M2 growth registers decline

The State Bank of Pakistan (SBP) said on Thursday the pace of broad money (M2) growth during the first nine-and-a-half months of 2005-06 registered a decline, touching 10.14 percent (Rs 300.84 billion) from 12.91 percent (Rs 320.99 billion) in the corresponding period of the last year.
Data released by the SBP reveals that the decline was dominated by a reduction in Net Foreign Assets (NFA) of the banking system, reflecting increasing pressure on the country's external accounts.
The NFA of the banking system registered a decline during the period under review to Rs 21.525 billion against Rs 69.456 billion in the corresponding period of the last fiscal year. The decline has been the result of widening trade deficit, which resulted in massive outflows of foreign assets from the domestic economy and lower net receipts of the external financing.
Within the banking system, both the SBP and the scheduled banks contributed to the overall decline in NFA. The decline in SBP's NFA is quite in line with the volume of its interventions in the forex market to reduce exchange volatility, while decline in the scheduled banks' NFA is the outcome of the expectation of a stable exchange rate that resulted in robust growth in trade-related lending against Foreign Exchange Circular No 25 (FE-25).
The decline in M2 during the period is also reflected in its components as the growth in total deposits of the banking sector and currency in circulation has registered a decline as compared to the same period of the last fiscal year.
The government has planned to keep M2 growth within the limit of Rs 380 billion for 2005-06 with growth of 12.81 percent.
The decline in M2 growth reveals that the bank's tight monetary policy had vigorously helped in containing the growth in broad money to ensure that inflation remains within the projected limits of 7.7 percent to 8.3 percent.
Private sector credit growth also led to a sharp expansion in the NDA of the banking system by 11.99 percent (Rs 379.316 billion) in the first nine-and-a-half months of 2005-06, which was Rs 251.535 billion with the growth of 13.22 percent in the corresponding period of the last fiscal year.
The surge in credit growth has been counterbalanced by decline in the NFA, which limited the M2 growth to a moderate 10.14 percent during the period.
The NFA position has been impacted by exceptional growth in the trade deficit that reached 8.62 billion dollars during July-March 2005-06, showing an increase of 102.19 percent over the corresponding period of the last year.
The data states that M2, which comprises currency in circulation, demand deposits, time deposits, resident foreign currency deposits (RFCDs), and other deposits with the SBP up to April 15, 2006, stood at Rs 300.84 billion against Rs 320.99 billion in the corresponding period of the last year. It also reveals that all the M2 ingredients declined during the period under review.
This 2.77 percentage point reduction in M2 growth since July 2005 indicates that the central bank moved to contain the inflation successfully through its tightened monetary policy instrument.
In its second quarter report for 2005-06, the SBP had projected consumer inflation (consumer price index) to rise between 7.7 percent and 8.3 percent in 2005-06. The original inflation target was eight percent. To arrest inflation within this range, the bank is keeping M2 growth in check, whose fast-paced growth may add more fuel to inflation.
The government's tightened monetary policy is working and the CPI inflation is declining. The way the central bank is trying to contain monetary growth would help in curtailing CPI inflation. The experts believe that the M2 growth could be controlled if the NDA of the banking system falls sharply.