The fall in foreign exchange reserves, which started as of April 30, 2005, continued week-in-and-week-out so that, by June 11, 2005, the cumulative decline in overall foreign exchange (forex) reserves in rupee terms as per monetary surveys amounted to Rs 41 billion. On April 30, 2005, the liquid foreign exchange reserves of the country had risen to $12.976 billion, which plummeted to $12.448 billion on June 11, 2005.
The depletion of reserves was almost entirely on account of State Bank of Pakistan where the reserves declined from $10.231 billion on April 30, 2005 to $9.704 billion on June 11, 2005--a decline of $527 million.
The reserves with the scheduled banks remained largely unchanged, around $2.744 billion, amid minor fluctuations. It appears that the central bank used these reserves to retire the maturing foreign loans besides directly financing oil import bills which continued inflating as petroleum prices in dollar terms gradually rose in recent months from mid-50s to upper-50s and lately to $60 per barrel.
The part of foreign reserves used to retire maturing foreign liabilities was not without its fallout effects on budgetary borrowings as the government has to purchase foreign exchange from the central bank by paying in rupees.
This process necessarily results in increase in budgetary borrowings, either because of decline in government deposits with the central bank or because of fresh debt creation. Also, the government has to finance subsidy allowed on domestic sales of petroleum products which has a bearing on budgetary borrowings.
Seen in this perspective, it is interesting to note that utilisation of bank credit by the government, which rose to Rs 92 billion on June 4, 2005, exceeding the year-end credit target by Rs 37 billion, rose further by Rs 16.5 billion to reach another record level, viz, Rs 108.6 billion, on June 11, 2005. Credit expansion on government account thus surged by Rs 53.2 billion in just two weeks, of which Rs 51.6 billion, or 97 percent, was on account of budgetary borrowings and the remaining 3 percent on account of commodity operations (3.2 percent) and other credit expansion (-0.2 percent).
The expansion on account of budgetary borrowings, however, took place entirely on account of Federal Government which created debt worth about Rs 50 billion with the central bank through MRTBS during the week ended on June 4, 2005, and another amounting to Rs 105.5 billion through auction of 3-, 6- and 12-month T-Bills on June 8, 2005. The proceeds of the two debt creation acts were used to pay for the maturing T-Bills/government securities, retiring foreign liabilities and allowing transfers to provinces, leaving very little to be added to Federal Government deposits with the central bank.
Federal Government deposits with it increased by only Rs 6.8 billion to Rs 53 billion on June 4, 2005, and remained almost unchanged at that level on June 11, 2005.
Among other developments, expansion in private sector credit continued during the week under report but its speed slowed down considerably. On May 14, 2005, private sector credit had stood at Rs 371 billion. After four weeks, on June 11, 2005, it still hovered around Rs 378 billion, ie, the growth rate just averaged Rs 1.75 billion per week compared with much larger increases in the earlier weeks.
However, during the same four weeks, export credit expansion decelerated from the peak of Rs 24.1 billion on May 14, 2005, to Rs 21.6 billion on June 11, 2005. In the meanwhile, overall credit contraction under PSEs, NBFIs and other items (net) or OINs amounted to Rs 105 billion as against the combined Credit Plan provision of Rs 85 billion.
Increase in credit contraction under the foregoing heads and decline in net foreign assets of the banking system helped in containing growth of both domestic credit and money supply which rose to Rs 381.6 billion and Rs 413.2 billion compared with their Credit Plan provisions of Rs 330 billion and Rs 360 billion, respectively. Component-wise, the increase in money supply during the fiscal year so far consisted of Rs 122.1 billion as currency in circulation and Rs 291.1 billion as deposit money.
Reserve money increased by Rs 149.7 billion during FY05 to June 11, 2005, and was composed of Rs 122.1 billion as currency in circulation, Rs 26.7 billion as bank deposits with SBP, Rs 2.7 billion as other deposits with SBP and (minus) Rs 1.9 billion as cash in tills.
The causes of the above mentioned changes in monetary and credit aggregates may be found in the upward/downward movements of various heads of accounts of the State Bank and the scheduled banks as of June 11, 2005.
Total assets/liabilities of Issue Dept of SBP increased by Rs7.2 billion to Rs 731.4 billion on June 11, 2005, in the main accounted for by an increase of Rs 9.1 billion in holdings of approved foreign exchange and a decline of Rs 1.9 billion in the holdings of GOP securities on the Assets side and an increase of Rs 7.1 billion in notes in circulation on the Liabilities side.
Total assets/liabilities of SBP Banking Dept increased by Rs 4.6 billion to Rs 684 billion explained, in the main, by increases of Rs 12.6 billion in investments in GOP securities and Rs 0.6 billion in debtor balances, and a decline of Rs 9.2 billion in holdings of approved foreign exchange on the Assets side and increases of Rs 11.6 billion in deposits of banks and Rs 2.2 billion in other liabilities and declines Rs 0.5 billion and Rs 8.6 billion in deposits of Federal and provincial govts, respectively, on the Liabilities side.
On June 11, 2005, total assets/liabilities of scheduled banks declined by Rs 1.2 billion over the week and were accounted for, in the main, by declines on the Assets side of Rs 4 billion in balances with banks abroad, Rs 2.9 billion in investments in GOP securities, Rs 1.1 billion in advances other than those to banks and Rs 2.4 billion in money at call and increases of Rs 13.8 billion in balances with SBP and Rs 1.4 billion in investments in treasury bills and declines on the Liabilities side of Rs 5.6 billion in demand deposits (general) and Rs 2.2 billion in money at call and increases of Rs 4.9 billion in time deposits (general) and Rs 1.6 billion in capital & reserves.
During the week ended on June 11, 2005, the rupee managed to limit its losses despite higher demand for dollars during the pre- and post-budget sessions.
The rupee retained its firmness as some major payments were served by the State Bank directly from its reserves besides increased inflow of expatriates' remittances.
In the inter-bank market, the rupee gained three paisa in relation to the dollar for buying and selling at Rs 59.62 and Rs 59.64, respectively. In the open market, the rupee almost maintained its firmness versus dollar for buying and selling at Rs 60.40 and Rs 60.45, while versus the euro, it picked up 10 paisa for buying and selling at 74.00 and 74.20 respectively.
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