MONEY WEEK: government borrowing squeezes amid rising private sector borrowing

Because of the unfortunate happenings in Karachi, which practically reduced the week to three working days, the State Bank could not finalise on time the consolidated balance sheet of the banking system, also known as the monetary survey of the country, for the week ended on 1st April.
However, unconsolidated information available in the balance sheets of the State Bank and the scheduled banks alludes to the fact that, net government borrowing (ie, budgetary borrowing plus/ minus credit expansion/ contraction under commodity operations and other heads), which was about Rs 128 billion on 25th March compared with whole year target of Rs 120 billion, stood much lower during the week ended on April 01.
Also, assuming borrowing under commodity operations and other heads still around (minus) Rs 33 billion, budgetary borrowing, which had increased to Rs 161 billion on 25th March, appears to have declined appreciably. As a result net government borrowing expectedly stood lower at Rs 45 billion showing a fall of about Rs 83 billion over the week.
This decline in government borrowing occurred because central bank's total investments in government securities fell by about Rs 79 billion while government deposit balances with it increased by about Rs 25 billion. The two developments were directly the result of government sale of $1.3 billion to the State Bank creating hefty rupee revenue for the government.
When the effect these two factors (viz., rise in deposits and decline SBP investments in sovereign paper) is adjusted for change in scheduled banks investments in the government and other securities (up Rs 20 billion), the net impact on reduction in budgetary borrowing comes to about Rs 83 billion.
Apparently, the largest reduction in budgetary borrowing occurred on account of federal government though provincial governments might also have ended up in net negative borrowing from the banking system because of a major improvement in their deposit base with the central bank (up Rs 16.3 billion against net bank borrowing of about Rs 15 billion as on March 25).
The above figures may, however, change upward or downward depending upon the actual level of government deposits with the scheduled banks as on April 01.
As per last monetary update (April 08), private sector borrowings at Rs 340 billion on 25th March exceeded the full-year credit target by Rs 10 billion. These appear to have increased further as scheduled banks 'advances- net of provision' surged by about Rs 14 billion to Rs 1,943 billion besides an increase of about Rs 1 billion in export credit by the State Bank.
All in all, private sector credit might have increased at least by another Rs 10 billion over the week as some increase in 'advances- net of provision' is assumed to have taken place on account of government commodity procurement activities especially of wheat whose harvest stands completed in the province of Sindh.
Advances under Continuous Funding System (CFS) also should have increased as, according to available data, advances here had been increasing at an average rate of over Rs 1 billion per month over the past 9 months- rising from Rs 4.2 billion in July 2005 to Rs 1.8 billion in March 2006.
The KSE 100 Index, which was 11,459.58 on March 24 rose to 11,485.90 on March 31. The increase in private sector credit occurred despite surging interest rates and tight liquidity conditions in the money market. Banks resorted to additional borrowings, mainly from the central bank, in the amount of some Rs 28 billion to meet the demand of private sector clients.
Care should have been taken by the concerned quarters- the central bank and the banks at large, that a major part of this additional private sector credit must have gone to financing production rather than a variety consumer financing let loose in the system or speculation instead (again of a variety of nature).
As regards money supply, larger reduction in central bank's Issue Department's investments in government securities (down Rs 42 billion) than increase in 'approved foreign exchange' (up Rs 31 billion), did cause a reduction in currency in circulation of about Rs 11 billion over the week.
However, increase in deposit money (represented by 'deposits and other accounts' with the scheduled banks) of about Rs 14 billion should have more than offset the contraction effect of currency in circulation on money supply.
To conclude one may say that incremental money supply over the week, ended on April 01, either remained unchanged at March 25 level of Rs 282 billion or increased albeit marginally.
Among other developments, liquid foreign exchange reserves of the country improved from $11,307.5 million on 25th March to $12,484.3 million on 1st April- being mainly the impact of government sale of $1.3 billion worth of foreign exchange to the State Bank on 31st March.
Additionally, on April 07, Etisalat deposited the second instalment of $660 million with the State Bank to complete its $1.4 billion upfront payment, which should have increased the reserves as on April 08.
However, against expectations, not only that the reserves did not rise to $13 billion mark, these actually stood reduced to $12,401.6 million as on April 08 ($10,124.4 million with SBP and $2,277.2 million with banks) presumably because of some major payment against maturing foreign liabilities between April 01 and 08.
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