus of budgetary borrowing is fully tilted towards the central bank. Promissory note printing in the year to-date is at exuberant levels Rs842 billion versus a retirement of Rs78 billion corresponding period of last year. On the flipside, the government retired its liabilities of commercial banks by Rs395 billion in the first five months, compared to the borrowing of Rs497 billions last year.
The shift in government’s borrowing pattern is more of an illusion than a fundamental shift. In the past two years the SBP extensively used the reverse open market operations to keep liquidity afloat in the system to meet the never ending appetite of the government. That is effectively a money creation mechanism as well. There is no other way to subside the fiscal financing encroachment on the domain of private credit but by curtailing the fiscal deficit.