MONEY WEEK: massive loss of net foreign reserves helps contain monetary expansion

The March 13 up-date of the State Bank (SBP) places domestic credit expansion at Rs 337 billion on February 25 compared with Rs 332 billion the previous week and Rs 219 billion in the corresponding period of FY05.
Money supply, in the meanwhile, recorded a rise of Rs 256 billion during FY06 to February 25 compared with Rs 238 billion on February 18 and Rs 271 billion during July 1-February 26 (FY05).
The rise in money supply during FY06 so far was lower than domestic credit expansion because of a massive loss of net foreign reserves amounting to Rs 94 billion on February 18 though somewhat lower at Rs 81 billion on February 25 because of larger inflows of foreign exchange than outflows during the intervening week.
Compared with previous year, however, the rise in money supply during FY06 so far was lower by about Rs 16 billion mainly because in FY05 the foreign reserves were accumulating instead of depleting and hence leading to larger expansion during FY05 in money supply than domestic credit expansion.
Within domestic credit, the main cause of expansion was private sector credit - up Rs 311 billion and going almost neck to neck the previous year''s credit expansion but with much less impact on the production side. Commenting on prospects in the agriculture sector, the latest SBP quarterly report on the state of economy had observed that provisional data was suggestive of a growth rate which may fall even the levels seen in FY05.
Substantiating the guess, the report further stated that the growth in agricultural credit disbursement had also slowed-down. According to the same source, available data suggested visible slowdown in all the three sub-sectors of the Index of Industrial Production, namely, large scale manufacturing (LSM), electricity generation and mining and quarrying.
The only non-productive sector yet thriving at record-breaking levels had been the business at the country''s bourses. Did credit go in financing speculative business in shares? It is any body''s guess but it that be case it would mean a lot of foul play at the end of banks and borrowers who somehow failed to ensure the proper end use.
The entire credit expansion in private sector took place in the commercial banks'' segment as specialised banks'' overall credit position showed a net retirement.
Export credit, as reflected by banks'' utilisation of export credit from SBP, also showed almost no activity in the export sector for the last several weeks. A slight increase in credit was, however, witnessed in the case of PSEs for the second week in succession.
Other details revealed that government sector borrowing went up reaching Rs 117 billion as on February 25 compared with Rs 115 billion on February 18 and an expansion of only Rs 3 billion in the corresponding period of the preceding year.
The increase over the week occurred mainly in budgetary borrowing which increased from Rs 145 billion the previous week to over Rs 147 billion on February 25 though borrowing under commodity operations also picked up by Rs 1 billion over the week.
Further details of budgetary borrowing revealed that major part of fresh borrowing during the week was on account of provincial governments (up Rs 2.5 billion) of which Rs 1.8 billion were provided by scheduled banks and the rest by the State Bank.
In line with developments in the foreign sector, where net foreign assets (NFA) of the banking system (NFA) improved from a net draw-down of Rs 94 billion on February 18 to a net draw-down of Rs 81 billion on February 25, liquid foreign reserves improved by about 32 million dollar to 11,400 million dollar on February 25 with the rise occurring almost entirely in reserves with the scheduled banks.
This improvement in reserves continued through March 4 when reserves stood at 11,441 million dollar showing an increase of 41 million dollar over the week and about 75 million dollar over the fortnight.
The increase during the week ended March 4 occurred entirely in reserves with the State Bank as reserves with the scheduled banks actually declined by 152 million dollar.
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