MONEY WEEK: money supply contracts despite rise in government, private sector borrowings

Money supply contracted to Rs 2469.2 billion on October 8, 2005 compared with Rs 2486.6 billion on June 30, 2005 despite increase in private and government sectors borrowing (up Rs 39 billion and Rs 41 billion, respectively).
The phenomenon occurred because of massive net draw-down of foreign reserves [net foreign assets (NFA) of the banking system] which declined from Rs 583.2 billion to Rs 500.4 billion during the same period.
This was revealed in the latest monetary and credit profile released by the State Bank after consolidating the accounts of the banking system as on October 8. According to this profile, money supply declined by Rs 17.4 billion while NFA declined by Rs 82.8 billion during July 1-October 8, 2005. The increase in overall domestic credit (NDA) during this period worked out to Rs 65.4 billion.
As explained in an earlier review, changes in NFA and NDA of the banking system bring out changes in the same direction and by the same magnitude in assets and liabilities of the banking system.
The balance of the two (positive or negative) always depicts an increase or decrease in the existing level of money supply.
As pointed out above, the overall increase in bank credit was shared by both the government and the private sectors. The government sector's borrowing, which was limited to Rs 12 billion on September 24, surged to over Rs 39 billion on October 8, 2005 mainly on the back of budgetary borrowing, as other government borrowings (mainly under commodity operations) remained more or less unchanged.
Government's budgetary borrowing, which declined to Rs 26 billion on September 24, after touching Rs 59 billion on September 17, 2005 and later increased to Rs 36 billion last week, picked up rather swiftly to reach Rs 51 billion on October 8, 2005 (cf BR October 27, 2005).
Of the total, Rs 35.2 billion was on account of Federal Government and Rs 15.6 billion on account of Provincial Governments. These figures compared with a net retirement of credit of Rs 0.5 billion in the case of Federal Government and a net incremental borrowing of a little over Rs 5 billion in the case of Provincial Governments in the corresponding period of FY05.
Further analysis of overall credit expansion of Rs 65.4 billion showed that while expansion in overall credit on account of private sector and government sector was of the order of Rs 80 billion, utilisation of credit by other economic agents [including in particular PSEs, SBP credit other financial institutions (OFIs) and net changes in banking system's sundry or other items] ended up in net retirement of credit in the amount of some Rs 14.7 billion during July 1-October 8, 2005 when compared with the respective levels obtained on June 30, 2005.
Private sector credit rose by Rs 41 billion mainly on account of commercial banks (up Rs 41.7 billion) while specialised banks contributed to a net retirement of Rs 0.8 billion. Credit to private sector included general purpose loans, loans to export sector, consumer financing and badla financing etc.
It may be recalled that banks and DFIs involvement in badla financing, which stood reduced enormously to a record low level of Rs 4.2 billion at the end of the last week of July 2005, started picking slowly thereafter when badla financing technique was replaced with Continuous Funding System (CFS) w.e.f. August 22, 2005 to reach Rs 7.1 billion at the end of the last week of August 2005 and later rose to Rs 12.6 billion at the end of the last week of September 2005. Data on other segments of credit would become available after the release of SBP's first quarterly report on the state of the economy in FY06.
Component-wise analysis of Rs 17.4 billion contraction in money supply revealed that the entire contraction occurred on account of decline in all three elements of deposit money including demand deposits (down Rs 26.8 billion as on October 8), time deposits (down Rs 35.3 billion) and resident foreign currency deposits or RFCDs (down Rs 1.7 billion). Their total contraction impact on account of deposit money (down Rs 63.8 billion) was largely offset by an increase in currency in circulation in the amount of some Rs 46.5 billion.
In the meanwhile, downslide in liquid foreign exchange reserves continued unabated which, according to statistics released by the State Bank, stood reduced to $11,922.7 million on October 8, 2005, which included $9,406.7 million with SBP and $2,516.0 million with scheduled banks. According to the latest press release of the State Bank, liquid reserves had slipped to $11,601.7 million as on October 22 after standing at $11,736.1 billion a week ago (for details see BR October 29, 2005).
The downslide had continued despite the fact Pakistan received an amount of $1,002.65 million as workers' remittances during the first quarter of the current fiscal year (July-September, 2005), as against $983.15 million received in the corresponding period of last fiscal year, registering an increase of $19.50 million, or 1.98 percent.
Workers remitted $341.10 million in September 2005 as against $312.94 million in September 2004, depicting an increase of $28.16 million, or 9 percent.
The foreign currency market witnessed a steady trend during the week ended on October 8, 2005 in the wake of smooth supply of US currency. The rupee gained in both interbank and free markets.
In the interbank market on the opening day of the week the rupee shed one paisa versus dollar for buying at Rs 59.70 and lost 2 paisa on the selling side at Rs 59.72. On Saturday, the rupee retained its Friday levels at Rs 59.69 and Rs 59.71 per dollar for buying and selling respectively.
In the free market, the rupee was traded at Rs 60.30 and Rs 60.40 per dollar for buying and selling, respectively, on Monday October 3. At the weekend, on October 8, the rupee maintained its Friday levels for buying and selling dollar at Rs 60.10 and Rs 60.20 respectively.
At the weekend, the euro was purchased and sold by banks at Rs 72.30 and Rs 72.40 respectively for buying and selling as against Rs 72.30 and Rs 72.40--these being the same as on the opening day of the week.
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