The State Bank did not release monetary data for the week ended on 18th March. According to available data, during the week ended on 4th March, government bank borrowing exceeded the year-end target by Rs 4 billion.
Latest update by SBP reveals that during the week ended on 11th, it is past the target by a still higher margin (viz., Rs 35 billion) reaching Rs 135 billion. What is more worry-some is the fact that private sector credit is following suit.
At Rs 326 billion on 11th March, this sector's credit utilisation was only short of Rs 4 billion compared with the full year target of Rs 330 billion. Since there has been no respite in private sector credit expansion in recent months/weeks despite the central bank's manoeuvres, it is well nigh possible it will exceed the target next week.
By how much, is any body's guess. To recall, it had been increasing by about Rs 9 billion per week over the past five weeks. Together, the two factors might have led to monetary expansion much higher than the previous year but for the contractionary impact originating from banking system's other items (net) or OINs and NFA which helped keep monetary expansion to a moderate level.
Increase in the government borrowing was characterised by a hefty increase in budgetary borrowing which rose to Rs 168 billion on 11th March compared with the full year target of Rs 98 billion.
Credit expansion under commodity operations and other areas (Zakat and privatisation proceeds) remained subdued as these items contributed to a net credit contraction of some Rs 33 billion during July 01 ('05) -March 11 ('06).
But credit expansion under commodity operations would pick up in big way as wheat procurement begins at the end of the provincial governments in coming weeks till the end of June. This would push up government borrowing rather speedily until budgetary borrowing is reduced. This would actually stand reduced when foreign component of deficit financing becomes available.
As of now, the heaviest borrower from the banking system was the federal government borrowing some Rs 161 billion (SBP Rs 194.5 billion and Scheduled banks (minus) Rs 33.5 billion) compared with about Rs 6 billion in the corresponding period of previous year viz., July 01 (05) -March 12 (06).
Provincial governments borrowed only Rs 7 billion (SBP Rs 4.9 billion and scheduled banks Rs 2.4 billion) compared with about Rs 14.8 billion in the corresponding period of previous year (SBP (minus) Rs 1.3 billion and Scheduled banks Rs 16 billion).
As mentioned in the previous review, private sector borrowing continues to be ruthless. At Rs 326 billion on 11th February, it is already close to the year end target of Rs 330 billion. If this expansion in credit is going to contribute to production, the State Bank and banks must ensure the proper end use. If this cannot be ensured there is every possibility that part of this would slip into speculative financing of shares, precious metals and real estate.
What is very worry-some is the fact that utilisation of export refinance from the central bank is not picking up: Does it mean the credit for exports has become expensive or banks are using their own sources for export financing or production activity in the export sector slowed down and if production has slowed down, how come exports are on the increase.
If it is the rate issue, the State Bank, including the governor, had made it clear that it will not be de-linked from the rates applicable to treasury bills. We support this stance of the central bank because it was this linkage which in the past brought interest rates on export finance down to their historical lows in the previous years. Now that interest rates on treasury bills are rising, exporters should faithfully be prepared to pay a higher cost.
The above developments in the government and private sectors pushed up domestic credit to Rs 361 billion, which was fast approaching the full year target of Rs 365 billion. Last year, domestic credit had increased only by Rs 257 million far below the level achieved this year. Had accumulation/utilisation of foreign assets in the system gone the way the central bank expected at the time of Annual Credit Plan formulation, money supply would have risen to somewhere Rs 400 million after pro-rata adjustment of projected other items and NFA.
But it was lingering on at a level much lower than this viz., Rs 285 billion. The reason was that not only the projected increase in NFA did not materialise, it in fact ended up in a colossal drawdown of foreign reserves amounting to some Rs 84 billion (about $1.4 billion) during July 01-March 11.
The main reasons being the debt servicing, financing of trade and services deficit both on account of their general imports and, to some extent, quake related imports. This was despite increasing home remittances (up $198 million over July-February FY05) and emergency quake assistance.
According to March 16 update of SBP on balance of payments, trade deficit during July-December FY06 amounted to $3.9 billion while services account also had a deficit of $3.4 billion. Data revealed that growth of our imports of goods and services has been higher while that of exports relatively lower when compared with the previous year.
The impact of the two deficits was, however, partly offset by net gains on account of private and official transfers ($4.3 billion and $0.2 billion respectively) squeezing the current account deficit to $2.8 billion during FY06 so far compared with $0.7 billion in the corresponding period last year.
With capital account resulting into a surplus of $391 million, the overall balance requiring financing from reserves and other sources came to about $2.5 billion.
Accordingly, foreign reserves were used to the extent of $898 million (central bank $702 million and deposit money banks $196 million) and exceptional financing to the extent of $1,647 million. Use of Fund credit to finance the imbalance, however, showed a net payment of $90 million to the Fund.
According to other available data, the gap between exports and imports continues widening and was about 33 percent higher in July-February over July-December. There is thus likelihood that the current account deficit as well as overall negative balance may further swell leading to still greater use of banking system's net foreign assets (NFA).
Already, liquid exchange reserves of the country dipped down to $11,403.9 million on 11th March and further to $11,303.5 million on 18th March only to marginally rise to $11,307.5 million on 25th March indicating further deterioration of foreign assets of the banking system.
The only hope rests with the surrender of dollar proceeds in respect of floatation of recent 20 and 30-year sovereign bonds and privatisation deals (PTCL and PSMC). It may bring down budgetary borrowing and augment foreign reserves though sovereign dollar bonds would increase the debt burden and ultimately the debt servicing. Up to 25th March, however, the SBP balance sheet does not bear any evidence about the receipt of these proceeds.
A peep into the balance sheet data of banks and the State Bank for 18th March, respecting investments in the government securities, government deposits, customer deposits and advances and use of foreign reserves etc, do reveal that almost all monetary indicators will show aggravations of varying magnitudes when consolidated balance sheet of the banking is made available by the State Bank on 3rd April.
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