MONEY WEEK: private sector credit nosedives to Rs 218 billion on year-end window-dressing

The 2006 calendar year-end window-dressing, which banks resort to in the last fortnight, or so, of every calendar year to show huge development in loans and deposits, at least on their balance sheets, showed the private sector credit plummeting to Rs 218 billion in less than a week on January 6 2007 following retirement of pseudo loans.
To recall, on December 30, te incremental bank credit to the private sector had dramatically surged to Rs 243.6 billion from Rs 140.5 billion on December 2 and Rs 162.6 billion on December 16--an increase of Rs 103 billion in about a month, of which Rs 81.6 billion, or over 79 percent, occurring in the last fortnight.
More pseudo loaning is expected to be retired in the following week.
The decline in credit occurred almost entirely in commercial banks loaning to the sector.
In the meanwhile, government borrowing galloped to Rs 36 billion after reaching down to a paltry Rs 11 billion on December.
The entire increase occurred in borrowings meant for bridging the revenue gap. Such borrowings rose to Rs 54.5 billion compared with Rs 28.3 billion the previous week.
Retirement under commodity operations, however, continued through the week reaching over Rs 17 billion as against a little less than Rs 16 billion on December 30.
The break-up of budgetary borrowing showed that the increase occurred in both central and provincial governments' borrowing.
In the former case, it rose from Rs 27.4 billion on December 30 to Rs 45.7 billion on January 6, an increase of Rs 18.3 billion over the week, entirely on account of the central bank (up about Rs 25 billion) instead of the scheduled banks (down about Rs 7 billion).
In the latter case, it rose from about Rs 1 billion on December 30 to Rs 8.8 billion on January 6, an increase of Rs 7.8 billion over the past seven days though entirely on account of the State Bank as position of scheduled banks in this context remained unchanged over the week.
As was the case with private sector credit, money supply also dropped by over Rs 32 billion over the week to Rs 226.6 billion, or a little over 6.6 percent, compared with Rs 258.7 billion, or 7.6 percent, on December 30 (against the whole year provision of Rs 459 billion, or 13.5 percent). As expected, the decline mainly occurred in deposit money (down Rs 30 billion) as currency in circulation declined only slightly (down Rs 2 billion).
Again, the reason for the decline was window-dressing, which on the one hand appeared as an increase in private sector bank borrowing and, on the other, as a surge in deposit money. Short notice deposit mobilisation was promptly paid back to the so-called depositors, or lenders should we say, as the calendar year 2007 dawned.
Among other developments, continuing retirement of credit by PSEs increased from Rs 1.3 billion on December 30 to Rs 5 billion on January 6, mostly on account of larger PSEs, as smaller ones' retirement increased further. Minus balance of OINs of the banking system also increased from minus Rs 8 billion on December 30 to minus Rs 31 billion on January 6. NFA of the banking system also fell from Rs 11.5 billion to Rs 6.7 billion between the respective dates.
The decline in money supply on these accounts was effectively counterbalanced by increase in government borrowing for budget purposes.
Along with the decline in NFA of the banking system, the net use of liquid foreign exchange reserves (LFR), which amounted to $834 million on December 2, and stood reduced to $232.6 million on December 30, first improved to $215 million on January 6 but then increased again to $221 million on January 13 with overall reserves declining from $12,921.8 million on January 6 to $12,915.4 million on January 13, the decline occurring entirely in reserves held by SBP (down $35.5 million) as scheduled banks' holdings actually increased (up about $29 million). (For comments and suggestions [email protected]).