Government borrowing at Rs 42 billion during the year so far (July 01-October 15, 2005) showed a 390 percent increase over borrowing of merely Rs 8.6 billion recorded in the corresponding period of 2004-05, revealed the latest monetary and credit statistics released by the State Bank.
Within overall borrowing, budgetary borrowing recorded a still higher growth rate- it rose to Rs 56.8 billion during FY06 to October 15, 2005 or about seven and half times higher compared with just Rs 6.7 billion during the corresponding period of previous year.
On the other hand, borrowing under commodity operations and other heads of expenditure showed a net retirement of Rs 14.1 billion and Rs 0.5 billion compared with much lower retirement of a little over Rs 1 billion and an expansion of Rs 3 billion, respectively, in the corresponding period of 2004-05.
Other details of budgetary borrowing showed that Federal government was responsible for 59 percent of it (Rs 33.5 billion) and provincial governments for the remaining 41 percent (Rs 23.3 billion).
In the corresponding period last year, Federal government budgetary borrowing showed a net retirement of Rs 1.7 billion while provincial governments made a net borrowing of Rs 8.4 billion. Institutional details showed that, in the case of Federal Government, SBP made a net lending of Rs 83.8 billion compared with more or less similar amount in the comparable period of last year whereas scheduled banks showed a net retirement of Rs 50.3 billion compared with a much higher retirement of Rs 85 billion last year. In the case of provincial governments, both SBP and scheduled banks contributed to their budgetary borrowings, which amounted to Rs 16.8 billion and Rs 6.5 billion respectively during the year so far. In the corresponding period last year, these totals were of the order of Rs 10.8 billion and (-) Rs 2.4 billion respectively.
In the meantime, private sector's borrowing during the year so far increased to Rs 47.5 billion compared with only Rs 10.5 billion on August 27, 2005 and Rs 83 billion in the comparable period of FY05 (viz., between July 01-October 15, 2004). Over 99 percent of total credit was extended by commercial banks while specialised banks also loaned out a paltry Rs 0.4 billion or about 0.8 percent of total credit. Although sector wise distribution of credit is not available but, looking back at 2004-05 figures, it appears that of the total private sector credit in 2004-05 manufacturing claimed about 52 percent of total private sector credit within which 28 percent was claimed by textile sector alone. Another major manufacturing sector claimed about 5 percent of total private credit. After manufacturing, the other largest claimant was 'personal loans', which included all segments of consumer credit such as house building, auto finance, credit cards, consumer durables and other personal loans, and claimed about 29 percent of all private sector credit. Agriculture, telecommunications, construction and power were responsible for 7 percent, 6 percent, 4 percent and 2 percent respectively.
Among other developments, drawdown of foreign assets (NFA) of the banking system during FY06 to the week ended on October 15, 2005 far exceeded the build-up of its net domestic assets (NDA) or what is generally known as domestic credit expansion, while the NFA denoted a downslide of Rs 88 billion during the period so far. The NDA showed a surge of Rs 76 billion. It is worth mentioning that as long as reduction in NFA exceeds, increase in NDA, money supply would indicate a contraction and as such a dampening effect on inflationary trends. But as the gap narrows, it would indicate increase in available money balances in the economy putting pressure on obtaining price levels.
During the last seven weeks, for which the data were made available by the State Bank, the average of drawdown of foreign assets at the week-ends (viz., between July 01 and the weekend date) mounted to Rs 74.5 billion (with the lowest of Rs 56 billion being on August 27 and the highest of Rs 88 billion on October 15) whereas the average of credit expansion for the seven weekends was Rs 53.4 billion (with the lowest of Rs 30.5 billion being on September 24 and the highest of Rs 76 billion on October 15). On average, therefore, monetary contraction during the seven weekends was a little over Rs 21 billion with the lowest of Rs 11 billion being on August 27 and the highest of Rs 36.4 billion on September 24.
The reduction in NFA on the weekends took place rather steadily almost every week whereas credit started picking up only after September 24 or close to the end of the first quarter of FY06. The latter reached Rs 76 billion as on October 15, 2005. Ordinarily, reduction in NFA should necessarily result into monetary contraction. However, it may not be the case if domestic credit also starts rising simultaneously. In that case, the contraction impact of the drawdown of NFA is neutralised to the extent that domestic credit rises.
To further explain the phenomenon, the draw down of NFA results into monetary contraction because when economic agents, including also the government, purchase foreign exchange, they surrender rupees to the central bank/scheduled banks resulting into contraction of their balance sheets on both sides of it. If purchased from the central bank, either currency in circulation or (government) deposits with it go down on the liabilities side (depending upon who purchased the foreign exchange) while holdings of foreign exchange go down on the assets side.
If purchased from scheduled banks, private or government sector's deposit balances with them go down on the liabilities' side and their foreign exchange holdings on the assets side. Available data show that major part of Rs 12 billion contraction in money supply during July 01-October 15, 2005 was entirely accounted for by reduction in deposit money which declined by Rs 64 billion during this period while currency in circulation increased by Rs 52 billion during the period.
In the meantime, downslide in liquid foreign exchange reserves continued which, according to statistics released by the State Bank, stood reduced to 11,736.1 million dollar on October 15, 2005 including 9,223.4 million dollar with SBP and 2,512.7 million dollar with scheduled banks.
In the foreign exchange market, the week ended on October 15, 2005 witnessed a steadier trend as the domestic currency was able to retain its existing levels versus the dollar in the wake significant inflows of US Currency.
In the inter-bank market, the rupee succeeded in holding on to its previous week's rates at Rs 59.72 and Rs 59.74 per dollar for buying and selling, respectively.
In the open market, the rupee at Rs 60.05 did not show any change, in terms of the dollar, on the buying side while at Rs 60.15 it shed five paisa on the selling side. Versus the Euro, the rupee slipped by five paisa for buying and selling at Rs 72.25 and Rs 72.35 respectively compared with the opening day of the week.
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