Net foreign assets (NFA) of the banking system, or crudely the liquid foreign exchange reserves (LFR), continued rising through the week ended on December 31, 2006 and so did the money supply.
Between December 2 and 31, improvement in NFA contributed some Rs 67 billion to fresh money supply which was Rs 146 billion on December 2 but rose to Rs 258 billion on December 30, an increase of Rs 112.6 billion in about a month.
The NFA, which stood depleted by Rs 55.4 billion over June 30, 2006 level, on December2, crossed the end-June level by over Rs 11.5 billion by December 30. In dollar terms, the liquid foreign exchange reserves showed a net use of reserves in the amount of some $834 million on December 2, which was reduced by a net use of $232.6 million on December 30 and further lower to $215 million on December 30 over the level obtaining on June 30 2006.
The surge in NFA was propelled in main by the sale of 10 percent of Government stake in the OGDC share capital offered to international investors through GDR listing at London Stock Exchange which fetched nearly $813 million to the Government. However, the expansion impact of improvement in NFA on money supply was neutralised, to the extent the Government used the rupee counterpart of these and other similar proceeds to retire budgetary borrowings.
It may be noted that budgetary borrowing of the Government amounted to Rs 98.6 billion on December 2, which stood reduced to a mere Rs 11 billion on December 30. Between these two dates, therefore, the Government was able to retire domestic debt created on that account to the extent of Rs 87.6 billion.
As per other details, the decline between the two dates in budgetary borrowings was shared by both Federal and provincial governments, as well as by the central bank and the scheduled banks. On December 2, Federal Government's budgetary borrowing amounted to Rs 82 billion, which declined to Rs 27 billion on December 30.
On the other hand, provincial governments' budgetary borrowing amounted to Rs 16.5 billion on December 2, which declined to less than Rs 1 billion on December 30.
Institution-wise, the central bank's (SBP's) lending to the Federal Government declined from Rs 82.5 billion on December 2 to Rs 72.6 billion on December 30. As against this, Federal government's retirement of credit to the scheduled banks, being mainly the result of SBP's open market operations, increased from minus Rs 0.3 billion to minus Rs 45.3 billion on the respective dates. In principle, reduction in scheduled banks' debt to the government means borrowings from the State Bank against securities witnessing that debt to replenish their liquidity position, which they use to lend to the private sector.
Scheduled banks' lending to the provincial governments, which amounted to Rs 0.5 billion on December 2 stood converted into a net retirement of Rs 5.8 billion on December 30. On the other hand, SBP's lending to the provincial governments declined from Rs 16 billion to Rs 6.6 billion on the respective dates.
Incremental private sector credit, which amounted to Rs 140.5 billion on December 2 on account of commercial (up Rs 137.8 billion) and specialised (up Rs 2.73 billion) banks dramatically surged to Rs 243.6 billion on December 30--slightly less than Rs 241 billion on account of commercial banks and Rs 2.72 billion on account of specialised banks. (For more details in this area, see BR 13-01-07).
During the same about one month period, PSEs credit utilisation also improved with their net retirement of credit decreasing from minus Rs 8.2 billion on December 2 to minus Rs 1.4 billion on December 30. The surge occurred mainly on account of larger PSEs like Wapda, KESC, OGDC, PTC, PIA & Pak Steel, whose credit utilisation increased from a net retirement of Rs 0.5 billion to a net additional use of Rs 4.5 billion.
All in all, changes in private and government sector credit, credit to the PSEs and OINs (down Rs 8 billion from down Rs 32.7 billion on December 2) plus the accumulation effect of NFA of the banking system (cf opening paragraphs) during the last about one month, money supply during the reported 28 days of December alone increased by Rs 112.6 billion, while overall money supply during FY07--between July 1 and December 30, 2006--surged to Rs 258.7 billion, or 7.6 percent, as against the whole year provision of Rs 459 billion, or 13.5 percent.
Component-wise analysis showed that currency in circulation contributed about Rs 134 billion of the additional money supply during the year so far, while bank deposits accounted for the remaining Rs 124.7 billion (with demand deposits up Rs 1,180 billion, time deposits down Rs 1,053 billion and RFCDs down Rs 2 billion over their end-June levels).
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