MONEY WEEK: record monetary expansion amid decelerating private sector credit

Monetary expansion during FY07 to June 9 rose by another Rs 21.5 billion during the latest week to a record figure of Rs 549 billion (16.1 percent) compared with the Credit Plan provision of Rs 460 million (14.5 percent) and the actual expansion of Rs 383 billion (13 percent) in the comparable period of last year.
All sectors contributed to the expansion during the week under report except the non-government sector where growth of private sector credit utilisation in fact decelerated by Rs 8 billion to Rs 279 billion compared with Rs 287 billion a week ago and Rs 350 billion in the corresponding period of FY06. At this level, private sector lagged behind the whole year Credit Plan provision of Rs 390 billion by a wide margin.
The other segment of non-government sector, namely, PSE also retired Rs 2.5 billion of credit utilised up to June 2 so that their net credit utilisation by June 9 stood lower at Rs 12.7 billion. But even at this reduced level, PSEs net credit expansion was higher than that provided in the Credit Plan by Rs 7.7 billion. The retirement occurred entirely on account of smaller PSEs as white elephants continued depending on bank credit for their development and non-development operations.
It may be of interest to mention here that in the corresponding week last year also, credit expansion scored by private sector had decelerated by Rs ll.2 billion to Rs 333.9 billion. It appeared as if it was a seasonal pattern. The entire deceleration of credit during the week occurred, however, on account of commercial banks as specialised banks credit expansion remained stable around Rs l.2 billion.
Among other sectors, a monetary expansion of about Rs 25.4 billion was brought about by the government sector during the week with budgetary borrowing rising by Rs 23.4 billion to a net borrowing of Rs 164.8 billion against a Credit Plan provision of Rs 120 billion- with federal government's budgetary borrowing rising by Rs 5.3 billion to Rs 171 billion and that of provincial governments increasing by over Rs 18 billion compressing net retirement of Rs 21.5 billion on June 2 to Rs 3.4 billion on 9th June 9.
As regards the shares of the central bank and the scheduled banks in the budgetary borrowings, over Rs 3 billion of borrowings were provided by the former while the remaining Rs 20.2 billion were made available by the latter.
It may of interest to mention here that in the absence of an auction of government debt, which is held at regular intervals, these shares change because of two-way open market operations of the SBP to influence liquidity in the system.
In the meanwhile, borrowing of the government under its commodity operations, especially for the on-going wheat procurement, rose by another Rs l billion with net retirement of credit under this head contracting to Rs 8 billion on June 9 from Rs 9 billion on June 2.
These loans are given to procurement agencies by the commercial banks on self-retiring basis, which continues occurring during a financial year whenever the stocks are sold to the market. When outstanding levels under commodity operations do not respond to unloading of stocks, the SBP intervenes reminding the agencies of their responsibility to retire the loans contracted earlier for the purpose.
Monetary expansion originating from foreign sector amounted to Rs 159 billion during the year to June 9, including Rs 9 billion during the current week although authors of Credit Plan visualised only an expansion Rs 10 billion during the whole year on account of this sector. Contrary to this year, expansion in monetary balances during the comparable period of FY06 had amounted to just Rs 21 billion.
The Credit Plan provision was so low that it just equalled the expansion figure recorded during the latest one week. In terms of liquid foreign exchange reserves which crossed the $15 billion mark on June 9, during the current week alone amounted to $1,242.8 million mainly because of the dollar proceeds sold by the government to the SBP received recently against successful flotation of sovereign Euro bonds abroad.
It is strange, however, that the fiscal managers did not bother to take the central bank into confidence on this point at the beginning of the year although the SBP Act explicitly provides for such information sharing through the Monetary and Fiscal Policies Coordination Board at the very beginning of the year as well as through out the year on a quarterly basis.
The result is that the SBP is unable to sterilise the monetary impact of foreign sector at the fag-end of the year leading to a rise in Reserve Money of 20.28 percent up to June 9, 2007 compared with 12.60 percent on June 10, 2006.
This phenomenal increase in Reserve Money would continue its proliferation effect next year making the things difficult for the central bank to control monetary expansion and hence inflation. (For comments and suggestions [email protected]).